New report shows that introducing competition into VET and employment services has failed to deliver better outcomes

A new report issued today shows that the introduction of competition into vocational education and training (VET) and employment services has failed to deliver better outcomes for Australian consumers and undermines community collaboration.

The research report by CHOICE and ACOSS, entitled Competition Policy and Human Services: Where Theory Meets Practice, assesses two areas of human service where various combinations of choice, contestability and competition have been significant: VET and employment services.

Researchers found that the competitive models introduced into these two sectors have largely failed to deliver better outcomes for consumers, and have caused major barriers to improving collaboration.

The report concludes that, “At this point in its history, however, one would have to conclude that the costs of [VET] competition have almost certainly outweighed the benefits.”

ACOSS CEO Dr Cassandra Goldie says:

“The report’s findings show there are significant risks in introducing further competition into human services, particularly as the benefit to people is doubtful, and is not evident in these two examples.

“Where competition has been introduced in vocational education and training, it’s led to rising costs, people being placed in inappropriate courses through aggressive sales practices, and a significant reduction in quality across the sector.

“In employment services, ‘marketised’ service delivery has led to private providers focusing their efforts on people who are job-ready rather than people who need more assistance. That’s part of the reason why so many people remain unemployed for 12 months or more.”

CHOICE CEO Alan Kirkland says: 

“This report reinforces the fact that competition should only be pursued where it is going to lead to better outcomes for consumers. Introducing competition into sectors like vocational education and training appears unlikely to help consumers, and could in fact be harmful.

“Our first priority should always be to ensure that people have equitable access to good quality services. Competition, especially where it involves for-profit service providers, should only be pursued where it will help achieve this.”

CCA CEO Dr Don Perlgut comments:

“The ACOSS-CHOICE report is both ground-breaking and up-to-date. It systematically examines existing literature and recent reports, and comes to appropriate, accurate and devastating conclusions.

“The policies of governments to ‘marketise’ Australian VET has been a disaster, and this report explains why – clearly, unemotionally and professionally – with the consumer and the community interest as highest priorities.

“The damage done to TAFE and government VET providers, and the not-for-profit community education sector, has been profound. Research of this sort shows us the way forward, what to stop doing, what to start doing and what can work.

“CCA commends this report unreservedly.”

Excerpts from the Report

CCA has included excerpts from the report below. CCA recommends going to the original report, as well as the Executive Summary.

(Excerpts follow. Italicisation below is by CCA for emphasis, not in the original report.)

Key findings from the case studies

A genuine [VET and employment services] ‘market’ generally does not exist. A principal-agent supply model generally pertains and there is frequently an absence (or at least suppression) of price signals and limited-to-no capacity for users to switch providers.

Consequently, the ‘market’ is disciplined not by consumers/buyers substituting one supplier for another, but by government regulation and monitoring of supplier behaviour.

To the extent a market may be said to exist, it is characterised by systemic failures, including information asymmetries, customer lock-in, underservicing, externalities and an absence of price signals.

Assessing quality is extremely problematic. Assessments are often made by reference to proxy indicators.

This in turn can encourage gaming or cost-cutting measures which impact on quality but not access to funding.

Government responses to unintended outcomes tend to result in a constant state of regulatory flux. This in turn leads to risk management strategies (by both government and providers) which favour incumbents over new entrants and discourage innovation.

There is a need for intermediaries to navigate and interpret information in order to assist users to make quality assessments. Such intermediaries, however, are not always best placed to provide advice.

An initial expansion of provider numbers has typically been followed by contraction. Exploiting economies of scale (some of which result from the complexity of the regulatory structure) is a key way in which ‘effective’ competitors can reap the benefits of their efficiency. For-profit providers face particular incentives to cherry pick, both on the basis of geography as well as customer segments.

As concentration increases, large providers pursue strategies that mean they are being simultaneously less risky and more profitable.

Where economies of scale do prevail, cherry picking is particularly problematic, as less profitable segments are left for not-for-profit and government providers. Absent specific financial support from government, such providers must engage in cross-subsidisation.

Providers are stymied in benefiting from their own effective delivery of services. This contributes to the strong disincentives to share information and best practices. While users of human services will commonly benefit from collaborative delivery approaches, providers are mostly motivated to support an integrated approach only to the extent it involves related businesses in adjacent sectors.

While such outcomes tend to be described as unintended or even perverse, they frequently reflect the intersection of the regulatory framework with the predictable incentives of profit-maximising firms.

Vocational Education and Training

Over the last decade, Australia’s VET sector has opened up considerably with government, not-for-profit and for-profit training organisations competing. The manner in which contestability and competition has been implemented, however, has been highly problematic, resulting in enormous budgetary blow-outs, considerable consumer harm and questionable results for industry. These outcomes have occurred against a background of ongoing policy refinements and occasional backflips.

The impact of increased competition

The introduction of user choice, contestability and competition has certainly delivered some benefits in the sector. Analysis demonstrates that there have been improvements in participation, accessibility and choice, due (in whole or part) to the increased role of contestability and competition. Students have access to a broader range of courses, delivered by a broader range of providers. In addition, there is evidence that increased contestability has encouraged greater efficiency and responsiveness by public providers.

But the introduction of contestability and competition intersected with a regulatory framework that created perverse incentives, distorting competitive outcomes. It gave rise to myriad problems (most of which will have long-term consequences). These problems include: predatory behaviour (with ‘dodgy’ marketing practices employed, principally by for-profit providers, often via their commissioned brokers); lower completion rates; substantially increased tuition fees (disproportionately affecting disadvantaged students); considerable concerns about the quality of the courses offered; a failure to address skills shortages as identified by industry; and escalating student loans (and disproportionate increases in students loans by Government which are unlikely to be repaid), resulting in extraordinary funding blow-outs.

The impact on government and not-for-profit providers has been mixed. Such providers remain integral to the VET sector, to service ‘thin’ (i.e. unprofitable) segments. TAFE, in particular, is asked to be both a ‘first responder’ (i.e. innovate and offer new services) as well as a provider of last resort offering high investment/low return training needs, servicing non-commercial markets and simultaneously setting a competitive benchmark against which cherry picking private providers can be measured. Yet, without specific targeted government support, TAFE could only service the less attractive areas of the ‘market’ by cross-subsidising, thus meaning ‘popular’ courses are more expensive. This in turn would mean TAFE would attract fewer students (adversely affecting its economies of scale) and would be unable to provide the competitive benchmarking which appears to be required to discipline for-profit providers.

Applying the framework to VET: Conclusions

The positive outcomes brought about by competition – increased participation, accessibility and choice – were the direct result of Federal Government policy. The less positive outcomes – described as “unintended or perverse outcomes” – were in fact completely in accordance with the basic economic tenet of competition theory: for-profit firms are expected to maximise profits. For example, there is a clear incentive for for-profit providers to encourage students to enrol in those courses which are cheapest to provide. Indeed, there is a broad range of strategies open to providers which can reduce costs without impacting on the allocation of government funding.

These strategies are open to both for-profit and not-for-profit providers alike. Where quality is not impacted, these lessons in efficiency (generally emerging from the for-profit sector) are one of the key benefits to flow from private participation and competition in a given market. In the case of VET, however, there was a clear impact on quality, as measured by the quality of course delivery, completion rates and the alignment between enrolments and industry needs.

But the debate about VET should also prompt broader consideration.   Returning to the original reason for implementing contestable funding, it was “assumed that a competitive market will deliver better quality and better value outcomes by fostering more provider competition, lower fees and more innovative course design and delivery…”. Other than the mere fact of more competition – which should never be an end in itself – this assumption could not have proven to be more incorrect.

In designing reforms, policy makers have largely failed to consider the costs of the extraordinarily complex regulatory structure required and the waste that occurs with ‘regulation on the run’, as design flaws are exploited by companies intent on profit maximisation and regulators struggle to catch up.

Competition does indeed have many benefits, but its costs should not be ignored, simply because such costs do not conveniently sit with preferences for choice and a blind belief that it is the best means to ensure efficiency and responsiveness. VET remains a work-in-progress when it comes to assessing the benefits of competition. At this point in its history, however, one would have to conclude that the costs of competition have almost certainly outweighed the benefits.  

Failures to address skills shortages  

From the perspective of industry, students are enrolling in the wrong courses. Private for-profit providers tend to focus on high volume, high profit areas like business studies, despite a relative absence of need from prospective employers. 

What of government providers?

TAFE’s many diverse objectives – including ensuring equitable access, competitive benchmarking and addressing gaps in the market – cannot be achieved if for-profit providers effectively command the majority of contestable funding and the most profitable enrolments. 

The pros and cons of competition

It is easy to see why there is a public perception that private providers are “exploiting the system”. There is an increasing sense that rather than being demand-led, as was intended, the sector has been supply-driven. While the outcomes of student and employment satisfaction surveys appear ambiguous, labour outcomes appear poor, particularly for lower level VET qualifications.

While adjustments to the regulatory structure can certainly go some way to address the various problems identified, one should be careful in placing too much faith in regulatory reform as the answer. As described below, many of the identified issues are an obvious and even natural consequence of competition in a sector impacted by unavoidable market failure.

How did these issues arise? The business case of for-profit providers

The positive outcomes brought about by competition – increased participation, accessibility and choice – were the direct result of government policy. The less positive outcomes were an indirect (and unintended) consequence, but they were in fact completely in accordance with the basic economic tenet of competition theory: for-profit firms are expected to maximise profits.

Profit-maximising typically occurs by offering consumers more of what they want, more efficiently. Here, however, the for-profit providers were not competing for students, so much as they were competing for allocations of government funding. This dynamic is fundamentally different, and it is essential to understand its full ramifications. 

Lowering costs

There is a clear incentive for for-profit providers to encourage students to enrol in those courses which are cheapest to provide. This is a point at which the incentives of the for-profit and not-for-profit providers can diverge: not-for-profit providers have no particular incentive to direct students towards such courses and indeed often have a specific interest in offering particular courses which runs directly counter to this strategy.

In addition to influencing course selection, providers have several other available strategies to reduce costs without impacting on the allocation of government funding: delivering training online; abbreviating the qualification period; minimising staffing costs by subcontracting course delivery and/or hiring less qualified teachers; minimising rent by focusing on the virtual, not the physical; and investing less in equipment.

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