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    Determination of Economic Cost - February 1998

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    How to compute economic costs

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    of 95
    THE UNIVERSITY OF THE WEST INDIES DETERMINATION OF ECONOMIC _COST- TASK FORCE REPORT Febraury 1998 NIVERSITY OF THE WEST INDIES — MONA DETERMINATION OF ECONOMIC COST - TASK FORCE REPORT February 1998 TABLE OF CONTENTS Page INTRODUCTION AND EXECUTIVE SUMMARY 2 (CURRENT METHODOLOGY FOR THE DETERMINATION OF ECONOMIC CosT 7 EXAMINATION OF THE UNIVERSITY'S COSTS " ANEW MODEL FOR THE DETERMINATION OF ECONOMIC COST a OTHER RECOMMENDATIONS OF THE TASK FORCE 2 APPENDICES ‘Appendix — ‘Summary of Operating Costs of Uw 1986 - 1898, ‘Appendix Il Global Summary of Expenditures ‘Append Il— Departmental Expenditures - UGC. Appendix V- entra Expenditures ‘Appendix V — Gross Centre Expenditures Appendix VI- Centre Expenditures - UGC Appendix Vil Explanations for Movements in Cos from UWI ~ Office of Finanes Appendix Vill- Universities Selected for Benchmarking ‘Appendix Ik - ‘Comparison of Uii's Coss for 1995/95 with Universities Selected for Benchmarking (1985/98) ~ Converting at Exchange Rates ‘Appendix x = Comparison of UW's Costs for 1995/95 with Universties Selected for Benchmarking (1935/96) - Converting at PPP Factors Appendix XI- ‘Comparison of UW's Costs for 1995/95 with Universities Selected ‘Appendix Xil- for Benchmarking (1995/98) - Converting at PPP Factors (UW's Departmental Salaries Adjusted) Salary Comparisons ~ Uw vs Selected Universities Page 2 ot 29 1. INTRODUCTION AND EXECUTIVE SUMMARY. 14 Introduction and Terms of Reference In May 1997, The Minister of Finance established a Task Force to. address the issue Of the precise calculation of the economie costs for each faculty of the Univers of the West Indies (Mona Campus) ‘The members of the Task Force appointed by the Minister of Finance were as follows: ‘+ Mr. Erle Crawford ~ Partner, Price Waterhouse (Chairman) ‘+ Mr, Lloyd Brown ~ Director of Cash management, Ministry of Finance + Mrs, Lenice Bamett ~ Executive Director ofthe Students’ Loan Bureau + Ms. Jackie Lucie-Smith ~ Principal Finance Oiticer, Ministry of Education ‘The Minister also requested the Vice Chancellor of the University, to appoint two ingividuals to the Task Force to represent the University. The members appointed by the Vice Chancellor were: ‘+ Mrs. Elaine Robinson — University Management Aucltor, University of the West incies + Mr. Basil Waite ~ Student Representative uring the last & months, to aidinits deliberations, the Task Force has had numerous meetings and discussions with + members of the University finance and administration departments in their capacity {8 experienced tertary education administrators, 1 collect information and ‘explanations on the cast of running the Ui ~ individuals from a number of enities and institutions, locally and overseas (including the World Bank, Commonwealth and United States based universities), to develop. ‘relevant comparative cost information ~ senior members of the Ministry of Education, to batter assure that the approach taken by the Task Force (particulary with reference to the selection of Universives for benchmarking) was acceptable DISCUSSON DRAFT 120208 Page 3 of 29 1.2 Appreciation of the Need The mandate of the Minister indicated that the imperative which motivated him to appoint {the task force to review the calculation of an economic cost, s "the focus on the foes tobe charged atthe UW..." He felt that an appropriate approach te Yactiale tis” development of an explicit and transparent measure for calculating these costs would be fo establish a task force which will study the matter and prepare @ report which couls then form the basis of discussions between the various concemed parties, ‘The Task Force further sees the importance of this exercise in + Focusing on the issues of cost management and cost containment atthe UWI, The process should be one that demonstrates that the delivery of ‘education atthe UW is being achiaved atthe optimal "economic cost” for students who are required to fund part ofthat cost. as well as forthe wider society through Government's coniibutions. + Reducing ambiguity n the determination of the economic cost and ‘understanding its components by having a clearly defined and documented ‘approach. In particular, the Task Force feels that itis important to sisure that costs that are to be borne by students are allocatod as fairly and transparently as is possible over the different teaching centres in the University + Providing @ point of reference for any future deliberations on economic cost ‘+ Setting and establishing the tuition fees for the University 13 Executive Summary and Conclusions The Task Force has analyzed the costs incurred by the Mona Campus in delivering its programme to students from two main perspectives + We have reviewed the costs from a historical perspective. Excluding expenditures in ‘respect of Projects that are funded by sources other than Government subvertion ‘and tuition fees, and adjusting for certain expenditures (Centre Costs) that are incurred at Mona but which relate to other campuses and vice versa, costs have increased by 24.4 times between 1986 and 1296 Inflation, recomputed with 1985, as the base year, increased by 10.8 times and we have Compared increases in various cost components to this, Activities pursued at the Centre are mostly esearch or teaching related. As the costs of those activities vary with the extent to which those programmes are added or iscontinued from time to time, itis necessary to exclude those activives to get an assessment of those costs that may be considered recurrent” On ths basis, Fecurrent expenditure ineveased 24.2 tmes QSCUSSION DaseT 1270288 Page $29 ‘The cost per student (adjusted for inflation) had increased by 17.3% over the ton years, despite the increase in numbers of students (Tl time equivalents) by about 6% over the period. We found ths to be an unexpected tend. The Universiys response to tis is that given the nature oftheir product, is normal for per unit costs to increase with increases in the student Dody ~ the inereased expenciture on security and technology forthe benef ofthe Student body is also largely responsible for this rene the dynamic nature ofthe student body in terms ofa shit between full and part fime students where two parttime students are equated o one fulltime scent howaver the cost ofa part-time student is atleast the same as that of stu iene student ‘We also examined in some deta the components of the Mona costs that were brimariy responsibie forthe increases. In arms of operating expensitare emoluments showed the greatest levels of increase, up to 8 multiple of 30 in he case of academic salaries. There ware also other significant increases in maintenance of buildings and premises (25 times for cenval expenditures) and ofice & general expenses (hose relating to central administration of the camines teronced by 18 times). ‘The University atinbutes these increases primary to union negotiated salary increases, increased expenditure on security, additonal buildings and ecuisnent deployed scrote tho campus aiid computerization of several of he funchions on the Comparing similar entities, itis dificult to make an assessment as to re easonaleness ofthese assertions. Sased on data on academic salaries obtaining in the United States however, it does not appear that those paid by Ui! a excessive, In fact, the data suggests that faculty salaries paid at UWVI es than the 70 percent of the United States average that the UWI administration sine or + The Task Force considers that a criical element in the determination ef economic cost is for a modelo ba developed that can evaluate the roueonabloncee enn ests incurred by te UWMLin ts programime oterings, We co notes fat ey apportioning actual costs between students andthe Gavernmant ss mens ae {or determining “ecanomie cast’ inthis context an portent sce her he ne aise acressed was now the costs of operating ina Mona Campus compare} at {hose of simiarinstatons intematnaly In pursuing bis obeces corre a ‘as developed for selecting oer nsttulons tho someone DISCUSSION DasET 120288 ‘These citeria were agreed with the Vice Chancallor. He expressed reservations about the sutablity of some of the Insitutions that we selected based on the criteria and suggested alternatives. We have compiled data for both sats and included them in the report, ‘A major issue that we encountered was the tansiation of the costs of the UW into foreign currency for purposes of the cost comparison, We were concerned that a direct exchange rate comparison would be inappropriate, because itis recognized ‘hat a given unit of currency in one economy invariably purchases more or less ofthe ‘Same goods and services used by any institution in that country than the equivalent Unit of currency (based on the oficial exchange rate) would purchase in another economy. We learned that the World Bank had developed an index to faciitate this {ype of comparison, the Purchasing Powar Party (PPP) Index. We contacted the Bank, explained our needs and they confirmed that in tne absence of a PPP index. {or education, the PPP for GOP or GNP would be the next best translator ‘The Vice Chancellor of the University disagrees strongly with our approach, He expressed the view thatthe relevant comparison is what i would cost a Jamaican student fo obtain an education in a foreign University tnatis comparable tothe UW, ‘and not the notional Jamaican dolar cost based on PPP that he ought to pay to attend the LW. This being the case he argues that a straight exchange rate ‘comparison isthe only relevant comparison, and that the PPP approach is “eleva Nevertheless, in our attempt to address the reasonableness’ issue discussed above, ‘we have computed the costs of UV in United States dollars using the GNP PPP index forall costs other than academic salanes We accepted the arguments of WT Office of Finance that since academic salaries need to be internationally competitive and not domestically competitive, those costs should be converted at 75% (to recognize the objective of maintaining those salaries at 75% of US salaries) ofthe Exchange rate, Other costs were converted at the PPP index for Jamaica, The UW's costs were lower than the average costs of the US universities sampled, but higher than those ofthe Canadian Universities for which we were able to lain data We emphasize that no firm conclusions should be drawn from this ‘comparison. There are a number of factors that make the comparison imperfect, and these are discussed in section 12. Nevertheless, we feel that this ‘methodology is one that could be developed ino a model that could be agreed between the Government and the University as a basis for evaluating the reasonableness ofthe cost ofthe Universiy’s programmes, ‘Apar from the examination of the casts experienced by the Mona campus as described above, we examined the basis of allocating casts between the faculties and consequently diferent groups of students, and have cecommended a number of ‘modifications to the existing methodology. We believe that these modifications would improve on the equity with which the inescapable costs are allocated to the beneficiaries. This is discussed in detail in section IV DISCUSSION DRAFT 1202/98 Page 6 029 Finally. we have recommended that given the magnitude of the sums involved, the {computation of Eeanomic Costs that form the basis af calculation of students’ fees and Government subyention should be reviewed independently on an annual basis, possibly by the University’s internal auditor ar the external auditors. We make this recommendation because based on a limited review af one of the calculations, we ‘concluded that an error could have gone undetected. 14 Organisation of this Report ‘The remainder of the report is organised as follows: [ ‘Section Explanation TT] Current ethodology for me Determination of Economic Cost "Ii | Examination of Universiy Costs —] “The methodology thatthe University curenlly applies inthe determination of economic cost structure of —| the University’s costs and historical trends in the various components of cast measured against against rates of inflation and the ‘experience of ether similar Universities TW” | Anew model forthe Determination of Economic Cost ‘The new methodology proposed by the Task Force V_| Other Recommendations oF he Task Force ther observalions ofthe Task Force ia the ‘concluct ofthe exercise OSCUSSON DaArT 120208 MV CURRENT METHODOLOGY FOR THE DETERMINATION OF ECONOMIC COST ‘The costs of operating the University are clasifiod + Departmental expenses + Central Expenses + Centre Expenses ‘Adktionally, the University undertakes certain programmes, the funding of which is raised from sources other than student fees and Government subvention, These are {ferred to a8 “Project Expenditures" and are not factored into the calculation of “economic cost”. In recent years, Project Expenditure has ranged between § 60 and 23.2 percent of total expenciture incurred at Mona 11 Departmental Expenditures ‘The departmental expenditures are the costs of operating the various departmental units Within the University. The departments are cost centres of tne University ana ‘accumulate costs under the contral and respensiaity of a Head of Department. The departments include but are not limited to teachingicora instucton departments. A ‘number of other departments are included in this category ‘The mejor categories of cost accountad for in the departments are as follows Salaries ~ Teaching and Administrative Stat ‘Superannuation Provision Wages - Technical and Clerical Staff Related Costs, Maintenance, Cleaning and Repairs Office and General Expenses, Departmental Books and Equipment Expenditure from Special Funds 112 Contral Expenses The central expenses of the University relate to general campus expenditures which are attributable to no single facully but are incured forthe running of the camnpus as a whole 1.3 Contre Expenses ‘The University Centre constitutes those departments and administrative units the Activities of which benefit all three campuses, Thase costs are incurtad on three campuses. The expenses included in the Mona Campus Financial statements as Cente Expenses are in fact expenses incurred in respect of programmes pursued at al three campuses. Correspondingly, some centre expenses that are incurred atthe Cave Mil {and St Augustine Campuses relate to activites tat are pursued at Mona DISCUSHON ORArT 120298 Page of 29 ‘These Centre expenses relate to departments and administrative units such as: ‘+ School of Continuing Studies ‘+ Distance Education Centre formerly UWIDITE) + Vice Chancellory ‘The economic cost per student per faculty is determined by the sum of the following + departmental costs divided by the number of fll time equivalent (FTE) students in the faculty + central (campus) costs divided by the number of FTE students on the campus ‘+ centre costs ofall campuses divided by the total number of FTE students in the University ‘The current methodology forthe determination of economic costs reflected in the diagram below. ‘The mechanism to determine the FTE is as folous + for each faculty the on-campus student registration is weighted as below ‘fulltime registration = 1 FTE. 4 parttime registration = 0,5 FTE these weights are the same forall programmes ~ undergraduate, certlicate, diploma or higher degree, Ds BAT Page 9 029 *+ Each computed faculty FTE is then adjusted to take account of eross-faculty teaching, The weights used are as follows fone 3 credit course registration = 0.1 FTE ‘one 4 credit course registration = 0.125 FTE M4 Criticisms of the Current Costing Methodology of Computing Economic 1. The current methodology does not track all the costs incurred at te University, butis limited to those expenditures fundes by student subscriptions and Govemments.. Goverment contributions are determined by the University Grants Committee (UGC). Because Project expenditures have become a significant portion of the total expenditure on the campus, they need to be brought within the purview ofthe systams ef budgetary contol at ail levels, including the formal review of the UGC. Furthermore, the Task Force expects that, to the extent that some of these funds are provided by Jamaican private sector donors, a tax deduction will be claimed in raspact of those donations, since the University is an approved insttution under section 13 (h) ofthe Income ‘Tax Act. Hence, one third of those contributions tnat are from Jamaican Contributors are being funded by the State. The Task Force was also informed that when the funds that were anticipate from extemal donors do not materialize, the Government is invariably requested to fil the gap. If forno other reason therefore, the process of developing the economic cast aught to inchide an examination of Project expenditures, ‘The Task Force also believes that the non-inclusion of these project expenditures in the determination of economic cost under-states the real cost of operating the University, as these project expenditures have become a erica part of the verll funding of University activities. We have recommended elsewhere that the overall cost and cost per FTE should be montored and benchmarked against those of similar institutions as a measure of the faieness ofthe economic cost of the University. Benchmarking can only be vals ial costs ofall institutions being ‘compared are accumulated 2. The current mechanism forthe allocation of cental costs should be improved, ‘The apportionment of a central cost on the basis of FTE's is not the most rational basis for certain categories of expenses Faculties only budget and are charged in the accounting records, for the direct ‘costs that ae related to them. Examples of central costs which could be apportioned to departments/facults include: + Insurance, based on the value of buildings/assets insured in the department + Central utilities, based on the nature of the expense item and a means of representing benefit derived. Elacticity may be apportioned based on space occupied by the facultyidapartment DISCUSSON ORAET 12,0208 Page 10 029 ‘+ FSSU (Federated Superannuation Scheme for Universities) Adjustment - this adjustment arises from the linking of pensions to steting and the University picking up the cost of any exchange rate adjustments and could bbe apportioned directly to departments based on staf salaries. However, the notes tothe 1995196 financial statements indicate that, based on changes to the Income Tax and Pension Laws in the United Kingdom, the scheme will have to be phases out + Torthe extent that research grants are identifiable with specific departments/faculties they should be allocated to the same. ‘This redistrbution of costs tothe prime level of cost capture (Geparimenvtacully) would ensure that 2 lower level of central expenditure is ‘apportioned on the basis of FTEs thereby enhancing the equity nthe sharing ofthese costs by the faculties crectly deriving benefits from them, 3. Several ofthe activities pursued inthe Centre are academic pursuits elivering an educational service to specific sectors of the University and the ‘wider society. Such activites include the Sehool of Continuing Studies and the Distance Education programmes. These costs should not be classified {as Centre Costs but rather should be isolated and treated in the same manner as Facuity expenses. The Task Force understands that activities Such as these are expected to increase insignificance in te future as the programmes expand io effect delivery toa wider student body. Hence, their costs will increase over time, which increases the importance of ensuring that they are recovered, DISCUSSON DRAFT 120298 Page 11 of 29 EXAMINATION OF THE UNIVERSITY'S COSTS Analysis of Expenditures ‘The Task Force decided to adopt two approaches in arriving at an assessment ofthe reasonableness or otherwise of the costs of operating the Mona Campus + Anistorica review ofthe different elements of cast, compared with the {general levels of prices in the economy as reflected in the consumer price index. + A review of Mona's costs compared to those experianced by other Universities deemed similar to tis campus. “Similanty” was based on agreed ceria MA Review of Historic Costs versus Consumer Price Index The Task Force reviewed the expenditures of he University for he eleven-year period 4988 to 1996. The data was gathered from the annual reports ofthe University 25 Provided by the Office of Finance, MLA.1 Absolute and Percentage Increases in costs {ne total expensiture incurred at Mona in 1988 was some $101 millon, and in 1896 it Was $2,402 milion. Included in these figures are Project expenditures of $17 milion in 1986 and $227 milion in 1996 (See Table A in Appendix |) Part of the centre expenses incurred at Mona and inckided in the above figures, are not in respect of activities undertaken at Mona, but relate to activities pursued ai other campuses, Correspencingly, some expenses incurred at some other campuses a0 not included In the figures quoted above. ‘An adjustment has been made to take into account those expenses that relate to other Campuses as well as those incurred on otner campuses where they relate to Mona. Since the value of Project expenditure at other campuses that relate to Mona projects is ‘not known, ithas not Been possible to include those inthe analysis. The total ‘expenditures at Mona per the accounts have been adjusted as folows TaiSermemicme an aN tam of men] vomcr om sna? ran] easel as Poet Greco a4 4e | ral el Sorkin iis eae ET een a] oy TREE TS SET Ta Tee Sencha dine Onomitad” S EG eS S| el ee eT Tel DISCUSSION DRAFT 120208 Page 120129 (Over the ten year period, the student population increased from 4,949 t0 8,191. The ‘consumer price index (July to July) in 1996 was 10.8 times the 1986 index In 1986, Departmental expenditure was 25 7 times that of 1988, Central expenciture was 22.27 times 1986's and Centre costs were 25.9% times 1986's, Details may be seen in Table C Appendix ML4.2. Relative weight of cost components During the period under review there has not been a significant change in the Composition ofthe total expenditure in terms ofthe relative waight of each component to the total, As expected, Departmental expencitures have consistently accounted forthe largest proportion of the expenditure total. As a percentage of lotal costs, expenditures in the departments have increased over the period, trom 47.8 percent in i986 to 50.2 ercent in 1996, That was attributable toa corresponding 3 percentage point decrease In Central expenditures as a percentage of total, whist centta costs as a percentage of total increased by 1 percentage point IIL4.3. indexation of Cost Components ‘The Task Force computed expenditure indices from each of the components of ‘expenditure and compared this to the Consumer Price Index (recomputad to match the ‘base period ofthe analysis). The graph below shows thatthe index of total expenditures over the period has moved ata significantly faster rate than the movements in tne CPI for the same period DSCUSHION DaAET 120208 Page 13 029 a Tate vo 88888 Rr T Rm ‘Table C in Appendix! shows that using 1986 as a base, the Consumer Price Index in 1988 was 1079.6 compared to 12573 for Departmental expenditures 2227.1 for Central expenditure 12547 for Centre expenditures, 2441.7 for Total expenditures. DISCUSSION DRAFT 120298 Page 14.0129 na Fut eat sapere The graph above shows that between 1987 and 1982, the index of student enrolment and the index of Total Real Expenditures (constant 1986 prices) were moving at the After 1982, the Total Real Expenditures index, though on average moving ahead of Student enrolment, displayed sharp increases and declines with an overall upward trend Page 15 029 M414 Analysis of increases in expenditure heads ‘The Task Force appreciates thatthe costs of funding the University would not ‘necessanly miror changes in inflation. We therefore examined the major expense heads that constitute the separtmental, centre and central expenditures to identily where major increases were occurng Departmental Expenciture (Append Il) Over the 10 year period > Academic salary and salary related costs increased 30 times > Other departmental salaries and salary related costs increased approximately 26 times > Maintenance office & general expenses increased 14 %s times. Central Expenciture (Agpendix 1) ‘The expenditure heads that have been shown the major Increases over the period are Maintenance of Buildings and Premises — increased 25 times Office & General Expenses - increased 18 times Traveling and Motor transport ~ increased 2 times Rent & other expenses ~ increased 27 times ‘Students’ Facilities and amenities ~ increased 25 times Research Fund increased 146 times ‘Administration salaries — increased 25 times vyvyvey Contre Costs (Appendices V and Vi) Approximately 60 percent ofthe expenditures incurred at the Centre relate to research (oF teaching actvties, These activites in 199596 and the years when these activities ‘commenced were as follows Institute of Social & Economic Research (ISER) - existed pre 1988 ‘Tropical Metabolism Research Unit (TMRU) ~ existed pre 1988 ‘Teacher Education Development ~ axisted pre 1986. UWI Distance Teaching Experiment (UWIDITE) commenced 1987 Challenge Programme — commenced 1987 entre for Gender Studies ~ commenced 1992 onsortium graduate School - commenced 1994 ertity Management ~ commenced 1994, Extra Muralischoo! of Continuing Studies — existed pre 1986 Distance teaching:IOB commenced 1995 Sustainable Develoment ~ commenced 1994 Office of Science and Technology ~ existed int994 only DISCUSSION DRAFT 120208 Page 16029 Expenditures atthe Centre are therefore a function of the specific programmes being Undertaken there from time to time ‘As explained above, centre expenditures at Mona relate to all three campuses, and some expenditures at Cave Hill and St Augustine ralate to Mona acliviigs, These expenditures are not reallocated across campuses on a routine basis, and for purposes ofthis exercise, they were reallocated on the basis of FTEs (see Il’ sbove) on each ‘campus. After taking this reallocation into account, expenkitures al the cartre were in 1998 were 25 times the 1985 levels, but a detailed analysis of exactly what expenses are responsible fortis increase is not available. This level of expenditure ie obviously partially attributable to the increase various programmes being undertaken at the centre over the period. 1141.5 Explanation of the increases We requested explanations from the UW's Office of Finance, for the movements in costs observed over the 10-year period. Their analyses are reproduced in Appendix Vil | summary, the primary factors to which the increases are attrbuted are the following ‘+ changes in salaries and at the departmental, central and centre expenditure levels have had significant impacts on the overall costs of the Universty ‘These increases have been driven mainly by Union agreements. In order to ‘meet the objective of attracting faculty members ofthe appropriate calbre, the University fxes its remuneration at approximately 78 percent the average emoluments paid to academics in the United States. hence the levels attained, whist an improvement on what obtained many years ago, cannot be ‘considered excessive + atthe departmental expenditure level, salaries and related staff costs account for approximately 65 percent (Task Force computation) ofthe expenditure over the 10 year period (approximately 60% for academic and 5% for ether Salaries), In the years of significant increase (where expenditures increased bby more than 0% over the prior year), the corresponding salary increases in the year were as follows Increase in expenditure over the prior yoar 1990 62.3% 1991 127.2% 1082 61.8% 1993 129.6% Salary increase under the WIGUT agreement 198091 = 75% 10.77% 199192 “6456 10.82% 199293 = 173% to 247% + in 1993 salaries paid tothe teaching staff of the UW, Mona were adjusted Upwards to be on par with the Barbados campus. DISCUSSION paHET 120208 ‘+ significant amounts were incurred to pay premiums in pounds sterting under the Federated Superannuation Scheme for Universities (FSSU) withthe ‘major increases being in 1990/91 which saw a 75% increase or $3.5 milion ‘and in 1991/92 which saw a 116% increase or $10.4 milion + atthe Centre level, salaries account fora significant portion of total expenditure, Over the 10-year period approximately 68% ofthe total Centre ‘expenditure were in respect of salanes and staff related costs. The factors which gave rise tothe signiicant increases i the departmental expenditures had the same impact on the Centre salaries, *+ the costs at the departmental level may be broken down into ongoing departmental expenditures and project expenditures. The Task Force believes that this separation is not pertinent as itis unlkely thatthe, departments would be able to operate at ther current level without the project funding and that these funds, though erratic in movement at times form a Critical part ofthe operational cost base forthe university departments 1.2 Benchmarking Against Costs of operating Other Universities ‘The Task Force recognizes the uniqueness ofthe University in terms of Caribbean Insitutions and therefore the unavaliabilly of data amongst other local institutions against which to benchmark ts costs, We also felt incapable of evaluating whether spectfic areas or levels of expenditure were appropriate or inappropriate. Indeed we felt that sacnnc.quessing the acministratore ofthe University by estiquing their judgement of wnat expenditures ought to have been Undertaken would be highly subjective and inconclusive Nevertheless, we are convinced that an evaluation ofthe reasonableness ofthe ‘cost of delivering the University’s programmes should form an indispensable element in determining the University’s “economic cost”. it cannot be ‘acceptable that economic cost is determined merely by an arithmetic exercise which accumulates part ofthe actual costs incuered by the University (that is, {otal costs minus what is funded by danars) and appertions them between the wifferent parties who fund such expenditure (Government and students). ‘Benchmarking the financial performance of economio units, be they businesses, Government and non-Governmental agencies and even entire counties. Is considered a cial element in establishing the efficacy with which economic fesources are deployed. The Task Force maintains thatthe University of te ‘West Ingies ought net to be excepted from the imposition of ths ciscipine. Its Important, therefore, for a madel tobe developed that is acceptable to al Concermed to regularly (atleast annually track the University's costs against those of a sample of similar institutions. Suggestions as to how this may be ‘approached are discussed in section V of tis report. DISCUSSION OFA 120208 Page 18 029 ‘The Task force has attempted to gain some insight into how the costs at Mona compare to those experienced by simiar institutions, and has compiled costs of ‘Some other Universitas for this comparison 1.2.4. Selection Criteria for Comparable Universities, ‘The following criteria were established for selecting the institutions for comparison: ‘all shouldbe state colleges - publicly funded + range of courses offered are similar to UW, They are non-specialist insttutions + allrated by Princeton Review, Student Advantage Guide 1997 - Complete Book of Colleges all co-educational and multi-racial matriculaion/elgibiity is based on academic performance to date all operate on a semester timetabie ‘courses range from Bachelors to PhO Faculty - more than 65% PhD all have preferential rates for local residents ‘The above were uyieed wit tie Vice Chancellor of ne UWI. Nevertneless, ne ‘suggested that a number of other institutions be included in the sample. The institutions selected by the Task Force and those by the Viee Chancellor are listed in Appendix Vil 112.2. Translation of the Costs of Selected Universities for purposes of Comparing UW's ‘The Task Force appreciated that translating the casts of operating Universities (or any other institution) in a foreign country, using the official exchange rates of the respective currencies would not be appropriate. This, because tis, Fecognized that a given unit of currency in one economy invariably purchases ‘more or less ofthe same goods and services used by any institution in bat ‘county than the equivalent unit of curency (based on the official exchange rate) in another economy. For example, the Jamaican dollar equivalent of one United ‘States dollar may purchase significantly more or less goods in Jamaica than one dollar can purchase in the United States. Hence, the same motor vehicle sells for Significantly more in Jamaican dollars in Jamaica, than it would sell for in United States dolas in the U.S. On the contrary, most services can be bought for less in Jamaica in Jamaican dollars (managerial compensation, teachers ‘Compensation, medical services) than they would cost in the United States We discussed this issue with the World Bank, and became aware that that institution prepares a “Purchasing Power Parity" index to measure precisely this Phenomenon, The 1997 World Bank Atlas defines Purchasing Power Party (PPP) as the number of units of a county's currency required to buy the same DISCUSSION DASET 1202/8 Page 190629 ‘amounts of goods and services in the domestic market as USS1 would buy in the United States...” Jamaica's PPP for 1995 (latest availabe atthe time of writing) was 13.6. This ‘means, that basad on the basket of goods and services included in the World Bank's sample, i would take JS13.5 to buy what USS1 would buy in te United States, \We sought the views of te World Bank on the appropriateness of using this as translator of the foreign currency costs to Jamaican deliar costs. We indicated in our communication that we proposed to". vide the Vamaican dollar spending [of the UWI] by 13.6 and compare the resulting figures with he ‘spending for the US universities..." The World Bank responded that "In the absence of PPP for education for Jamaica, the second best thing isto use PEP for GNP or GOP (whicheveris available)" In discussing this methodology with the Office of Finance at Mona, the point was made tous that a significant proportion of the University’s costs are indeed directly pegged to the United States dolar at official exchange rates, viz academic salaries, The University’s experiance is that academic staff need to be offered atleast 75% of the average compensation paid to equivalent personnel in the US. tobe able to atract and retain the callre faculy that is required to maintain the established standards of the University. The Office of Finance suggested therefore, tat if the PPP were baing used as a mechanism for Converting the costs of UW for comparison with overseas Universities, academic staff costs ought to be converted at official exchange rates, whist the PPP index ‘could be applies to ther costs. (A comparison by the Task Force with data Published by the American Association of University Professors in thei Annual Report on the Economic Status ofthe Profession 1986-98 indicates that average ‘salaries for Professors in four ofthe Universiias in the Task Force's sample was USS77,150. Associate Professors earnings averaged USSS5,$00 and Assistants averaged USS45,225, By comparison, avarage earings of Professors atthe UWI were USS37.381 and USS34, 116 for medical and non-medical faculty respectively (J81,327,026 and JS1,211,112)), See Appendix Xl We emphasize that no firm conclusions can be dravin from the results ofthis ‘Comparison. Our objective in pursuing this exercise was to gain an insight into how Mona's costs would compare with those of similar institutions using citer ‘other than a straight exchange rate conversion, There are several limitations to Using the PPP index as we have. inclucing The index is @ general one, and not speciic to education ‘+The index ignores the differential in the qualitative mix of cost ‘elements between the WV ang those of the foreign Universes. For ‘exemple, it does not take cognisanice of any diferences inthe qualiy of students’ facies in Jamaica versus that which is avaliable atthe overseas Universities + Some costs are “hidden”, For example, the UWI and certain facuty benefit from certain tax reliefs that are not availabla to their US counterparts. DISCUSSION DRAFT 120298 Despite these shortcomings, we believe thatthe use of the PPP presents an indication of how a model could be structured for the periocie comparison of the Ws costs with those of similar institutions. On further detailed investigation, it ‘may be concluded that the PPP index soon to be published for education is an acceptable index for purposes of this comparison, Altamatively, it may be desirable for a separate index to be developed by one of the national statistical agencies with the required compatence to do 30, 112.3. The Etfects of Research In reviewing the cost data pertaining to the UWI compared tothe other institutions in the sample, it became apparent that the UWI spends significantly less on research than those in the sample. Whereas, on average, research represented 17% of total expenditures of he U.S. universities in the Task Force's ‘sample (26% in he Vice Chancellors), the UvW's expenditure on research Comprised only 3% of total expenditurs. Although the UWI states that they do not isolate the cost ofall research activities for purposes of thelr financial reporting, we felt that it would be useful for the comparison of costs to be ‘compiled with and without Research costs, 1.2.4. Results of the Comparison (See Appendices IX to XI) Based on the foregoing, with research costs Included. and converting academic Staff costs at official exchange rates and other costs at PPP index. the cost per student at the Mona campus comes out at US$18,372. This compares to an average per student cost among the nine US Universities n the Task Force ‘sample of US$24,040 (Vice Chancellors sample USS 24.770) With research costs excluded, the average cost per student at Mona is USS17,656 compared to US$19,842 for he US Universities (Vice Chancellor's sample USS 25,906 ). DISCUSSON DRAFT 12.0298 IV ANEW MODEL FOR THE DETERMINATION OF ECONOMIC COST IV Definition of Economie Cost and Mission of the UWI To aid in the deliberations of the Task Force, a working definition of economic cost was developed. Economic Cost was defined as, “the full eomploment of resources required for operating and maintaining the University, whilst ensuring is continued viability and the highest quality of output” “The definition set the framework for what ought to be included in the determination of ‘economic cost and balanced this against the outputs of the University which are stated in the Mission statement as follows: “UW! as the designated Regional University, wil actively support growth and dovelopment of West Incian society through +The cost effective training ofthe high quality human resource, and the generation, adaptation and dissemination of knowledge which the peoples and institutions ofthe region require to formulate and implement development plans from time to time + Acting as a catalyst to enhance the capabilty of the Tertiary Level institutions ‘and ganaraly aparaling as the hub ofthe tertiary ecication system inthe region ‘+ Delivering expertise and advisory services to Governments and the wider West indian community by enlarging its functional inkages with Govemments, business enterprises and other groups commited fo the development of West Indian society + Serving as a bridge joining the region with sources of information, markets, resources and opportunity in the rest of the world ‘+ Enhancing the stancing of the people ofthe ragian in international fora by ‘contributing meaningfully tothe world stock of knowledge on development issues and to the ars and iterature, and ‘+ Providing a congenial atmosphere for its on-campus and off-campus students land maintaining a fiendly and mutually beneficial relationship with ts alumni" 1V.2 Approach of the Task Force The Task Force, attempted to avoid being influenced by the existing methodology for the determination of economic cost, which could end up in merely tailoring or fine-tuning what existed before DISCUSSION DRAFT 1202798 Page 2 029 ‘As such, a‘clean-slate' approach was adopted, where the Task Force defined @ methodology to compute the economic cost and subsequently compared ths to the UWI ‘current approach, ‘The Task Force took a four pronged approach to the determination of econemic cost as follows ‘+ Cost Identification — ths involves the identiication ofall costs of running the University broken down into functional areas = determine full costs ofthe University educational activities, dentiying these costs by faculty + determine the Administrative controUcentralised University caste whic are not specific to any one faculy or set of programmes, but rather, support the running ofthe University as 8 whole + Cost Reasonabieness ~ this involves the determination of the fairness of the Costs of operating the UWI, Mona campus by benchmarking against those of ‘other Universities (adjusted to reflect local socio-economic conditions). The benchmarking would indicate what costs of the Univarsty ought to be ‘adjusted for determining the real economic cast ‘+ Cost Apportionment — involves the apportionment of the adjusted costs to the facuties of the University on some rational basis + Cost per faculty computation ~ determination of te cost per student in ‘each faculty of the University, DISCUSSION DRAFT 12,0288 Page 2 029 ‘The methodology forthe determination of economic cast proposed by the Task Force is depicted in the Cost Schematic below: UWL. Cost Schematic for propse determination of econ int ‘The proposed costing mechanism is as follows ‘+ determine the direct costs ofthe faculties resulting in the Total direct cost per faculty. ‘A number of departments in the Centre are de facto teaching departments and the costs of these should be treated in the same way. Examples of these departments ‘are UWIDITE and Schoo! of Continuing Studies + review centralised costs to determine which costs may be apportioned to the faculties using logical bases of apportionment. The lst of centralised expenditures from the Projection Estimates for the Biennium 1997 - 1988, and proposed bases for cost apportionment are provided in the table below Expense item Proposed Basis of Apportionment Audit foes ‘These are campus-wide costs and cannot bbe apportioned on any rational basis ‘These are campus-wide costs and cannot be apportioned on any rational basis Legal and Consultancy Security and Fire Fighting services ‘These represent 26% of the approved budget 1896/97 of total central expenditure (not including utes, fnance charges and depreciation) and should be apportioned based on tne FTES in each department DISCUSSION DRAFT 120288 Expense Item Examination expenses ‘Student Passages and Pass on Computing Services Research and Publication Official Ceremonios Scholarships and Prizes ‘Staff Training and Development Pension Payment including valuation Other / Electricity Telephone DISCUSSION DRAFT 120298 Page 24 of29 Proposed Basis of Apportionment insured by acuity These represent 50% of the approved ‘budget 1998/97 of total central expenaiture {not including utes, finance charges and \depreciation) and should be apportioned based on the value of the assats insured by faculty ‘Those expenses may be apportioned bbased on the FTE per faculty These are campus-wide costs and cannot be apportioned on any rational basis ‘These are campus wide costs and cannot 'be apportioned on any rational basis, These are campus-wide costs and be apportioned on any rational Basis These ere camous-wide caste and cannot 'be apportioned on any rational basis, These are campus-wide costs and cannot be apportioned on any rational basis These costs may be apportioned based on the academic staff salary costs of each faculty ‘These are campus-wide costs and cannot 'be apportioned on any rational basis, These costs may be allocated to faculties ‘based on the relationship between the total square footage (or metres) of the overall campus and the square footage (or metres) ofthe individual faculties. Some departments withia faculties are Ingvidvally metered and would recaive a specific charge for electricity These centralised telephone costs may be ‘pportioned based on the number of PBX Expense Item Water Finance charges Page 25 0629 Proposed Basis of Apportionment extensions that are in each faculty. Some faculties that have direct ine are directly charged with the same and would receive an additional allocation of telephone charges. ‘These costs may be allocated to facutos ‘based on the number of points of access to water (taps). These are campus-wide costs and cannot be apportioned on any rational basis Discuss: Expense item Proposed Basis of Apportionment Depreciation These costs may be apportioned based on the capitalised value of the assets by faculty or the value of the assets insured by faculty. The depreciation charge reflected in the Mona campus budget reflects a cash grant or asset replacement fund and represents the money that the [UWI expects to receive from the Government for asset replacement. The financial statements of the University reflect @ depreciation charge for the period based on useful asset lives and Predetermined depreciation rates. As the budget forms the basis for the determination of the economic cost. the dopreciation reflected therein must be adjusted to more closely reflect the actual depreciation charge for the coming perio. ‘+ add tothe facuty direct cost, centralised costs that have been apportioned to faculties in some rational manner. The resultant figure would be the fully burdened faculty cost, ‘+ the fully burdened faculty cost is divided by the numberof full time equivatonts in the faculty + total centralised costs which cannot be related to faculties in any systematic or Scientiic way should be divided by the otal full tme equivalent of the campus as these are campus-wide costs, a piece of which should be bome by each student + the remaining centre costs (after taking out costs for de facto teaching

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