UTAS' STEM is a furphy

 

There’s a eerie similarity between UTAS’s current predicament and that of the State government.

In the case of the latter, it has been made blindingly obvious by Saul Eslake and others that the State is on an unsustainable path. The Government’s Strong Plan for 2030 is not simply a smokescreen. It’s a blatant untruth. There is no possible way the State will be able to run cash deficits at any stage in the foreseeable future without radical changes. Debt servicing and paying other past liabilities is taking an increased share of the stagnant pool of State government revenue leaving less to fund current services.

The government knows it. So does the opposition. Although they don’t readily admit it. Both are united by omerta, the code of silence adopted because neither have a clue what to do.

Fortunately brush fires keep flaring which distract mug punters. The TTLine debacle for instance diverted attention and whilst symptomatic of our woes helped everyone avoid discussion of the terminal diagnosis of the body politic. For a time at least.

 Likewise, the Mac Point Stadium debate acts as a distraction. Although important as a sub-issue it lulls people into thinking it’s part of the main game. It’s just a side show. There are much more serious problems which our current head in the sand approach to future sustainability is helping us avoid.

Likewise, in the case of UTAS the elephant in the room is the lack of sustainability of its current model.  Current attention is focussed on funding a $500 million STEM building as if that is the only thing needed to secure UTAS’s future.

But just like the $775 million Mac Point Stadium the cost of STEM hasn’t changed for 8 years. Are we supposed to take these guys seriously? UTAS has been talking about new STEM facilities for at least 12 years.  Buildings at 62-82 Argyle St Hobart first valued by UTAS in 2013, purchased for STEM purposes for $9.8m in 2015 are still unused for their intended purpose.

Minister Ferguson lost his job over his failure to deliver Berth 3 on the Mersey River Devonport in time for the new Spirit ferries. STEM is UTAS’ Berth 3.

To continue the analogy, after 12 years UTAS still hasn’t decided which side of the river to build a new berth or whether existing facilities can be fixed to do the job. Not to mentions how much it may cost or where the funds will come from. They’re still at the scribbling-on-a-table-napkin-after-a-late-lunch stage. Mr Ferguson, all is forgiven your sins are venial compared to UTAS. Yet UTAS is still trying to run the largest infrastructure project in the State’s history and Parliament is contemplating bowing to their every wish.

Fundamentally the sale of bits of the Sandy Bay campus is not about funding a $500m STEM. There has been at least 12 years and plenty of cash in that time to find a solution to the STEM problem even if it meant building a new facility. Selling Sandy Bay is about selling the family jewels to keep the wolves from the door, to find ways to service  debts and other liabilities that UTAS has incurred as the dream of a future paved with gold exploded with the advent of Covid, putting paid to the best laid Ponzi plans to keep developing and flogging future rents from student accommodation, vainly hoping the sky will always be blue and the sun will keep shining.

UTAS has lost its way

Fifteen years ago, UTAS updated its student accommodation strategy following the introduction of the National Rental Affordability Scheme (NRAS) designed to provide incentive payments for development of new low-cost housing. UTAS received approval to build 770 rooms. West Park, Newnham, Inveresk and Hobart apartments were built. Approval meant UTAS became entitled to receive an indexed payment for 10 years.

The urge to shift to Hobart CDB meant more funds were needed and UTAS decided to forward sell 30 years’ worth of rents from the new NRAS approved properties plus some other existing properties, viz Christ College, John Fisher and University Apartments (all at Sandy Bay) and Investigator Hall in Launceston. The deal was completed in 2017 with Spark Living paying $132.6 million for the right to receive 30 years of rents from the properties. UTAS agreed to collect the rents and pay rates and other admin cost with the balance going to Spark who had to attend to maintenance and upgrades so that when the properties were resumed by UTAS at the end of 30 years they were in an agreed condition. This agreement is known as PBSA1 (PBSA means Purpose Built Student Accommodation).

Before the ink was dry on PBSA1 UTAS and Spark agreed to proceed with PBSA2 for a further 422 rooms at 42 Melville St (now known as Hytten Hall. This time UTAS provided the land (existing buildings such as Red Cross House were demolished) and Spark funded and built the new building. In return for 30 years of rents Spark paid UTAS a further $70.8 million. Whilst the building is owned by UTAS, Spark has a right to receive rents for 30 years.

Before PBSA2 funds were received early in the 2021 calendar year, UTAS embarked on PBSA3, more student accommodation at the K&D site in Melville St. The Mid-City Hotel was also bought and developed, as was the Fountainside Hotel. It is not clear whether these latter two properties were to form part of PBSA3 or whether they were to be a separate PBSA4 arrangement. In total PBSA3 and PBSA4 of the overall Ponzi scheme cost UTAS approximately $90 to $100 million in property purchases. It was expected that Spark would pay for cost of any new building erected on the K&D site as was the case with PBSA2.But this never eventuated. Covid struck. The plan quickly became redundant. The carefully crafted plan had the shelf life of a meringue pie on a hot day. The Mid-City and Fountainside have both since been sold at a loss.

PBSA1 and PBSA2 still have over 20 years to run. Spark has in effect lent UTAS $203 million to be paid back over 30 years. Spark are assuming risks so one would expect they will need a rate of return to compensate. They also need extra to cover asset maintenance expenses.

Intuition suggests Spark would need to be receiving between $15 and $20 million in current $ terms each year over 30 years to make it a worthwhile investment for them. Rents for approximately 1350 rooms are probably somewhere in the region of$15 to $18 million so once UTAS pays opex, rates etc as required, probably around 30 per cent of rents, say $5 to $6 million, there won’t be enough left for Spark to make the deal stack up for them.

That’s where the NRAS payment come in. It appears as if UTAS assigned its right to NRAS monies to Spark as part of the PBSA1 deal. That’s probably somewhere in the region of $5 to $6 million per year. It’s not a figure that’s readily available from UTAS accounts because the amounts bypasses UTAS and are probably received directly by Spark. UTAS did receive some amounts in the 2015 to 2017 years but that was before the Hobart Apartments were built and PBSA1 started. An extra $5 or $6 million would provide Spark with an acceptable rate of return in addition to the balance of rents received from students after UTAS deducted its costs. But and this is a big BUT, the NRAS is due to run out in 2026 with the last payments being made in the following year. It was only a 10 year arrangement scrapped by Prime Minister Tony Abbott . So for the rest of the 30 year term UTAS may have to come up with extra from its own cash resources to ensure Spark continues to receive its entitlements as agreed.

Intuitively this is what one would expect. One wouldn’t expect a borrower to be able to discharge a loan for the entire 100 per cent of a property cost from rents alone, without the need for outside funds especially where rents are below market rates and the borrower has managed to shift some of its risks to the lender meaning the lender will want a bigger slice.

If UTAS has to find extra to pay Spark once NRAS monies disappear it will  put more pressure on its cash flow. It will mean that its EBITDA figure, its earnings before interest tax and depreciation, currently hovering around break even, will continue below levels required for sustainability as an education and research entity.

UTAS submitted to PAC (Public Accounts Committee of State Parliament) that it requires an annual EBITDA of $60 million for sustainability. Of that approximately $15 million is to pay interest on the $350 million of Green Bonds currently issued, and $30 million it to fund ordinary capex each year, plant replacements, building upgrades etc essential to keep the organisation operating effectively. Arguably a prudently planned and executed capex program which included ongoing STEM spending each year would have negated the need for a single lump sum outlay for a new $500 million facility currently being discussed. UTAS is so far from achieving a $60 million EBITDA figure Tasmanians should demand to know what happens if it doesn’t, and start planning accordingly.

The effects of the PBSAs on the EBITDA calculation are far from clear from UTAS’ financials. UTAS is adamant the PBSA is not a borrowing which requires approval from the Treasurer under Sec 7(2) of UTAS’s governing Act.  But it conveniently treats part of the payments to Spark pursuant to the PBSA as de facto ‘principal’ payments which reduces the prepaid lump received from Spark which sits as a liability on UTAS’s balance sheet and is gradually reduced over the 30 years of the deal. This means part of the payment to Spark being part of the net rents it is entitled to, about $6 million pa, is effectively excluded when an EBITDA figure is calculated from the Income Statement. EBITDA is consequently overstated.

UTAS is secretive about how it calculates EBITDA. Its financials refer to core earnings which is a pretty good proxy for EBITDA, the only difference being the amount of depreciation. It’s easy to make that adjustment. But as part of the core earnings calculation UTAS excludes restructuring costs which have averaged about $9 million pa over the past 5 years. These are included under wage costs. Why they aren’t included when calculating an earnings figure for the year is a mystery. Maybe they are the notorious severance payments which include NDA (Non-Disclosure Agreement) amounts paid to stop the growing cohort of disgruntled staff from publicly discussing  UTAS, arguably capital outlays by UTAS to help maintain its diminishing reputation and therefore not outlays on the income account to be included for earnings purposes. Perhaps that’s why UTAS ignores restructuring costs when presenting a core earnings figure?

However, it’s not just the legacy issues from paying PBSA liabilities that will linger for a while, it’s the cash flow crunch when $280 million of Green Bonds need to be repaid in seven years’ time that will cause huge problems. Why not get UTAS to lay all its cards on the table now and allow Tasmanians to see for themselves what UTAS has created. UTAS won’t be able to redeem the Green Bonds on current indications. Its only hope is to be able to sell off bits of Sandy Bay.

The lurking fear is that UTAS’s cash problems are just as serious as those of the State Government, although on a proportionately lesser scale.

The halcyon days of universities are over. The model is busted. UTAS’ current shaky position has largely resulted from the risky assumptions adopted when it decided on its chosen path. It’s not too late to change course. But to simply give UTAS carte blanche approval to continue without Parliament putting a few more checks and balances on a rogue organisation would be remiss. If now is not the time to shake up UTAS then when will it ? The notion that UTAS needs money for STEM is a furphy. UTAS needs a clear plan which Tasmanians can understand which allows our only university to give greater priority to education and research for Tasmanians on a sustainable basis.