Australian universities ‘need prudential oversight’

Australian universities behave like financial corporations and should be regulated as such, according to economist and management consultant John Howard.

Dr Howard said that universities’ accounts and operations should be scrutinised by a body like the Australian Prudential Regulation Authority (Apra), which supervises banking, insurance and superannuation organisations.

And like listed corporations, universities should be obliged to report quarterly. “They’re big businesses; something that escapes a lot of people’s attention,” said Dr Howard, a visiting professor at the University of Technology Sydney.

“Some universities have a lot of financial assets tied up in investment banks, but we don’t know which ones because the annual reports don’t say.” He noted that risky behaviour by investment banks had precipitated the collapse in global asset values that drove the 2008 financial crisis.

Dr Howard said that “prudential” oversight would improve the transparency of universities’ finances and provide independent advice on how to extract maximum value from their assets.

He said that university financial management had “come a long way” since 2008. Guided by chief finance officers of generally “high calibre”, universities had secured funding sources beyond teaching and research grants and leveraged advantageous credit ratings to bankroll campus redevelopments.

“That makes good financial sense, but we’d all have comfort if someone was running the ruler over it,” Dr Howard said. “It might be a body saying, ‘You’re going to borrow hundreds of millions of dollars – can you be confident that it can be serviced, in light of your business plan?’ Apra regulates banks’ capacity to cover a proportion of their deposits, which is a similar sort of thing.”

He said that a prudential body could advise on how much money universities should hold in reserve and how much should be spent to improve facilities. It could benchmark senior executive remuneration and set targets for budget surpluses – things already regulated in New Zealand – and advise on appropriate levels of casual employment.

It could also provide “fallback” to shield universities from unjustified criticism, such as being pilloried for amassing “huge profits” when they generate sensible surpluses, or for not using tied donations to avoid redundancies.

Dr Howard said that universities’ accounts were opaque even though they reported to multiple authorities including state parliaments, federal agencies and the higher education and charities regulators.

Financial accounts presented at “a specific point in time” – typically 31 December – allowed universities to manipulate their figures by speeding up or delaying receipts or payments. Accounts reported once a year could be “completely meaningless” by the time they were published months later, when the stock exchange index might have changed by several hundred points.

Dr Howard said that vice-chancellors had confused things further by adopting inconsistent financial terminology “to paint a picture of commercial health – which would make a good case for investors – or crisis, to make a strong case for increased government funding”.

While universities have blamed their financial woes on stalled overseas enrolments, accounts suggest that declines in investment earnings have dwarfed their international education losses.

Dr Howard’s analysis suggests that these investment losses have largely been illusory – partly because 2019 investment earnings were extraordinarily high, with income roughly doubling from 2018, and partly because universities shielded themselves from market volatility by switching investments into cash.

The University of Wollongong, which recorded the second biggest revenue decline of any Australian university last year, converted A$388 million (£205 million) of long-term investments into cash – which, unlike investment earnings, is not reported as revenue.

“Investments and contracts entered into long before the pandemic, based on the best trend information at the time, had to be reconsidered in the wake of a fundamental and unprecedented shift in circumstances,” a spokesman said.

john.ross@timeshighereducation.com