(Apart from the three introductory paragraphs, this blog was sent as a
supplementary sumission to the Legislative Council’s Inquiry into Provisions of
the University of Tasmania Act 1992.)
Maybe it was a coincidence or maybe it was intended. UTAS dumped a huge
cache of documents and minutes on its website which related to its intended
move into the Hobart CDB just days after the Legislative Council inquiry met
with Treasurer Michael Ferguson on the 6th July 2023, thereby resticting
the sorts of question he would otherwise have faced, essentially about the role of the State government in UTAS’
affairs.
The data dump can be found HERE.
Pursuant to sec 7(2) of the UTAS Act the Treasurer needs to give UTAS
approval before it undertakes any borrowings.
The previous blog on this site explored some of the issues around UTAS’
borrowings following the Treasurer’s brief appearance, what it means for the
State governemnt and we as Tasmanians, and what the Treasurer knew/didn’t know/should
have known/ignored about UTAS.
This blog attempts to fill in some of the missing pieces of the puzzle gleaned from the new information in the public domain.
At the UTAS Council meeting of April 5th 2019 Agenda item 6
covered future plans in the south of the state. Council approved
·
the
'City-Centric Campus' model as a basis for the future development of the
University's Southern Campuses (with one
dissenter)
·
setting
up a new entity to sell surplus Sandy Bay assets.
·
a
sequence for transitioning into the Hobart CDB, and
·
a
Southern Infrastructure Funding Strategy.
It’s the funding strategy (Agenda
item 6.4) that is of most relevance to the Committee’s inquiry.
The minutes noted the discussion included:
·
The Funding Strategy assumptions effectively describe the “right size”
for the University in terms of student numbers and mix between domestic and
international, as well as staff numbers and ratios (staff/student and
academic/professional), although it was noted that the average ratios do not
convey the mix of class sizes that will be a feature of future differentiated
offerings. Similarly, the number of international students does not describe
the intention to change the mix of international students and target areas
where the University is seeking to expand capabilities within the State.
·
The sale and leaseback option has been recommended on the basis that the
University does not
currently have the financial capacity to borrow all
the funds for this investment while also retaining the financial
flexibility to manage potential financial shocks. This
option involves a lower level of financial risk for
the University.
·
The sale and leaseback option
enables the University’s capital to be applied to other
activities with a potentially higher rate of return than a property investment,
while also enabling the University access to the economies of scale that a
large institutional investor could bring to the construction of the facility.
·
The experience with the PBSA on Melville St highlights the need to
clarify in a sale and leaseback contract the ability of the University to
control how it intends to utilise the building.
·
The contract needs to specify how the building will be refurbished over
time to maintain fit-for-purpose facilities and provide the University with
options to either extend the lease or purchase the property outright at
conclusion of the initial term.
Council then approved, again as per the minutes:
·
proceeding to the planning phase of the proposed funding strategy 1(a),
which comprises: sale and leaseback for the Science, Technology, Engineering
and Mathematics (STEM) building and central library; establishment of debt
facilities; partial utilisation of the University's
investment portfolio and partial value realisation of surplus property.
·
delegation of authority to the Vice-Chancellor to engage as advisers for
the sale and leaseback transaction via direct negotiation, subject to
undertaking independent market testing.
The
Treasurer told the Committee if “the university took on a property that it
didn't own and leased it on a long-term lease, it would also be a recognised
accounting liability rather than borrowing.” That is correct. But the
proposed sale and leaseback of the STEM building includes a large element of control
over the property and an interest in the property at the end of the lease.
Which makes the arrangement, not so much an operating lease in the standard
landlord/tenant sense, but a service concessional asset like the PBSA
arrangement with Spark Living. Which in turn make it a borrowing like
arrangement which should fall under the purview of the Treasurer, regardless of
whether his role is one of oversight (Treasurer Ferguson’s view) or a wider
role to manage the economic and fiscal risks of the State (the view of former
Premier/Treasurer Peter Gutwein).
It was noted
“The sale and leaseback option has been recommended on the basis that the
University does not currently have the financial capacity to borrow all the
funds for this investment while also retaining the
financial flexibility to manage potential financial shocks.” The absence of
an Oxford comma after the words “…for this investment” and the
subsequent inclusion of the word “also” suggests UTAS couldn’t borrow
the funds needed and it lacked the financial flexibility to manage
future shocks. How a sale and leaseback arrangement would address the second
concern is not obvious. Neither is it obvious how it “involves a lower level
of financial risk”. An investor would require a higher rate of return than
the cost of funds from say Tascorp. Unless the fate of the building at the end
of the lease agreement was pre-determined, an investor would require an even
greater return to compensate for the risk of being left with a purpose-built
building becoming a stranded asset.
So how
exactly will the financial risks of a purpose-built building, a core component
of the CDB relocation, be minimised with a sale and leaseback arrangement? An investor
imbued with the knowledge that UTAS couldn’t raise funds elsewhere would surely
charge more? Or is UTAS proposing a sale and leaseback arrangement with the
Sisters of Charity?
Enabling “the
University’s capital to be applied to other activities with a potentially
higher rate of return than a property investment” might sound like a good
idea but when its core activities of teaching and learning produce losses,
increasing the losses with extra rents seems an odd move.
Delivering
public goods via the increased leverage of public assets is something
consultants chant as if it were a holy mantra. It was the likely rationale for
the PSBA arrangements with Spark Living. Build or otherwise acquire
accommodation, hunt the globe for students, forward sell the rents via a
service concession arrangement, use the cash to build more. If new buildings
are required, then build them. Forward selling the rents may not work as the buildings
are for self-use. Do a sale and leaseback arrangement instead. It’s just
another service concession arrangement, but never mind, it’ll raise the cash we
need.
That it was
a plan with a lot of Ponzi like characteristics became even more apparent when
Covid had such a dramatic impact. The discussion in the minutes (pre Covid)
alluded to UTAS lacking the financial flexibility to manage potential financial
shocks. What did it do? It went ahead regardless. The science of risk analysis
owes its existence to the reality that salad days don’t last forever. What may
be a good idea can soon develop into a disaster as the University of Wollongong
will attest.[1]
The possible
“economies of scale that a large institutional investor could bring to the
construction of the facility” is listed as a possible outcome of a sale and
leaseback arrangement. Dealing with one investor may be preferable to dealing
with a multitude but didn’t UTAS ignore that maxim when it subsequently raised
$350 million via a bond issue to multiple investors. Perhaps there was a silver
lining to the bond issue. Bond investors don’t hold security which would have
been a blessing for UTAS. Their place in the queue is right behind secured
lenders.
It’s
difficult to imagine what economies of scale investors bring to construction,
given that UTAS requires control over the specifications of its purpose-built facility.
Builders provide economies of scale, if any. Investors provide the dough.
The minutes
state that UTAS didn’t “have the financial capacity to borrow all the funds
for this investment.” What has long been suspected and what this latest
admission all but spells out is that Tascorp was not prepared to lend on the
terms UTAS wanted. Tascorp has always erred on the side of caution. It must pay
more than just lip service to the economic and fiscal risks facing the State. It
would have wanted security which would have constrained what UTAS planned to
do.
Tascorp
wouldn’t have been impressed with UTAS’s plans for the future of the southern
campuses if the summary of the discussion points listed in the minutes of April
5th 2019 are anything to go by. It is clear the arguments were
heavily loaded in favour of the City-Centric Campus option rather than
remaining at Sandy Bay. The discussion points in the minutes could well go down
as the first set produced by ChatGTP software after a computer was fed a select
diet of consultants’ reports. A copy of the minutes is pasted at the end of this
note.
There were
so many unknowns from a financial viewpoint, that even if Tascorp assessed UTAS
as having sufficient collateral, which it undoubtedly had, financing a plan
which contained more questions than answers, for a large property development project
run by novices, would mean having to turn a blind eye to prudence.
UTAS’
funding strategy has revolved around raising funds without having to pledge too
many assets as collateral which would tie its hands as the uncertain. largely
secretive transition into the Hobart CDB gradually unfolded.
In the past UTAS
was always able to raise sufficient funds via Tascorp on an unsecured basis,
signing a Master Loan agreement which required it to always maintain a level of
cash and investments at least equal to the level of borrowings.
But that wouldn’t
have been enough to fund all the Hobart transformation plans because as the
minutes disclosed “partial utilisation of the University's investment
portfolio” was needed.
Raising cash
by forward selling future rents, the service concession asset approach, started
two years earlier in 2017. More was in the pipeline. Another tranche was raised
in 2020 but then Covid intervened.
But now we
know the sale and leaseback variation for UTAS major assets in the Hobart CDB,
the STEM building and library, was also underway having been approved in April
2019.
Even more
funds were needed but Tascorp were reluctant lenders, certainly under the terms
required by UTAS.
Whether the
sec 7(2) borrowing approval which enabled UTAS to raise funds from third party
investors specifically allowed for the $350 million bond issue is not known.
What we do
know, from Professor Black’s evidence to the Committee is that he regards UTAS
as a State entity meaning he believes the State will step in if UTAS runs into
difficulty.
Moody’s gave
UTAS the same credit rating as the State, so whilst UTAS might not formally be
a State institution Prof Black believes there is an implicit guarantee from the
State, as indeed there is with States where, if they get into trouble, they can
in turn expect a bail out from the Feds.
But it far
from clear which level of government would be first to attend the scene of any
accident. As a Treasury official told the Committee:
“As the Treasurer said, there is no liability to the state
from the university. Obviously, the council is the governing body. I think this
has been raised previously in the rating that Moody's did for the university.
They implied a level of support from the Commonwealth government for the
university. They would provide extraordinary support from the Commonwealth in
the event of the situation that you have described. The caution with this is
that Moody's generally adopts that standard view when they are rating both
state and public institutions. You only have to look at Tasmania's rating from
Moody's and you will see a similar clause in there.”
What that
all means is this: Tasmania’s credit rating is as high as it is because the
Feds will bail us out in an emergency. We might have to suffer a bit of pain,
hence the rating is not quite as high as the Fed’s rating. UTAS has the same
rating as the State which suggests we are treated like Siamese twins. If the
State doesn’t come to the party, the Feds will. No matter what UTAS does, it
will always be bailed out – by someone.
For UTAS to
be aware it doesn’t have “the financial capacity to borrow all the funds for
this investment while also retaining the financial flexibility to manage
potential financial shocks” whilst it ploughs on regardless, comforted by the
presumption it is too big to fail and will always be bailed out, is gobsmacking
brazen arrogance.
At the risk
of heresy, that is not a sound basis for public policy making.
There is no
doubt that anything UTAS does can easily have ramifications for the State, for
the State’s credit rating which then affects the whole operations of the Total State
sector which currently is locked into a pattern of cash and fiscal deficits now
occurring in a higher interest rate environment with monotonous regularity. and
which can only be funded by more borrowings.
Even if the
Feds assist it won’t be a free lunch.
That is the
context the Committee should use when assessing the role of the government in
UTAS’ affairs.
Attachment:
Extract from UTAS Council minutes 5th April 2019
(these
are the Agenda Items 6.1 to 6.3 which preceded item 6.4 Southern Infrastructure
Funding Strategy
Southern Futures
………(redacted)………joined the meeting at 11.15am.
6.1 *Future
of the Southern Campuses
Each member of Council provided a response to the papers an
recommendations in relation to the future of the southern campuses (including a
pre-recorded video from Mr Gregg), Discussion included:
·
The location of the University in Sandy Bay
stems from an era when Universities were intentionally located outside of city
centres to provide an “interval” between school and work life. As higher
education has expanded and knowledge become ever more central to contemporary
societies and economies, there is a strong case for a university to be embedded
within and contribute to the community as articulated through the city-centric
model.
·
One of the key benefits of the city-centric
model is considered to be greater accessibility to facilitate student
participations, while enhanced opportunities for collaboration and a close connection
with industry and the community under this option was also highlighted.
·
A case for remaining at Sandy Bay was strongly
made built around the distinctive experience aligned with our strategy that it
offered, and the sense of community built around the current campuses.
·
The emotional attachment and appeal of the
campus to those who studied there was noted.
·
The accuracy of elements of the data was
questioned by some, while others offered the view that even if there were
issues with some parts of the data, it was quite sufficient for the purposes of
the decisions to made.
·
It was
noted that the move to a city-centric model began a number of years ago when
the University started to relocate facilities into the Hobart Central Business
District (CBD). The adoption of the citycentric model is a continuation of
these earlier decisions.
·
A range
of feedback has been received by Council members from staff, students and
external stakeholders in relation to the two options. The view of students was
that a city campus location was more attractive if the issues of parking and
transport could be successfully addressed.
·
Location of the University in the city provides
greater opportunity to highlight the contribution of knowledge to the success
of the city and its community.
·
Concerns
were noted in relation to the costs and disruption for staff and students that
would be involved in refurbishing and relocating facilities on the Sandy Bay
campus as part of the distributed model.
·
The establishment of new facilities in a new
location will provide greater opportunity for innovation in learning and
teaching.
·
A key to
the success of the city-centric model will be the establishment of a campus
heart, while the University’s vision for learning and teaching as part of the city-centric
model also requires clear articulation.
·
Transport and parking issues are highly
important for staff and students under either option, and there is a need for
the University to address these without relying on a resolution from the State
or Council.
·
There were concerns of adverse reputational
impacts and challenges in gaining community support if the University chooses
to adopt the city-centric campus model.
·
The benefit of the proposal to involve third
parties in the provision of University infrastructure and the establishment of
a separate subsidiary to manage surplus property needs to be compared to the
benefit of managing these activities within the University’s existing
structures and resources.
Council members commended the quality and comprehensiveness
of the materials provided to Council to enable an informed decision to be made.
The approach to engage staff, students and stakeholders in consideration of the
two options was also commended and Council thanked all those involved in
preparing these materials.
05-04-2019_UC_9467-5202
Council approved the business case which supports the 'City-Centric Campus' model as a basis for the future
development of the University's Southern Campuses.
…….(redacted)…………. requested that his objection to the
motion be recorded in the minutes.
Management provided an outline of the communication plan in
relation to the decision, with communication to staff and students to commence
later in the afternoon.
6.2 * Framework for managing surplus University property
……(redacted)…………. joined the meeting at 12.45pm.
Discussion included:
·
Under the proposal to establish a separate
entity to manage surplus property, Council would specify the objectives of the
entity in its constitution and through this would determine the direction,
values, policies and risk appetite that would apply to the entity. The
Directors would ensure management of the entity would manage the University’s
surplus property in accordance with these directions.
·
Council would determine which properties would
be managed by the entity, establish design principles to be followed and
approve proposed master plans for these properties, including any associated
requirements or constraints.
·
A
separate subsidiary is considered the optimum structure to mitigate the
University’s exposure to development-related risks as well as being more
attractive to external counterparties who would prefer to deal directly with a
specialist entity focused on property management.
·
Costs related to management of the entity would
be contained through engaging project teams for a fixed term to deliver
specific projects.
………(redacted)……… left the
meeting at 1.05pm.
05-04-2019_UC_7135-5203
Council approved
·
The proposed approach for managing the
University's surplus property assets.
·
The establishment of a new entity (wholly-owned
by the University) for managing the University's surplus property assets.
05-04-2019_UC_7135-5204
Council noted the intention that future Council approval
will be sought in respect to the new entity’s constitution, appointment of
Directors and the transfers of specific land holdings to the new entity.
…………(redacted)……left the meeting at 1.30pm.
6.3 * Sequence of transitioning into the Hobart Central
Business District (CBD)
Discussion included:
·
The establishment of a student hub with study
spaces in the Hobart CBD is considered a priority, noting that the construction
of the Purpose-Built Student Accommodation (PBSA) on the old Red Cross site
will include considerable ground floor space for student facilities.
·
Potential
opportunities to utilise the former Forestry Building early in the transition
process, as well as the optimal transition timing for specific disciplines to
minimise student disruption, will be considered as part of the development of
the master plan.
05-04-2019_UC_8136-5205
Council approved the
proposed sequencing of relocation to the Hobart Central Business District.
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