Applying the Export Education Levy for 2010

Executive summary

1. This Regulatory Impact Statement (RIS) sets out a policy to continue to apply the Export Education Levy to education providers which enrol international fee-paying students, during the 2010 calendar year. Factors which have a bearing on the setting of the 2010 levy rate include current and estimated future levy revenues, the levels of required spending across the purposes of the Export Education Levy (EEL), and matters relating to how the costs and benefits of the EEL will be spread across the sector. Possible impacts of changes on sector cohesion and the development strategy for the sector are also relevant.

2. The preferred option is to continue to apply the existing rate of the Export Education Levy (EEL) to education providers from 1 January 2010. The existing rate of the EEL is considered adequate to meet the objectives of the levy at this time. This would be accomplished via an Order-in-Council signed by the Governor-General and published in the New Zealand Gazette.

3. There are no additional costs to the Ministry of Education of collecting the levy from education providers, as the necessary collection systems are already in place. There are also not expected to be any additional administrative costs to providers.

Adequacy statement

4. This RIS has been reviewed by the Ministry of Education. It has been assessed as being adequate according to the objectives defined by Cabinet [Cabinet Office Circular CO (07) 3 refers, dated 3 April 2007].

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Status Quo

5. A policy process beginning in 2002 led to amendments to the Education Act 1989 creating an Export Education Levy (EEL), which has been administered by the Ministry of Education since 2003. Section 238I of the Education Act 1989 established the levy. The levy is made up of a flat fee component of $185 (excl GST) payable by each provider, together with 0.45 % of tuition fee income (excl GST) from international students. The EEL is collected from all education providers that enrol international fee-paying students. The purposes to which levy funds may be put are specified as:

• the development, promotion, and quality assurance of the export education sector
• the making of payments (reimbursements) to students affected by the failure of a private provider
• the administration and audit of the Code of Practice for the Pastoral Care of International Students (the Code)
• the general administration of the levy and associated purposes.

6. There was initially significant resistance during 2002/03 to the proposed levy on providers. The Ministry has consulted with providers every year since 2003 on the rate of the levy, as required by section 238H(3) of the Education Act. The annual consultation has found that sector views on the levy appear to have moderated, and there now appears to be a tacit acceptance of the activities which the levy supports.

7. Different provider groups earn widely varying fees from international students, depending on the length of their courses (note: during 2008 the average tuition fee per international student charged by the public tertiary institutions was $10, 924; for schools it was $7,585; and for private training establishments it was $3,812). The impact of the EEL is minimal for schools and public tertiary institutions, whereas it is more pronounced for private English language schools. State and state integrated schools pay the EEL as a component of their International Student Levy (ISL), which will be reduced from $900 to $420 effective from 1 January 2010.

8. Competition between individual institutions is important to ensure development in the export education industry. However, there are circumstances in which industry-wide cooperative development can be a better approach. These circumstances are:

• Economies of Scale: where costs decrease with the scale of an activity or development (for example, market research and professional development assistance).
• Free-rider problem: where an activity or development has benefits for a large number of institutions, but does not benefit an individual institution enough for it to fund it (for example, the international promotion of New Zealand education).
• Cooperation brings better results than isolated individual actions: cooperative action may bring better results than isolated individual actions, as it provides a remedy to the free rider problem.
• Mechanism for empowering an industry: in small systems and/or in domains that are dominated by government intervention, a levy helps to rebalance the power-balance in the relationship between industry and government.

9. As a result of the large number of export education providers which have very different interests, voluntary coordination across the sector to generate economies of scale and/or solve free rider problems is not a practical option. On this basis, the compulsory Export Education Levy has proved to be an effective means for funding activities which are intended to support cross-sector development.

10. While levy revenues have declined from the peak of $3.8 million recorded in 2004/05, there was an increase of 15% in 2008/09 compared with 2007/08. Income from the EEL was $3.3 million for the year ended 30 June 2009 with an operating surplus of $0.2 million. The balance of the Levy Trust Account was $0.92 million as at 30 June 2009.

11. There has been a marked shift in the extent of expenditures funded from the EEL. During 2003/04, the largest single item of expenditure was $0.63 million to reimburse international students affected by the failure of a number of private training establishments (PTEs). Since 2005/06, the focus of levy-funded expenditures has shifted to international education promotion activities, followed by research (particularly market surveys).

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Problem

12. The operating surplus from the EEL is maintained within the Levy Trust Account administered by the Ministry of Education (funds raised by the Levy are held in an Export Education Levy Trust Account, administered by the Ministry of Education, and are ring-fenced to ensure that strategic development work is on-going and securely resourced). A key purpose of the Trust Account is to maintain a sufficient balance (‘buffer’) to meet any necessary requirements to reimburse international students affected by the failure of private training establishments. For example, a spate of recent provider collapses in Australia has meant that the country’s main back-up fund to protect overseas students has suffered a $2 million reversal to its bottom line in just two years, recording a deficit of $1.3 million last year ( from ‘Cash crisis as back-up fund hits the skids’ in The Australian, July 22, 2009). Maintaining sufficient EEL revenues is essential to avoid a similar situation occurring in New Zealand.

13. The size of a minimum necessary ‘buffer’ has previously been actuarially calculated at $0.58 million. Notably, reimbursement of $0.27 million has so far been required since 1 August 2009, due to the recent failure of a private flying school in Christchurch. This is the highest level of reimbursement since 2003/04.

14. A process to establish the EEL rate for 2010 needs to be followed even if no changes to the current rate are proposed. The results of this consultation will then inform the drafting of a paper to the Cabinet Social Development Committee. Following the Cabinet decision, regulations for the 2010 EEL rate will be finalised by the Parliamentary Counsel Office. A notice in the New Zealand Gazette will need to be published by early November, prior to the levy regulation coming into force by 1 January 2010.

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Objectives

15. The objective of this policy is to continue to apply the Export Education Levy to education providers which enrol international fee-paying students during the 2010 calendar year, in order to fund the development, promotion and quality assurance of the export education sector. Another key objective is to maintain a sufficient balance in the Levy Trust Account in order to meet any requirements to reimburse international students affected by the failure of private training establishments.

Alternative options

16. Three possible options for the rate of the Export Education levy in 2010 are set out below.

(a) Reduce the current rates

Pros: While a reduction in current rates is likely to find support within the sector, there is no current advocacy by the lead sector bodies for a reduction in the levy rate(s).

Cons: Reducing the current levy rates is likely to result in insufficient funding of generic international education promotions, research and professional development, administration of pastoral care requirements (via the Code Office) and allowing a margin for any necessary student reimbursement.

(b) Increase the revenue-based component for all providers to: 
    i. 0.55% of fees 
    ii. 0.65% of fees

Pros: Increasing the levy rate would increase total income (by about $0.6 million for a rate of 0.55% or $1.3 million for a rate of 0.65%) and would be relatively equitable in terms of the level of contribution from different providers. This would take account of the need for more resources for generic education promotion, and the likelihood that a sustained effect in attracting more students will be achieved through ongoing higher spending in this area. Increasing the surplus in the Levy Trust Account would allow for increased sector-funded allocations for promotions and communications into the future, i.e. after the 2009/10 financial year.

Cons: There is no immediate need to raise the levy rate in 2010, given the size of the remaining surplus in the Levy Trust Account. There is also likely to be a small increase in levy revenues for 2009 due to increasing international student enrolments. There would be risks associated with proposing an increase in the levy rate primarily for the purposes of funding more generic education promotion as, despite the industry’s desire to spend more in this area, there is – as yet – no general agreement by provider groups as to the appropriateness of the levy as a means to sustain this spending in the long term. A rise in the levy would have a greater impact on the finances of private training establishments, particularly English language schools, as these providers earn lower levels of per-student tuition revenue.

(c) Increase the flat fee component to:
    iii. $500 for each provider 
    iv. $1000 for each provider

Pros: An increase in the flat fee component would result in an increase in the overall revenues of $0.27 million (for an increase of $500) and $0.55 million (for an increase of $1000). This would allow for a more even distribution of Code of Practice costs (the actual spending for Code Office Attestation, Monitoring and Resources is reported annually in the Ministry of Education’s Export Education Levy Annual Report) across all providers.

Cons: This would take no account (for the purposes of Code costs at least) of the significant differences in student numbers across providers. It could encourage providers with only a small number of students to exit as they would pay proportionately more than larger providers. It would also require a very sizeable increase in the flat fee in order to raise significant additional revenue.

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Preferred option

17. Taking these factors into account, the preferred option for consulting on the levy rate is to propose maintaining the current rates for the calendar year 2010.

Pros: The current rate of 0.45% of turnover has yielded sufficient revenue to meet all the statutory purposes of levy expenditure, and there is also likely to be a small increase in levy revenues for 2009 due to increasing international student enrolments. The balance of the Levy Trust Account is sufficient to provide additional resources for sector promotions, to cover externally driven costs (e.g. student reimbursement) and to provide an offsetting cushion against future downturns in revenue. In this sense the current rate appears pitched at the right level, and should be maintained at that rate in the absence of any compelling evidence that it should be adjusted.

Cons: Maintaining the rate of the EEL will limit the capacity of the government to make greater industry-funded resources available in the 2010/11 financial year to sustain New Zealand’s competitiveness in education promotion activities vs. the effects of other nations active in the international education market.

18. The Levy Trust Account had a balance of $0.92 million as at 30 June 2009. Estimates for the current financial year indicate that the existing levy rate will continue to deliver revenues sufficient to meet expenditure needs across the range of levy purposes during 2009/10. The funds available are adequate to undertake the industry development programme, administer the Code of Practice for the Pastoral Care of International Students, and provide an implicit ‘buffer’ of up to $0.58 million for reimbursement of students affected by any private training establishment collapses.

Rationale
19. This approach would be the most administratively straightforward means of operating the EEL for the 2010 calendar year.

Risk assessment
20. Administratively, this process would be a low-risk measure, as the Ministry of Education payment systems have been in place since 2003. Responses to public consultation on this measure (see below) indicate there is a low risk of negative reaction to the continuation of the EEL from education providers.

Compliance costs
21. There are no additional costs to the Ministry of Education of collecting the EEL from education providers in 2010. There are also not expected to be any additional administrative costs to education providers.

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Impact on the stock of regulation

22. The Regulations setting the EEL for education providers will replace the Education (Export Education Levy) Regulations 2008. Consequently, there will be no net change to the stock of regulation.

Implementation and review

23. The EEL for education providers will be implemented by the Ministry of Education from 1 January 2010. A review of the operation, administration and effectiveness of the EEL was completed in February 2006, and was reported to the House of Representatives by March 2006. The Review was positive and is listed on the website of the Ministry of Education.

Consultation

24. A letter inviting submissions on a proposal for an unchanged EEL rate for 2010 was sent by the Ministry of Education on 25 September (and follow-up email reminder on 8 October) to the eleven international education sector peak bodies (the 11 peak bodies consulted were: Association of Proprietors of Integrated Schools, Education New Zealand Trust, English New Zealand, Independent Schools of New Zealand, Independent Tertiary Institutions, Institutes of Technology and Polytechnics of NZ, New Zealand Association of Private Education Providers, New Zealand Educational Institute, New Zealand Principals’ Federation, New Zealand School Trustees Association, and the New Zealand Vice-Chancellors' Committee). Submissions were required by 13 October 2009. Ten submissions were received.

25. The New Zealand Vice-Chancellors' Committee did not wish to make any comments on the Export Education Levy rate for 2010. The Secondary Principals’ Association of New Zealand also made no comment on the Export Education Levy. The submissions from the Association of Proprietors of Integrated Schools, and Independent Schools of New Zealand, supported the current levy rate, as did the submissions from New Zealand Principals’ Federation, the New Zealand School Trustees Association, and the Education New Zealand Trust. The Metro group of Institutes of Technology and Polytechnics did not support an increase in the levy rate. English New Zealand opposed the current policy and proposed abolishing the Export Education Levy. The New Zealand Association of Private Education Providers also opposed the levy, but accepted the current rate.