Trading places: The impact and outcomes of market reform in vocational education and training

This study is an evaluation, from a national perspective, of the impact and outcomes of market reform in vocational education and training (VET), particularly competitive tendering for government funds by all VET providers and 'user choice', where employers and their apprentices and trainees are able to choose their training provider and course elements. The introduction of market mechanisms into VET funding from the early 1990s has triggered complex chains of interactive effects that are often difficult to interpret. Nonetheless, the research findings highlight, as at 2001, a number of general market reform outcomes.

• The study identifies several benefits and costs of market-based competition in VET. On balance, the weight of available evidence suggests that, currently, negative rather than positive outcomes predominate.
• Outcomes appear to be positive in relation to choice and diversity, responsiveness (to medium/large enterprises and fee-paying clients), flexibility, and innovation.
• Outcomes appear to be generally negative in relation to efficiency (due largely to high transaction costs and complexity), responsiveness (to small enterprises, local/surrounding communities, and government-subsidised students), quality, and access and equity.
• As a result of market reform, technical and further education (TAFE) institutes and non-TAFE registered training organisations are trading places with respect to income sources, whereby non-TAFE organisations are becoming more heavily dependent on government VET funds, and TAFE institutes are becoming less reliant.
• Assessments by registered training organisations of the global impact of market reform in VET are evenly divided, although a net majority of TAFE institutes and adult and community education (ACE) centres delivered a negative verdict.
• The report argues the need for a more creative and judicious mix of state planning and market forces that serves the needs and interests of all stakeholders, and preserves the distinctive character and mission of the public VET sector. It suggests that existing policy arrangements need review, particularly in regard to the impact of market reform on public interest objectives (including community service obligations and public accountability), thin markets (where the number of students undertaking a particular qualification only warrants funding for one or a small number of providers), and the financial viability of TAFE institutes and small registered training organisations.

The redesign of vocational education and training (VET) along market lines is a radical and unprecedented policy experiment in Australia, if not internationally. Twenty years ago, it would have been almost unthinkable to speak of 'markets' for the public VET system. By the late 1990s, however, the concept, practices and language of markets and competition were commonplace and widespread in this sector.

Market reform entails major changes in the way in which VET has traditionally been organised, financed and delivered, with significant implications for key stakeholders. It challenges longstanding assumptions about the nature and purposes of VET, and reframes the roles, responsibilities and relationships of government, providers and clients. Government has reduced its traditional role as planner, funder and provider of VET, and has increasingly adopted the roles of market facilitator, regulator, and purchaser of programs and services on behalf of individual students. Under 'user choice', employers and their apprentices and trainees are able to choose their providers and course elements. Public and private providers are now viewed as 'suppliers' or 'sellers' of VET programs and services who compete with one another on a 'level playing field' for government funds, new apprentices, and private fee-paying clients. Individual learners and enterprises are variously viewed as 'clients', 'users', 'buyers', 'customers' and 'consumers' who, as the major beneficiaries of the training, are expected to pay more for the VET programs and services, or 'VET products', they use.

In these ways the development of a competitive training market represents a decisive shift away from the centralised model of state planning, financing and provision of VET that prevailed following the Kangan Report (Australian Committee on Technical and Further Education 1974). Above all, market reforms 'represent the dismantling of the walls of monopoly' (National Board of Employment, Education and Training 1991, p.25). Since the introduction of private provider recognition, competitive tendering and user choice, technical and further education (TAFE) institutes are no longer the sole recipients of public VET funds and recognition, as they had been previously. Instead, they are now viewed by government as one of many VET providers, alongside and in competition with schools, adult and community education (ACE) centres, industry and private providers.

The Deveson Review (1990) argued that market reform would produce a range of benefits not possible through centralised state planning and bureaucratic controls. Drawing on economic theory, but unsubstantiated by empirical evidence, this review claimed that market-based competition would result in greater choice and diversity, efficiency, responsiveness and quality, without adverse consequences for access and equity. Subsequent government policy statements have made similar claims (for example, ANTA 1996). On the other hand, critics of these reforms have argued that market reform will have adverse effects on the public interest in vocational education and training (also without clear evidence). See Anderson (1997) for a fuller discussion.

Despite the significance and potential implications of market reform in VET, there has been no comprehensive evaluation of its impact and outcomes to date. User choice was evaluated nationally, but at an early stage of implementation (KPMG Consulting 1999). Several reviews of state government VET policies identified problems in VET markets, especially in relation to quality. The Senate inquiry into the quality of VET (Senate Employment, Workplace Relations, Small Business and Education References Committee 2000) proposed that an independent national evaluation of competition and market reform in VET be conducted. No such evaluation has subsequently been undertaken.

The principal purpose of this study is to evaluate, from a national perspective, the impact and outcomes of market reform in VET, particularly competitive tendering and user choice. It aims to do so by:

• examining the structure, composition and dynamics of contestable or 'quasi-markets' for VET
• assessing the impact and effects of market reform on providers and clients
• evaluating the outcomes, both intended and unintended, of market reform in VET.

It also attempts to identify how existing market arrangements could be improved to produce more effective outcomes.

The research for this study comprises several elements. These are:

• a review of local and international literature on market reform in public services, including VET
• an examination of the policy, financial and regulatory framework for VET markets, including market mechanisms
• an analysis of national data on participation and finances in VET
• an investigation of the structure, composition and dynamics of VET markets
• an evaluation of the outcomes of market reform in VET against key preconditions and performance indicators.

The main sources of data are: policy documents, research reports and government reviews; official statistical collections on participation and finances in the VET sector; stakeholder consultations and focus group interviews; and a national survey of registered training organisations.

The most important data source was the national survey of registered training organisations. A sample of 2581 registered training organisations was undertaken, which yielded 842 useable survey returns, representing a 33% response rate. Although this provides a reasonably sound basis on which to analyse the impacts and outcomes of market reform in VET, the survey tool has a number of limitations. These relate to cause-and-effect attribution (in this instance, some outcomes may have been incorrectly attributed to market reform by survey respondents), the lack of comparative before-and-after data, and the partial and subjective nature of senior manager perspectives.

The research finds that, from the early 1990s, a substantial amount of recurrent VET revenue, normally paid to TAFE institutes, was diverted to the new quasi-markets for VET at the same time that growth funding for VET was made available by the Commonwealth Government (that is, from 1992 through to 1997 inclusive). Competitive tendering was used to allocate about 5% of national recurrent funds in 1999. User choice was used to allocate up to 18% of recurrent VET funds in 2001. By 2001, government revenue allocated via non-competitive processes accounted for only 70% of the public VET system?s total revenue (including student fees and charges) for VET delivery, down from about 82% in 1992. Revenue from quasi- and commercial markets accounted collectively for 35% of total VET (mostly TAFE institutes) revenue in 2001, almost double what it had been at the outset of market reform.

From 1997–2001, payments to post-school non-TAFE providers grew by a remarkable 87% nationally. In 2001, they won 44% of contestable VET funds nationally, equivalent to almost 8% of total recurrent revenue for VET delivery. As a consequence, a considerable proportion of non-TAFE providers have become heavily reliant on government VET funds. Conversely, TAFE institutes derived about 13% of their total delivery revenue in 2001 from quasi-markets, and 16% from commercial markets.

Despite considerable progress towards the creation of a national training market under the steerage of the Australian National Training Authority (ANTA), only a modest proportion of registered training organisations were found to be delivering nationally recognised training across state/territory borders. However, a considerable number are competing for business outside their local markets, particularly in rural/regional markets and also, to a smaller degree, in export markets. TAFE institutes continue to dominate the primary and secondary industry training markets, although less so than prior to market reform. They appear to face more competition from a wider range of non-TAFE registered training organisations in most industry training and qualifications markets, but especially in those of the growing services industries/occupations.

Despite efforts to place registered training organisations on an equal footing through 'competitive neutrality' arrangements, the 'playing field' is far from level. Around half of all TAFE institutes and non-TAFE registered training organisations identified at least one factor that restricts their ability to compete effectively. The most significant restriction on registered training organisations as a whole, and the second most significant restriction on TAFE institutes, is the capital cost associated with entering new markets. The main restriction on the competitiveness of TAFE institutes is industrial awards and conditions for teachers/trainers; the costs of meeting community service obligations are also significant. The main competitive restrictions on rural/regional registered training organisations are their geographical location (thin markets) and difficulties experienced in attracting or retaining experienced or qualified teachers/trainers. Such restrictions increase production costs and disadvantage the affected providers.

The introduction of market-like mechanisms into VET resource allocation processes has triggered complex chains of interactive effects which are often difficult to interpret. Due to the broad-scale nature of this study and limitations in research methodology, the conclusions reached about the outcomes of market reform in VET are tentative. Nonetheless, the research findings do indicate the general direction and outcomes of market reform.

This study identifies several benefits and costs of markets in VET. Some of the purported benefits of market reform remain unsubstantiated, even if not entirely disproved. Additional data are required before clear-cut conclusions can be reached. On balance, however, the weight of available evidence suggests that, at the time of this study, negative rather than positive outcomes predominate.

Outcomes appear to be positive in relation to choice and diversity; responsiveness (to medium/large enterprises and fee-paying clients); flexibility; and innovation. Conversely, outcomes appear to be generally negative in relation to efficiency (due largely to high transaction costs and complexity); responsiveness (to small enterprises, local/surrounding communities and government-subsidised students); quality; and access and equity. Overall, assessments by registered training organisations of the global impact of market reform in VET are evenly divided, although a net majority of TAFE institutes and ACE centres delivered a negative verdict.

The research raises questions about the impact of market reform on public interest objectives (including community service obligations and public accountability), thin markets, and the financial viability of providers, particularly TAFE institutes and small registered training organisations.

Overall, the research suggests that, as a result of market reform, TAFE institutes and non-TAFE registered training organisations are trading places with respect to income sources and organisational identity, values and priorities, with non-TAFE organisations becoming more dependent on government VET funds and TAFE institutes less so. Such changes have potentially detrimental implications for the public good. The report concludes by arguing the need for a more creative and judicious mix of state planning and market forces, one which serves the needs and interests of all stakeholders and preserves the distinctive character and mission of the public VET sector.

Additional material relating to this report in Trading places: Impacts and outcomes of market reform in vocational education and training—Support document can also be downloaded.