Saving TAFE: an article in honour of the memory of Dr John Kaye 1955-2016
When I heard of Dr John Kaye’s death on May 3rd, I felt I had lost someone who had looked out for me, not personally, although he had been very supportive of my research work, but as a mentor of an entire community. I first met John through the Save Bulli ED community campaign, which fought to keep the emergency department at Bulli Hospital open. A public rally was organised and politicians from all the major political parties were invited. The only one to come was John Kaye. In front of an audience of over 500 people, he spoke eloquently, intelligently and from the heart about the importance of Bulli and the public health system.
John became a Greens member of the NSW Parliament in 2007, and always carried a broad portfolio. He served to protect our environment and the legacy left by previous generations. He believed in the principle of universal health and campaigned against the corporatisation of our health care system; he fought for safe drinking water by opposing the flagrant vandalisation of water catchments by coal seam gas miners. He campaigned against the Trans-Pacific Partnership (TPP) Agreement, and he worked very hard at developing policies to protect a future made possible by renewable energy, a field to which he brought his considerable high level expertise as an electrical engineer.
The following essay on the privatisation of TAFE is dedicated to John’s other passionate campaign, the protection of public education against economic abuse and neglect, corruption, and disrespectful and callous treatment of staff and students. He clearly saw that students’ futures were dependent on high quality, financially accessible courses, provided by trained experienced teachers in well-resourced colleges.
This article is in honour of Dr Kaye by way of continuing his work, his fight to save TAFE and the future of our children, community and economy which he understood was so inextricably linked to quality public education run by the people for the people, and whose interests should not be held hostage to those of profiteers and investment banks.
TAFE on the line
Pulling all the threads together, in order to weave into view a picture of what is happening to TAFE and why it is happening necessitates an examination of the forces at work in an entirely different part of the society, the finance sector.
The relationship between the finance sector and vocational education is flagged by the latest report from the Boston Consulting Group released in April 2016. Commissioned by the NSW Government, The NSW Vocational Education and Training market and TAFE NSW's competitive position within it report, posits an economic rationale for the sell-off of TAFE. It recommends the government continue with its plans to develop a contestable market for vocational education; at the same time pointing out that TAFE would find it difficult to compete in such a market. “To remain competitive, TAFE NSW must improve its productivity, decrease its cost base, and maintain or grow enrolments up in order to defray high fixed costs.” Those high fixed costs include salaries and wages, administration, and assets like land and buildings, calculated by Boston to be worth around $4.7 billion. If TAFE can’t reduce its costs, they say, it may be forced to raise student fees, making it even more uncompetitive; the implication being that TAFE is not fit for purpose in a 21st century contestable marketplace.
So what is a contestable market and how has it changed the nature of competition in vocational education? A contestable market is a market that has no barriers to entry or exit. Entering the market as an education provider is cheap and easy; you don’t have to sink money into infrastructure, you can just lease floor space for classes, you don’t have stringent regulations to contend with or high licencing fees to pay. Your flexible workforce of contractors and casuals don’t leave you with high redundancy costs if you decide to exit the industry and reinvest your capital elsewhere. Even foreign investors, can transfer overseas, their profits and revenues from the sale or liquidation of training businesses and colleges, without transaction costs or other capital controls. Such barriers to the outflow of money, Australia agreed to remove, when the Federal Coalition Government signed up to the TPP and other international trade and investment agreements between 2014-15.
Does this kind of market increase competition between providers? The short answer is no. The word ‘contestable’ is a misnomer. A contestable market actually leads to mergers and acquisitions until eventually you end up with just a couple of players in the market or even a monopoly, which a contestable market justifies on the grounds that without barriers to the market potential new providers will threaten incumbents, so even monopolies are forced to behave competitively, keeping prices low. That’s the theory; in 2018 when student fees are deregulated (according to the NSW Independent Pricing and Regulatory Tribunal, IPART), fees may well go up, particularly if the taxpayer keeps subsidising students in private colleges, a distortion of the market, that does not figure in any contestable market modelling.
There has already been considerable consolidation and exits from the market with three of the largest companies, Vocational Ltd, Ashley Services and Australian Career Networks, buying up competitors, and then in the space of a few years, winding up under dubious circumstances. Eventually this kind of volatility in the market will diminish and a large corporate or two will emerge to take the place of TAFE’s once illustrious and socially beneficial near monopoly of vocational education.
But this substitution swindle financed from the public purse is not simply about creating a new education market for private oligopolies or monopolies.
Embedded in the privatisation process is another glittering prize, the release of TAFE’s assets, primarily its land and buildings (TAFE real estate) onto the property market. The property market in turn feeds the collateral on these real estate assets to the finance sector which converts this collateral into financial products, primarily derivatives which are traded on global markets.
The evidence of the intention to sell-off TAFE is in Boston’s report which incriminates TAFE’s assets as a major contributor to TAFE’s low competitiveness, stating, “High asset costs are driven by a large and diverse asset pool”, the implication being that if TAFE wants to compete in the contestable market it must divest itself of those assets to bring its costs down.
The sell-off of TAFE’s assets nationally has also been endorsed by the Commonwealth Government, when in 2014, the then Coalition Treasurer, Joe Hockey, promised to pay 15% on the assessed value of any asset sold by a state government. This incentive scheme which is operational to 2019, encourages the states to build new infrastructure with capital raised from the sale of old infrastructure. It is called asset recycling and it is designed to accelerate asset sales and the accompanying boom in new infrastructure. Of course financing infrastructure construction is very expensive, much more so than maintaining current infrastructure, which partly explains why government debt keeps going up and up, even though they are privatising.
Selling off TAFE assets is in effect selling Australia’s vocational education system to be gambled on global financial markets. TAFE real estate will be sold and the banks will issue loans against that real estate to both government and private investors, which will induce further competition in the property market and trading on financial markets.
Governments in turn will say, ‘vocational education needs fixing’ and the fix will be to build new colleges and educational facilities. They will take the recycled capitol from assets sales, plus more borrowed money, because constructing new infrastructure is an enormous drain on Treasury, and feed the burgeoning debt crisis which serves the interests of the banks who sell debt money. Private investors are also invited to invest in this new infrastructure through bonds, particularly infrastructure bonds and other financial products. This is likely to induce what economists call ‘credit collateral spirals’ were you end up with too much debt, both public and private, causing severe economic instability.
Governments are fuelling these spirals by way of creating the conditions for leveraging (debt financing) a real estate‒infrastructure boom at taxpayers’ expense. And once the infrastructure is built there will be further pressure on government to borrow more in order to fund the operation and maintenance of this new infrastructure, leaving ever smaller amounts of money to fund staff and ongoing expenditure on actual services.
John Kaye feared that any further undermining of TAFE could collapse the vocational education sector and precipitate a general ‘downward economic spiral’. The collapse which is already advanced in Victoria and which nationwide has seen thousands of students and staff struggle with falling course standards, the closure of TAFE colleges and ever diminishing TAFE budgets, has direct adverse impacts on the real productive economy. Small to medium sized enterprises and the economy at large is entirely dependent on a highly skilled trained workforce. If that workforce training is undermined the economy is undermined.
The collapse of TAFE is also linked to the financial sector, because in order for the sector to expand it needs more assets to invest in. The process of privatisation releases public assets into the market, thereby inducing further investment and expanding global financial trade. If the TPP is ratified the expansion of the private education market will embrace the Asia-Pacific region from where it will draw, investors, students and vocational education and training (VET) workers. At this point Australian governments will have much reduced control over buying and selling in the education market and the real economic risks of TAFE privatisation that are already emergent will intensify.
CRASH through: a short history of a money making model
There is a truism about financial collapses that says they never happen in the same way twice – but they do happen again and again because the same factors are at work in the system and the vestiges from one crisis feeds the next.
To grasp the significance of the economic risks that the privatisation of TAFE poses to the Australian economy one needs to travel back in time to the United States and the beginnings of the Global Financial Crisis (GFC), a crisis which saw millions of people worldwide lose their homes, their businesses and their jobs.
The crisis began in the US housing mortgage market. In the years preceding, large sums of money were injected into the US economy, by countries, especially China, buying US bonds because they were deemed a safe investment. US citizens could access this new money through loans from commercial banks and government-sponsored lending enterprises like Fannie Mae and Freddie Mac, to buy new houses, renovate and purchase consumer goods. This capital, combined with low interest rates, drove the expansion of the prime housing mortgage market to saturation point. There was still a pile of money to invest, but no more borrowers with stable jobs and incomes to lend to - they already had houses. In order to continue lending, the banks called for more growth in the housing sector. The Federal Government responded by establishing the American Dream Downpayment Fund, announced by President George W. Bush in June 2003. Under this scheme the US government guaranteed down payments on housing loans, thereby enabling millions of low income Americans to borrow the deposit on a house because the government would go guarantor.
The flood gates were opened. Banks and mortgage brokers sent their salesforces into the slums of America to recruit the poor and destitute into the housing market. These borrowers were nicknamed NINJAs, no income, no job or assets and the loan products they were sold were called sub-prime mortgages. These were dubbed ‘toxic loans’ and to hide them, investment banks bundled them up with prime loans (that could be repaid). To on-sell these loans (called re-hypothecation) the banks invented new types of mortgage products, such as collateralised debt obligations (CDOs). The belief was the US housing mortgage market could not fail. As the honeymoon period on low ‘teaser rates’ loans ended, thousands of sub-prime borrowers faced monthly repayments well beyond their capacity to pay – the trickle of defaults soon turned into a tsunami which resulted in a catastrophic fall in house prices. In 2007-8, the housing market collapsed causing six million people in the US alone to lose their homes.
By the end of October 2008, the GFC was all but over for most of the big US investment banks. Hank Paulson, Treasury Secretary and former CEO of Goldman Sachs, had allocated $250 billion of taxpayers’ money to bail out the investment banks. The banks consolidated. Goldman bought out Lehman Brothers, Bank of America bought Merrill Lynch and J.P. Morgan got the lion’s share of Bear Stearns. These banks who had made billions trading derivatives for years had gambled and won. With the assistance of their own people in government and the cooperation of the US Congress, their debts were covered, which left them with a big problem - where next to invest all this money?
Australia the next best thing
Between 2008 and 2014 foreign direct investment (FDI) into Australia increased by 84% the majority coming from the US. In 2015 inward FDI was $735.5 billion representing 24% of total foreign investment in Australia. As an investment destination, Australia has a lot going for it, particularly its expanded markets created by privatisation of the public sector which began under Labor in the 1980s. Now there are hospitals, colleges, ports, toll roads, airports prisons, detention centres and much more, offering investors opportunities. Privatisation and the infrastructure boom that has accompanied it, has contributed to finance becoming the fastest growing sector in the Australian economy, clocking up 5.1% annual growth rates. As for the Australian finance markets, their annual turnover in 2015 (exchange traded and over-the-counter) was a massive $135 trillion according to the Australian Trade Commission (that’s 84 times Australia’s GDP).
So where does TAFE fit into all this?
In 2009 the Federal Labor Government established the VET FEE HELP student loan scheme which triggered investment in vocational education. The scheme was ostensibly aimed at getting people into education by lending them the money to pay for courses which had previously cost students very little. The aim was to grow the market for private providers by ensuring a supply of students who could afford the courses run by profit takers. To ensure TAFE did not undercut the private providers on price, state governments started to hike up student fees. Course fees rose in many cases stratospherically from just a nominal yearly fee to many $1000s per semester. State governments also ensured that TAFE did not compete with private providers on quality. Governments defunded (cannibalised) their own colleges and have continued to cut millions from the system at the same time private colleges have been rorting billions of dollars. Staff numbers were cut, facilities within colleges removed, equipment not upgraded, course length reduced, and courses abolished. To squeeze more out of the market, some private training providers sent brokers into poor disadvantaged and remote communities to recruit people to sign-up to government student loans who had little chance to start courses let alone finish them and repay their student debt. What they were eliciting was sub-prime student loans, which became toxic to the funder, the Commonwealth which is faced with burgeoning bad debt from students, estimated by the Grattan Institute to reach $13 billion across all higher education by 2017.
One solution to the problem of student bad debt put forward by the Grattan Institute in 2014, is to introduce asset contingent HELP repayment for estates over $100,000. This means that if a person dies without paying off their student loan, their estate must pay the debt. In 2015 ACIL Allen recommended that student debt write-off upon death be abolished and concurred with the Grattan Institute that estates over $100,000 be targeted for repayment. This recommendation paves the way for private lenders to create a student loans market as debtor estates can be used as the collateral needed to guarantee student loans.
Student debt is only one component of the emergent debt crisis. The sale of TAFE assets encouraged by the assets recycling policy, will see banks create more credit money as investors borrow to access these assets. It is the role of government to constrain this type of private leverage – not fuel it. The third key component of the debt crisis is infrastructure debt. Governments faced with a failing economy will have to renew investment in educational infrastructure – in other words, rebuild the TAFE they sold off. Along with health, roads and other infrastructure, governments are now massively over subscribed to new development which they are borrowing for at historically low interest rates. Many infrastructure projects have not been prudentially managed, as attested by the new Fiona Stanley Hospital in Perth and Sydney’s cross-city tunnel, just two examples of budget blow-outs.
Infrastructure development is fuelled by the finance sector which trades in infrastructure bonds, cover bonds and other financial products serving as debt instruments for these developments. If governments do not put the brakes on, if they simply swill at the same fraudulent troughs then another debt fuelled GFC is inevitable – and when that happens, the bailouts will begin. ‘Too important to fail’ is likely to be the catchphrase next time round.
At the very end of Adam McKay’s telling film, The Big Short, there is a statement about a new financial product called ‘bespoke tranche opportunities’ (BTOs). BTOs are being put together using infrastructure bonds. Tranche is French for slice - so investors, with the help of investment bankers, put together slices of securities with varying degrees of risk, into a BTO, for example infrastructure bonds with different maturities and domestic/international mixes and slices of interest rate swaps etc. So basically BTOs are about splitting securities up and selling them off to investors like hedge funds, who then sell on to more investors. BTOs are simply another variation of collateralised debt obligations (CDOs), the gambling product which played such a significant role in the collapse of the US mortgage market.
Taking the fight to government
John Kaye was fully aware of the dangers that private ownership of vital social infrastructure posed. He threw support behind the NSW Nurses and Midwives Association’s campaign to prevent the privatisation of the Northern Beaches Hospital and the closure of public hospitals at Mona Vale and Manly. Healthscope, the corporation awarded the tender for the new hospital was floated on the Australian Stock Exchange (ASX) in 2014 by the US based TPG (Texas Pacific Group) and the Carlyle Group, which has focused much of their investment strategy in the armaments industry. They have since sold their $872 million stake in the company. Other major investors include HSBC, J. P. Morgan and the Swiss, UBS. The latter two investment banks were bailed out by US and Swiss taxpayers, respectively in the 2008 crisis. In August 2014 John, aware of my research on financialisation of public assets, asked me to assist in preparing questions for the NSW General Purpose Standing Committee. He pursued the issue of financial risk regarding the hospital:
Dr JOHN KAYE: “Suppose … that provider, because of its trading arrangements elsewhere, goes belly up and is unable to continue to trade. What will happen to their public hospital provision?”
Dr HAMMETT: “There are contained within the RFP document, commercial guarantees, that would require the parent company and their financiers to make significant substantial payments to the State …”
Dr JOHN KAYE: “There is no entity left ... goes belly up and you have nothing, who is going to provide --
Mrs JILLIAN SKINNER: “This is about as likely to happen as pigs might fly.”
So here writ large is the very attitude that brought the world economy to its knees in 2008 – the belief that it can’t happen. The possibilities of it happening are entrenched in the system. Infrastructure NSW, the statutory authority tasked with advising the government on infrastructure is chaired by the chairman of HSBC Australia. There are no citizen representatives here, no professional bodies, no unions, no taxpayer associations, no constraints, just business and bureaucracy.
Dedication to the Future
Dr John Kaye towered over his political adversaries, by dint of his ethics, his intelligence and strength of character. He did not hold to the delusion that the ‘market’ would ensure a skilled workforce matched to the needs of a changing economy. He did not seek personal financial gains by joining the boards of ASX listed private education companies, and he always held to the idea that education was not just about work readiness, it was about the development and empowerment of individuals to fulfil their lives and contribute to their communities. His was a very broad perspective that pivoted on social values.
He was a fine politician, a master of the art who lived up to what Plato understood to be fundamental over 2,000 years ago.
"the true political art must care not for the private but the common—for the common binds cities together, while the private tears them apart—and that it is in the interest of both the common and the private that the common, rather than the private, be established nobly." The Laws of Plato.
Our community has lost a fighter for justice. An ethical, caring, intelligent man who cared deeply for his community and the Planet and who dedicated his life to stopping its destruction and planning for a better more viable future. Forever in our hearts.
Caroline Colton
21 May 2016
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