Vocational education and training providers in competitive training markets

The training industry in Australia has been through a series of regulatory changes since the early 1990s, with the aim of making it more market-oriented. There are now several thousand private providers, typically small and serving niche markets, competing against one another and against about another 60 technical and further education (TAFE) institutes. They compete for the publicly funded training dollar, which is contestable to varying degrees across states and territories, and also for the business of employers and individuals who are willing to purchase training on demand.

Ferrier, Dumbrell and Burke have produced a report that explores how both public and private providers do business in today's market. They focus on three particular aspects of operating in a competitive environment: income sources and mixes; thin markets for vocational education and training (VET); and research and development activity. In an overall sense it is clear that competition has provided a tremendous spur to how providers operate, encouraging adaptability and creativity, and often collaboration. The study offers a number of interesting lessons for regulators.

Key messages

• Public and private providers are keenly interested in establishing and maintaining their financial security. They recognise that this means seeking out alternative sources of funds and reducing their reliance on one stream of income, especially when this comes from government sources of funding.
• VET providers earn income through diverse arrangements, including direct fee-for-service training, ancillary trading and by leveraging government funds to increase private investment. The variety of these arrangements is not well captured in current VET data collections.
• The extent of thin markets in VET may be overstated and sometimes used as a device to limit competition. Public and private providers argue that it is more costly to deliver training in thin markets.
• The number of providers who are engaged in research and development - beyond market research and innovation in teaching and learning - is very small. Those who are engaged report benefits, including in reputation, funding, staff development and better training.

Tom Karmel
Managing Director, NCVER

Market reforms since the 1990s have created a new environment for vocational education and training (VET) providers, presenting opportunities and challenges, both of which arise from greater competition for funds, new clients and training demands.

This project aims to contribute to knowledge of the experiences and practices of VET providers in this new environment by exploring and highlighting some of the factors influencing provision.

Three specific areas where knowledge is limited were chosen for study; they were also chosen because of their relevance to the current reform environment:

• income sources and mixes
• thin markets for VET
• research and development.

Investigations for this project centred on provider experiences and initiatives in the selected areas and important contextual factors such as policy settings. We held discussions with 14 public and private providers across five states, with state and territory training agencies and with a number of industry skills councils and employer organisations. The project also drew on published findings of previous studies. It should be noted that these investigations revealed that the diversity in the activities through which VET providers earn income is poorly represented in current VET data collections.

Income sources and mixes

Data on funding for public VET providers show a decreasing reliance on government support and a growth in fee-for-service income, with especially strong growth in recent years in income from international students. The proportion of fee-for-service income varies across the states and territories. Surveys of private providers show a stronger reliance on non-government funding; however, some rely indirectly on government funding through incentive payments to employers and for other initiatives, such as the previous government's skills vouchers for individuals.

Both public and private VET providers obtain income from governments, enterprises and individuals. All are striving to diversify their funding sources and to reduce their reliance on any one source, especially government funding.

To be successful in a competitive funding environment, providers engage in ongoing market scanning and maintain close relationships with industry associations and individual enterprises to identify specialist or emerging training needs or other unmet demand. Timing is critical - it is essential to be 'ahead of the pack' in identifying opportunities. This work requires investments in staff development, resources and facilities, in marketing and in nurturing relationships with potential partners and clients. However, some providers express concern about the adequacy of their internal resources for supporting this work.

There is increasing collaboration between providers, including between public and private providers and between providers and other organisations, including with enterprises and industry associations. Such collaborations increase the capacity of providers to respond to opportunities that arise in the competitive training market and enable access to facilities and expertise to meet client needs and allow for the sharing of costs (such as for marketing) and risks.

Using public funds as a means to increase their private income - leveraging - is an evolving area for both public and private providers. Governments see leveraging as a way to increase training delivery and to encourage private sector contributions. However, among providers and stakeholders there is uncertainty about how leveraging is best used, with the following suggestions being made.

• Leveraging should be restricted to specialist training.
• Leveraging may be particularly appropriate for labour market and similar programs in skills shortage areas.
• Tax reform might encourage industry to support leveraging arrangements.

Providers identify some formal restrictions on their activities and restrictive practices that discourage their participation in some markets, including government requirements for minimum class sizes and different requirements between states and territories vis-a-vis national provision.

Among the providers who participated in the study, cross-subsidisation of activities was indicated only in the use of private funds for public benefit, such as for staff development to improve the quality of training. Providers indicated that this practice had increased as government funding for VET had tightened.

Thin markets

Thin markets in VET are those in which the actual and potential number of learners may be too small to attract training providers. They are recognised as occurring in occupational, industry and geographic areas, alone or in combination. Industry skills councils consulted for the study noted that the existence of thin markets in their industries reflects factors such as industry structure, its geographical spread, traditional forms of training and low rates of labour turnover. Some industry stakeholders believe that, where there is considerable demand for training, but not for the type delivered by the formal VET system, thin markets may be 'overstated' or 'artificial'. Artificial thin markets also arise out of a 'silo mentality' that fails to recognise synergies between training needs across industries or occupations. The atomisation of training as demand grows for smaller and more specific skill sets also contributes to thin markets. Industry skills councils point to a need for more accurate measures of demand for training before thin markets become recognised as such.

In their user choice arrangements for apprentices and trainees, most states and territories identify thin markets as mainly geographical and occupational. They manage the training market in these areas using two principal strategies: restricting the numbers and types of providers in the market; and looking at each case individually, taking state priorities into account in deciding whether or not to intervene. A third strategy - identified in two states - is to allow the market to sort out any issues. The first strategy is less likely to continue as markets mature, demand for skills increases, and more and more training takes place on the job.

VET providers have two main concerns about thin markets: costs and restrictions on provider activity. Both public and private providers argue for a higher price to be paid for training in thin markets and for all states to apply loadings for the higher cost of delivery in regional and remote areas. Where the price is too low, some providers choose not to enter the market, thus reducing the options available to learners. Others enter it reluctantly - some public providers feel an obligation to deliver in thin markets, despite cost pressures and a limited ability to cross-subsidise.

Restrictions, such as limits on the provision of apprenticeship training in some jurisdictions, are of concern to private providers, who argue that state regulations are not keeping pace with the trends in the shift to workplace training and the use of new technologies. Employer and industry groups in the study stated that lifting such restrictions would result in an increased response to industry needs in thin markets.

Providers are considering and developing strategies to reduce costs in thin market areas, including delivering the first year of an apprenticeship as a traineeship, which enables more on-the-job assessment. As measures to ensure that delivery of training meets demand in thin markets, industry skills councils suggest flexible delivery, networks and partnerships, and a national focus.

Research and development

Engagement in research and development, defined as systematic work to increase the stock of knowledge and the use of this knowledge to devise new applications, is not traditionally expected of, nor undertaken by, VET providers. In recent years there has been a growing recognition of the potential role of VET in the national innovation system as the link between new knowledge and end users. This role has been recognised in some policy changes and initiatives at state and territory levels, many of which emphasise networks and partnerships between the VET sector and industry.

While the number of VET providers engaged in research and development is still very small and primarily confined to public providers, many more do undertake market research and innovations in teaching and learning, recognising these as vital to success in a competitive market. Those providers who are engaged in research and development do so to solve a problem or to increase their capability. They gain benefits in income, in staff development and in adding value to training.

Conclusions

VET providers are responding to changes in the competitive training market and they expect further change, including in funding sources. A primary concern in this environment is financial security. Providers are therefore seeking alternative sources of income to ensure long-term economic viability. They are also concerned about how best to meet the needs of learners, communities and client groups, recognising this as critical to their economic wellbeing. Consequently, providers are developing the following range of strategies to ease the pressures they are confronting.

• To overcome barriers to participation and success in some markets, such as formal restrictions, restrictive practices and limits to their capabilities, they are forming partnerships and alliances and targeting alternative market segments.
• To stretch their resources to cover activities such as market scanning and research, innovation and professional development, they are reducing costs and seeking additional income sources.
• To distinguish themselves from their competitors, they are offering innovative and distinctive products and services and co-branding with respected partners.
• To strengthen their capabilities, they are developing their own staff or forming alliances which give them access to additional capabilities.
• To market themselves effectively, they are forming alliances with partners able to provide assistance with marketing, seeking referrals from existing clients and maintaining close relationships with potential clients.

Overall, the work of VET providers who are successful in a changing competitive environment is characterised by application, adaptability and creativity.