Public universities are stressed, but there’s no sign they will fail

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Recent statements in the media on the “financial risk” of universities given the current disruption created as a consequence of COVID-19 have received attention in a number of quarters. There is little doubt that the Australian public university sector is under stress, but we would argue, on the publicly available evidence, this is a long way short of seeing any public university fail.

A neighbour approached one of us last week asking if it was wise to continue to send his daughter to a university recently labelled as “high risk”. These reactions, while understandable, are not helpful to the universities so labelled as well as to the range of other stakeholder groups including students, staff and university management. In the wider scheme of things, the financial risks facing the university sector might be more appropriately seen as varying from exceptionally low to moderate.

More broadly, it is understandable that there is a sustained focus on the negative consequences of the disruption. This has been a major and traumatic event, careers have been derailed, study plans stymied and research in many fields lost or significantly delayed. Those who are educationally vulnerable will be more so. Those whose careers were on the edge of academia — casuals, fixed-term appointments, post-docs — now have a further delay and less likelihood of securing a more permanent role. Institutions are struggling to manage their budgets and secure sustainable cash flow. Some staff will enter early and unwelcome retirement or simply move to underemployment or unemployment.

However, in common with most parts of society, there are some things that the disruption has changed that we would want to keep. There are also opportunities for those willing to take them. The challenge is to support the people and institutions dealing with the negative consequences and at the same time focus on the recovery of the sector and secure its sustainable future. While it is important to know where the sector has come from, the opportunities and successes in the coming years should not be overlooked.

Why is the tone of the current narrative and the associated debates of concern? In large part, aspects of the discourse are seen as negative and even disparaging. Some of the narrative will be perceived by some as a criticism of university management, in particular university risk management. It is this management that is now working to recover and move forward. Some of this narrative distracts from the task ahead, that is to learn from previous crises and, in a sense, from our various governments’ approaches. While there are different recovery challenges facing individual institutions, there are some reform opportunities that are common to all, and now is the time to identify where the sector will put some collective effort into strengthening Australia’s higher education system.

Importantly, we need to understand that the current financial challenges faced by many but not all universities, are real and significant but, in the short term at least, largely relate only to cash flow and can be solved in the vast majority of cases in the near to medium term.

For many years it has been the case that the federal government has provided cashflow support to universities. It is understood that there are instances as far back as a decade and a half ago, probably longer, where the Commonwealth has provided, without fanfare, support to certain public universities in the form of cash advances. Further, commercially available borrowing has rarely been so cheap; interest rates are at exceptionally low levels.

What of the opportunities for the future? There is evidence of a willingness to engage in change and structural reform not apparent even six months ago. This reform can involve changes both within individual institutions as well as for the sector more broadly. There are instances in the past, and no doubt will be in the future, where higher education institutions have merged or otherwise changed structurally.

The extent of possible within-institution changes will depend on the scale of the difference in the present structural reliance on international student income and that which is sustainable in the future. This type of reform is common in other sectors in the economy and is a necessary activity for renewal. While painful in the short term, especially for affected staff and students, if successfully managed, it can be positive and advantageous and create a sustainable and successful future for Australia’s universities. It would not be unreasonable for the government to support those who are willing to engage in this collective activity.

There are revenue generation opportunities both on the domestic and international spheres. Some universities are working on strengthening and extending online and digitally delivered education as a revenue generation (and risk mitigation) strategy. The upside here could be very considerable. Interestingly just a few weeks ago, one elite overseas university (ranked above most, if not all, in Australia) announced an ongoing commitment to online education. Digital education can be rapidly built from the work already undertaken to either strengthen existing, or to build from scratch, a significant digitally delivered learning portfolio. Digital education is an area that the sector could collaborate on and build global comparative advantage for Australia.

Also in respect of revenue, it is important not to overlook the externalities. Some see the prospect of Chinese students returning to Australia as more limited. In 2019, there were an estimated 400,000 Chinese students in US higher education. One recent estimate from within China has only 200,000 of them returning to the US, resulting in sizeable unmet demand. With a strong response to the pandemic as compared to some other potential destinations along with other factors, Australia and New Zealand will be an attractive comparative option even in the presence of some clearly negative signals. How the sector as a whole will market to these prospective students will now change. Innovation in this area is already apparent by looking at the actions of others.

There are many other risk management and revenue orientated responses. One Australian university has publicly announced the development of a further offshore facility to mitigate risk and strengthen revenue. University managements across the country will be working on a range of revenue options. There could be some co-ordinated sector wide responses.

There is also one strategic response that, while being actioned in private, has not been publicly canvased yet it is crucial. A number of universities have invested in developing excellent levels of efficiency and productivity. The levels of efficiency and productivity are important elements in being able to deal with financial ‘shocks’. Institutions close to or on the efficiency frontier (that is, at a high level of efficiency that might be thought of as achieving ‘value for money’), are likely to have a greater capacity to recover from financial downturns. A university that is further away from the efficiency frontier (that is with lower levels of efficiency in its research or education activities or both) can also recover by developing the ability to identify and capture under-utilised efficiency gains. These could be in the academic sphere or the ‘back office’ as appropriate. These efficiency gains can add considerably to financial recovery.

A factor sometimes overlooked when actions are taken ‘on the run’ is that there is a need to consider efficiency when looking for cash flow savings and longer-term financial recovery. An unwise cut in some activities can save cash today but can have efficiency consequences that ultimately have a significant impact and negatively effect on cash flow tomorrow. The consequences for international rankings and global competitiveness are also not insignificant.

Students, their families, staff and other interested stakeholders need to be aware of the complexity of this situation before determining whether an institution that might be labelled as being in any given risk class is, in reality, at risk in delivering on what they want and need both today and in the future.

Keith Houghton is chief academic strategist of the Higher Education and Research Group. He is formerly a member of the ANU Council and chair of its audit and risk management committee.

Mark Clisby is the chief executive officer of Research Coaching Australia. He formerly held executive positions in the Australian university sector including at La Trobe and Flinders Universities and the ANU.