Transcript Declining oil prices and funding tertiary level education

Declining oil prices and
funding tertiary level
education in an oil exporting
economy
Martin Franklin, Roger Hosein and
Bhoendradath Tewarie
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Introduction
 The accumulation of human capital is critical and central to
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the economic development process.
The development of human capital is costly.
Both Article 13 - UN International Covenant on Economic,
Social and Cultural Rights, 1966 and the UN Convention on
the Rights of the Child 1989 declare that “Higher education
shall be made equally accessible to all, on the basis of
capacity, by every appropriate means.. “
Funding of tertiary level education (TLE) is a major concern
for countries.
Developing economies have a wide range of competing
needs in addition to TLE expansion; all of which can be
identified as urgent.
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Introduction
 Several contending schools of thought on the funding of
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TLE exist.
TLE offers a high element of private returns to
participating students, and consequently some part of
the cost of TLE participation should be borne by the
student.
What is the reality?
Lending mechanisms and schemes have been devised
for those unable to afford; these are typically cost
sharing arrangements.
Cost of TLE shifts away from the State to the students.
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Overview
 An exercise in foresighting.
 The TLE environment in T&T is facing the twin pressure of rising
demand and fiscal pressures amidst declining prices of its main exports
 Aims to assess the possibility of alternate means of providing funding
for some of the cost associated with TLE.
 Five Sections:
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I. Thoughts on the general impact of TLE and the economics
of funding TLE.
II. Observations on the link between the economy of
Trinidad and Tobago and TLE.
III. The mechanics of TLE funding in T&T
IV. Options from the literature for students to contribute to
the funding of TLE
V. Policy Recommendations
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The general impact of TLE and the
economics of funding TLE.
 Issues of social and private costs as well as social and private
benefits (Chia 1990)
 Private benefits e.g. Increased earnings, enhanced standard of
living
 Social benefits e.g. Enhanced productivity, contribution to
national development
 In a zero fee environment MSC > MPC (subsidy); over
investment of TLE and high production of TLE graduates
 In a full fee environment MPC > MSC; under investment of TLE
and under production of TLE graduates
 Countries must strive for a different environment
 Cost sharing arrangement gives rise to a feasible environment
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T&T Economy & TLE
 Oil and gas sector is the principal source of T&T government
revenue.
 Oil prices are strongly correlated with the prices of other
commodities exported by the T&T energy sector.
 Given the dominance of oil and gas in the economy, the price of
crude oil has an impact on the amount of TLE that the
government is able to fund.
 Plunging petroleum prices and weak forecasts for these
commodities in the short to medium term require that the T&T
government of T&T continuously review its strategy for future
funding of TLE.
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Key Macroeconomic Variables for the T&T Petroleum Sector 1999 – 2008.
Source: CBTT Data Center & Own Computations from CBTT Annual
Economic Survey (various years)
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R eal P etroleum V alue A dded
as a S hare of T otal G D P
70
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O il R evenue as a S hare of
T otal R evenue
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P etroleum E mployment as a
s hare of the T otal L abour
F orc e
40
30
fdi/g c f
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10
O il E xports as a s hare of
T otal E xports
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
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WTI Spot Price FOB (Dollars per Barrel)
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Source: Energy Information Administration
TLE Funding in T&T
 1989 – Student Cess of 10% of the economic cost of
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attending university. Loans available from commercial banks
with government as guarantor.
2001 – Dollar for Dollar ; 50% of tuition fees paid by
government to students in 7 institutions.
2004 – GATE; guaranteed 50% of tuition fees paid by
government to TLE students in all GATE approved
institutions; Means Testing Facility introduced.
2006 – GATE Modified; guarantee of 100% of tuition fees
paid by government to all TLE students.
2006 – HELP; complements GATE by providing funding for
both books and personal expenses such as food,
accommodation and transportation.
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Tuition Fees covered by GATE at UWI by Faculty
2008-09
Faculty
Current Fees Number of years to be paid
(per academic
year)
Engineering
$16,175
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Humanities and Education
$12,515
3
Medical Sciences (yrs 1-3)
$37,415
3
Medical Sciences (yrs 4-5)
$44,715
2
Social Sciences
$12,715
3
Law
$13,715
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Source: UWI Bursary
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Enrolment Profile 2001-2008,
UWI, St Augustine
2001-2002
2004-2005
2007-2008
% Increase
2001 - 2008
Total Enrolment in First Degrees
5360
8526
11328
111.3
Total Enrolment in all programs
7641
11734
15775
106.4
3:2
11:7
16:9
18.7
8186
12756
15875
93.9
Ratio of female to male
Total enrolment in Main Campus and
UWIDEC/Open Campus
Source: UWI CITS
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GATE
 GATE is a lump sum subsidy in the form of an increase in
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government expenditure to facilitate the consumption of TLE.
It is well-intentioned but horizontally inefficient (Hosein et al.
2005)
It was never (and still is not) informed by a national skills
needs assessment.
According to the Hansard June 30, 2008, pg 28
Government’s total expenditure on payments under GATE
was $458,044,442 for 2007.
So far Government has not been able to hold beneficiaries to
their ‘contractual’ responsibility in terms of service to T&T.
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Approaches to Student Contribution to
the Cost of TLE
 Students pay their fees at the point of
consumption whilst they are studying
 Students are allowed free access to consume
TLE but they are charged a graduate tax
upon graduating
 Students borrow whilst studying and repay
when they obtain a job i.e. they can take a
student loan, a permutation of which is an
income contingent loan.
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Payment of Upfront Tuition Fees
 Targets for increasing access to TLE put pressure on
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national budgets to provide for state led subsistence of
TLE.
A sensitive issue - How to treat with the financially
needy?
Approach raises questions about social justice and
mobility as well as educational equity (UNESCO 1995).
Considered both inefficient and inequitable (Barr 2001
and Chapman 1997).
Preference for a system in which TLE is free at the point
of consumption but payment is deferred (Barr 2001 and
Chapman 1997).
Unequal liquidity constraints and accrual of financial
benefits.
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Upfront Tuition Fee as a preferred
approach
 There is a more urgent need for revenue
supplementation.
 The price of oil were to fall so sharply in subsequent
years that government can no longer sustain its role as
main lender.
 Graduates had a high propensity to migrate.
 No tradition exists for voluntary, reliable self reporting of
incomes and no public sector systems exist for
monitoring and verifying incomes
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Graduate Tax
 Can take on a variety of forms.
 Generally student receives a grant (waiver of tuition
fees) which is repaid after the student graduates;
students may modify rate of payment & hence payment
period.
 Key characteristics:
• A supplementary tax charged to TLE graduates;
• A threshold level of income below which the tax is not
charged (tax is on the total income and not the value
added of the graduate’s income);
• Well defined criteria for selecting the repayment period;
• Breadth of coverage that includes maintenance taxes.
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Graduate Tax
 All users of TLE pay for the service they receive.
 Both low income and high income students are required to
repay their loans after graduation.
 Students do not carry the psychological burden associated with
the incurrence of a loan and hence the repayment of a debt.
 Leads to superior equity outcomes by ensuring that both low
income and high income students start TLE from the same point
(Oosterbeek 1997, Johnes 1993 and Barr 2001)
 Generates a source of long term funds.
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Graduate Tax
However, one may argue that
 As long as students have to pay, the
mechanism will be seen by them as negative;
 Ideally, low income students should be
treated better than high income students;
 Students with high lifetime earnings repay
much more than the grant received.
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Income Contingent Loans (ICLs)
 The fact that risk averse students may not borrow to fund their
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TLE combined with the riskiness of human capital investment
tend to lead to market under-investment.
Income contingency – an intervention that provides some form
of insurance to the investors against possible future loss of
earnings.
The income contingency aspect of an ICL is the facility whereby
the student only pays if upon graduation, he/she earns an
income above a minimum threshold.
With ICL the lender is more likely to be the government.
ICL is typically characterised by:
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i) the amount of the monthly/annual payment;
• ii) a proper definition of income; and
• iii) the terms of release from the loan obligation.
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ICLs
 Typical limits:
The amount to be repaid;
 The repayment period;
 The effective rate of interest deployed;
 The age of the borrower.
The logic of the ICL is that the student contracts to pay a
specified fraction of his/her future earnings. The government
endeavours to see to it that the total repayments from all students
are sufficient to cover all costs (West 1995).
ICL is spread over the income earning lifespan of the graduate.
Equity – payment is made by the graduate at point of
employment.
Efficiency – students and lenders are not deterred from
participating because of excessive risks.
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ICLs
 ICL offers a considerable degree of default protection and so helps
to solve part of the capital market failure problem associated with
investments in human capital (Chapman, 2005).
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ICL allows the student body to carry a larger debt; this is more
efficient as it makes the seller much more responsive to the buyer
(Johnstone 2005).
 Most superior form of student lending. The strength of the ICL really
lies in the way this subsidy is covered by the government and/or
other funding institutions (Barr 2001).
 The government and/or other funding institutions effectively
subsidize TLE today with the intention of recovering later and at the
same time keeps the system afloat.
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ICLs
 ICLs carry the psychological advantage of not being
classified as a tuition fee and typically gets more
political support than tuition fees.
 The government by stressing the ICL obligation reduces
dependence on parents and places more emphasis on
the users of TLE contributing to the cost of their
education.
 A greater percentage of graduates will have formal
employers and this can help make repayment
compliance easier and more manageable.
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Policy Recommendations
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In the context of GATE, the government of T&T seeks to increase the level of social
benefit derived from its tertiary funding strategy. In this regard, the ‘ad hoc’
arrangements by which students are made to satisfy their contractual requirement to
work in T&T for three (3) years must give way to formal arrangements.
Some of the burden of financing TLE be transferred to the student from the State and
the general taxpayer.
At some point the government should consider the use of income contingent loans
(ICLs) over upfront tuition fees and graduate taxes as an alternative funding
mechanism for TLE given that this mechanism is free of both the need for the
payment of upfront tuition fees at the point of consumption as well as the inequity
bias inherent in the graduate tax.
Consideration be given to whether students in each type of degree program need the
same category of funding from the state. Clarity of developmental strategy, including
sector priorities and clarity about human resource development needs will assist in
clarifying policy decision in this regard.
The tertiary funding strategy be informed by a Skills Inventory for the T&T economy
and be implemented alongside an intensive strategy for the overhaul of primary and
secondary education systems in the country.
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