Post Mortem

A financial model for higher education

By Nagaland Post | Publish Date: 11/7/2020 1:31:55 PM IST

 India’s gross enrollment ratio (GER) in higher education is 28%. It lags behind the global average of 38% and behind China’s 51%. If India wants to become a knowledge economy, our higher education institutions (HEIs) will have to play a leading role in boosting the innovation ecosystem while, at the same time, increasing GER to 50%. This calls for the scaling up of existing institutions as well as the creation of new premier ones. To put things in perspective, 23 Indian Institutes of Technology (IITs) will admit as many as 15,000 undergraduates this year, while just one state university in the United States (US), Arizona State University, admits 13,500 undergraduates each year.

While the scaling-up of existing institutions and the creation of new institutions require additional budgetary allocations, running them well calls for money on a recurring basis. As a percentage of Gross Domestic Product (GDP), the nation’s expenditure on higher education remains low. This lower investment per student also has a strong correlation with global rankings.

The new National Education Policy (NEP) is trying to address this issue by allocating a fixed percentage of GDP for higher education. It also talks about granting administrative autonomy to higher education institutions. Currently, these institutions receive upwards of 80% of funds from the government. They must explore 21st-century financial models to secure financial and administrative autonomy.

What is needed is a structural overhaul and creation of a diversified financial model for our institutions. Indian Institutes of Management (IIMs) have been able to achieve autonomy by charging a higher tuition fee, contributing up to 85% of their funds. Is charging high fees the only viable financial model? It need not be if we follow the best practices of various countries and use a combination of these models.

Tuition fees contribute up to a quarter of the income for the most universities in the US, Australia and Asia. In the IITs, it contributes to only 6-7%, since only a fraction (approximately one-third) of students pay the upper limit of tuition fees. Others pay a much lower amount, based on their social category and economic status. This contribution can be increased not only by charging market competitive tuition fees, but also by bringing all students into the fee-paying category. This can be achieved by decoupling students and their families from the upfront financial barriers by offering them collateral-free and interest-free Income Contingency Loans (ICLs) through a centralised financial structure. Australia’s Higher Education Loan Program (HELP) is a widely-praised ICL model that is managed by the Australian taxation office. The repayments are linked to the debtor’s income level and are collected directly by the Australian tax authorities. ICLs are different from the education loans offered in the US that have caused massive student debt problems. A scheme can be piloted in India with IITs, which could also offer professional, executive and online programmes that do not require the infrastructure conventional degree programmes do.

A third of the income could come from the research activities. Though research is primarily government-sponsored, universities such as UC Berkeley, Harvard and Ecole Polytechnique Federale de Lausanne raise up to a third of their research funds from non-government sources. Research at IITs is predominantly government-sponsored. A critical challenge has been managing and operating research facilities with insufficient overheads (ranging 5-10%) from these government grants. Alongside the expected increase in overheads, IITs could tap funds from the private sector, invest in and incubate research start-ups, and strengthen technology transfer and intellectual property licensing mechanisms. Mechanisms such as Foundation of Innovative Technology Transfer (FITT) at IIT Delhi and Society for Innovation and Entrepreneurship (SINE) at IIT Bombay may facilitate institutional equity investment in deep-tech start-ups. The recent launch of the world’s most affordable Covid-19 testing kit by IIT Delhi and the supply of over 4.5 million export-quality personal protective equipment by IIT Delhi start-ups are small demonstrations of the potential such investments by HEIs can generate. For boosting industry participation in research, IIT Madras has shown a way through the creation of technology parks. IIT Delhi is currently developing three technology parks for various industry sectors.

Harvard, Stanford and Massachusetts Institute of Technology (MIT) have pioneered the concept of endowments, now adopted by public universities across the world. Endowment investment returns can easily contribute up to a third of the university’s income. Endowments are raised not only from the alumni but also from industry, philanthropists and governments. Last year, IIT Delhi launched an endowment fund with a target of raising $1 billion, that will provide a conservative investment income of Rs. 700 crore every year. A successful endowment model will require the creation of fund-raising teams and investment policy changes to overcome bureaucratic hurdles.

The new financial model for HEIs will be fuelled by the income from, one, deferred tuition payments; two, research grants/equity investments in startups/technology transfer fees; and, three, endowment donations. The transition is imminent, and it is up to us whether to lead or follow.

V Ramgopal Rao and Anurag Sachan

(V Ramgopal Rao director, IIT-Delhi, and Anurag Sachan is executive, IIT-Delhi)

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