UTAS' broken model

 

It cannot be stressed how crucial it is for interested parties to understand the earnings challenges confronting UTAS.

Parliament is about to resume consideration of a Bill that relates to UTAS’ Sandy Bay land which UTAS wishes to sell to fund its future plans.

It is ludicrous however to assert that Policy A will have Beneficial Effect B without an adequate understanding of UTAS’s current position.

But that’s what’s happening.  

UTAS’ unique status of being able to stack its own Board and not have to report to members as does every other public entity of any significance, has meant it has operated with less constraints than other public bodies.

As a consequence, the public understanding of UTAS’s financial position is woeful. Asking UTAS to explain the mess they’ve created for itself is unlikely to produce full and transparent disclosure.

An attempt by the Public Accounts Committee (PAC) to obtain info from UTAS about its financial position via a short inquiry led to a snow job from UTAS. UTAS took advantage of an under resourced and overworked committee dominated by party members either disinterested, unable or unwilling to look at issues other than through a party political lens and flooded the committee making it difficult for members to distinguish wood from trees.

UTAS gave PAC a slide show back in August 2024 (posted on the PAC website) which contains much useful information even though a little inaccessible at times. It was essentially a lecture from Rufus, basically telling the committee what he wanted them to hear.

Slide 21 shows UTAS’ earnings over time which helps explains the last 10 to 15 years of UTAS.

A few comments on chart follows:

1.     The ‘core result’ is the profit/loss from education & research activities. EBITDA is the cash result from those activities. The 2x lines track one another closely, the difference is essentially the non-cash amount of depreciation as one would expect.

2.     The years 2014 to 2020 are when UTAS aggressively sought students particularly international students. Prof Black struck in 2019, Covid a year later.

3.     The dotted line for EBITDA required to replenish assets of $60 million is the current figure. It was not $60 million for each of the 24 years.

4.     Looking at 2023, the last completed year, EBITDA was only $1 million when $60 million was required. Even in the best year ever in 2000 EBITDA was below $60 million. UTAS’ ill-fated plan expected the upward trend experienced from 2014 to 2000 to continue. It didn’t.

5.     Of the $60 million in earnings, $30 million is needed to fund a sustaining capital budget, the absolute minimum (NB UTAS’ words) needed to maintain existing buildings equipment and systems. The balance of earnings is needed to pay interest, mainly on Green Bonds of $15 million per annum, plus another $15 million buffer for other capital/principal outlays.

6.     The sustainable capital budget covers existing property plant equipment and IT systems needing upgrades and replacements. It doesn’t include new buildings etc. These are being funded by UTAS’ fast disappearing investment portfolio or by capital grants not by yearly EBITDA.

7.     However it’s not an orthodox EBITDA calculation. Excluded are restructuring cost of $9.5 million and other core expenses of $5.5 million. Even if they are one-off expenses and/or not part of continuing operations they usually form part of EBITDA. For them to be excluded they would need to be capex costs. UTAS doesn’t explain their exclusion from EBITDA. These two adjustments would make the EBITDA for 2023 negative $14 million.

8.     UTAS is insistent the PBSA arrangement with Spark Living which meant it received $202 million in rents in advance in 2x lumps (to fund other Hobart properties and finance new buildings) is not a borrowing arrangement, yet it treats part of the rent distributions to Spark each year as de facto principal payments which helps overstate the EBITDA figure. The overstated amount for 2023 was $6.2 million. That makes the EBITDA calculated according to ordinary accounting principles for 2023 negative $20.2 million, a far cry from $1 million according to UTAS’ calculations and a world away from a positive $60 million which UTAS volunteers as being necessary for a sustainable university.

9.     At the end of the day, it’s a little academic whether amounts are included or excluded from UTAS’ EBITDA calculation, as long as readers are made aware of what outlays need to be serviced by EBITDA, whether it’s just interest and capital outlays or whether it also includes restructuring costs, other unexplained core items or rent distributions to Spark Living. It makes a huge difference.

10.            In 2023 additional actual spending from EBITDA was interest of $14.7 million and capex (excluding new buildings) of $10.3 million. As EBITDA was negative this necessitated running down UTAS’ equity. Not a long-term option unfortunately.

11.            By its own admission $30 million per annum is needed to maintain buildings, equipment and systems, yet only $10.3 was spent in 2023, a woeful underspend.  2023 wasn’t an outlier year It’s become an established pattern. This highlights UTAS’ problem.

If insufficient is spent maintaining capital, education outcomes will suffer maybe not immediately, but increasingly so as the years go by.

Which is what the STEM issue is all about, that insufficient has been spent maintaining capital, that facilities are now claimed to be beyond repair and completely new facilities are required requiring outside funds. It is almost certain the capex shortfall is across all areas, not just specific to STEM.  Anecdotal reports from staff indicate this.

What is beyond staggering is that UTAS has known about negative EBITDAs for years. There a long lead time between event A occurring and the effects showing up in UTAS’ financials. That’s the nature of its business. Check the following from Council minutes, in bygone days when the Minute Secretary faithfully detailed what was discussed.

From the Council meeting of 27^th April 2023:

3.4 *2023 Financial Forecast and Strategic Questions

University Council discussed the challenging conditions facing the University in 2023 including a decline in student numbers, the removal of the CGS Guarantee in 2024 and intense competitive pressures in the economy and the sector and the resulting financial consequences for the 2024 – 2026 period. Members considered a range of potential options and actions consistent with the agreed right-sized modelling for the University in order to generate a positive EBITDA in the coming years.

In considering the proposed actions to address the funding challenges, the following aspects were raised in discussion:

·         Members encouraged exploring untapped opportunities for the University to partner with industry, government, and community to plan for future Tasmania.

·          Noting the trends in growth and decline across a variety of degree offerings over time, the question of size, scale and what right-size might mean for the University was considered.

·          Council noted that the results of the national student experience survey data indicated that the University of Tasmania had higher score in overall student satisfaction than any Group of Eight university.

·         Members discussed options for the University to take advantage of its distinctiveness to compete against strong sector competition, through promoting distinctive course offerings and experiences for students.

·         Consideration of options to address the funding challenges would remain a priority for Council, to be agreed before the strategic planning process in October. Council noted that management would be preparing a paper on financial modelling including proposed funding options for consideration at the June Council meeting.

Resolution 27-04-2023-UC-3.4(1)

University Council noted the challenging conditions facing the University in 2023 and the financial consequences for the 2024 – 2026 period

Two years later what exactly are the EBITDA consequences for the strategic questions raised? When will UTAS deign to tell us?

In the last ten years or so, UTAS has embarked on extensive development of the Launceston and Burnie campuses mostly funded from grants. The facilities are well embedded in the community and enjoy widespread support.

However UTAS informed PAC as part of the slide show in August 2024 that operations at regional campuses are cross subsidised by Hobart by between $40 million and $60 million per annum. Let’s say it’s only $40 million. With a minimum EBITDA for a sustainable UTAS being $60 million per annum, prima facie this means that the EBITDA from Hobart and the rest of UTAS needs to be $100 million per annum. How is that remotely possible? Has UTAS become unsustainable? Why didn’t the Lower House trouble itself with matters of UTAS’ fundamental lack of sustainability when they discussed the UTAS Bill last November? Are they not aware of the situation? Or is it the same as the State’s financial position. Too hard. Please don’t ask. If former Treasurer Ferguson is forced to step aside because of his Berth 3 failures, how many more lives does the UTAS Council get?

For an organisation that has presided over a vanity project rather than looking after existing assets and staff, and only discloses information when it needs to, the mind boggles at the Trumpian arrogance that it be allowed to continue with its unfettered nightmare.

The public debate is currently mired in the STEM matter, which has been years in the making due to a relentless pattern of underspending on capital upgrades. Which resulted from an EBITDA which is running way below what’s needed, and which has never been achieved even at the height of the international student tsunami.

The EBITDA question is crucial. If it isn’t resolved, then nothing will be. UTAS will continue to rely on moral hazard to design and pursue plans regardless, knowing someone will always come to the rescue. We’ll lurch from crisis to crisis. As Tasmania’s only university UTAS is too big to fail.

Approving the current Bill before a workable plan to fix UTAS’ parlous EBITDA has community support would be remiss, tantamount to sending the gravy train on another journey knowing it’s only a matter of time before more public assistance will be required.