Gloom not doom: unis will survive the loss of international student income

The international student boom that got underway in 2013 came to an abrupt end in early 2020 with the impact of COVID-19. With the ending of the boom, the loss of associated income flows, and the financial crisis that ensued, it is opportune to reflect on what actually happened during those boom years.

 

Over the 2013-2019 period, international student fees brought in an additional $30 billion for Australian universities.  The extra money has been spent on capital investments in property plant and equipment, growing non-academic staff numbers and casual appointments, increasing employee benefits, and contributing to Australia’s university research capability.

 

But most significantly, the international student boom allowed the Commonwealth off the hook from the neglect of its responsibilities to support and sustain the Australian higher education system. From 2013 Commonwealth recurrent funding ran down, and capital funding effectively ceased.

 

Between 2013 and 2019, student numbers at Australian universities increased by 248,000 (20.1 per cent) to 1.5 million. International students accounted for 62 per cent of that growth, increasing their proportion of the student population from 24.3 per cent to 30.6 per cent[1]. Following the reintroduction of enrolment caps in 2017, domestic student numbers increased by only 7,500 over the two years to 2019 – contrasting with a 77,000 increase in international students over the same period[2].

 

The Australian international higher education industry grew out of the public sector in the complete absence of a national policy or strategy, consideration of capacity to sustain it, and the impacts on the Australian higher education system in meeting the requirements of students, industry or the community. It is time to seriously address this shortcoming.

 

University lobbies and state governments celebrate the tremendous contribution of international education to exports – neglecting to point out that most of the income generated by international students while working in Australia is paid in Australian dollars. Of course, student earned income can contribute to GDP through purchases of locally produced goods and services. But in any event, this commodity narrative is not the right way to think about Australia’s higher education system.

 

Capital investments

 

The Commonwealth has never been able to sort out the best way of providing capital funding to universities. In 2007 it legislated for the Higher Education Endowment Fund (HEEF), later to become the Education Investment Fund (EIF), to provide large-scale funding which would, according to the then Treasurer “put our institutes of higher learning on a secure footing forever”.

 

The EIF was designed as an $11 billion fund to be managed as a special account with an expert assessment committee chaired by Philip Marcus-Clarke. The EIF was shut down at the end of 2014. Over its short life, the EIF provided $4.2 billion for infrastructure projects through four competitive funding rounds.

 

Between 2013 and 2019, universities used international student income to invest an additional $7.5 billion in property, plant and equipment – over and above the average annual investment of $3.0 billion incurred before the boom. Most universities increased capital investment over the 2013-2019 period, but 75 per cent of the additional investments occurred at just ten universities.

 

These additional investments, of course, related to university priorities, not national priorities in research and teaching. However, it relieved the Commonwealth of an obligation to think about university capital requirements – until now. In the absence of substantial income flows from the international students, the Commonwealth will need to again think seriously about higher education capital requirements.

 

Staffing

 

Over the boom period, universities increased full time equivalent (FTE) staff by 17,442 (14.5 per cent) to 137,578.  Full-time and full time fractional staff increased by 11.7 per cent and FTE casual staff increased by 29.1 per cent. This increase in casual staff to 24,873 FTE represented 29.1 per cent of the total growth. The effect was that in 2019 causals made up 18.1 per cent of FTE staff, up from 16.0 per cent in 2013.

 

In terms of actual staff numbers, DESE reports that in 2019, 76,713  staff were tenured (61 per cent) and 48,575 (39 per cent) were on limited term arrangements – a proportion that has remained steady over the 2013-19 period. These numbers do not include casuals, who rarely have any formal agreements at all.

 

Universities have always employed people on a casual basis to deliver tutorials, guest lectures, specialised content, course elements, and fill-in for staff on study leave or assigned to major research projects.

 

DESE does not provide estimates of the number of casuals across the higher education system. But without ongoing contracts, they are generally the first to go with the onset of financial austerity. Staff data for 2020 shows that casual FTEs dropped by 3.7 per cent from the 2019 level to 23,946. Media reports suggest reductions are likely to continue into 2021

 

With the Job-ready graduates package aim to eliminate the teaching surplus, staff on limited term contracts, including research assistants and lab technicians, will be targeted for termination. Tenured staff are likely to be required to do more teaching hours to make up for the loss of casual tutors – hours when that would have been applied to research.

 

Of the increase in full time FTE staff (11,837), 20.2 per cent were located in academic operating units, 9.4 per cent in academic support units, 17.1 per cent in student services, 1.4 per cent in public services (engagement) and 52.4 per cent in what is termed general higher education institution and overhead services.

 

This increase in non-academic staffing is a matter of concern. It is well understood that as organisations grow, there is an upward pressure for greater professionalisation of institutional services in the areas of finance, human resources, information technology, procurement, marketing and public relations, advancement, property management, and research management and commercialisation. More people are required for the ever-growing state and commonwealth compliance burden. Senior executive remuneration increases with the increasing size of budgets.

 

Over the 2013-19 period, the cost of academic staff benefits increased by 12.9 per cent to $8.8bn (inflation-adjusted) and non-academic staff benefits by 14.3 per cent to $7.9bn.  The total increase was $2bn. These increases were unevenly distributed across the system.  However, there is a strong view that too much international student income was diverted into corporate overheads and administrative support activity.

 

Contribution to research

 

ABS Higher education expenditure on research and development for 2018 shows a total commitment of $12.6bn, having increased from $10.6bn in 2012. The human resources component amounts to 43.4 per cent of total expenditure.

 

Increases in expenditure have been largely funded by international student revenues and teaching surpluses. The disappearance of these streams could have major implications for university research effort unless other funding steams are sourced.

 

Some action is in hand. The 2020-21 Department of Industry Science research and innovation budget tables published on 18 February, report a 110 per cent increase from 2018-19 in the research support program (to $1.9bn), an increase of 0.5 per cent in the Research training programme (to $1.1 bn), an increase of 3.1 per cent in the ARC National Competitive Grants programme (to $803.2m), an increase of 155 per cent in payments from the Medical Research Future Fund (to $568.6m), and an increase of 55.9 per cent in the National Collaborative Research Infrastructure Sstrategy (to $255.7m).

 

These increases will contribute to sustaining the sizeable human resources effort. Between 2012 and 2018 research effort increased from 74,669 person-year equivalents to 81,717 (9.4 per cent). Academic staff numbers increased by 6.4 per cent, postgraduates by 7.5 per cent and other staff by 26.7 per cent.

 

There appears, however, to be a structural problem in balancing the domestic and international postgraduate contribution to the research effort. DESE data show that in 2019, there were 45,335 postgraduate students in Australian universities, of whom 42.0 per cent were international. In 2013 the international proportion was 35.3 per cent. Over the 2013-19 period, the number of domestic postgraduate students dropped by 2,230 (7.2 per cent) to 26,283, while the number of international postgraduate students increased by 3,521 (22.6 per cent) to 19,502.

 

DESE data also shows that Australian doctorate enrolments are heavily concentrated in society and culture (24.8 per cent), natural and physical sciences (21.8 per cent), and Health (19 per cent). Only 9.7 per cent are researching in the fields of engineering and related technologies. International enrolments also have a concentration in the natural and physical sciences (25.9 per cent) but are very strong in engineering (25 per cent).

 

Postgraduate research makes a very substantial contribution to the Australian higher education research effort. But with the number of Australian postgraduates in decline, and the small commitment to engineering and related technologies, it is not certain that the funding is sufficient or the priorities right for securing the talent to drive Australia’s industries of the future.

 

Separating the domestic from the international business

 

Knowing whether the international student income was well spent is made difficult by the absence of a distinction between the international and domestic business and the lack of information about the actual costs of delivering education to overseas students.

 

The separation of the two businesses is essential for an argument that the Commonwealth must restore its commitment to Australian higher education. It’s not good enough for the Commonwealth to renege on its domestic responsibilities on the assumption that international students will pay.

 

Income and expenditure relating to international education should be corralled with surpluses reported separately. Surpluses, if any, could be applied to investments in non-current financial assets to provide income streams for future priority purposes. They could also be used for matching purposes in Commonwealth capital programs

 

Responding to the crisis

 

Based on financial projections regularly published in the media, the community has been spooked into thinking that some universities will be facing financial ruin. But based on a realistic assessment of all the available financial data, and the capacity of executive and financial leadership, the community should have confidence that there is sufficient capacity to work through the situation – tactically and strategically. If that confidence is misplaced, then we do have a problem.

 

In general terms, over the last few years, university financial management has become increasingly sophisticated, with chief finance officers (or their equivalents) reporting directly to very astute vice-chancellors. This sophistication may not be available in smaller universities and external independent strategic management advice and structural adjustment assistance could be justified.

 

University financial strategies target many performance metrics, the most significant being operating margin (income less expenses) at around 6 per cent. They also have cash flow targets. Performance targets are the focus of governing boards and auditors. In a crisis, to meet targets, universities have to either increase income or reduce expenditure. With revenue falling, the focus will be on expenditure reduction or offsets,

 

In the current cash crisis, universities have been taking one or more of the following courses of action:

 

  • requesting government subsidies or bailouts.
  • reducing staff numbers, particularly in corporate and operational support areas through voluntary redundancies and contract terminations.
  • freezing and cutting discretionary expenses – travel, ICT services, non-capitalised equipment purchases, and so on.
  • cancelling or deferring building and other capital programs financed by cash and looking to longer-term borrowing arrangements.
  • looking to short term borrowing and lines of credit to finance working capital and “lumpy” commitments.
  • selling or back leasing assets, particularly under-utilised or surplus buildings.
  • entering into more “right of use asset” deals with developers and finance companies.
  • diversifying revenue streams into undergraduate certificate training courses.

 

According to regular reports in Campus Morning Mail and several other publications over the last few months, these tactics are well in play. Regrettably, these not only impact the international higher education business, they also flow through to the Australian higher education system.

 

There is now a concern that some of the expenditure cuts have gone too far. In recent weeks two of the largest universities have reported substantial operating surpluses for 2020.

 

In the corporate sector, businesses can purposely enter into a loss situation to retain and invest in talent to build the capability essential for a return to surplus. However, state auditors-general may not be comfortable with this strategy.

 

Rather than disrupting the Australian higher education system, the international student boom has contributed to its distortion – away from the needs and requirements of Australian students, industry and the community.

 

In the washout of the financial crisis, some providers will continue to grow, whilst others will concentrate on playing to their strengths. Still others will develop fundamentally different business models. Parts of the system may end up smaller but more focussed and sustainable. This is the essence of the framework for a diversified national system, presented in my recently published book. Rethinking Australian higher education.

 

The financial crisis offers a new beginning.

 

This paper picks up parts of Chapter 2 and Attachment 4.2 in Dr John H Howard’s Rethinking Australian higher education, published by Howard Partners and UTS on 18 February 2021.

 

[1] In Canada, by contrast, over the decade to 2018-19 the proportion of international students increased from 6.4 per cent to 16.2 per cent of the student population.

 

[2] The 2020 Job-ready graduates package will create up to 30,000 new university places, and 50,000 new short course places by 2021 and provide additional support for students in regional and remote Australia.

 

 

 

NEWS

A comprehensive review of Australia's higher education system was published as Rethinking Australian Higher Education by Howard Partners and UTS on 18 February 2021.

 

In May 2020 an extended analysis of Australia's research capacity was published as  Challenges for Australian Research and Innovation by UTS as an Occasional Paper.

 

In 2019 Howard Partners completed the first ever comprehensive Performance Review of the Rural Innovation System for the  National Primary Industries Research and Innovation Committee.

 

CONTACT

Dr John Howard

PO Box 47

Rose Bay NSW 2029

 

M 0403 583 600

E john@howardpartners.com.au

 

 

 

 

 

 

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