Small universities struggling to keep pace with larger institutions

Smaller universities in Australia are set for tough times, in light of an imminent spending crunch for the education sector as a whole. This is according to a macro-level analysis of Australia’s higher education sector conducted by professional services firm Grant Thornton.

The firm’s analysis is set against the backdrop of what it describes as a higher education sector in a state of flux, currently undergoing transformation from all directions. This is in reference to factors such as the advent of technology-driven changes to education models, mounting customer expectations from students, changes to funding models, and not the least, the Covid-19 crisis.

Like any other country, the higher education sector is a crucial component of Australia’s economy. An EY report from late last year revealed that improving student performance at the university level in addition to tackling other key challenges facing the higher education sector could add more than $3 billion per year to Australia’s economy.

Proper university education is also crucial for Australia to tackle the growing skills gap that it faces in a rapidly digitalising economy. However, as Grant Thornton highlights, the sector is currently in a state of flux, and with the current outlook, smaller universities are more than proportionately facing economic challenges.

Smaller universities in Australia lag far behind their larger counterparts when it comes to revenue growth. Australian Universities that fall in the top income quartile, according to Grant Thornton, have registered a compound annual growth rate (CAGR) of 5.5% over the last half a decade. For universities in the bottom income quartile, the CAGR has been 3% over the same period.

The scenario spells more trouble for smaller universities when considering contributions to operating surplus for the higher education sector. For large universities, this is 57%. For smaller universities, the contribution is 1%.“If this trend continues it will mean that the smaller universities, including those based in regional centres, may find it harder to compete with the financial resources of larger universities,” said Stuart McDowall, a partner at Grant Thornton in Brisbane.

What smaller universities also have to consider is that spending for the whole sector is on the rise, worryingly faster than their income. Between 2014 and 2018, expenditure on Australia’s entire higher education system grew by 5.9% each year, while the income of smaller universities grew by a lower 5.1% annually.

This trend has according to Grant Thornton already burdened a number of smaller universities with operating deficits. These universities find solace in the fact that learning outcomes are as central a metric of success as operating surplus, and many of them are doing relatively well on that metric. However, operating surpluses are crucial for a university’s long term capacity to sustain itself.

The coronacrisis

The coronacrisis is obviously having a major impact on universities in Australia, forcing them to shut their doors as part of the lockdown, with the delivery of courses now delivered virtually and remotely. Australia has around 1.3 million university students, with the University of Melbourne, Monash University and the University of Sydney among the largest institutions.

Across the board, Australia’s university sector is hit hard by its high reliance on Chinese student revenues. The share of international students in Australia’s higher education sector is in relation to other countries very high (over 25% of the total student population), and the education hungry Chinese represent by far the largest chunk of that group.

Factors such as loosened visa regulations and better trade relations, among others, have made Australia an attractive destination for international students. Now, as the Coronavirus stops millions of Chinese students from coming to study in Australia, the sector is exposed to billions in damages.

PwC recently calculated that the damage from this scenario could add up to billions, while another analysis, from the University of Sydney, calculated that even if the epidemic ends by the end of the summer, it will slice at least A$2.8 billion off Australia’s education exports. The development comes following several warnings about the danger of plummeting Chinese enrolments. “People have been voicing this risk for years,” said University of Sydney sociologist Salvatore Babones.

For smaller universities, the bright spot in the gloomy picture is that its reliance on international students is lower (below 20%) than that of larger counterparts (above 35%). “Universities who over-rely on international students need to have a course of action for dealing with the drop-off in demand,” said McDowall.