Greedy universities demand immediate budget stimulus

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Facing a multi-billion dollar reduction in fees from the loss of international students, Australia’s universities are now putting their hands out for budget stimulus:

Universities and international education providers are holding out for more direct coronavirus support in the May budget…

International Education Australia chief executive Phil Honeywood said he would push for more support in the budget, which may include a second tranche of stimulus measures, to support his members.

“What we’re looking to is the federal budget for specific support for international education providers,” he said…

Group of Eight chief executive Vicki Thompson said the universities would continue to push for support in the coming weeks.

“We are suffering significant ­financial loss which will have an impact on the broader economy and will detract from GDP growth,” she said…

Education Minister Dan Tehan said on Thursday the wider university sector made a $1.8bn profit in 2018-19 and was well placed to ride out the economic downturn.

So, after getting fat on tuition fees from international students, which ballooned by $9.1 billion in the six years to 2019 (see next chart), the universities are now demanding a taxpayer bail-out.

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Professor Salvatore Babones explained in no uncertain terms why the universities’ special pleading should be rejected, arguing that ‘moral hazard’ is running amok:

…university Vice-Chancellors are in a class all their own.

What keeps them awake at night is the loss of Chinese student tuition revenue. At a time when the rest of the country is hunkering down, universities are preparing to airlift thousands of Chinese students to Australia the moment the travel ban is lifted. The University of Sydney has even prepared to evict students from their dormitory in order to reserve an entire apartment building for incoming Chinese students needing quarantine.

For these VCs, moral hazard is a bigger risk than the coronavirus. Moral hazard is the expectation that organisations (and their leaders) will reap the rewards of their successes while others will bear the burdens of their failures. It’s heads I win, tails you lose. And it’s reached epidemic proportions in our universities.

If our Chinese students come back and no one gets infected, the VCs will look like heroes for having stood up to the supposed racism of those who wanted the travel bans maintained. But if the universities unleash chains of infection on their students and the wider community, the hospitals and health system will bear the burdens (both human and financial) of managing the outbreak. That’s moral hazard.

Even worse, several VCs are encouraging their students to enter Australia via the back channel of two weeks spent in a ‘third country’ like Thailand, Malaysia, or Dubai. If these students dodge the virus bullet, universities win. If any of them get sick while in transit, then they will be stranded in developing countries, far away from loved ones, perhaps without access to healthcare. Heads the VCs win; tails the students lose.

Professor Babones also righly argues that universities should have saved some of their international student fee bounty in preparation for a downturn:

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Chinese enrolments at Australia’s higher education institutions have risen six-fold since 2002, without a corresponding increase in risk preparedness…

Notwithstanding the reckless past behavior of Australian education services exporters and the threat of moral hazard arising from a potential government bailout, it is likely that universities and other educational institutions will lobby the government to make good their losses on the argument that the government gratuitously imposed a ban on travel from China…

In order to avoid rewarding irresponsible behaviour, it is important that any government assistance offered in response to the coronavirus epidemic not include unconditional grants to make up for revenue shortfalls…

Universities should, in the first instance, be expected to meet coronavirus-induced revenue shortfalls out of their contingency reserves. In cases where these prove insufficient, universities should be expected to turn to financial markets to make up the shortfall. Credit ratings agencies are reportedly confident of their ability to do so.37 If the government does decide to provide financial assistance to universities affected by the coronavirus epidemic, it should do so by offering
short-term loans to augment universities’ reserves at penalty rates of interest.

Too right. Australia’s universities privatised the gains from international students. They must not be allowed to socialise the losses on taxpayers.

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.