Advocates of the rationalisation of universities in line with modern conditions, especially economic ones, would be well advised to look carefully at Australia. They may then have second thoughts about subjecting their institutions to the laws of business economics and judging degree programmes strictly according to their financial profitability.

The model imposed on Australian universities by the Howard government in the mid-1990s was that of the US for-profit institutions, which calculate the cost, in terms of salaries and overheads, of every service they offer and pass these on to customers - their students - in the form of tuition fees. A major difference from this model is that almost all Australian universities belong to the state; they are neither owned nor funded by private corporations. Nevertheless, the pragmatism common to many English-speaking cultures suggests that publicly owned educational utilities should pay their way, even if they cannot be expected to turn a profit. In this climate, tertiary education has rarely been seen as an aspect of the national task to be fulfilled by governments - both state and federal - for the good of their people.

It was not difficult for the federal government to draw up a bank balance for the nation's universities. All it needed to do was calculate, or estimate, the total cost of the country's university teaching programmes and divide the sum by the number of students in those programmes. The resulting figure gave the basic tuition fee to be levied on students - or their parents.

But this ignored the financial benefits to be gained from a university education, which is another calculable sum; so a fee scale was constructed on the basis of what the qualification provided by a university education was worth in terms of predictable earning capacity. The system now ranks arts graduates, realistically enough, at the bottom of the scale, so they are charged a mere A$22,000 (?12,600) a year; medical students must pay almost three times this amount - up to A$62,000 a year.

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As the federal government works on the assumption that such exorbitant sums cannot be paid up front by students or parents (an average three-year degree costs between A$67,000 and A$195,000), the lion's share of the fee is borne initially by the state in the form of interest-free loans (for which the singular term "help loans" has been coined by an inventive education authority). Students only have to put down a fraction of the total cost - between A$4,000 and A$9,000 a year, depending on the subject they are studying.

At some point, however, the loan must be repaid, and here too the standard of measurement is prospective professional income: repayment currently begins at a threshold of A$42,000 a year.

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European readers may be astounded by the sheer level of Australian university fees, but Australians are made of sterner stuff. Far from complaining, they often prefer to earn money "on the side" rather than accept loans that, if taken in full, would burden them with unmanageable debt in the early years of their professional lives.

This also has implications for the universities, however, for many students spend half their time working in restaurants, hotels or whatever industry will help them dispense with some of the state's amply proffered help. Whether they want to or not, they become temporary workers who study part-time. The result is half-empty classrooms and students who, when there at all, sit overtired and listless through courses that, from their point of view, have degenerated into a tedious formality. To their ears, the fact that in parts of Europe - Germany, for instance - tuition fees are a mere €1,000 (?820) a year sounds like a fairy tale.

Australians see their university fee system as fair dinkum: you pay for what you get - after all, it's the students themselves who will later profit from their investment, and loans help them do so. Foreign students, however, have to pay the fees in full, "cash down" and without loans.

There are some 170,000 overseas students - mostly from China, India and Korea - at Australian universities and their total cash value comes to about A$6 billion-A$7 billion a year. And don't forget their living costs, which give the Australian economy a boost to the tune of A$13.7 billion a year.

It would be wrong, however, to assume that the income from "education exports" directly benefits those who provide it. A substantial portion of the sum flows not into the faculties in which most of these students are enrolled (economics and engineering), but those where Australian nationals prefer to study.

In other words, the 170,000 international students, mostly from "Bric" (Brazil, Russia, India and China) or threshold countries, are subsidising the degree programmes of their Australian classmates - rather the opposite of what is generally thought of as overseas development aid.

In the hard-nosed world of business, foreign students are an important item for the Australian export industry.

Educational exports rank high on the list of Australian sources of income - after the sale of iron ore, coal and other minerals, primarily to Japan and China. So it's no surprise that Australian universities maintain well-funded agencies in China and India to recruit such lucrative customers. That the agencies themselves are funded from the fees yielded by their crop is only logical.

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The morality of this type of university financing - of an industrially developed country supported by one that is less developed - is little discussed in Australia. It works and that's what counts.

Moreover, it is often not the students themselves or their long-suffering families who pay: many developing countries provide scholarships for their young people to study abroad. This means that the economy of the developing country itself is directly supporting the economy of Australia. At the level of the funds involved, this financing model exceeds anything yet seen, or even dreamt of, in Europe. Its consequences, however, for Australian universities are fatal.

For starters, as overseas students make a direct and very substantial contribution to the running costs - especially salaries - of their university, they tend to receive preferential treatment. Hardly any of them fail their degrees; indeed, most pass with honours.

University teachers constantly tell of the pressure put on them by administrators to ease the passage of these students. A message from the Department of Immigration and Citizenship last year illustrates one aspect of the practice: it complained that most foreign graduates had failed the obligatory, and relatively simple, English test required of all - and they are many - who choose to stay in the country and seek employment.

Understandably, the note caused a considerable stir in the national press, which asked what the Chinese, Indian and Korean students had actually learned at university if they could not even pass the test set for all immigrants, of whatever educational background, who apply for a work permit. The universities were unable to give a satisfactory answer: it was obvious that many of them had complied all too willingly with the role of "degree mill" wished upon them by the financial and educational authorities. They promised to look into the matter and offer more language courses in future for new overseas undergraduates.

Second, Australian universities rely not only on overseas students, but also on the domestic intake for their income. As elsewhere in the world, state subventions depend on the number of students on the university roll. The result is that young Australians tend to conceive of their universities as mental-wellness-and-degree-distribution authorities rather than as places of intellectual training.

And many lecturers meet them halfway in this respect, for their own wellbeing and career prospects depend on the good opinion of their students: the regular evaluations of teaching performance ensure that this is the case.

If your evaluation falls short of top marks (and these will certainly be awarded in return for good grades given for students' essays and papers), you will rarely be able to bank on promotion from lecturer to senior lecturer or associate professor. Nor will the university - or, indeed, government - authorities look kindly on anyone whose students drop out from their courses in anger or frustration, for this has rather serious financial consequences.

So far as university careers are concerned, it is perhaps worth noting that the type of open national and - albeit less frequently - international competition for professorships that still takes place in, say, the German system is largely foreign to the Australian (and, indeed, the wider English-speaking) academic world. Here, a young junior lecturer will slowly progress or not progress at all, with much bowing and scraping both upwards and downwards through the hierarchical ranks of their university, rarely moving elsewhere en route.

Professorships are seldom given to outsiders; on the contrary, they are by and large thought of as a reward for faithful (and largely administrative) service, good evaluations and generally keeping on the right side of one's superiors - the heads of school and faculty deans. Up until now, research has played a very minor role. The Labor government promised to change this and link promotion and state funding more closely to research; under the Howard government, all that counted was teaching and administrative work - the latter rather more than the former after the various school and departmental secretaries had been sent home.

Third, in order to boost their research profile in this new climate, the universities are now avidly recruiting research fellows - generally postdoctoral students - to write the articles and books that have not been, and are not being, written by tenured staff. For each essay, whether by new or established faculty members, the university is rewarded with a several-thousand-dollar bonus from the federal government; for a book it gets as much as A$10,000.

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The recruiting drive has inevitably led Australian universities to look more intensely abroad, and many overseas scholars (mostly European) with long publication lists have suddenly found themselves popular with their Australian colleagues, because their books and articles guarantee additional federal subsidies. The appointment of an out-of-work but productive young European academic may bring in more than A$100,000. Not often will the person concerned see any of the money, though reductions in teaching load have recently been granted to faculty members actively engaged in research.

Finally, should the young European scholar hope for a more tangible and longer-term reward, they should be warned: tenured positions have for some time been the preserve of Australian passport holders. Foreign academics are given temporary contracts for up to three years. After that they are free to compete with their Australian peers for tenure, but they rarely win.

One is tempted in this context to speak of "national discrimination", an accusation that may - at times plausibly - be countered by invoking less than excellent student evaluations of the academics concerned. In the foreign language and literature departments, where many European staff are to be found, top evaluations are difficult to attain: academics from France, Germany or Spain are expected to lecture in their native tongues to students whose schooling has not equipped them to understand them, let alone engage in dialogue. And who is going to give good marks to a teacher they don't understand?

If the academic in question points out their (by Australian standards) above-average research performance and level of teaching, they may well encounter a weary smile accompanied by the comment: "We don't need high flyers." And in a certain way, the deans and heads of school are right: their students are much happier if the level is not too high. That leaves more time for earning money.

The model is, in its own way, admirably consistent. It demonstrates that the subjection of universities to the demands of economics leads to their inexorable decline.

Second-tier responses: Australian lessons for the UK's overseas market

The original Australian ÖйúAƬ model involved a small number of established universities delivering programmes on their main campuses and via satellite colleges in more remote areas.

Similar to the UK, in the 1960s the government began to fund major expansion of the academy through the creation of a two-tier system by allowing existing satellite colleges to become universities.

Many of these new universities embarked on massive spending programmes to expand on-campus facilities and hire new professors to increase research output. But by the 1990s, the inability of the government to meet an ongoing rise in the sector's operating costs led to the introduction of fees for undergraduate domestic students.

Solving the ongoing need to further increase the level of public funding without requiring a greater contribution from domestic students had been avoided until recently because of Australia's early successes in attracting overseas students. But in the face of flattening demand, the Review of Australian ÖйúAƬ charged with reforming the sector recommended a change in the funding model.

Instead of each university being allocated a specific number of full-time equivalents, the new model is based upon the philosophy that "funding follows domestic students". This will create financial problems for the country's second-tier institutions because the "Big 8" universities (The Australian National University, Monash University and the universities of Sydney, Melbourne, Adelaide, Queensland, Western Australia and New South Wales) are expected to recruit a larger number of domestic students.

The other problem is that the rising cost of full-time university education means school leavers are a declining component of total student numbers and few mature students can afford to study on a full-time basis.

In the face of declining full-time student numbers, the second-tier institutions will need to sustain revenue by expanding the provision of part-time programmes for people in work seeking to upgrade their capabilities or change careers.

Recruiting part-time mature students will require a more flexible attitude involving the greater use of acquired vocational qualifications to exempt students from the first year of degree programmes and, in some cases, even some modules in the second year.

A key area designed to reduce operating costs is the use of electronic educational technology to expand the provision of distance learning. Unlike in the UK, where online education is seen as more expensive and less effective, in Australia it is increasingly accepted that online delivery is more cost-effective than equivalent classroom-based provision.

Hence, some universities perceive electronic educational technology as a critical way to attract more students than less technologically aware institutions worldwide and gain a competitive edge. To respond to this threat, UK institutions need to invest in electronic educational technology and implement staff-development programmes to become more capable of delivering degrees via the virtual classroom.

The emerging view in Australia is that revenue from overseas students will continue to decline because the market has become intensely competitive and the developing nations are upgrading the quality of their provision.

Few Australian universities perceive building campuses overseas as a financially viable option. Their new focus is to rely less on in-country sales agents and instead develop contractual relationships with specific overseas universities. This is usually accompanied by an agreement whereby the overseas institution is accredited to deliver a higher-level diploma that exempts overseas students from some of their undergraduate or postgraduate programmes while studying in Australia.

Australian universities face the most intense competition in the master's sector. Their strategic response has been to focus on expanding involvement in doctoral-level programmes, which, in some cases, may be partially delivered in-country by their overseas partners.

UK universities can expect similar problems in attracting overseas students and so may wish to follow the Australian model by creating more formal partnerships with institutions in countries such as China, Indonesia and India. This is a more effective model to sustain student recruitment.

They will also need to accredit a greater proportion of undergraduate and postgraduate international diploma programmes that permit overseas students to complete part of their studies prior to coming to the UK. And in the postgraduate market, they should place increased emphasis on the provision of doctoral-level programmes.

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Ian Chaston manages the University of Plymouth's online part-time distance-learning students in the UK. He recently took part in an Australian government-funded project to examine the strategic implications of second-tier institutional survival in the face of financial constraints.