Two critical things are coming into focus that affect the financial position of universities as they struggle to deal with the devastating impact of the COVID-19 virus. Unfortunately neither of them are what you want to hear if you’re sitting in the vice-chancellor’s chair.
The first is that international travel restrictions could carry into next year, meaning the intake of new students arriving for the first semester of 2021 may not be able to get to Australia.
If this is the case then the enormous revenue losses suffered this year will be compounded.
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Not only will the students who were prevented from starting this year still be unable to come (assuming they still want to) but next year’s first semester intake will be blocked too.
The second is that the federal government is batting back all talk about a bailout out for universities to offset the revenue gap, which this year is conservatively around $5bn. Not that universities have specifically asked for a “bailout”. They don’t like calling it that.
But be assured, if a bag of money were on the table they would leap at it. The problem is that it’s not there.
You may wonder how this squares with the government’s announcement last week of an $18bn package for universities. That, in fact, is not new money. That’s what the universities were going to get anyway in funding for this year.
There were some relatively small benefits in the package that will help universities and independent education providers across the tertiary sector. It’s not possible to calculate their value exactly, but the Australian National University’s Andrew Norton (on a very rough back-of-the-envelope calculation) estimates they could be worth just over $600m.
In the scheme of things that’s not nearly enough to lift the air of despondency descending on universities.
For example, on Monday University of Melbourne vice-chancellor Duncan Maskell said in a video message to his university community that not only was there a revenue fall of about $500m this year, but “almost certainly, similarly reduced revenues for the next two or three years”.
On Tuesday CQUniversity vice-chancellor Nick Klomp provided his institution’s outlook. His budget this year is likely to fall $100m short with “further significant losses in 2021”.
How serious are the losses for the university sector? First, it’s important to be clear that very few, if any, universities are in danger of insolvency.
Collectively, universities reported in 2018 (the latest available annual report for most of them) that they have a huge cushion of $36bn of retained earnings and $23bn in reserves, a total of $59bn. So a $5bn hit this year won’t send them broke. Nor will an extended blow that continues into next year and even the year after.
But universities do have a cashflow problem. They still have to meet their current and near-term liabilities, despite the lost international student income.
This is a very real issue. For example, Melbourne University ran a surplus of $57m in 2018 and this year its budget is short by a figure nine times that. Its current liabilities (that is, liabilities due in the next 12 months) were $808m, as recorded in the 2018 annual report.
With $500m less revenue, it’s clear that Melbourne University (like almost every other university) is going to have cashflow difficulties.
So what’s the answer? After making expenditure cuts (which it will certainly do, probably including shedding staff) it can dip into retained earnings and reserves, assuming they are liquid enough to turn into cash. And if there’s still not enough liquidity, it can borrow against these assets.
In the absence of substantial help from the government, this is how every university will get through this crisis: choosing from a menu of spending cuts, postponed capital projects, liquid reserves and borrowing. Luckily, most universities are not heavily borrowed.
There may be some smaller universities that will still be in difficulty. In that case expect the federal government to do what it has done for some universities before: quietly advance them Commonwealth Grant Scheme money (the funding for student courses) ahead of time to help them meet their obligations. Only if a university is actually facing insolvency are we likely to see a true bailout.
The fact universities have got a credible path through the COVID-19 mess doesn’t mean it will be pretty or easy.
The cheapest jobs to shed are casual and contract positions. This means the next generation of academics and researchers could be hollowed out, doing damage that lasts for decades.
Also, the abundance of international student fee revenue was also what allowed universities — particularly those in the Group of Eight — to boost research spending. Research programs are in danger of being filleted.
It also means that universities will lack the ability to make major investments for the future.
The big opportunity now is in online education. Technology is rapidly advancing in this area and, after the experience of COVID-19, students all over the world will be more ready for it. It’s a field in which early movers can gain a huge advantage. But will Australian universities have the ability to invest and compete with the world’s big players?
To minimise the damage and maximise the opportunities, universities badly need international students to be able to return next year. Time to hope and pray.
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