Providing free higher education for all under the current system will dramatically increase the burden on the state while giving a free ride to the rich and affluent middle class who make up 40%-50% of student enrolments.
The fear among many educationalists is that this will result in the sector being able to enrol fewer students and will compromise the quality of education, given that SA is severely fiscally constrained and stuck in a low-growth environment.
Fortunately, a task team set up by higher education minister Blade Nzimande last year, led by former FirstRand CEO Sizwe Nxasana, has proposed a more rational solution than free education for all.
The plan is to overhaul the indebted National Student Financial Aid Scheme (Nsfas) and replace most of its operational functions with a new private-public partnership (PPP) scheme, the Ikusasa Student Financial Aid Programme.
[Ikusasa is] a grant system that works on a sliding scale with the promise of providing additional wrap-around support to set students up for success
— Sizwe Nxasana
The key to the new model is to broaden the available funding by accessing private institutional funding.
Cabinet has given its approval for a detailed feasibility study and a R200m pilot of the scheme in seven universities and one college, to be conducted this year. Nxasana is the project officer.
The task team estimates that SA will need R42bn-R45bn/year to cover the full cost of tertiary study — excluding wrap-around support such as additional tuition and psychosocial services — to poor and “missing middle” students (those from households earning up to R600,000/year).
If implemented, this would cover just over 500,000 students in 2018, roughly 65% of students enrolled at public universities. Support will be comprehensive, including tuition, accommodation, books and meals, and it will cover the regulated course time plus one extra year. (Under Nsfas students are allowed two extra years.)
Tertiary education will be free only to “very poor” students — those whose families are dependent on social grants, pay no income tax and earn less than R75,000/year.
The rest, including “the poor” (household incomes from R75,100-R150,000) will be funded through a combination of grants and loans, which they will have to top up with family contributions.
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The proportion made up of loans and family contributions rises with income levels on a sliding scale (see table).
Given that government is budgeting to provide only about R17bn/year in the short term, the remaining R25bn will have to be sourced from the private sector.
The problem, says the task team, is that Nsfas receives almost all of its funding from the state, having lost most of its private funding due to inefficiencies.
To give the new model a fresh slate, Ikusasa will be run by a new management company (ManCo) and funding company (FundCo) operating under a formal PPP agreement with Nsfas.
There will be two separate income streams: private funding will be channelled exclusively through FundCo to ManCo, while government funding will flow through Nsfas to ManCo.
To boost corporate funding, the department of trade & industry has agreed in principle that 25% of a company’s voluntary skills development contributions, equivalent to 1.5% of payroll, may be diverted to Ikusasa and qualify for BBBEE points. This is expected to bring in R8bn in the coming fiscal year, rising to R15bn by 2019/2020.
Nxasana is also in discussions with national treasury to see if employers can be encouraged through the tax system to take over the student loans of their employees.
To further raise private capital, Ikusasa intends to issue social impact bonds (SIBs). Through this innovative financing mechanism, investors pay for interventions to improve a particular social outcome desired by government and in return share in any savings achieved.
“SIBs are a way of leveraging private investment to save the state money,” explains Nxasana. “Investors take a risk because they make a promise to the state that they will make sure the saving happens. If there are no savings, they get nothing.”
So while SIBs offer governments a risk-free way of raising private finance to pay for social goods, they also give investors a stake in ensuring that their philanthropic investments improve social conditions. And, unlike with the issuance of normal government bonds, there is no increase in the country’s debt burden.
In the case of Ikusasa, SIBs will be raised to try to reduce high student drop-out rates. If, for example, the drop-out rate is reduced from 50% to 30%, simplistically this would save government R3.4bn (20% of the R17bn it spends on the sector each year).
If investors spend, say, R2bn providing additional support to students with the aim of reducing the drop-out rate, their contractual pay-out if successful could be R500m of the R3.4bn saving. The rest would accrue to the state.
“Government has already budgeted R900m over the next three years for measures to reduce the drop-out rate, but this is not enough for 26 universities and 50 TVET [technical vocational education & training] colleges,” says Nxasana. “We’re looking to raise a couple more billion to do this across the whole system.”
Institutional investors will take time to develop confidence in the new funding model and for it to develop a solid track record, Nxasana feels. But he is confident, based on his experience in the financial sector, that “the funding pool is there” and once the new fund gains traction, investors will come to the party.
The scheme expects to raise R1.5bn from private capital markets and donations in year one, rising to R15bn by year three.
Various legislative amendments will be required to give effect to the scheme. Among those already gazetted is a proposal that the Banks’ Act be amended to allow banks to make student loans without having to meet the stringent capital adequacy requirements that would normally apply to the granting of unsecured student loans.
Another key innovation is that all beneficiaries of Ikusasa loans who graduate and obtain employment will be subject to automatic salary deductions by the SA Revenue Service to replenish the fund and counter the culture of nonpayment that took root under Nsfas.
“Affordability criteria will apply because we must ensure that students are not overindebted and don’t have this huge repayment hanging over their heads,” says Nxasana.
Stellenbosch University education researcher Nic Spaull has hailed the model as a “workable, sustainable solution that will decrease financial exclusion and be cheaper than funding higher education for all”.
However, some student leaders continue to reject it on the basis that it doesn’t provide free education to all immediately. Severe disruptions are expected again once campuses reopen.
The task team is engaging with student formations almost every week. One of the first things Nxasana explains to them is that the constitution never promised free education to the rich.
Rather it enjoins the state to take “reasonable measures” to make higher education progressively available.
Many students also dismiss Ikusasa as just “Nsfas 2”, not appreciating that it is “a grant system that works on a sliding scale with the promise of providing additional wrap-around support to set students up for success,” says Nxasana.
There’s no doubt that the Ikusasa model is the way to go. It’s just a pity it took a violent student rebellion (that cost one life, racked up a bill of close to R1bn and catastrophically destabilised learning and teaching) before government put real effort into addressing the problem.
What it means: New model targets R25bn a year in private funding, including social impact bonds to tackle high drop-out rate,
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