Brian Gaynor: University numbers mean big business

The Government is planning to spend $13.5 billion on education in the June 2017 year, second only to the $16.2 billion it plans to spend on health.

This is an important sector because public and private expenditure on tertiary education in New Zealand is about 2.1 per cent of gross domestic product (GDP), compared with an OECD average of 1.6 per cent.

The three main areas of education spending are primary and secondary schools ($6.1 billion), tertiary funding ($4.3 billion) and early education ($1.8 billion).

This column looks at the $4.3 billion of tertiary funding and in particular the country’s main universities. These are big businesses as our six long-established universities have combined annual revenue of $3.2 billion.

Where does this money come from and what strategies are our universities adopting to raise revenue and attract students in a competitive global environment?

New Zealand’s tertiary education sector provides a wide range of learning opportunities, from foundation skills to doctoral studies. There are 418,000 students enrolled in tertiary education.

Approximately 48 per cent of them are at university on an EFTS (equivalent full-time students) basis, 27 per cent are at institutes of technology and polytechnics, 16 per cent at private training establishments and 9 per cent at wananga.

The Ministry of Education places a strong emphasis on tertiary education because it estimates that an individual with a university degree earns 67 per cent more than one without a qualification and people with a lower tertiary qualification earn 26 per cent more than those with no qualifications.

One of the first points to note about the university sector is the QS World Ranking, the widely recognised rating system for more than 800 of the world’s top universities. The six New Zealand universities in the accompanying table are listed from left to right according to their QS Ranking.

The highest rated global universities are Massachusetts Institute of Technology (MIT) and Harvard University, with University of Cambridge and Stanford University in joint third position.

The latest New Zealand rankings — with their ranking three years ago in brackets — are as follows:

• The University of Auckland, 82nd (83rd)
• University of Otago, 173rd (133rd )
• University of Canterbury, 211th (221st)
• Victoria University of Wellington, 229th (237th)
• Massey University, 337th (308th)
• University of Waikato, 338th (374th).

The country’s other universities are Lincoln University (ranked 373rd in the latest survey) and Auckland University of Technology (481st).

These rankings are important because parents and students believe they have an impact on the employability and earnings potential of graduates. Highly ranked universities also attract top quality academic faculty staff and postgraduate students.

High QS rankings also attract overseas students, who are important from a revenue point of view. Australian universities, of which there are six ranked above the University of Auckland, derive 17 per cent of their revenue from international student fees whereas our universities generate only 10 per cent of their revenue from this source.

The University of Auckland is the most successful in attracting international students. According to the QS website, New Zealand’s largest university has 8385 international students compared with 6762 at Auckland University of Technology (AUT) and 3698 at University of Otago.

The latter’s shirt sponsorship of the Otago Highlanders’ Super Rugby team has raised its international profile, particularly in Japan.

University of Otago has the most international academic faculty with 802 overseas academic staff, followed by the University of Auckland with 632 and Massey University, 538.

Our universities’ main sources of revenue are government grants, tuition fees, research income and services (student accommodation etc.). The figures in the accompanying table are derived from annual reports but they may not be directly comparable because the six universities have slightly different definitions for each revenue source.

The six universities derived $1.19 billion, or 38 per cent of their total revenue, from Government grants. Tuition fees, which total $855 million, comprise domestic and international students. Universities don’t usually differentiate between domestic and internationally sourced tuition fees but Victoria University’s latest accounts showed it had domestically sourced fees of $83.8 million and international student fees of $30.9 million.

Research-based income, which generated revenue of $617 million for the six universities in their latest year, is also important, and services income includes student accommodation services.

Last year, the Government asked the Productivity Commission to undertake an inquiry into new models of tertiary education. Finance Minister Bill English wrote that the inquiry “will focus on how trends, especially technology, tuition costs, skill demand, demography and internationalisation may drive changes in business models and delivery models in the tertiary sector”.

_{Source: Graphic/NZ Herald.}

The inquiry covers eight universities, 17 institutes of technology and polytechnics, three wananga and 244 Government-funded private training establishments.

The terms of reference noted that there was considerable inertia in the New Zealand tertiary sector as providers appear reluctant to be “first movers” or “early adopters” and are unwilling to shift away from their traditional models. Students have the ability to access almost unlimited content in real time via the internet yet the traditional university lecture theatre “would be readily recognisable to medieval scholars”.

The Government noted that the tertiary education sector faced considerable challenges because of: technology changes; increasing tuition costs; a reduction in the number of domestic tertiary students over the next few years and increased competition from Asian universities.

Asian universities are growing rapidly, both in terms of size and quality, and there are now two in the QS ranking’s top 20 compared with none four years ago. These two top-20 Asian universities are based in Singapore.

The Productivity Commission published a 121-page issues paper in February, covering a large number of topics.

It noted that New Zealand has 54,471 fee-paying international tertiary students, with 24,956 of them generating fee income of $343.4 million for the universities. The remaining 29,515 overseas students are at other tertiary institutions.

As far as the universities are concerned, overseas students peaked in 2004, declined between 2005 and 2008, but have stabilised in recent years.

There are a number of reasons for this including: the growth in the number of Asian universities; Asian universities climbing the QS ranking table while New Zealand institutions struggle to hold their position; the online education model reducing the need for students to travel from one country to another and China’s college-age group declining from 137 million in 2010 to 109 million in 2020.

Another issue raised by the Productivity Commission is whether New Zealand universities should be required to undertake research. This is an important national issue because our universities account for approximately one-third of the country’s total research.

In New Zealand, as well as Australia, universities are required to undertake research alongside teaching. In much of Africa, Asia and the United Kingdom, as well as some US states and British Columbia, there is no requirement for universities to undertake research. A 1996 study showed there was no relationship between the quality of academics’ teaching and the quality of their research. In other words, being a great teacher does not necessarily mean that an academic is also a great researcher.

The Commission asks the question: “What are the benefits and disadvantages, in terms of students’ learning outcomes, of bundling together research and teaching at universities in New Zealand?”

Hopefully, this question, and large numbers of additional questions, will be answered in the Commission’s draft November report and its final report to Government in February.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.