The Investment Case for Higher Education and a Look at Funding Models

In his inaugural speech, HE President Ibrahim Mohamed Solih gave every Maldivian family a great hope – the hope that every child will be able to pursue higher education regardless of their socio-economic status.  His affirmation of the administration’s commitment to make education free up to completion of undergraduate level is a land mark decision in public fiscal policy.  It is a clear acknowledgement of higher education as a public good and an indication of the government’s policy prioritization towards universal provision of tertiary education.

The investment case for the decision is compelling given the delayed private benefits of higher education and positive externalities it create. As a society, we are more likely to benefit from pro-social behaviour such as wider engagement in activities that bring social good, inter personal trust, responsible political participation and contributions towards innovative solutions. Increased labour force participation rate (which currently stands at 57.6%1) and reduced crimes are key long term benefits the administration would certainly expect to achieve. These are not unrealistic gains given the evidence provided elsewhere in the globe where there is data available. Across OECD countries2, for example, employment among tertiary educated 25-64 year olds is at 81% compared with 60% among those who leave school before upper secondary. On average 25-64 year old adults with a tertiary degree earn 54% more than those with only upper secondary education. The OECD average for internal rate of return is 10% for men and 8% for women. Based on similar projections or slightly conservative estimates, the economic returns can easily be justified for the Maldives. Our 364-Day treasury bill presently stands at 4.60%3.

When we look at the essence of the debate on free provision of undergraduate education, we see that the arguments mainly revolve around the issue of equity and opportunity cost. Monthly course fees for an undergraduate programme roughly range from MVR 3000 to MVR 4000 in private sector institutions and MVR 1000 to MVR 2500 in subsidised public universities. Accommodation and food in a shared dwelling for students cost around MVR 3000 a month. In sharp contrast, income per earner by income quintiles (shown in table 1) is very low for 80% of the population. This means a youth coming from an average family will find it extremely hard to support his or her own studies even with a full time job let alone concurrently handle the responsibility of earning daily bread for the family, which often is the case in the Maldives.

Per capita income quintile Income per earner (MVR)
Poorest 20% 4296
21st – 40th 6292
41st – 60th 7980
61st – 80th 9937
Richest 20% 18146

Table 1: Income per earner by income quintiles, 20161

The opportunity cost must be discussed in light of trends in higher education markets across globe. The world is at the verge of fourth industrial revolution and education systems around the globe are moving fast. Without governmental backing, the Maldivian higher education sector is unlikely to be able to diversify into areas that need substantial infrastructure. The opportunity cost of not acting is too high a risk. Meantime, it is important to recognize the wider role played by higher education in any society. We should understand that each stage in tertiary education corresponds to a specific function of tertiary education in society. While elite tertiary education prepares students for roles in government and the learned professions, mass tertiary education provides the leading strata of the technical and economic organizations, and universal access to tertiary education prepares large number of people for life in advanced societies4. This is a good point to ponder upon. The Maldives graduated from the list of LDCs in 2011. We are able to keep abreast of many neighbouring countries and small nation states on many human development aspects such as universal primary and secondary education, gender equality, universal access to health, telecommunications. The green constitution passed in 2008 has a complete chapter on fundamental rights and freedoms. Today, the per capita income stands at US$10,5365. These are substantial achievements that needed careful planning, coordination and sweat. Perhaps it is time to take on another big challenge.

However, even with a strong investment and social case, at this stage it is important for us consider our strategic direction. It is important to give some thought into the kind of model of higher education that we want to see established 10-20 years down the line.  Do we want to adopt a tax heavy Nordic Model where government funding provides the bulk of finance or do we prefer a model similar to the Japanese Model where there is high reliance on private universities with a lot of room for private funding? Many East Asian countries and some of the western countries such as United States, Australia and the United Kingdom have chosen the latter model. As a result, these countries are able to sustain higher education financing without putting much strain on public finance. In contrast, many of the countries adopting the Nordic model are either struggling to keep up with rising higher education costs or are slowly moving towards a more balanced model. However, it should also be noted that student debt is an equal problem in countries like UK. Hence, the solution does not seem to be so straight forward. An ideal model cannot simply be picked based on pure empirical evidence.

We will have to consider country specific factors such as our bleak prospect of acquiring sufficient private funding to finance infrastructure required for Science and Technology, earnings gap between rich and poor, escalating fiscal pressure on healthcare and pension, and growing national debt. These factors, together with the global trends suggest that a balanced model of financing would be more beneficial for the long-term sustainability of the sector. Some proportion of funding could be borne by the student or employer, ideally through loan payback schemes. In OECD countries, on average 31% of funding is borne by the private sector2. A 75-25 split seems reasonable for the Maldivian scenario. This cost sharing arrangement provides some responsibility to the primary beneficiary while acknowledging that education is a public good. The 25% of student loan funding will shift the burden of payment from the point of consumption to the point of earning. Both increased taxes and loan repayments would not be problematic as long as the economy is buoyant and has and absorptive capacity.

Another important question at this junction is how do we allot or apportion government funding? Would students be provided with scholarships to fund a degree of their own choice or would institutions get funding directly based on funding formulae? Some of the funding models where institutions are directly provided with funding include input-based model, performance-based model and competitive funds. The input-based model calculates funding based on an input formula constituting components such as number of academic staff, qualification of academic staff, number of students, etc. Performance based funding is allotted using commonly used performance indicators such as the graduate output at various levels, attrition rate, research productivity, etc. They are often provided to run specific programmes or to achieve specific outcomes. Competitive funds on the other hand are usually supplementary funding for research or innovation projects and functions on the basis of institutional proposals that are subjected to review using pre-announced evaluation criteria. Almost all of these three models are quite bureaucratic. They are subject to uncertainty and bargaining. A very likely result would be soiled competitiveness. Therefore, the best model seems to be providing scholarships to students to fund a degree of their own choice. Rather than means-tested funding of scholarships, universal access schemes are preferable as research shows means-tested funding do not often work in the spirit they are set. This raises a serious question on the sufficiency of MVR 50m set in the budget of 2019 and MVR 175m proposed for subsequent two years. Given the current demand in higher education and the influx of people expected to join higher education upon commencement of the scheme, it is highly unlikely that the funding would suffice. This is one of the reasons why we need some contribution from the students. After all, having to roll back the scheme would be detrimental for all stakeholders once we commence it.

Another crucial aspect for the success of the scheme would be the commitment of the administration to work indiscriminately with both public and private sector. International Institute for Educational Planning’s Policy Brief of 2011 on Tertiary Education in Small States identifies that ‘sustainability requires predictable government funding, a clear position on private sector participation in the education sector, public-private partnerships, entrepreneurial interventions, commercialization in higher educational institutions, and leveraging regional and international partnerships’. The last thing we want to see is a higher education system completely deprived of market signals and blind folded without any incentive for driving competitiveness and innovation.

Every child deserves a good quality education. It is not the certificate per se that is the right of the children but the value it represents. The scheme is a great opportunity for the human development of this nation and we should all work together for its success.

Note: The views expressed here are those of the author and do not represent or reflect the views of any institute.