UTAS borrowings

 

This is an additional submission to the Legislative Council’s Inquiry into the Provisions of the University of Tasmania Act 1992 supplementing submission # 93, evidence given on 12^th December 2022 and a further submission made 19^th December 2022.

The supplementary submission was prompted by the lack of transparency and scrutiny surrounding UTAS’ borrowing arrangements as it pushes on with its move into the centre of Hobart.

The discussion is widened to include the raising of funds other than by traditional borrowings and whether Sec 7(2) of UTAS’ governing Act which requires the Treasurer’s approval to borrow, needs to be broadened to include other borrowing-like arrangements.

This is followed by comments on other arrangements that impact of UTAS’ financial position.

The Auditor General looked at UTAS as part of one his performance related audits HERE. 

The objective of this audit was to express an opinion on the effectiveness of the University’s management of student accommodation, not whether the arrangement was a defacto borrowing.

Nevertheless, it gives a good description of the arrangement.

The following paragraphs in italics are cut and pasted from the Auditor General’s Report.

From May 2016, the student accommodation strategy was influenced by the University’s appointment of a consultant to develop a strategic capital management framework report and advise on a possible student accommodation transaction to monetise the University’s PBSAs. This was progressed further in September 2016 when the University Council approved the strategy to pursue the monetisation of the University’s Purpose built student accommodation (PBSAs).

In 2016, the University engaged a consultant to assist it monetise its investment in 10 PBSA facilities located around the State. At this time, both the Australian National University and the University of Wollongong had entered into similar transactions.

The University envisaged such a transaction would:

 • provide the University with an upfront payment from an investor

 • transfer risk and responsibility to an investor

• provide the University with flexibility to initiate future student accommodation developments

• achieve desired balance sheet gearing outcomes

• fit with the University’s wider academic and non-academic strategy

Financial outcomes from the PBSA Agreement included:

 • an amount of $132.6m received by the University from Spark Living Consortium on 5 September 2017

• the payment of advisory costs associated with the transaction of approximately $3.5m or 2.7% of transaction value 

• the transfer of risk and financial responsibility for capital expenditure and maintenance to Spark Living Consortium for the 30-year term of the PBSA Agreement

• the introduction of a student rent mechanism to ensure affordability and compliance with GST and NRAS obligations

• flexibility to build new PBSAs, with first refusal rights provided to Spark Living Consortium

• the ability for Spark Living Consortium to provide capital for new PBSA builds whilst retaining flexibility for University to design and construct PBSA assets

• higher expenditure on asset services and cleaning than previously spent by University and an average investment of $1.0m each year for asset lifecycle works over 30 years

• the ability for the University to retain funds owing to Spark Living Consortium if quality standards and University condition grading requirements are not achieved

The proceeds from Spark Living were added to UTAS’ investment portfolio, presumably to be used to fund future capex.

A further $70.8 million was received under the same arrangements in February 2021. In that year most of the proceeds were probably used to repay Tascorp’s borrowings as they reduced by $55 million during the year as part of UTAS freeing itself from the pesky demands of Tascorp (more on this below).

The balance of the liability ‘Grant of right to Operate ‘at 31^st Dec 2021 was $180.3million.

Under the PBSA Agreement, the University retained responsibility for collecting student accommodation rent. This is probably, at least in part, because UTAS is a registered charity with the Australian Charities and Not-for-profits Commission (ACNC) and charities who provide accommodation at less than 75 per cent of market rates get special treatment under the Goods and Services legislation allowing a refund of GST on rental property expenses. Usually residential rents are input taxed, which means GST isn’t chargeable, but nor is GST claimable on expenses incurred by residential landlords. It is input taxed in other words. The special GST treatment extends to claiming GST on new PBSAs, which means that eleven units can be built for the price of ten. This is a huge bonus for UTAS.

Ordinarily a private company wouldn’t forward sell rents for a lump sum in the way UTAS has (or monetise the value of the PSBAs as financiers describe it) because the sale is in fact the sale of an asset that is created at the time of sale with a near zero cost base. The new asset is a right to operate PSBAs for a set term and receive the benefits of the rents. It is not an ownership interest. Ownership remains with UTAS.

In the case of the first tranche the cost base is probably the $3.5 million in fees charged by the paper shufflers to set up the deal.

Hence almost all the proceeds from the sale of the newly created asset is likely to be a capital gain with a low cost base which for a private company would be taxable at ordinary rates.

But a tax-exempt body like UTAS doesn’t pay income tax. That’s why it can structure a deal like this. Tax paying entities would lose a large chunk of a lump sum payment which would dissuade them from attempting a similar arrangement.

The matter of UTAS’s borrowing and the Sec 7(2) requirement was mentioned at hearings with UTAS on 1^st March 2023 (pages 43 to 45 of the transcript).

It’s easy to argue as Prof Black did, that the deal with Spark Living may have created a liability but that liability is not a borrowing.

But if one takes a see-through approach, looking past the paperwork that support the deal, it is no different than a borrowing. The balance sheet remains the same.

Most of the value of the PSBAs have been transferred from Property Plant & Equipment to an account labelled Service Concession Asset.

And rather than having a liability termed borrowing there is a liability termed Grant of right to Operate, which refers to PSBAs managed by Spark Living.

This is like a revenue in advance account. It will reduce each year as rents are collected by UTAS and handed over to Spark Living.

For all intents and purposes, it’s little different from a landowner collecting rents and then handing some over to a bank to discharge borrowings used to finance the landowner’s investment.

If it looks, walks and smells like a duck, then it’s probably a duck.

There’s no point in having an esoteric debate of whether it’s a borrowing. The only relevant issue is what is the point of Sec 7(2? If there is a need to seek the Treasurer’s permission before borrowing, should the definition of borrowings be widened to include all borrowing-like arrangements?

It’s reasonable to conclude that forward selling rental income was part of a plan to accumulate funds by UTAS to pay for the shift from Sandy Bay to Hobart Central. In that regards the outcome is identical to UTAS borrowing money for that purpose.

If the aim of Sec 7(2) is for the Treasurer of the day to monitor and possibly veto such activities, then Sec 7 (2) needs to be amended to include borrowing-like arrangements.

On the matter of borrowings Prof Black said as reported on page 44 of the transcript on 1^st March 2023:

“……. the borrowing requires approval of the Treasury, for the very good reason that our kind of balance sheet affects the state's balance sheet. That makes a great deal of good sense given that would be the case. That is why I am very comfortable that one explores where are the appropriate boundaries and what are the appropriate mechanisms by which decisions are of consequences to other parts get decided?”

It is not immediately clear what Prof Black meant. UTAS’s balance sheet does not affect the state’s balance sheet.  Although a public entity, it falls outside the government sector for accounting purposes. It is not part of the General Government sector, nor the wider Total State Sector which includes government businesses as well as the General Government.

If UTAS borrows from Tascorp, any borrowings needed by Tascorp (a liability for the State) will be offset by a loan to UTAS (an asset in the State’s books). The state’s balance sheet won’t be affected.

Nor will it be affected if UTAS borrows elsewhere as it did when it borrowed from parties other than Tascorp in 2022 (more on this below).

If Prof Black is indicating that he thinks it makes a good deal of sense for UTAS to get approval from the Treasurer before borrowing, then the Act needs to be amended to include all borrowing-like arrangements.

UTAS’ fund raising to finance the re development of the Sandy Bay campus and the move to Hobart has seen UTAS alter its banking arrangements, moving away from Tascorp and organising a $50m facility with one of the major banks and raising $350m via the so-called Green Bond issue.

It is not intended here to detail the move from Tascorp except to say the RTI documents detailed here suggest the transition process resembled a dog’s breakfast. It should have been a simple matter to seek and gain the requisite approvals required by the Act.

So what were the problems?

The issues and the ensuing questions appear to be:

·        As Sec 7(2) applies to all borrowings was timely approval given in all instances?

·         If not, does the section need amending?  Should thresholds be established which would trigger a report to Parliament?

·        If approval was granted for a ‘facility’ up to a certain amount was that approval used to raise funds via a bond issue which capital market players don’t regard as a ‘facility’?

·        What are the conditions that attach to the approval that covers current borrowings?

·        It appears clear that UTAS was unhappy to surrender to Tascorp’s requirements for more security feeling that it would be unnecessarily restrictive. Up till then Tascorp’s facilities were largely unsecured and governed by a Master Loan Agreement which appears to have required UTAS to always have cash and investments greater than the facility (which it did).

·        As well as additional security Tascorp would likely have required detailed business plans and probable regular reporting. It is not certain whether Tascorp and Treasury were given what they needed.

·        If there is going to be little or no scrutiny by the government are changes needed to enhance UTAS’s reporting? There are any number of ways this can be done …. Via regulations, Treasurer’s Instructions to name two. To whom should UTAS report? To Members maybe if the Committee can identify who those Members should be?

·        How was UTAS able to get a Moody’s rating the same as that of the State government, which applies to Tascorp when it borrows on the market? Did Moody’s assume, and/or have they stated or implied to bond investors that UTAS has an implicit guarantee from government(s)? If so, is this correct? If not has UTAS or the government done anything to correct the record? If there is a government guarantee, then this would affect the State’s position. Perhaps this is what Prof Black had in mind when he referred to UTAS’ borrowings affecting the State’s balance sheet? If this is the case, then it needs to be clearly disclosed both in UTAS’ financials and the State’s statement of position outlined in the Treasurer’s Annual Financial Reports.

·        What has the Auditor General (AG) had to say about Sec 7(2) and the transition from Tascorp to other sources of funds? It would have formed part of his 2022 audit. He audits compliance with the UTAS Act. His audit reports specifically confirm this. AG also says he communicates with the UTAS Council if he finds problems. There should be a good paper trail. There would be an engagement letter, an audit plan, communications to and from parties if there were problems.

Responses to these issues will throw light on how the current Act has operated and whether it needs amending.

With UTAS pleading to be granted freedom to operate effectively in today’s commercial world which confronts universities, it is important to remember some of the arrangements which apply which gives it advantages over others in that world.

·        It is a tax-exempt entity. It doesn’t pay income tax on any of its activities including income from investments.

·        It, almost certainly, receives special treatment under the GST Act allowing a refund of GST incurred pursuant to the input-taxed provisions that relate to most residential housing services.

Providing accommodation at below market rates to students is not an act of generosity that comes at a cost to UTAS’ bottom line.

Being income tax exempt and with special GST treatment means UTAS’ students in low-cost accommodation are subsidised by taxpayers not by UTAS. UTAS’ net returns would have been similar to private tax paying landlords who charge market rents.

UTAS may even have been better off, which allowed it to sell off future rents to Spark Living who would be getting a market acceptable rate of return which is likely to be greater than the rate of interest that UTAS would have otherwise paid Tascorp.

Why ‘borrow’ from Spark Living if Tascorp’s rate of interest on borrowings is less? To get away from Tascorp? How much, if any, did UTAS sacrifice with the Spark Living deal rather than borrow from Tascorp?  How much did it ‘pay’ to remove itself from Tascorp’s strictures?

The AG performance audit noted UTAS had managed to shift the risk for maintenance and capex to Spark Living over the term of the deal. No mention was made about the risks on the revenue side. It would be reasonable to assume they remain with UTAS with Spark Living receiving a guaranteed revenue stream.

It is not unreasonable to conclude that the special arrangements that apply to UTAS have allowed it to escape from what UTAS regarded as the yoke imposed by Tascorp.

But in doing so it has further removed itself from public scrutiny. Not only are there ill-defined ownership interests and reporting lines but UTAS has managed to avoid any intrusions by Tascorp, an arm of the government, by shifting its borrowings elsewhere.

UTAS’ Moody’s rating suggests Green Bond holders may believe UTAS is guaranteed by governments. This needs to be clarified. Any such guarantee needs to be fully disclosed. Otherwise, we may find ourselves in a moral hazard situation where a too-big-to-fail institution will plough on with its plans to irrevocably alter the city centre of Hobart and neighbouring Sandy Bay despite very little independent information on the risks, cost and benefits, and  the conspicuous absence of a social licence.

UTAS’ property developments have been enabled by its huge cash flow advantages boosted from revenues in advance, not only rents but grant income as well. The special provisions that apply to UTAS have probably had benign effects in bygone days but are now used to leverage its position unfairly.

The defence has always been that UTAS is a public body acting in the best interests of the public as it sees them. This is essentially what UTAS says.

However, the evidence that UTAS has become a law unto itself is more persuasive, with ill-defined ownership interests and reporting lines, and the ability to largely determine who is appointed to Council.

However, planning to sell off public land gifted to it so it can impose its largely undisclosed plans upon the majority of Hobartians without adequate consultation is arguably a step too far.

The antiquated Act that governs UTAS’ affairs needs updating.