Part 3: Our assessment of business cases for investment decisions

3.1
In this Part, we discuss the results of our assessment of the business cases for investment decisions of selected universities and polytechnics.

3.2
We assessed 14 business cases from 11 universities and polytechnics. Most business cases were from 2013 and 2014 (they were the most recent business cases available from the Tertiary Education Commission when we started our work). The average amount of funding sought in the business cases was $251 million and the median value was $134 million.

3.3
The business cases were not written or structured in a uniform way, which made direct comparisons difficult. Appendix 1 lists our assessment criteria and each of the business cases we assessed.

3.4
We expected the sample of business cases to provide useful information about:

• whether the universities and polytechnics had considered the effect of their asset investment decisions on other tertiary education institutions;
• whether the universities and polytechnics had considered opportunities to share or use assets for the benefit of the sector when making new investments; and
• what kinds of financial analysis and indicators the universities and polytechnics considered important for assessing the value they would gain from their asset investments.

Business case assessment criteria

3.5
The business cases we reviewed were generally well prepared. When considered on their own, they were good quality documents and met most of the Treasury's expectations of better business cases.

3.6
Although the business cases also met most of our assessment criteria, many did not provide the analysis and discussion we were expecting about changes in domestic student numbers, the effects of competition from other tertiary education institutions, and how to use assets for the benefit of the tertiary sector.

3.7
We looked for evidence that the universities and polytechnics were:

• identifying management strategies to mitigate risks and realise opportunities;
• clearly setting out risks;
• forecasting revenue;
• forecasting domestic student numbers;
• forecasting international student numbers;
• using financial and service performance metrics to monitor progress;
• considering asset investment and management decisions throughout the sector; and
• considering opportunities to use assets throughout the sector.

Identifying management strategies to mitigate risks and realise opportunities

3.8
The business cases we assessed included a regular focus on managing risks and benefits. The benefits realisation and risk-management approaches were usually described in detail. The risks identified were frequently categorised and prioritised, and post-programme evaluations were common.

3.9
The expected range of functions, such as programme management, project governance, and the role of staff and stakeholders, were described.

3.10
A range of options were usually identified and assessed for a variety of indicators, such as ease of delivery, alignment to the business case objectives, potential cost savings, cost of implementation, and impact on benefits.

3.11
Though some were more detailed than others, the links between financial information and risks and opportunities were usually clear. The sections dealing with risk often included comments about a range of financial indicators, for instance operating surplus, net surplus, and net cash/debt position.

Clearly setting out risks

3.12
Risks were described clearly and most accounts were very comprehensive. We noted:

• the use of formal assessments and risk assessment standards;
• constraints and dependencies for the proposed programme of work were usually clearly stated;
• a range of negative scenarios were often considered; and
• risks to student numbers and expenditure were identified.

3.13
The business cases also assessed a range of risk scenarios – low-risk, medium-risk, and high-risk.

3.14
Overall, the business cases provided a comprehensive picture of the potential effect of risks and opportunities for the individual university or polytechnic.

Forecasting revenue

3.15
Revenue forecasts were generally comprehensive and detailed. Some forecasts were independently reviewed. Most included significant revenue forecasts, such as international student numbers and associated fees revenue.

3.16
The assumptions underlying the revenue projections were usually clearly stated and explained.

Forecasting domestic student numbers

3.17
Forecasts showed different levels of sophistication. For example, in one business case, projections were broken down by type of student enrolment, with projections given for each type's annual growth and cumulative growth. Graphs were supplemented with analysis of the projections, with descriptions about each of the types of enrolment also provided. As a whole, the projections in this business case were comprehensive and clearly explained.

3.18
Some business cases provided detailed breakdowns, for example, by region or department, and had comprehensive forecasts that took into consideration the effect of changes in gross domestic product and other macro-economic factors on new enrolments (with the associated effect on revenue). They also showed varying demand between colleges in the institution or enrolment programmes. Others included only a basic level of information.

3.19
Overall, although there were different levels of sophistication in the way business cases discussed domestic student numbers and forecasts, these type of discussions were included in all of the business cases we reviewed. However, we did not find an assessment of the potential effect on domestic student numbers of the investment decisions of other tertiary education institutions.

Forecasting international student numbers

3.20
As with the domestic student number forecasts, business cases demonstrated different levels of comprehensiveness in forecasting international student numbers. Twelve business cases included international student forecasts. The growth rates that they forecast varied.

3.21
In some business cases, strong links were drawn between the capital developments that were the subject of the business case and increasing the attractiveness of the institution to international students. In one business case, for example, strong links were drawn between new and improved buildings and specialised facilities, university rankings, the quality of university staff, and attracting international students.

3.22
However, we did not find an assessment of the potential effect on international student numbers resulting from the investment decisions of other tertiary education institutions.

3.23
Separate from our business case analysis, the Tertiary Education Commission told us that it was aware that the sum of providers' growth forecasts exceeded the projected growth in student numbers for both domestic and international students. This suggests that forecasting might be optimistic and not reflect the effect that competition from other providers could have (see Figure 2).

Using financial and service performance metrics to monitor progress

3.24
The business cases included metrics or indicators that the universities and polytechnics planned to use to monitor or evaluate the proposed development or initiative once it was in place. It was usually less clear how they would track the progress of the business case.

3.25
However, some universities and polytechnics made it clear how and what would be used to track progress. For example, in one business case, the institution's council would need to approve work continuing, based on progress updates.

Considering asset investment and management decisions throughout the sector

3.26
On the whole, the business cases we assessed did not consider the actions or plans of other tertiary education institutions and their potential effect on expected revenue. Most of the business cases focused on the individual university or polytechnic's asset investment decisions rather than take a wider view.

3.27
Two business cases were about merging operations to form a new entity. These cases promoted the combination of their resources for the benefit of the sector or provision of educational services to students throughout the tertiary sector. In these business cases, the institutions wanted to provide a better and more sustainable service than they could provide individually and to continue to provide services to largely rural and semi-rural regions.

3.28
Two of the 14 business cases included the asset investment decisions of other tertiary education institutions as part of their revenue forecasts (and one updated its institutional financial modelling as a result). In these business cases, the decisions of other tertiary education institutions were taken into account as an influence on the viability of the proposed investment.

3.29
We expected to see more of this sort of consideration – about how the investment and management decisions of other tertiary education institutions could affect the feasibility of the proposal, particularly the effect on student numbers and revenue.

3.30
The Treasury's guidance on preparing better business cases includes the need to discuss competition as one of a range of reasons for change as part of the strategic business case. The business cases tended to discuss the effect on revenue of changing student numbers as a result of changes in demography, school enrolments, gross domestic product, and shifts in demand between different faculties of the university or polytechnic. The effect of competition from other tertiary education institutions on student numbers was not usually considered.

Considering opportunities to use assets throughout the sector

3.31
The Treasury's guidance on better business cases also suggests consideration of strategic or less formal collaboration in procurement. Three of the business cases we assessed were about joint working, collaboration, and the creation of new ways of delivering tertiary education services.

3.32
One business case was a response to declining student numbers in a mainly rural region. Another was about two institutions working together to boost their individual effectiveness and better serve their shared regional catchment area. The third business case was about two institutions sharing resources and working together to create a centre of excellence for a specific programme of study.

3.33
We saw an instance where the local authority's strategy for tertiary education was noted, but the asset use or financial consequences of this strategy were not discussed in the business case.

Our concluding comments

3.34
Competition between tertiary education institutions for student enrolments might explain why we did not see business cases based on the better collective use of assets in the sector.

3.35
Some business cases, however, described plans for working with other tertiary education institutions and with businesses, schools, and the community to improve research outcomes, strategic alignment, and co-ordinate the provision of tertiary educational services.

3.36
Business cases often stated that investment was needed to enhance the attractiveness of the institution and that this would help attract or retain students. When the effect of investment by other institutions on student enrolments was considered, it influenced the financial assumptions in an institution's business case. In our view, more widespread analysis of the effect of investments by competing institutions would strengthen the forecast and other revenue assumptions in business cases.

3.37
The Tertiary Education Commission assesses the quality of the business cases it approves. The Commission applies a range of criteria, including the effect of the proposal on the sector. However, those criteria do not specifically include whether the proposal has taken into account the effect other tertiary education institutions might have on the proposed asset investment and management decisions.

3.38
The business cases we reviewed were mainly from 2013 and 2014. For 2015/16, the Tertiary Education Commission asked tertiary education institutions to "explore ways to increase efficiencies through shared services, infrastructure and other collaboration, such as partnerships". If they do so, we would expect to see business plans that consider how to make the most of tertiary education assets throughout the sector.

3.39
When we reviewed the more recent investment plans of the 11 universities and polytechnics, some were looking for opportunities to share or use assets with others to produce operational efficiencies. Compared with the business plans we assessed, this could indicate a shift toward using assets for the benefit of the sector.

Recommendation 1

We recommend that the Ministry of Education, the Tertiary Education Commission, and other education agencies work with tertiary education institutions to improve the use of, and investment in, tertiary education assets by improving business case guidance and assessment criteria to support tertiary education institutions in considering how their business cases and asset investment proposals are affected by the investment decisions of other tertiary education institutions.