Election 2024: UTAS issues

 

The Clark electorate in Hobart is particularly crucial. If major parties only manage to get two seats each at the State election on March 23rd they will need four seats in the other four electorate to achieve a majority in the new parliament. That’ll be a tough ask.

Given the poll 18 months ago revealing three quarters of Hobart City electors are opposed to UTAS’ move into the City it is a little surprising there hasn’t been a greater willingness by third parties and potentially key independents vying for the three remaining seats to discuss their views with voters.

Discussion is made more difficult because UTAS doesn’t provide much information.  Glossy photo ops are preferred. Anything up to six months can pass after year end before UTAS needs to lodge financials with ACNC, the Australian Charities and Not-for-profits Commission. In the past we have waited even longer to see a copy of the full Annual Report.

UTAS’ 2023 year finished on 31^st December 2023. The upcoming March 1^st meeting of University Council is expected to sign off on 2023 financials. They will have been audited by now. Whilst UTAS is required by its governing act to furnish Education Minister Jaensch with a copy which usually sits in his in-tray for as long as possible before the statutory period for tabling in Parliament elapses, there is nothing to stop UTAS from releasing its 2023 results publicly when it wishes. It’s a public institution and the next four weeks of election discussions would be a good time for voters to get their heads around the multitude of problems facing the State. Our many problems are inter-related as Hobart residents well know – traffic, housing, the UTAS move. They’re all connected.

Much of what we know about UTAS’ move to the City has been provided reluctantly often due to the dogged perseverance of UTAS’ arch nemesis Robert Hogan.

The commitment to issue minutes of Council minutes once approved as being true and correct records of proceeding has become a farce. Nothing of substance is revealed now they know some people read them - who turned up, who wandered in and out of the meeting and maybe a  final decision, but only if the decision was made at the meeting rather than being flicked off elsewhere for finality out of the public gaze. No discussion about issues or challenges facing UTAS. The recent second day of the all-important October 2023 meeting of Council where strategies for the upcoming 2024 year were supposedly discussed wasn’t even a formal meeting. No agenda means no minutes. It was probably run by a facilitator, rather than a formal meeting with a chairman requiring minutes. For a public institution it’s the sort of opacity one would hope third parties and independents would want to address.

Universities have been forced by funding decisions of successive Federal governments to become more sustainable by attracting more international students to help boost revenue and fund research. In the process universities have become a front for a Big Australia, with powerful backers like the property lobby and the Harvey Normans of the world. Universities have become promoters of an edu-migration Ponzi scheme, a model that depends on a constant stream of new international students.

But like all Ponzi schemes, what happens when inflows subside? And when people realise the spill over costs are much larger than anyone imagined. And much larger than the supposed benefits. That’s when the best laid plans of mice and men tend to go astray.

Like all Ponzi schemes the first flush of cash brings out the worst in people. Making 30 years plans based on a few aberrative years was always going to be a mistake.

Universities have had a long history of conservative balance sheets with lots of assets and not much debt. ‘Lazy balance sheets’ was a common description from consultants, smart suits and other paper shufflers who were enthusiastically welcomed by university management to navigate a way forward as part of a neo-liberal solution to bring a bit more private sector rigour to the musty halls of academia.

Not only were universities blessed with heaps of net assets ripe for exploitation, but they were also tax-free entities with good cash flow guaranteed by government. The government guarantee stems from the fact that each university is governed by its own State act of parliament and either that State or the Federal government would step in if a university got into trouble. Everyone assumes someone will bail universities out if required. It’s yet to be tested.

Tasmania can only borrow money because most of its revenue comes from the Australian Government. In turn UTAS has the same credit rating as the State of Tasmania solely because it is assumed it will be bailed out by a higher level of government should it face difficulties. If one were searching for a good example of moral hazard, UTAS would be the standout choice. When errant behaviour doesn’t have adverse consequences riskier decisions are encouraged.

By following a money trail, the reasons for decisions often make a lot more sense than the cosmetic rationalisations offered by the PR spruikers.

Despite having a pile of assets to shuffle around the biggest constraint was a clause in UTAS governing act (Section 7(2)) requiring the Treasurer’s permission to borrow. Not to worry. Plan B was to forward sell rents for up to 30 years on purpose-built student accommodation (PBSA). Instead of borrowing to buy and develop a building, UTAS would use its own resources to do so but then forward sell 30 years rent. It would retain the building but hand over the rights to rental income from the building in return for a lump sum. The building would then be reclassified as a Service Concession Asset with a corresponding liability representing the future rents to be handed over to the investor. From an accounting perspective it’s analogous to borrowing money for a building but crucially it avoided the need for the government to approve the arrangement because it wasn’t a borrowing per se.

Plan C was another borrowing like arrangement to avoid Section 7(2) – a sale and lease back arrangement. This was discussed at Council’s meeting of 5^th April 2019 the day approval was given to impose UTAS’ plan on Hobart City. The discussion on the Southern Infrastructure Funding Strategy was quite revealing:

·        The sale and leaseback option has been recommended on the basis that the University does not 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 the options to either extend the lease or purchase the property outright at conclusion of the initial term.

A few comments are in order:

·        The idea that a sale and leaseback arrangement would lower the financial risks is wishful thinking. A lender knowing UTAS was having trouble raising funds would charge higher interest rates in most circumstances.

·        UTAS’ core activities of education and research are loss making. The reason larger losses weren’t made is because it has owned its buildings rather than having to pay rents. To adopt as part of the Southern Infrastructure Funding  a strategy that greater returns could be achieved by being a tenant rather than a landlord suggests Kool Aid must have been served as refreshments at the meeting.

·        A sale and leaseback option of a purpose-built facility where UTAS was able to dictate to the extent proposed, suggests a building owner would require a higher return. What does an owner do with a purpose-built building if the tenant walks out? Sell at a loss? Refurbish? Let’s face it in these circumstances a sale and leaseback arrangement would be little different to a loan arrangement from a borrower struggling to raise funds. A higher rate would be charged.

It is clear from RTI documents obtained by Robert Hogan that Treasury considers existing borrowing-like arrangements when assessing whether to permit UTAS to borrow more. The PBSA deals which raised $200 million would have been included, as would the sale and leaseback of the STEM building and central library had they proceeded.

With the prospect of UTAS having to beg the government for a sceptical Treasury to keep approving more borrowings based on incomplete plans in an ever-changing world, UTAS decided to use the $400 million of approvals in place at the time, ditch Tascorp as a lender and raise $350 million via a bond issue and $50 million via an overdraft facility.

There is some doubt according to Robert Hogan as to whether the approvals in place related only to existing borrowings with Tascorp or whether they validly included other borrowing such as the bond issue. That is an issue yet to fully play out.

In the meantime, the value of bonds held by investors has fallen due to rising interest rates. Bonds pay a fixed rate of interest so an investor wishing to sell to another investor when interest rates have risen will have to accept a lower price. At 31^st December 2022 the value of bonds had fallen by $40 million, to $310 million. Calendar year 2023 saw interest rates continuing to rise so it is likely bond investors have suffered a similar loss again. We will know when we finally see UTAS’ 2023 financials. Accounting standards required UTAS to disclose the fair value of its liabilities. At this stage the bonds are still carried at the issue price. That’s the amount UTAS will have to pay when the bonds mature. Nevertheless, the fair value of bonds must be disclosed. The loss in value is not recorded in UTAS’s books but is disclosed in a note to the accounts. For an investor it’s also a paper loss unless the investor realises losses by selling to someone else. If there’s a possibility the bonds were issued without strict legal authority UTAS might have to cough up for any losses suffered. That’s the worst-case scenario facing UTAS.

The crucial questions now facing UTAS even apart from massive planning issues and looming traffic problems, is whether it has enough lines of credit in place to continue to reshape Hobart City and re-develop Sandy Bay and whether it will make the returns it says. The answers to both questions are ‘highly unlikely’, but we don’t know for sure.

We shouldn’t mindlessly pine too much for the good ole days but neither should we necessarily accept that the best way forward is for UTAS to operate an edu-migration Ponzi scheme where property development takes precedence over the education of locals and the professional requirements of those dedicated to help in that task.

Just because all universities do it is not a reason. We can choose to be different.

We need parliamentary representatives willing to understand the immense problems that will accompany UTAS if it continues its present path, and help reform governance and reporting of a significant public entity. Free school lunches and driving lessons will certainly have community benefits, but at the same time an election campaign which turns a blind eye to the land mines on the road ahead is wanton recklessness.