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Can Australian Higher Education withstand the Financial Shock of the COVID-19 pandemic?

As published in The Australian, 1 April, 2020

Australian Higher Education is potentially in a better position to withstand the likely financial shock of the COVID-19 pandemic than it was with the onset of the Global Financial Crisis (GFC) of 2008. But adjustments and support will be required in adapting to a post virus economy.

Since 2008 Australian public Higher Education has grown into an industry that makes a major contribution to Australian economic growth. It educates students, undertakes research and attracts a large number of international students and researchers. In 2018, in inflation adjusted terms, industry revenues stood at $34 billion and net assets at $58.18 billion. Their expenditures make a direct contribution to GDP in the order of 2%, with many flow-through multiplier effects.

Higher education is now “big business” In 2018, 11 universities had operating revenues in excess of $1 billion (four in excess of $2 billion) and nine had net assets in excess of $2 billion.

Several Australian universities now rank very highly in global league tables and their trajectory is upwards. These universities are effectively large global businesses. This globalisation of Australian higher education has accelerated since the GFC of 2008 and with expansion and growth associated with large injections of Commonwealth funding and rapidly increasing income from feepaying international students.

The Australian Government has supported the recovery and growth of the industry through the demand driven funding system, the Education Investment Fund (EIF) initiative, the HECS-HELP income contingent loans scheme, and targeted research investment programs in health and medical sciences (through the NH&MRC, and more recently the Medical Research Future Fund). However, targeted research programs have been largely absent in other areas, such as Engineering and Technology.

Universities have pursued a globalisation mission through a number of strategies: appointment of Deputy/Pro Vice Chancellors with specific international responsibilities; commitment to lifting research quality and performance; active participation in the international higher education market; increasing their commitment to borrowing to finance expansion of facilities and campus development (where borrowing costs have been relatively low); establishing offshore satellite campuses; and entering into long term teaching partnerships with overseas universities endorsed by host governments.

Most of the Go8 universities have achieved success in their globalisation strategies (Monash, Melbourne, Sydney, UNSW, UQ and ANU). Several technology and commuter universities have also pursued effective global strategies including RMIT, Deakin, QUT, UTS and Macquarie. Some universities have a very large proportion of international students based in overseas locations and in some cases numbers of international students offshore is close to half of all international students.

Expansion of Higher Education has moved a long way from the early “student recruitment” approaches centred on achieving scale in course offerings, although some universities still take this approach.

Not all universities have pursued a globalisation strategy. However, there is a clear relationship between global rankings, international student income, and new asset creation.

Those universities that have been most active in pursuing a globalisation strategy appear to be financially secure. They have very large portfolios of long-term financial assets. However, they have very thin current and capital ratios. These ratios are impacted more by what would appear to be high levels of provisions in areas such as annual and recreation leave rather than short term borrowings.

The COVID-19 pandemic has raised concerns about the precariousness of Australian university finance, especially for universities that have grown through a high level of dependency on international student income. Many large-scale campus developments in Australia, and overseas have been made on an expectation of increasing student numbers.

A global shock like COVID-19 will, potentially, hit these global universities hard, as did the 2008 GFC. In 2008 the sector-wide operating margin dropped to 1.9%, down from 8.1% in the previous year. Many universities were impacted by losses on financial investments. In 2009 the operating margin had recovered to 8.8%, associated with an injection of Commonwealth research funding and payments under the Better Universities Fund and the Education Investment Fund.

If student numbers dip during and in the aftermath of the pandemic, universities may again be confronted with operating losses.

In the last two years Australian university sector operating margins have been declining (4.2% in 2018, down from 6.3% in 2017). Results for 2019 are not yet available. In part, this deterioration reflects the slowdown in Commonwealth funding associated with the reintroduction of enrolment caps and reductions in funding under research programs such as the ARC. That slowdown has been less than offset by increases in international student income.

If expectations about the global growth of international higher education are valid, the losses could be short term if the right sort of adjustments are made. Already we are seeing universities freeze expenditure on property investments, salaries and travel, and making a greater commitment to on-line delivery of courses and programs.

But we cannot be certain that income from international students will recover to the levels reported in 2018: there are risks that there may be fewer students leaving China and other nations to study overseas and that competition from other nations will become increasingly intense. Australian universities with offshore campuses may be better placed.

The globally focussed universities may also be in a better position to withstand the current shock through their financial strength and more prudent financial investment strategies. They are unlikely to have a similar exposure as they did to the collapse of Lehman Brothers. However, the impact of stock market fluctuations on investment portfolios is much more difficult to ascertain. Many universities would have hedging arrangements in place.

Universities that are financially strong should be able to withstand a dip in earnings and manage through it over the shorter term by drawing on their financial strength. Smaller and less financially secure universities, particularly in rural areas, may struggle.

Universities that have been less strategic in their international student attraction approaches, and who lack the cash flows, investment buffer, financial strength and security, will be particularly challenged.

The University of Sydney has already announced that it is cutting $200m from its $2.8 billion budget by putting a hold on recruitment and travel. Other universities with high international student exposure will no doubt make (or have made) similar decisions.

Universities that have been pursuing active campus development strategies in partnership with developers and State Governments and industry as a means to diversify income streams and build external engagement may also be insulated to some extent from the shock. Many have been very active in precinct and innovation district initiatives.

But unlike businesses in the corporate world, there are limited options to diversify into new lines of business. They lack access to other sources of funds as in other countries, in the form of public and privately funded research and development programs. Government commitments to university teaching and research has been declining, and private collaborative investment is weak.

There is, however, an opportunity. Australian Governments have supported universities strongly in health and medical research for more than 80 years, and the results of that commitment have been played out in medical devices, clinical treatments, and vaccines. But in contrast to health and medical, universities have not been supported strongly in engineering and technology where major advances will be required for transforming the Australian economy in the post virus upturn – as well as in responses to climate change and moving the economy to zero carbon emissions.

Now is the time for Government to not only fund transfer payments to keep people alive, but also to make a longer term investment in Science, Technology and Innovation, particularly via universities and specifically through support for leading edge Engineering and Technology Research Institutes to support a resurgence in manufacturing, that might parallel the Medical Research Institutes that sit beside (and within) universities.

That investment should build in capability for non-R&D innovation, requiring investment in business, social sciences, and the humanities – skills and capabilities that enable the implementation and adoption of technology breakthroughs.

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