This report does not constitute a rating action.
- Australia is far more exposed to the unprecedented downturn in international student flows than other Anglosphere countries.
- Australia's prolonged border closure will bruise universities to varying degrees. The four institutions rated by S&P Global Ratings appear relatively robust, though two have negative outlooks.
- Universities have responded to revenue writedowns by cutting costs and headcount. Early 2020 results augur well.
The continued lockout of foreign students will punch a big hole in Australian university finances. The ongoing border closure has had an adverse effect on new commencements (see "Australian Universities Go From Boom To Zoom," published April 27, 2021). Before COVID-19, some institutions derived over one-third of their total revenue from international students (chart 2). This income stream is a function of the number of students enrolled and the tuition fees they are charged, both of which vary widely across the sector. Its growth far outstripped that of government funding over the past decade (chart 3)
Rated Institutions Appear Relatively Robust
The four universities rated by S&P Global Ratings are mostly in the top half when ranked by revenue exposure, but prepandemic they weren't chasing growth as aggressively as some peers (chart 2). Interestingly, and perhaps contrary to popular perception, members of the Regional Universities Network--CQ University, Charles Sturt University, Federation University, Southern Cross University, University of New England, University of Southern Queensland, and University of the Sunshine Coast--span the full spectrum from most to least exposed.
We assess rated universities as having had comparatively healthy balance sheets entering the crisis. They benefited from a two decade exponential boom in international enrolments, banking some of the windfalls for a rainy day. One simple measure we look at is the ratio of an institution's cash and financial investments to outstanding debt (chart 4). Under our methodology, a ratio of 3X or greater is particularly sturdy. Many Australian institutions have little debt, but some toward the righthand side of chart 4 are among those most exposed to foreign students in chart 2, and therefore appear to be more financially vulnerable.
A caveat: As with all simple metrics, the ratios in chart 4 should be interpreted with some caution. Financial assets may not be readily available for operating expenses or debt service if, for instance, they are tied up in endowment funds or set aside to meet pension or leave liabilities. In addition, while the stock of debt is an important indicator, for rated universities we also carefully examine the structure, amortization, and management of their borrowings.
Crucially, one thing the four rated universities have working in their favor, particularly three in the 'Group of Eight'--Australian National University, University of Melbourne, and University of New South Wales--is their relative prestige. We think this affords them greater flexibility to adjust to shifts in the market. If student demand wanes, they could tweak their fees or entry standards to cannibalize demand from lower-ranked peers, on the premise that students will often apply to multiple institutions and accept the best offer.
The COVID-19 pain will be unevenly shared not just across institutions but also faculties and disciplines. For instance, reliance on foreign income tends to be greater in business schools. And because it's widely acknowledged that fee revenue is used to cross-subsidize research, there is now a risk of a researcher "brain drain," with implications for performance in global rankings. The Melbourne Centre for the Study of Higher Education estimates that the sector will lose A$6.4 billion-A$7.6 billion in discretionary income available to support research over 2020-2024.
Early Indications Suggest Cost-Cutting Efforts Are Working
We think the forceful response by university managers to the crisis has helped to protect their balance sheets, for now. Universities have been slashing headcount, renegotiating employment contracts, freezing new capital investment, closing unviable campuses or courses, tapping reserves or contingency funds, selling assets, and, in some cases, raising new debt. They shed 17,300 jobs in 2020, according to Universities Australia. This figure equates to about 13% of the pre-COVID-19 full-time-equivalent workforce.
Some institutions will post operating deficits for calendar 2020, but early results give grounds for cautious optimism. Universities in Queensland and Western Australia were first to release their 2020 financial statements. Five of seven public universities in Queensland and two of four in Western Australia recorded surpluses. In unaudited guidance, Monash University and University of Melbourne (AA+/Stable/A-1+), both in the state of Victoria, also announced surpluses, though Monash foresees deficits in 2022 and 2023. Australian National University (AA+/Stable/A-1+), on the other hand, signaled a 2020 deficit. (Headline reported operating results differ from the metrics we use under our credit rating methodology; for instance, we typically omit unrealized investment gains and losses.)
Several institutions raised new debt. This will erode rating headroom. University of Wollongong (AA/Negative/A-1+) issued A$350 million in December 2020; the funds are needed in relation to a student accommodation public-private partnership that has become uneconomical because of COVID-19. Earlier in 2020, University of New South Wales (AA+/Negative/A-1+) drew down A$250 million from bank facilities to shore up its liquidity. In October 2020, Australian National University published a plan to borrow A$243 million in 2021 to fund new capital investments and staff redundancies.
Among unrated institutions, some in Queensland and Western Australia drew on loan facilities from their state government treasury corporations. Charles Darwin University, CQUniversity, and James Cook University entered into new loan agreements backed by the Northern Australia Infrastructure Facility, a Commonwealth agency.
If there's a silver lining, it is that the crisis has shown universities have substantial flexibility to respond to ups and downs. The sector's 2020 revenue decline (estimated at A$1.8 billion) was less than half both its annual capital expenditure (A$4.5 billion in 2019) and its pile of cash (A$4.7 billion at the start of 2020). An increasingly casualized workforce also makes retrenchment easier. Casual employees comprise about 23% of the academic workforce (i.e., not including teaching-only staff) on a full-time-equivalent basis and probably a majority on a headcount basis, according to the Grattan Institute. Rolling layoffs through 2021 will prolong the sense of emergency but help support long-term financial viability.
An Era Of Rapid Expansion May Be Over, For Now
Enrolments and staff numbers will shrink, and curriculum offerings will be reshaped. University of Tasmania will reduce its number of courses on offer to 120 from 514. Australian National University plans to close its neuroscience research arm. Monash University and Charles Sturt University will reportedly axe more than 600 subjects each. Victoria University, Swinburne University of Technology, and RMIT University are among those divesting multimillion-dollar commercial properties.
That said, not all institutions are reducing campus footprint. For instance, Griffith University is continuing work on a new inner-city Brisbane flagship campus. And City Deals--partnerships between Australia's three tiers of government and the private sector--will provide funding to support new city campuses for certain universities in Darwin, Launceston, and Perth.
We see university leaders facing a delicate balancing act. On one hand, they will call on staff for further parsimony in 2021, to defend against another year of revenue squeeze. (We noted previously that a diminished cohort of commencing students will affect revenue for several years, but so too will downsizing result in a structurally lower expenditure base.) As the pandemic drags on, resistance from staff and students could grow: A recent course-cutting proposal at Swinburne University of Technology, for instance, triggered a rare vote of no confidence in management. On the other hand, the solid 2020 financial results will embolden politicians who claim that the sector does not need aid and has overestimated its potential losses.
We view amalgamations as possible, though they are rare. A proposed merger of University of South Australia and University of Adelaide was aborted in 2018. Financial pressures could prompt a rethink. Larger institutions might benefit from economies of scale and bigger marketing budgets and research profiles, but universities in Australia are already large by global standards. Another option is for universities to partner with the private sector in mixed-use development of campuses. These could include space for retail and commercial real estate, health and aged-care services, startups, and industry. Examples include La Trobe's University City of the Future, University of Wollongong's Health and Wellbeing Precinct, and University of Melbourne's Melbourne Connect.
Australia Is Harder Hit Than Other Anglosphere Nations
Australian universities face proportionally larger revenue shortfalls than their counterparts in Canada, the U.K., and the U.S. This is because Australia punches far above its weight in international education. It accounts for 8% of global education market share, on par with the U.K., despite representing just 1% of global GDP.
Before the pandemic, over a quarter of enrolled students at tertiary level were from overseas. Over half of Master's-level students were foreign (chart 5). No public university in the U.S. has as high a proportion of international students as the average public university in Australia, according to the Centre for Independent Studies.
Foreign students account for an outsize share of revenue because they pay differentiated tuition fees. Course fees (known as "student contributions") for domestic Commonwealth supported places (CSPs) are capped by the government. International student fees meanwhile are essentially unregulated.
Australia, Canada, and the U.S. all charge foreign students over US$13,800 more per year on average than domestic students (chart 6). Larkins and Marshman (2020) calculate wide variation in Australia in the average fees received per foreign student (both onshore and offshore), ranging from about A$42,600 at University of Sydney to A$9,800 at Murdoch University. A handful of institutions, including University of Wollongong, currently offer fee rebates or bursaries of up to 20% to foreign students stuck offshore.
While Australia has navigated the health crisis well (chart 7), it is far behind its competitors in rebooting its education exports. Canada and the U.K. remain relatively open to students. The U.K. government has reintroduced poststudy work rights for foreign students. Over the past few years, other countries have also been proactive in opening transnational campuses and secondary schools that teach their curricula abroad. (This is not to say their universities aren't under any financial strain: Laurentian University in Canada, for instance, recently filed for creditor protection.)
If Australia can safely reopen to students, its status as COVID-19-free will prove an appealing point of differentiation from other countries. But we think there's a danger that an extended denial of entry will alienate foreign students, who could choose to study elsewhere. A November 2020 report by Tertiary Education Quality and Standards Agency, the federal regulator, found about one-third of remote learners were concerned about a lack of engagement and interaction with lecturers and peers. And a petition submitted to Australia's Parliament in February 2021 on behalf of international students complained of poor-quality online lessons and mental distress. It attracted over 17,000 signatories.
"Rivers Of Gold" Are Drying Up
Changes to the public funding model could make the years ahead even leaner. The Job-ready Graduates Package, which became law in late 2020, promises to raise the federal government's sectorwide funding to A$20 billion in 2024 from A$18 billion in 2020, creating up to 30,000 new places for domestic students. But it also fine-tunes the mix of tuition subsidies paid by the government and contributions paid by domestic students for certain courses, to make degrees cheaper in fields with purportedly better employment prospects (table 1).
The taxpayer-funded "rivers of gold" that a former Australian education minister once complained about are drying up. The overall effect of the reform package is that, on average, domestic student fees will rise 7%, government funding per CSP will fall 15%, and total revenue per domestic student, which is the sum of the two aforementioned components, will decline about 6%. It will take time to assess the implications for individual institutions and how they alter their intakes in response.
There is also some new money for a National Priorities and Industry Linkage Fund (A$900 million) and an Indigenous, Regional, and Low Socio-Economic Status Attainment Fund. A A$1 billion one-off boost to Research Support Program grants in the October 2020 federal budget helps to allay only partially the lost income from foreign students.
Our Coronavirus Assumptions
S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
S&P Global Ratings research
- Australian Universities Go From Boom To Zoom, April 27, 2021
- Outlook For Global Not-For-Profit Higher Education: Empty Chairs At Empty Tables, Jan. 20, 2021
- Australia, Canada, Mexico, And U.K. University Medians Report: Pandemic-Related Pressures Could Upset Recent Credit Metric Stability, Oct. 20, 2020
- University Challenge: Will International Students Keep A Distance From English Universities? Oct. 9, 2020
- The Higher Education Sector Outlook Is Now Negative For Australia, Canada, Mexico, And The U.K., May 14, 2020
- Hitting The Books: Could COVID-19 Affect Australian University Ratings? April 21, 2020
- Coronavirus Will Dent Australia's Higher Education Revenues, Feb. 5, 2020
- 2020 Higher Education Year In Review, Universities Australia, Catriona Jackson, Jan. 5, 2021
- Foundations For Good Practice: The Student Experience Of Online Learning In Australian Higher Education During The COVID-19 Pandemic, Tertiary Education Quality And Standards Agency, November 2020
- Education At A Glance 2020: OECD Indicators, Organisation for Economic Co-operation and Development, September 2020
- COVID-19 Pandemic Research Funding Shortfalls And Workforce Reductions Modelled For Individual Australian Universities, Centre for the Study of Higher Education, Frank Larkins and Ian Marshman, September 2020
- Modelling Individual Australian Universities Resilience In Managing Overseas Student Revenue Losses From The COVID-19 Pandemic, Centre for the Study of Higher Education, Ian Marshman and Frank Larkins, May 2020
- The China Student Boom And The Risks It Poses To Australian Universities, Centre for Independent Studies, Salvatore Babones, August 2019
- Mapping Australian Higher Education 2018, Grattan Institute, Andrew Norton and Ittima Cherastidtham, Sept. 16, 2018
Appendix: A Brief Look Back At 2020-2021
Chart 8 is a timeline of major developments affecting the Australian higher education sector since the start of the health crisis.
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
|Primary Credit Analyst:||Martin J Foo, Melbourne + 61 3 9631 2016;|
|Secondary Contacts:||Rebecca Hrvatin, Melbourne + 61 3 9631 2123;|
|Anthony Walker, Melbourne + 61 3 9631 2019;|
|Research Assistant:||Foram Patel, Mumbai|
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