UTAS: The State government's role

 

The following are comments which formed part of a supplementary submission to the Legislative Council Inquiry into the Provisions of the University of Tasmania Act 1992 following Treasurer Michael Ferguson’s appearance before the Committee on 6^th July 2023

The Treasurer’s brief appearance highlighted some of the relevant issues relating to the State Government’s role. The issues canvassed here include:

·        Ownership and/or control of UTAS’s assets

·        The reason for Sec 7(2), the need for UTAS to obtain the Treasurer’s approval before borrowing.

·        Borrowing like arrangements: service concession deals.

·        Borrowing like arrangements: other.

·        The University of Wollongong (UOW) experience: A cautionary tale.

The notes were prepared to assist the Committee understand the financial issues facing UTAS. They were prepared before the massive data dump by UTAS of documents, Council minutes etc relating to UTAS proposed relocation to Hobart CDB which occurred after the Treasurer’s Committee hearing, which conveniently meant the Committee was unable to chase up some interesting leads about funding the CDB move and what it may mean for UTAS, the state government and for all Tasmanians. An up coming blog will cover the more interesting revelations.

Ownership and/or control of UTAS’s net assets

The Treasurer told the Committee:

“It is important to note that while created by state legislation, the university is not owned by the government, it is not a state entity within the Total State Sector and therefore does not sit on government balance sheets.”

He went on to say:

“The university is established as an institution under state legislation. That's not remarkable or unusual. There are a number of other organisations that are established in state and federal legislation. It shouldn't be taken to mean that they are part of the Crown or part of the state sector or the federal government sector. One quick example is some of the residential colleges in Hobart. Even part of the Anglican Diocese in some cases has rules set out in state legislation, even though it's not part of the state.”

The question…” if the university were in a position of having to wrap itself up because it was financially in a pickle, who would own its assets”.....went unanswered.

UTAS’ assets are public assets. The reason UTAS isn’t part of the Total State Sector comes back to the matter of control. Who controls an asset will often determine where it appears in financial statements. A large amount of forestry land for instance is owned by the Crown, not Sustainable Timbers Tasmania P/L, yet because STT controls the land it’s an asset of STT (The fact that STT ascribes a nil value to that land is a separate issue).

UTAS may have been created by state legislation and the State may appoint some members to the governing Council but arguably there isn’t the level of control that would warrant UTAS being included in the Total State Sector.

Do we continue to turn a blind eye to the issue of who owns and controls UTAS? Or should the issue be resolved and formalised. Currently the reality is that UTAS assets are public assets largely controlled by  a self-perpetuating clique who control appointments to University Council.

To whom does UTAS report?

It was noticeable that the question…” If it's not a state entity then who is the university reporting to?”…. went unanswered. There is little doubt the question is a corollary to Who owns UTAS?

The reason for Sec 7(2)

The Treasurer was far from clear on this matter. At one stage he said:

“To the extent that the state plays a role, other than through the legislation's section 7(2), gives the Treasurer a defined role. It is a significant responsibility to not be too mean in terms of keeping the limit too low and, therefore, constrain what the university's growth opportunities or transformation opportunities might be, but also not too high so as to prevent the university from going too far into borrowings that it might struggle to be able to service.”

The Treasurer suggested Sec 7(2) was only inserted into the Act as a double-checking mechanism. When the Act became law in 1992 no one imagined UTAS would need to borrow much. Its borrowings were next to nil. In 1996 for instance, they were only $300k, essentially an overdraft.  That’s the way UTAS was run back then. Borrowing from anyone but Tascorp wouldn’t have been envisaged.

Tascorp began life in 1985 as a statutory corporation. It didn’t become a GBE until 1995, the year the GBE Act became law. Tascorp was the first GBE. Hydro and Forestry Tasmania (FT) came later on in the 1990’s. State Owned Corporations (SOCs) came much later. Corporatised public businesses borrowing from third party lenders was not on anyone’s radar when the UTAS Act was passed in 1992.

The following question and answer was telling:

Ms WEBB - Do you see that the Treasurer's role as outlined in the act, section 7(2), inherently holds a responsibility to protect the interests of the university and also to protect the interests of the state? That is the starting point of the question.

 Mr FERGUSON - I think more of the former and less of the latter. I think the legislators back in 1992, potentially sooner in earlier versions of the act that establishes the university, made a decision that in granting the design of the governance and the level of autonomy the University Council would have, there would still need to be an external third party - the Treasurer of Tasmania - to have a particular role or a right or a responsibility to ensure that before the university engages in borrowings, the third-party reference through the Treasurer who, Liberal, Labor or Independent at whatever point in time, would be taking advice from Treasury about what is a prudent level of borrowings. To the extent that it is about protecting the state, I would see that as part of the story, perhaps, but the less important of those two. It's really about ensuring that the university is in a strong financial position and is able to borrow. It is important for organisations to be able to borrow in order to develop capital infrastructure that will be enjoyed by future generations and be able to service those borrowings in a way that's fair for the current generation so that the current generation doesn't have to bear all of the costs of an asset that will be enjoyed by future people, students, members of the university.

When pressed about making a Sec 7(2) decision was the Treasurer looking after the interest of the State or UTAS he said:

“ I don't disagree with what you're saying and I thoroughly agree with your comment that the Treasurer, in making his or her decision on these matters, is making decisions that are in the interests of the state. I certainly endorse that view. But it's really about a third-party oversight of the level of borrowings.”

It’s primarily an oversight role. That was Treasurer Ferguson’s view.

Former Premier /Treasurer Peter Gutwein appeared to have a different view, this from a letter to UTAS dated 29^th Oct 2020 obtained under RTI.

The letter mentions economic and fiscal risks to the State. That seems to be more than just an oversight role to ensure UTAS doesn’t get into trouble. (NB the sentence mentioning other debt like obligations was also highlighted – see below comments on the subject).

To suggest as Treasurer Ferguson did, that legislators in 1992 drafted sec 7(2) to allow UTAS to borrow from external third parties is an ex-post rationalisation. If legislators were that prescient, they probably would have widened the definition of borrowings to include borrowing like arrangements.

Borrowing like arrangements: Service concession deals

The Spark Living deal is best described as a Service Concession Arrangement. Under accounting standards, it is not a borrowing as the Treasurer noted on a couple of occasions. But to say as the Treasurer did :

 “Just as, for example, 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 a service concession arrangement is analogous to an operating lease on a property shows either a lack of understanding or is an attempt to trivialise the issue.

Service Concession Arrangements are covered by accounting standard AASB 1059. It covers deals between a public entity (as grantor) and an operator. The operator manages an existing asset of the grantor and/or constructs and develops a new asset. The grantor controls the services that must be delivered and retains the residual rights to the asset at the end of the arrangement. The control aspect is an important concept as was noted above in the initial comments on who owns UTAS’ assets.

The operator pays the grantor, usually a lump sum, to acquire the right to manage the asset and in return receives payments over the term of the arrangement. In the case of an existing asset owned by the grantor the value of the rights will be much greater than where the asset is constructed by the operator. It may be a bit of both, an existing asset which is further developed by the operator. For all intents and purposes, a service concession arrangement is just another way of borrowing to acquire an asset. The big attraction for governments and other public entities was that it allowed borrowing like liabilities to be kept off their balance sheets. The big attraction for operators was dealing with governments which sound cash flows, the best credit rating in town and with tax exempt status, which taken together gave financiers a heaven sent opportunity to structure long term favourable deals. Before the advent of AASB 1059, which whilst issued in 2017 didn’t take effect until 2020, service concession arrangements were kept out of the public’s gaze.  Since 2020 asset and liability amounts are included in financial statements and some transparency has been restored.

Toll roads are the classic example of service concession assets. Melbourne City Link toll road is operated by Transurban. The Victorian government managed to keep the liability off its books until AASB 1059 became mandatory. Typically, the grantor will include an asset (a service concession asset) and a liability (a grant liability) on its books, whereas with a traditional borrowing arrangement the asset will be the asset itself with a borrowing as a liability. It’s one and the same. They’re both ways to finance a long-term asset.

UTAS signed a service concession arrangement with Spark Living in 2017 for Purpose Built Student Accommodation (PBSA). At the time the PSBA was an existing asset of UTAS, being various places of accommodations in Hobart Launceston and Burnie.  To its credit UTAS was an early adopter of AASB 1059 even though the standard didn’t apply until 2019, later postponed to 2020. UTAS granted a 30-year licence to operator Spark Living to receive net rentals from these assets from 31 December 2017 in exchange for payment of an upfront amount of $132.6 million.  More accommodation units were added to the portfolio and a further $70.8 million was received in 2021. The licensee/operator (Spark Living) is responsible for maintaining the asset condition to a pre-set regime and UTAS retained the operations of the premises. At the conclusion of the arrangement the asset will revert to UTAS’ control in a pre-agreed condition at which time UTAS will assume asset risk and rental revenue.

At the end of the 2022 year the PSBA Service Concession liability in UTAS’ books was $174 million. This was the yet-to-be amortised portion of the upfront license fees of $203.4 million.

It is not disclosed anywhere the net rentals received each year by Spark Living. These amounts are, in effect, the ‘loan repayments’ to Spark Living, in consideration for the $203.4 million ‘loan’. That reason alone suggests a greater need for an oversight role from Treasury than for plain vanilla borrowings.

UTAS is one of three known universities to use the service concession asset arrangement for student accommodation, the other two being the Australian National University (ANU) and the University of Wollongong (UOW). Submission #3 by Professor James Guthrie and his verbal evidence on 7^th December 2022 both gave mention of the disastrous consequences on UOW’s early termination of a service concession arrangement but there were no follow up questions and hence the significance of what happened may have escaped the Committee’s attention. A cautionary tale about UOW’s foray into the world of finance is attached at the end of this note.

ANU is a big user of service concession arrangements. At the end of the latest report year ANU’s borrowings were $268 million and the service concession liability was $519 million. By comparison UTAS has borrowings of $360 million and a service concession liability of $174 million. In turnover terms ANU is twice the size of UTAS.

When asked by Treasurer Ferguson to comment on whether a ratings agency considers total liabilities when assessing a credit rating, a Treasury official replied:

“We do not have any level of visibility of that. I am certainly not aware of how the rating agencies treated them when they did their rating.”

Then the Treasurer chimed in:

 “It really is outside our wheelhouse.”

One was left feeling the question was a set-up so the Treasurer could say it was none of his business. But why?

It’s a little hard to believe Treasury didn’t have any visibility as to how ratings agencies assess credit ratings in light of Treasurer Gutwein’s letter of the 29^th Oct 2020 (see above) which mentions obtaining a credit rating as well as querying the level of existing borrowings and other debt like obligations.

In addition, Treasury and Tascorp officials had a meeting with Moody’s on 12^th May 2021 according to a Treasury briefing note obtained under RTI. The briefing note was almost fully redacted so we can’t be sure what was on the agenda. They could have discussed their footy tips for the weekend’s games I suppose.

 

Borrowing like arrangements: Other

The Spark Living deal may fall outside the narrow definition of borrowings but when it comes to accounting standards which govern accounts preparation, lease liabilities are included. This is from the UTAS’ 2019 Annual Return.

 

Total borrowings at the end of 2009 were $209.6m.  Lease liabilities are included. These are finance leases as distinct from operating leases.  

What was the sec7(2) limit back in 2019? Was it $200m? When the Committee gets to see all the Sec 7(2) as requested hopefully we might all be a little wiser.

 Accounting standards require finance lease liabilities to be listed as borrowings. So, did UTAS have sec 7(2) approval for the finance leases as well as the Tascorp facilities?

It may be nitpicking, but what about the business card facility limit?  Sure, it was unused at year end but there was an approved limit in place, by financiers at least.

At the end of 2022 UTAS had $406 million of approved borrowing facilities in place as per Note 17.

Borrowings due under lease arrangement were an extra $10 million at the end of the 2022 year (from Note 16).

Were all approved pursuant to sec 7(2)? Note 16 in the 2022 Annual Report only refers to a $400 million approved limit.

The finance leases currently are only small beer. But what’s to prevent UTAS from borrowing say $100 million via finance leases. Just like it borrowed $203 million via a grant to operate service concession assets. It’s certainly not beyond the wit of financiers to easily circumvent the narrow sec 7(2) requirements that it should only apply to certain borrowings, but not to other borrowing like arrangements.[1]

Even if sec 7(2) represents a mere oversight role it needs to be amended.

If it is meant to manage the economic and fiscal risks of the State as former Premier Gutwein believed, then the case for an amendment is indisputable.

 

The University of Wollongong (UOW) experience: A cautionary tale

Late in calendar year 2014 UOW signed a service concession deal. It received $120 million cash for a 39-year agreement with a partner for to establish a PPP, a Public Private Partnership. A liability of $120 million was recorded in UOW’s books as licence fees in advance.

On 1^st Jan 2015, the liability was extinguished when $120 million of buildings were transferred to the PPP, the operator of the service concession assets. The assets had been on UOW’s books at a lesser amount, so the transfer meant UOW booked a profit of $26 million on the transfer.

At this stage everyone was still smiling. The asset disappeared off UOW balance sheet. There was no accounting standard that required either the value of the service concession asset nor any liability to be included on UOW’s balance sheet.

The PPP agreement involved constructing and developing the asset - building more accommodation for students.

AASB 1059 meant UOW had to account for the assets and liability as from 1^st Jan 2019. The start date for AASB 1059 was then pushed back until 1^st Jan 2020 to be included in the 2020 annual return not due to see the light of day until the middle of 2021.

During 2021, possibly after calculating UOW’s future liability, UOW decided to terminate the service concession arrangement. At the end of 2021 the service concession assets, the student accommodation facilities, were recorded as having a value of $218 million in UOW’s books but the liability had a value of $274 million which included future expected payments to the operator.

In other words, the liability was far greater than the asset value. The agreement was under water. This occurred at a time when Covid severely affected student numbers.

UOW decided to exit the service concession arrangement but there were early termination fees.

Early in 2022 UOW forked out $274 million to discharge the liability and a further $169 million as an early termination fee, for a total of $443 million. The future must have looked bleak if it made sense to pay such a huge penalty.

UOW ended up with an asset worth $218 million. That represents a loss of $225 million over eight years less the initial license fee of $120 million plus whatever other amounts UOW paid the operator as fees over the eight years of the deal. All up, a loss somewhere between $150 million and $200 million. It was a staggeringly bad deal.

These are the sort of deals that require a sec 7(2) approval more so than straight forward borrowing arrangements.

 

 

 

 

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[1] The data dump by UTAS in the W/E 14^th July 2023 include minutes of the University Council meeting on 5^th April  2019 which gave the formal go ahead for the Hobart CDB move. The minutes mention a sale lease back arrangement of UTAS ‘s major Hobart CDB building, the $400 million STEM building. A sale leaseback arrangement is usually classed as a borrowing like arrangement.