New Zealand universities’ Covid-19 prognosis looks healthy

New Zealand may be internationally recognised for the effectiveness of its “go hard, go early” response to the Covid-19 pandemic, but its universities remain deeply concerned about their bottom lines.

The eight institutions derived half a billion New Zealand dollars – one eighth of their total revenue – from international student fees. The ban on foreign travel imperils that. And moving teaching and assessment online one month into the academic year only added extra costs.

Vice-chancellors told Parliament’s Epidemic Response Committee that they expect a combined loss of NZ$397 million (£200 million) in 2021, compared with a 2019 surplus of NZ$115 million. That is a half-billion dollar turnaround on total revenue of about NZ$4.5 billion.

Education minister Chris Hipkins was unmoved. He told reporters that universities “have cash reserves and borrowing facilities” that they can draw on. He also noted that enrolments are likely to go up because “in times of higher unemployment, participation in higher education increases”.

So when the government announced its budget on 14 May, there was money for supporting students, a 1.6 per cent rise in teaching funding rates and provision for funding the expected increase in enrolments. But, to no one’s surprise, there was no injection of cash for the institutions themselves.

How reasonable is Hipkins’ expectation that New Zealand’s universities can trade their way through the crisis?

In 2018 – the latest year for which we have complete data – all eight made operating surpluses, ranging from 2.8 per cent to 12.3 per cent of revenue, and averaging 4.3 per cent – compared with the government’s expected minimum of 3 per cent.

Net cash from operations is also very strong. At NZ$645 million, it is 70 per cent above the vice-chancellors’ estimated 2021 deficit. So the minister’s expectation is reasonable – provided income holds up and universities defer capital expenditure.

Hipkins is right that university enrolments are counter-cyclical. I recently confirmed this by looking at the effect of the economic cycle on university enrolments between 2007 and 2018. The relationship between participation and the unemployment rate was indeed very close following the 2008 global financial crisis.

The ministry’s enrolment forecasts for 2020 to 2024 show an increase of 10,000 equivalent full-time university students in 2021, a 9 per cent rise. If correct, that should add about $186 million to university revenue in 2021 – close to half the estimated deficit.

Another concern is research funding. New Zealand universities gain about 86 per cent of theirs from government sources. There is no indication that this is at risk, but an acute recession will squeeze the companies and charities that – alongside overseas funders – provide the other 14 per cent. Some will reduce the number or value of the research contracts they enter.

If half that revenue disappeared, it would amount to about NZ$65 million – 1.5 per cent of total revenue. But because the costs of contract research are high, the effect on the bottom line would be less. The biggest risk to research performance is actually teaching revenue because surpluses are used to subsidise research.

The most important question is what will happen to international enrolments given that international fees are, on average, 50 per cent higher than the total revenue from each domestic enrolment.

The crisis does have advantages for Australia and New Zealand since both have been relatively successful in combating the spread of Covid-19. A February 2021 start in a virus-free New Zealand or Australia will seem safer to prospective students than going to the US, UK or Canada in September 2020, when the disease is still likely to be present.

New Zealand’s universities have been working with health officials on a plan to allow foreign students to go through a supervised quarantine before studying – and Hipkins says he is open to that arrangement. There is some way to go, but this may rescue international programmes.

If international students don’t show up in good numbers, the universities’ strong cash position will ensure their survival. But there will be a cost in terms of staffing, capital, equipment and systems. In short, quality will suffer.

Roger Smyth is an independent consultant and adviser on tertiary education. He is the former head of tertiary education policy in New Zealand’s Ministry of Education.