Australian universities heading towards $9 billion shortfall
The coronavirus pandemic will have a major impact on the finance coffers of Australian universities. According to a preliminary estimate from Kearney, it could lead to a shortfall of up to $9 billion in 2020 alone.
For years, Australian university sector has been a success story. Lifted by unprecedented demand for a place at Australia’s universities by international students, the number of students enrolled at any given time has grown to 1.3 million. Meanwhile, some of the largest academic institutions such as the University of Melbourne, Monash University and the University of Sydney have grown into leading players on the global stage.
These factors have contributed to stunning growth during the past decade. Total revenues of Australian universities increased 5% annually according to Kearney, a global consulting firm, from $34.5 billion in 2015 to $42 billion in 2019.
International students have been a massive driver – revenue from this segment grew by 15% per annum in the past decade to top $9.8 billion last year. They now represent over 25% of the total student population, relatively high in relation to the higher education sectors of other Western economies, with education hungry Chinese students by far constituting the largest chunk of these internationals.
However, the analysis by Kearney partners Enrico Rizzon and Robert Holt shows that the Covid-19 pandemic will put a big dent in the sector’s growth trajectory. Restrictions on travel will lead to a sharp drop in enrolment from international students – between 30% to 50% is deemed ‘realistic’. On top of that, the relaxed visa restrictions undertaken by the UK and Canada last year could attract foreign students post-virus who may otherwise have considered Australia’s universities.
Adding to the drop, the number of domestic students is expected to fall by 15% to 20% for the next academic year. Overall, the university sector could see 20% wiped off from its revenue base. This in turn could see the operating surplus of universities, estimated at $2 billion pre-corona, plummet to around -$7 billion by the end of the year in the most realistic case, and -$9 billion in the worst case scenario.
Already on its back feet
The drastic turn in fortunes is however not only attributable to the impact from the covid-19 pandemic. The researchers point out that the sector was already seeing its growth trajectory slow. An oversupply of student capacity and fierce competition was driving net tuition fees down through discounting and reduced margin per student, and as a result top-line growth was slowing.
At the same time, the cost base of the sector has been rising rapidly, eating from profit margins. “Costs have risen faster than revenue growth, at 7% and 5% respectively,” leading to sliding operating surpluses numbers.
The authors contend that much of this gap is due to inefficient internal practices. “Based on our experience working closely with companies and other organisations, we believe that Australia’s universities are at least five to ten years behind corporations in achieving the benefits to be gained from productivity practices such as outsourcing, shared service centres, strategic sourcing, workforce planning, and automation.”
Universities also face high costs due to very generous agreements and contracts, including year-on-year pay increases are linked to tenure rather than performance, and enterprise bargaining agreements with terms significantly higher than legislated requirements. “We estimate these premiums cost universities 30% more than what corporates pay,” state Rizzon and Holt.
Factoring in these developments, “even without the Covid-19 pandemic, we project that universities’ operating surpluses would have retreated into negative territory within three years.”
With Covid-19 now accelerating the shortfall, the experts warn that “doing nothing is not an option” to assure a healthy future for the vital sector. “Now is the time for a ‘whole-of-university’ transformation.”
