Auditor-General's overview

Investing in tertiary education assets.

Naku te rourou nau te rourou ka ora ai te iwi

Tertiary education institutions – our universities, polytechnics, wānanga, and other tertiary education organisations – make an important contribution to New Zealand's social and economic success. In 2015, these institutions held about $9.7 billion in net assets, including $9.5 billion in capital assets. In 2014, they also planned to spend a further $8.2 billion on capital assets by 2024.

Investment in assets has been a theme of my Office's recent work and this report considers the effectiveness of investment in tertiary education sector assets to support educational success. To prepare this report we looked at some business cases and came up with a cost-effectiveness measure.

The tertiary education sector is facing pressures from new technology and ways of delivering education, ageing assets, and declining numbers of domestic students. Such pressures are inevitably increasing the level of competition for student enrolments. In this context, the Government's Tertiary Education Strategy 2014-2019 supports social and economic outcomes for the tertiary education sector. The strategy aims to enhance the effectiveness of the sector as a whole, as well as the effectiveness of its parts. High-quality information needs to be provided in a timely and transparent manner to help show whether the strategy is being achieved. Such information is also required to support good accountability in the sector so that New Zealanders can know that the taxes they pay are spent effectively.

Each tertiary education institution is required to prepare an investment plan to show how it plans to give effect to the priorities in the tertiary education strategy. For particular capital investments, tertiary education institutions prepare business cases and we reviewed 14 of them.

We found those business cases were generally of a high standard. Particular strengths were that:

benefits, risks, and risk-management approaches for the individual university or polytechnic were usually described in detail; and
most sections dealing with risk included comments about a range of financial indicators, for example, operating and net surplus, and net cash/debt position.

However, there was little evidence of the tertiary education strategy's aim to enhance the effectiveness of the sector as a whole. In most of the business cases, tertiary education institutions did not:

take account of the investments planned or made by other tertiary education institutions; nor
consider how to make the most of their investments by sharing or using the existing assets of other tertiary education institutions.

The business cases we looked at were prepared in 2013 and 2014. For 2015/16, the Tertiary Education Commission specifically asked tertiary education institutions to "explore ways to increase efficiencies through shared services, infrastructure and other collaboration, such as partnerships". Our findings and this requirement suggest it is important that tertiary education institutions give attention to wider sector considerations when they prepare future business cases to support their major investments.

For the purposes of good accountability and effective investments, and because education is so important to New Zealand's future, we developed a cost-effectiveness measure to see whether system-wide factors could affect the relationship between the money spent on assets and educational outcomes for students – in other words, a basic cost-effectiveness measure that we called "investment effectiveness". There are many ways to measure investment effectiveness. Our measure, for example, did not include research objectives associated with the investment in tertiary education assets. This shows an area of opportunity for tertiary education institutions and other education agencies in the future development of business cases and cost-effectiveness measures.

We used publicly available information about tertiary education institutions' assets and education outcomes (educational performance indicators) to apply the measure. Some feedback we received expressed concern about the quality of the educational performance indicators and their use in our measure. If the educational performance indicators do not meet good quality standards, then the sector and individual tertiary education institutions need to improve that accountability information.

Applying our measure shows how tertiary education institutions may individually and collectively be affected by changes in their wider environment. We used three scenarios involving changes in student numbers. Using our measure:

a large change in the number of international students has a small effect on investment effectiveness;
a small change in domestic student numbers has a comparatively large effect on investment effectiveness; and
if a group of tertiary education institutions increases its market share, this can decrease the overall (average) investment effectiveness of all tertiary education institutions.

When the results of the analysis are put together with what we saw in selected business cases, it is clear that there is an opportunity for education agencies, tertiary education institutions, and other stakeholders to explore the measurement of the effectiveness of investments in tertiary education assets and the potential opportunities for more sector-based investment decisions.

Some tertiary education institutions believe that a competitive funding model and regulatory environment make it unlikely that they will work together to improve the collective efficiency of their investments in assets. Others pointed to examples where joint investments have been successfully made and the complexities of the funding and regulatory environment were worked through. These diverse views pose both a challenge to the implementation of the strategy and an opportunity for further conversations and developments.

I hope that this report will start conversations in the tertiary sector about the further development and reporting of a range of cost-effectiveness measures and tools, for the sector and for individual tertiary education institutions.

I thank the tertiary education institutions, the Ministry of Education, the Tertiary Education Commission, the Treasury, the Productivity Commission, and Education New Zealand for providing us with documents and data for this report.

I acknowledge that this audit was completed before I took up the role of Controller and Auditor-General on 1 February 2017. However, I am pleased to endorse and agree with its findings.

Signature MM

Martin Matthews
Controller and Auditor-General

8 February 2017