VET funding – more than a Band-Aid required

We are seeing increasing public focus on future levels of VET funding in Australia in anticipation of a reduction in Commonwealth funding for VET in 2017-18. But so far, calls to renew funding have missed the mark – continuing our broken VET funding system would have no more effect than a Band-Aid. We need a completely new system.

Commonwealth funding for VET is currently provided through the states and territories through two Agreements:

• $1.476 billion in 2016-17 through the National Partnership Agreement for Skills and Workforce Development. This is an ongoing agreement which is only indexed to account for cost increases.
• $516 million in 2016-17 through a National Partnership Agreement for Skills Reform. This five year Agreement was entered into by the Commonwealth with the states in 2012 by the previous Labor Government, and expires this year. There is no ongoing funding for this Agreement in current Commonwealth forward estimates. Increased Commonwealth funding was not built into the VET funding base (unlike all previous VET agreements and new arrangements for schools funding).

In addition to these Agreements the Commonwealth provides advances (effectively revenue) to VET providers under the new VET Student Loans Scheme. This Scheme replaces the poorly designed and badly implemented VET FEE HELP scheme which saw advances to providers increase to $3 billion in 2015.  Advances under the new scheme will fall significantly, resulting in a further decline in revenue for VET providers.

In a rare joint press release issued by the Business Council of Australia, the Australian Industry Group and the Australian Chamber of Commerce and Industry, ACCI CEO James Pearson urged the Commonwealth to maintain funding for the National Partnership Agreement for Skills Reform.

The Leader of the Opposition Bill Shorten has criticised the Government for having nothing to the replace the Agreement, resulting in a $500 million cut.

The Australian Council of Private Education and Training (ACPET) has written to state and territory governments urging them and the Commonwealth to act before the National Partnership Agreement on skills expires. However the current Agreements between the Commonwealth and the states are seriously flawed, and are not an adequate basis to address the VET sector’s future resourcing needs.

The current Partnership Agreements did not require the states to maintain their levels of investment in VET. In fact, they explicitly removed any such requirement. As a consequence, while the Commonwealth increased its expenditure overall, the states reduced theirs.

Some states also shifted state funded courses into the Commonwealth VET FEE HELP scheme. The consequence for this is a decrease in state and territory operating revenue from 50.4 per cent of total VET operating revenue in 2011 to 34 per cent in 2015, and an increase in revenue from the Commonwealth (including VET FEE HELP from 28 per cent in 2011 to 46.6 per cent in 2015 (NCVER 2015 Finance Collection).

This is a dramatic shift in the relative funding roles of the Commonwealth and the states in a short period of time. The Commonwealth funding share also varies significantly between states.

If this was part of an overall trend towards the Commonwealth becoming the dominant partner in VET funding and perhaps taking full responsibility for VET funding in the longer term, this may not be a problem. However Commonwealth VET funding will now also fall – with a likelihood of further reductions in state funding as well.

Provider revenue from VET FEE HELP fell from $3 billion in 2015 to $775 million by December 2016. While this decline represents a truer picture of actual training, it will result in a significant fall in the share of Commonwealth VET funding. 

The current joint funding model which has operated in various forms since 1992 has run its course – it is time for total overhaul. As it is unlikely that the Commonwealth will want to take over full funding responsibility for VET, an entirely new system based on bilateral Agreements between the Commonwealth and the states should be put in place.

Mitchell Institute is continuing to develop a proposed new funding model for VET as part of an overall tertiary education financing framework for the VET and higher education sectors. The key elements of the VET funding model proposed by Mitchell are:

• the Commonwealth and the states would jointly fund VET qualifications in each state in agreed priority areas
• course subsidy levels would be based on an efficient price and co-funded by the Commonwealth and states
• states would continue to manage provider funding with Commonwealth funding flowing to states as under current arrangements
• maximum fee levels would be agreed by the Commonwealth and states with students in courses covered by the bilateral agreement eligible for Vocational Student Loans. States would share in the costs and risks of the Vocational Student Loans scheme
• states could continue to fully fund courses in areas of state need and priority, and could assume full responsibility for the costs of Vocational Student Loans for these course
• The Commonwealth could continue to provide Vocational Student Loans for full fee courses at its discretion and based on its own fee benchmarks and provider and course eligibility criteria. 

Commonwealth VET funding would then reward states that were prepared to invest in VET, remove the incentive for the states to cost shift to the Commonwealth, align Commonwealth and state funding in each state and remove upfront fees for students in VET courses. Successful and commercially viable full fee VET courses would also be covered, but without significant and hidden subsidies to providers.

To avoid the fiscal cliff facing the VET sector, both levels of Government through the Council of Australian Governments (COAG) should commit to at least maintaining their current levels of funding in the next financial year while the details of any new arrangements are discussed and implemented. COAG has had the issue of VET funding under consideration for over two years.

As the three peak industry bodies and ACPET have highlighted, urgent action to address VET funding is now required. But bolder and more far reaching reforms are essential rather than just renewing the current inadequate Partnership Agreements.