Time for the government to make a long-term investment in research and innovation

The Australian
31 Mar 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 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 $34bn and net assets at $58.2bn. Their expenditures make a direct contribution to GDP in the order of 2 per cent, with many flowthrough multiplier effects.

Several Australian universities now rank very highly in global league tables, and are effectively large global businesses. This globalisation of Australian higher education has accelerated since the GFC, with expansion and growth supported by large injections of commonwealth funding and rapidly increasing income from fee-paying international students.

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; increased borrowing to finance expansion of facilities and campus development (where borrowing costs have been relatively low); establishment of offshore satellite campuses; and entering into long-term teaching partnerships with overseas universities endorsed by host governments.

Most of the Group of Eight universities have achieved success in their globalisation strategies, as have several technology and commuter universities. Some universities have a very large proportion of international students based in overseas locations.

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.

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 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 such as 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 per cent, down from 8.1 per cent in the previous year.

Many universities were affected by losses on financial investments. In 2009 the operating margin had recovered to 8.8 per cent, 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 past two years Australian university sector operating margins have been declining (4.2 per cent in 2018, down from 6.3 per cent 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 those of the Australian Research Council. That slowdown has not been 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. The University of Sydney has already announced it is cutting $200m from its $2.8bn 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.

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 focused universities may also be in a better position to withstand the current shock through their financial strength and more prudent financial investment strategies. However, the impact of stockmarket fluctuations on their investment portfolios is much more difficult to ascertain.

Universities that have been less strategic in their international student attraction approaches, and which lack the cashflows, investment buffer, financial strength and security, will be particularly challenged by a sustained fall in international student numbers.

But, unlike their global counterparts, they lack access to other sources of funds that are available in other countries in the form of publicly and privately funded research-and-development programs.

In Australia, government commitments to university teaching and research have 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, which has led to the development of medical devices, clinical treatments and vaccines. More recently, there was the commitment to the $20bn Medical Research Future Fund.

But in contrast to health and medical research, universities have not been supported strongly in engineering and technology, where major advances will be required to transform the Australian economy in the post-virus recovery, as well as to respond to climate change and move the economy to zero carbon emissions.

Now is the time for government to do more than fund transfer payments to keep people alive during this crisis. It should also 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. This would support a resurgence in manufacturing that might parallel the success of the medical research institutes that sit beside (and within) universities.

That investment should also support non-R&D innovation in business, social sciences, and the humanities — developing the skills and capabilities that enable the implementation and adoption of technology breakthroughs.