TAFEs once had responsibility for vocational training, but their funding was cut, while private colleges were allowed to compete for funding in the sector. Credit:Dominic Lorrimer Australia's private vocational education system is now almost twice as expensive as Labor's home insulation scheme, and that prompted a royal commission. Those growing rich on government funding are the operators of private colleges and the brokers (salesmen operating door to door or from hothouse call centres) who sign up the poor, the uneducated, the mentally disabled and those living in Aboriginal communities for useless online diplomas at a cost of $20,000 each. For reference, that's twice what a year studying medicine at Melbourne University costs. In return for their lifetime investment, these new "students" – most of whom will never study at all – get a $300 laptop. The great unwinding of vocational education began almost a decade ago as the states cut funding to TAFEs – the stodgy and expensive bricks-and-mortar, government-run institutions that generations of people once looked to when their skills needed upgrading.

In the place of TAFE, state governments slung money at private operators. In words that could have been taken from any liberal economist since the 1980s, but quoted here from last week's Harper review, they were "promoting user choice and encouraging a diversity of providers". "Choice and diversity have the potential to improve outcomes for users, especially but not only by stimulating innovation," the review says. Victoria and South Australia were the early movers. They reduced barriers to entry and handed hundreds of new players a licence to call themselves a college, and market to, then teach students. Course design was left up to these new colleges so they could provide education when and where students needed it. Courses, it was believed, would quickly adapt to the fast-changing needs of industry. What too many of them did instead was adapt the new funding model to serve their own need for cash. They wrote the cheapest possible curriculums and delivered them online, reducing the quality and length of courses, while still charging the government full value. They virtually eliminated testing and standards and sold these new, slim-line courses far and wide. Thousands of people are saddled with debts, colleges and brokers are making off with the cash, and the government still pretends the money will be repaid.

Nursing home residents were signed up en masse to become IT professionals. Pharmacy assistants started turning up with Certificate III qualifications and no idea what an analgesic was. A sub-industry of "third parties", or salesmen, sprang up to find the students to feed into the fast-growing machine. People got rich. Choice. Diversity. Innovation. Instead of learning from these disasters, the federal government under Labor repeated them. A 2012 Council of Australian Governments agreement extended HECS-style loans to vocational education for the first time, calling it VET FEE-HELP, and extending Commonwealth funding to diploma courses. Limits on those eligible to register a college were virtually nil; the amount they could charge per course was uncapped; the curriculum and assessment was left up to new colleges; there were no minimum standards for entry into a course and no limit to the number of courses for which an individual could sign up. The "lifetime limit" for VET FEE-HELP loans was almost $100,000, creating a huge honey-pot of potential money to lure unscrupulous salesmen. There were few restrictions on their behaviour, little policing and no cap on the total cost of the scheme because the government expected the students would pay back their loans.

A feeding frenzy ensued. Salesmen who had been kicked out of selling retail electricity, after big Australian Competition and Consumer Commission fines for false and misleading conduct, started in vocational education. Regulators were underfunded and the legislative rules on college behaviour were so light they had very little with which to work. A few years later, thousands of people are saddled with debts, colleges and brokers are making off with the cash, and the government still pretends the money will be repaid. The new federal Minister for Vocational Education and Skills, Luke Hartsuyker​, is cracking down. On Tuesday, he announced a funding freeze and other emergency regulatory measures, but the horse has bolted. We will not know the final sums until next year, but it seems like a figure of $4 billion wasted this year alone might be a very conservative estimate. It's been left to the ACCC, again, to try to claw back some of the money from colleges that might well simply go broke and disappear. Home insulation; power industry privatisation; vocational education – all examples of governments using private-sector operators to deliver a public good and being rorted in the process. There are many more. There are, of course, good counter-examples of where private provision has worked as intended, and increased productivity and efficiency. But government must retain a significant role. As privatisation moves further into public life, through new markets in health, disability, education, prisons and so on, strong, properly funded regulators, well-thought out legislation and adequate sanctions for wrongdoing are crucial.

The Harper review recognises this. While "user choice" should be "at the heart of service delivery", it says, governments should retain "stewardship", particularly over regulation, with a "clear focus on outcomes". These are pretty words. Let's hope that in the design of the new productivity agenda, governments know how to translate them into reality. Michael Bachelard is The Age's Investigative editor.