Declining oil prices and funding tertiary level education in an oil exporting economy

1. Declining oil prices and funding tertiary level education in an oil exporting economy Martin Franklin, Roger Hosein and Bhoendradath Tewarie

2. Introduction The accumulation of human capital is critical and central to 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.

3. Introduction Several contending schools of thought on the funding of 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.

4. 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: • 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

5. 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

6. 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.

7. Key Macroeconomic Variables for the T&T Petroleum Sector 1999 – 2008. Source: CBTT Data Center & Own Computations from CBTT Annual Economic Survey (various years)

8. WTI Spot Price FOB (Dollars per Barrel) Source: Energy Information Administration

9. TLE Funding in T&T 1989 – Student Cess of 10% of the economic cost of 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.

10. Tuition Fees covered by GATE at UWI by Faculty 2008-09

11. Enrolment Profile 2001-2008, UWI, St Augustine

12. GATE GATE is a lump sum subsidy in the form of an increase in 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.

13. 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.

14. Payment of Upfront Tuition Fees Targets for increasing access to TLE put pressure on 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.

15. 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

16. 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.

17. 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.

18. 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.

19. Income Contingent Loans (ICLs) • The fact that risk averse students may not borrow to fund their 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: • i) the amount of the monthly/annual payment; • ii) a proper definition of income; and • iii) the terms of release from the loan obligation.

20. 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. .

21. 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). 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.

22. 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.

23. Policy Recommendations 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.