Part 2: Context for investment decisions

Investing in tertiary education assets.

2.1
In this Part, we set out some of the wider context in which decisions about investments in tertiary education assets are made. That context includes the connections and interdependencies of tertiary education institutions and their associated organisations, other education providers, public sector education agencies, students, relevant legislation, and Government strategy and policy.

2.2
We have not attempted an exhaustive discussion of all agencies, regulations, stakeholders, or other matters affecting the tertiary education sector.

Components of the tertiary education sector

2.3
In the second quarter of 2016, there were 27 tertiary education institutions and about 500 private training establishments or private tertiary institutions (about half of which receive Government funding). Together, these organisations provide tertiary education to more than 400,000 enrolled students, including more than 50,000 international students. Private institutions provide more than half of the courses for international students and more than half of that provision occurs in Auckland.

2.4
Tertiary education providers also include industry training organisations, community organisations, secondary schools (some of which provide tertiary courses), and Rural Education Activity Programmes.

2.5
The Tertiary Education Commission, Ministry of Education, Ministry of Business, Innovation and Employment, New Zealand Qualifications Authority, Careers New Zealand, and Education New Zealand are the main public sector agencies in the sector.

Tertiary Education Strategy

2.6
The Tertiary Education Strategy 2014-2019 (the strategy) is the Government's strategy aimed at supporting social and economic outcomes from the tertiary education sector.4 It connects tertiary education with the Government's wider social and policy objectives, as articulated, for instance, in the Business Growth Agenda.5

2.7
The strategy affects tertiary education institutions by emphasising key areas of performance linked to funding. The strategy aims to improve the effectiveness of the sector as a whole, rather than the effectiveness of the individual organisations in the sector.

The Government's framework for investment in the tertiary sector

2.8
In 2015, tertiary education institutions had net assets of about $9.7 billion. In 2014, they also planned to spend about $8.2 billion on capital assets in the 10 years to 2024. Most of the spending was expected to be on property, plant, and equipment, and most tertiary education institutions already had significant campus rebuilding and expansion projects under way. Several had located campuses or joint-venture operations in Auckland to take advantage of the expanding market for educating international students.

2.9
Given the importance of assets in the tertiary education sector, the Government has a particular interest in working with the sector to try to ensure that the money invested gets the best results possible. Results are important not only for individual students but for society as a whole, given the important societal effects that successful tertiary education should bring.

2.10
Tertiary education institutions have a degree of autonomy. This is recognised in the Education Act 1989, particularly in section 161:

Academic freedom
(1) It is declared to be the intention of Parliament in enacting the provisions of this Act relating to institutions that academic freedom and the autonomy of institutions are to be preserved and enhanced.
(2) For the purposes of this section, academic freedom, in relation to an institution, means—
  1. The freedom of academic staff and students, within the law, to question and test received wisdom, to put forward new ideas and to state controversial or unpopular opinions:
  2. The freedom of academic staff and students to engage in research:
  3. The freedom of the institution and its staff to regulate the subject matter of courses taught at the institution:
  4. The freedom of the institution and its staff to teach and assess students in the manner they consider best promotes learning:
  5. The freedom of the institution through its chief executive to appoint its own staff.
(3) In exercising their academic freedom and autonomy, institutions shall act in a manner that is consistent with—
  1. The need for the maintenance by institutions of the highest ethical standards and the need to permit public scrutiny to ensure the maintenance of those standards; and
  2. The need for accountability by institutions and the proper use by institutions of resources allocated to them.
(4) In the performance of their functions the Councils and chief executives of institutions, Ministers, and authorities and agencies of the Crown shall act in all respects so as to give effect to the intention of Parliament as expressed in this section.

2.11
Although the legislation lets tertiary education institutions act autonomously, they still need to be accountable and to properly use public money. They are required each year to prepare financial statements and report on their performance.

2.12
Tertiary education institutions prepare investment plans and provide these to the Tertiary Education Commission for approval. In the investment plan, the tertiary education institution is required to describe how it will give effect to the Government's current and medium-term priorities described in the strategy, and set out the programmes and activities for which it is seeking funding. The Tertiary Education Commission assesses the proposed investment plans against criteria, including how the tertiary education institution contributes to the priorities described in the strategy.

2.13
The Government also has expectations for investment- or asset-intensive agencies. These expectations, set out in a Cabinet Circular, include "Cabinet's intention that there is active stewardship of Government resources, and strong alignment between individual investments and the Government's long-term priorities".6 Although the expectations do not directly apply to tertiary education institutions, the Tertiary Education Commission needs to take the expectations into account in its assessment of investment plans.

2.14
The Government has also set out long-term policy priorities in its Business Growth Agenda. The goals under the skills area of the agenda cite the need for an "innovative, adaptable, and inclusive education sector".

Investment – the role of public agencies and the strategy

Tertiary education institutions

2.15
Tertiary education institutions are expected to consider how they can best contribute to achieving each of the strategy's priorities.

2.16
Most of the Tertiary Education Commission's funding of tertiary education institutions is for teaching and learning. With a few exceptions (for instance, after the Canterbury earthquakes),7 the Government does not provide new capital funding to tertiary education institutions. Tertiary education institutions are expected to fund capital projects, such as campus upgrades or new premises, from their existing resources or through borrowing.

2.17
The Tertiary Education Commission approves business cases for large capital projects, usually only if the tertiary education institution is seeking to borrow (as opposed to funding projects independently or through other means) or otherwise requires central government approvals. For this report, we looked only at business cases that were submitted to the Commission.

2.18
The Tertiary Education Commission also expects all tertiary education institutions to carry out regular self-assessments and obtain an independent assessment of their asset management policies and practices. The last round of independent reviews was in early 2015. The results of the reviews and self-assessments are not publicly reported.

2.19
As part of the annual audits, auditors receive information about, and might comment on, the planning for and controls in place to help individual tertiary education institutions to manage their capital projects. We commented on this in our 2013 report, Managing public assets.

Central education agencies

2.20
The Education Act 1989 and Crown Entities Act 2004 together require the Ministry of Education, Tertiary Education Commission, New Zealand Qualifications Authority, and Careers New Zealand to give effect to, or have regard to, the strategy when exercising their functions. Education New Zealand is required to implement the Government's policy on international education.

2.21
The strategy requires each central education agency to perform its role in ways that support tertiary education institutions and the wider sector to deliver the outcomes sought in the strategy. These agencies are expected to maintain high-quality standards and to focus on performance and value for money. They are expected to improve their speed and flexibility in resolving issues and problems reported by stakeholders as barriers to achieving the Government's priorities for tertiary education.

2.22
For example:

  • The New Zealand Qualifications Authority is expected to ensure that quality assurance is effective and efficient.
  • The Tertiary Education Commission is expected to direct public funds to the sector. It uses the strategy to set performance expectations and to shape its investment in tertiary education institutions in a way that reflects the strategy's priorities, shifting funding over time to the institutions that demonstrate they can make the best contribution to the outcomes sought by the Government. Funding is negotiated between education organisations and the Commission based largely on an investment planning process and related performance targets.
  • Careers New Zealand is expected to lead the sector in providing relevant and useful information to support prospective students' decision-making.8
  • Education New Zealand is a government agency that works to increase awareness of New Zealand as a study destination. It is expected to support education providers and businesses in promoting their services and products to the world.
  • The Ministry of Business, Innovation and Employment is expected to develop ways to better identify skill shortages and future skills demand, and will set science and research priorities that are increasingly focused on economic outcomes.
  • The Ministry of Education is expected to shape tertiary education policy to achieve the outcomes sought by the Government. It also manages Vote Tertiary Education (2014/15: $3 billion).

2.23
One of the Tertiary Education Commission's current goals is to get better returns for the Government's investment in education by providing more effective sector stewardship. The Commission also has an important monitoring role, and reports on the tertiary education institutions' shorter-term financial performance (viability) and longer-term financial performance and cost structures (sustainability).

2.24
Central government agencies are expected to work together to better align their processes and requirements so that their operational work does not run counter to the goals of the strategy.

Change in the tertiary education sector

2.25
New funding and fee-setting arrangements were put in place as part of the first tertiary education strategy in 2002, and led to an increase in participation in tertiary education. Statistics for 2015 show that 56% of New Zealanders aged 25-34 held a tertiary qualification.

2.26
Tertiary education institutions adapted to increasing numbers of students in the 10 years from 1994 to 2004, but student numbers have been more stable since 2004. Many regions are experiencing declines in domestic student numbers and they are also struggling to maintain the number of international students. Three-quarters of all international students now study in Auckland. This has led to many tertiary education institutions opening campuses or investing through subsidiary companies in Auckland.

2.27
Tertiary education institutions are facing pressures from new technology and ways of delivering education, ageing assets, and declining numbers of domestic students. This increases the competition for student enrolments. Tertiary education institutions need to be more efficient, given the increased financial pressure, and there are demands for them to make more effective and efficient use of their assets.

2.28
In this context of increasing pressures, tertiary education institutions' forecasts of student numbers are not the same as those of the Ministry of Education. We have compared the sum of the domestic student forecasts from each tertiary education institution with the Ministry's forecasts for total domestic students. The Ministry's forecasts take into account population distribution and unemployment projections. Figure 2 shows the forecasts from 2015 to 2020 and the gap between the tertiary education institutions' forecasts and those of the Ministry.

Figure 2
Forecast numbers of domestic students, by tertiary education institutions and the Ministry of Education, 2015 to 2020

Figure 2 Forecast numbers of domestic students, by tertiary education institutions and the Ministry of Education, 2015 to 2020.

2.29
Figure 2 shows an increasing gap between the Ministry of Education's forecasts and the forecasts that tertiary education institutions are making. The Ministry forecasts declining student numbers and tertiary education institutions forecast increasing student numbers. By 2020, the aggregated tertiary education institutions forecasts are higher than the Ministry's forecast by 18,000 – roughly equivalent to the number of students at Victoria University of Wellington.

2.30
Some uncertainty is expected in forecasting, and aggregate figures like these do not capture the ability of different types of tertiary education institutions to operate outside of the broad trend. Even so, the differences between these forecasts suggest that asset investments for some tertiary education institutions might be based on optimistic information.

2.31
In our 2015 audits of tertiary education institutions, our auditors regularly highlighted "going concern" or financial viability and/or sustainability as a risk. The risk was often generated by changes in student numbers, including policy changes that affected student enrolments and retention and financing decisions for large capital projects.

2.32
In the next Part, we discuss whether individual tertiary education institutions were considering wider factors (such as student numbers and the activities of other institutions) when they were making investment decisions about their assets.

4: Ministry of Education and Ministry of Business, Innovation and Employment (2014), Tertiary Education Strategy 2014-2019, Wellington.

5: The Business Growth Agenda sets out the Government's long-term policy priorities for the economy. It is published each year by the Ministry of Business, Innovation and Employment. The current edition, published in 2015, is The Business Growth Agenda: Towards 2025.

6: Cabinet Office Circular, Investment Management and Asset Performance in the State Services, July 2015. See also CAB Min (15) 11/7A.

7: The University of Canterbury faced unique post-earthquake circumstances and our report does not necessarily allow for all those circumstances – but our general recommendations still apply.

8: The functions of Careers New Zealand are being transferred to the Tertiary Education Commission.