by TOM SMITH and JAMES GUTHRIE
Deakin University VC Iain Martin has reacted to the Macquarie University Business School working paper (CMM February 5) that included a list of the “10 most exposed” universities, based on an analysis of each institution’s financial statements and earlier research. Professor Martin told staff, “we take issue with their inclusion of Deakin in the list and believe that their superficial analysis does not reflect the real position of our university.”
Professor Martin added the university, “carries no debt” (CMM, Monday).
We take strong exception to the view that our research is superficial. It is common practise for governments, auditors-generals, and other officials to use a range of financial and non-financial constructs to assess the performance, financial position and cash flows of institutions in the Australian higher education system.
However, research reveals that most of these universities’ 2019 annual reports did not factor in significant risks and exposure due to their heavy reliance on international student fees and holding few reserves. We are assuming the current 2020 annual reports will do so!
For instance, the 2020 Victorian Auditor-General’s Office (VAGO) report notes that these “indicators, formulas and descriptions” are “used to assess financial sustainability risks of universities” (VAGO, 2020, p. 47). The “indicators, formulas and descriptions” are essentially 12 ratios. Also, the Education Skills and Employment Department financial ratios in the Financial Reports of Higher Education Providers contains financial information compiled from Australian universities’ annual financial reports as of 31 December 2019, and this is the last year data available. They use financial metrics to determine the financial sustainability of public sector universities in Australia.
We used that data to show Deakin has no interest-bearing debt but has liabilities of $615,454,000 and total assets of $2,918,359,000 for a debt ratio of 21 per cent. We formed the judgment that this exposure is because of the heavy reliance on international student fees and few reserves.
Hence the title of our research “On the resilience of Australian public universities: Why our institutions may fail unless vice-chancellors rethink broken business models.”
We believe vice chancellors face significant social and financial risks due to reliance on on-shore overseas students’ fees as a substantial per centage of revenue and to their casualisation of employment on campus.
Our analysis indicated that Deakin U’s financial risk levels are largely due to on-shore overseas students’ fees as a per centage of revenue: 28.1 per cent in 2018 and 30.5 per cent in 2019.
Carnegie and Guthrie examined the pandemic risk disclosures of Victorian universities, made in their 2019 annual reports tabled in state parliament last June (CMM July 2). They found there was little discussion about these risk disclosures and the COVID-19 crisis. Remember, Australia closed its borders to Chinese students at the beginning of February 2020.
Deakin U’s risk disclosure is illustrated below, as extracted from the 2019 annual report.
“Due to this significant uncertainty surrounding the COVID-19 outbreak and the government’s response to this, it is not possible to estimate the full impact on the university’s operations, financial position and cash flow at this point in time. This being the case, the university does not consider it practicable to provide a quantitative or qualitative estimate of the potential impact of this outbreak on the Group at this time.”
In summary, the income derived from onshore overseas students for some time has substantially subsidised Australia’s public universities’ infrastructure, operations, teaching, and research. Without this income on the same scale as previous, due to the implications of COVID-19, vice chancellors need to rethink a broken business model.
Behind closed doors, VCs are now undertaking on-going estimate impacts and scenarios on their universities operations, financial position and cash flow. Our research is in the public domain and relies on the latest financial information available.
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Professor Tom Smith and Distinguished Professor James Guthrie, Macquarie Business School