Auditor-General's overview

Tertiary education is important to New Zealanders' personal development and economic well-being. Young people, their whānau, adults looking to retrain or learn a new skill, and employers all rely on the quality and stability of tertiary education providers. Tertiary education is also important to New Zealand's economy and is a significant area of public expenditure, with about $3 billion each year invested in about 650 tertiary training providers.

This report sets out our observations from our audits of the 27 public tertiary education institutions (TEIs). They consist of eight universities, 16 institutes of technology and polytechnics (ITPs), and three wānanga. There were 405,000 people, including 56,000 international students, enrolled at these institutions in 2017.

Main findings

All TEIs are operating in an increasingly challenging environment.

Domestic student enrolments rise and fall relative to unemployment rates – enrolments go down when unemployment rates go down. About 7000 fewer full-time domestic students enrolled at TEIs in 2017 compared to 2016. The Tertiary Education Commission's analysis shows the number of domestic students enrolling at TEIs has fallen by a third in the last 10 years.

The demographics and number of international students are changing, and there is increased domestic and global competition for international students. The Government also expects that its 2018 changes to post-study work visa entitlements might mean fewer international students applying to study some diploma or certificate-level courses in New Zealand.

The operating environment affected each type of TEI differently

Universities and wānanga were, for the most part, financially stable in 2017. The universities' combined surplus in 2017 increased by $18 million to $188 million. Although demand from domestic students dropped by 1.1% overall, the number of full-time international students enrolled increased by an average of 6.9%. Only one university had fewer international students in 2017 than in 2016.

Not all ITPs are experiencing financial difficulties. However, the effect of the changes in student numbers have been more strongly felt by ITPs. Demand from domestic students dropped by 8.1% overall, and 10 of the 16 ITPs had fewer international students in 2017 than they had in 2016.

As a result, just seven ITPs broke even or better, down from 11 in 2016. The remaining nine recorded a combined deficit of $71 million.

For some time, ITPs have relied on increases in revenue from international students to offset the costs of running the ITPs and to provide new facilities. However, that reliance brought risks of dependency on students from some countries. The decline in students from those countries, coupled with falling domestic enrolments, has meant that some ITPs were no longer able to cover their expenses. The Crown has had to provide support to these ITPs – sometimes with little warning.

My views

All TEIs are operating in a changing student and policy environment. However, the operating environment for ITPs in particular is challenging, and concerns about the viability of any institution is likely to adversely affect its student population.

The quality of governance and robust financial management are always important but, in the current environment, both need to be exemplary. In particular, I expect ITP councils to focus particular attention on four aspects – the robustness of financial forecasts, the quality of significant business cases for investment in capital assets, strong governance oversight of financial controls and management, and transparent non-financial performance reporting.

Financial forecasts

Student numbers are a critical element of ITP forecasts. My staff noted that some ITPs were optimistic when forecasting the likely number of student enrolments; for example, projecting increases that were not in keeping with previous trends.

Councils need to be aware of this optimism bias and the risks it carries. Some ITPs have been slow to reflect foreseeable changes in demand, such as the cyclical nature of the domestic economy and changing patterns of demand for international education.

Councils should be ensuring they get good quality financial forecasts that include well-evidenced trend and risk analysis at the local, regional, national, and international level. Scenario planning and sensitivity analysis are important aspects of that forecasting.

Business cases to support investment in capital assets

Many ITPs have embarked on capital programmes to build or upgrade facilities. These are long-term investments that carry both opportunity and risk for an institution. ITPs often measured the affordability of these programmes based on increasing student numbers, particularly international students.

We analysed business cases for our 2017 report Investing in tertiary education assets. Our analysis showed that the planning assumptions about expected student numbers were not robust, because they failed to take account of the national and global competitive environment for students.

We also saw a lack of "whole-of-sector" thinking for investment decisions more broadly. For example, many ITPs develop their own course content, despite similar courses running elsewhere. There are also multiple information technology systems for managing student enrolments, information and services, and payroll and financial management.

Some TEIs told us that the competitive funding model and regulatory environment made it unlikely that they would work with others. By 2017, few had done so and that continues to be the case.

I encourage councils to thoroughly test investment business cases, especially the financial assumptions underlying the recommended options. Further, because of mounting financial pressures, I encourage ITPs to work together where capital investment is required and it makes good sense to do so.

Strong governance oversight of financial controls

Councils need to be satisfied that financial management controls, including budget monitoring, are working well. Twelve ITPs did not achieve their budgets for 2017.

Of the seven ITPs that returned a financial surplus in 2017, just two met or exceeded the Tertiary Education Commission's low-risk threshold for financial return relative to revenue.

The main reason for budget shortfalls was ITPs not achieving their forecast student numbers. When those enrolments fell short of targets, the ITPs affected did not receive as much funding as planned, but had already committed to costs based on the expected number of student enrolments.

Some ITPs have not been quick to adjust their spending in line with falling income, spending more than planned on expenses at the same time that revenue was decreasing. This has eroded the financial "headroom" ITPs need to be able to invest in meeting the changing expectations of students and employers.

Non-financial reporting

As public organisations, TEIs are accountable for their performance as well as the money they spend. Consequently, TEIs are required to prepare a statement of service performance for their annual reports. A statement of service performance should set out what the TEI expected to achieve, and its actual performance.

Most TEIs' performance reporting gives a reasonable account of their academic results. However, most reported only on the Investment Plan measures (or a sub-set of them) aligned to the funding they receive from the Tertiary Education Commission. Not many of the TEIs have a robust set of measures for their wider strategic goals and objectives. For example, one TEI has an objective to enhance stakeholder relationships, but its measure is to hold two meetings a year.

A few TEIs are also failing to properly highlight significant performance results in their annual reporting. For example, my auditors found discrepancies between the sentiments expressed in the foreword of an annual report and the actual results in the statement of service performance. Often, limited or no explanation was given for a variance from what was expected. In my view, TEIs need to report more transparently when results do not meet targets.

Recent changes to the Education Act 1989 means that the TEIs' 2019 statements of service performance need to comply with generally accepted accounting practice (GAAP). GAAP aims to improve the consistency and transparency of reporting.

If some TEIs do not improve the content of their statements of service performance in keeping with GAAP, they risk receiving a qualified audit opinion.

In our experience, changes in reporting requirements like this take time to settle in and need the commitment of senior management. Councils should consider asking their chief executives to report on the state of readiness for the new requirements. I have asked my auditors to assess the TEIs' 2018 annual reports against GAAP on a "dry-run" basis, to help in identifying any improvements needed. I encourage TEIs to start their own improvement plan now, so that they are better placed to meet the new requirements in 2019.

Possible changes to the organisation of institutes of technology and polytechnics

The Government has asked the Tertiary Education Commission to look at possible changes for ITPs. The ITP Roadmap 2020 project is considering reshaping the ITP sector. The project aims are to improve sustainability while preserving the strengths of ITPs and regional access to tertiary education. The Minister of Education expects to report to Cabinet on alternatives by the end of 2018.

We will continue to provide assurance on TEIs' financial statements and performance reporting, alert council members to risks where we see them, and recommend improvements where they are needed.

John Ryan
Controller and Auditor-General

21 November 2018