Australian Universities Reimagining the higher education sector – Making collective investments to create new income streams and assets

November 2020

PwC | Reimagining the higher education sector 1 Contents

1 Overview 3

Why collective investments in new assets and businesses is 5 2 important for universities

Collective investments in practice – AARNet is a case study 8 3 example

4 Conclusion 12

5 Contact 14

PwC | Reimagining the higher education sector 2 Overview

Australia’s higher education The risk posed to university The ability for the higher providers have implemented rapid finances from the loss of education sector to diversify is responses to mitigate the impacts revenue from foreign students, underpinned by the need to build of the COVID-19 pandemic. With is not new. Credit Ratings and a broader base of revenues and the borders sealed to all inbound auditors-general of several state opportunities. Typically, focus travelers except Australian governments, have made similar has been placed on traditional citizens, residents, and family assessments over recent years. diversification opportunities members the sector is estimated such as the sourcing of non- to lose A$4 billion in revenue from With COVID-19 exposing the traditional students, offering international students putting dependencies of both the short courses, executive training, more than 21,000 jobs at risk over higher education sector and the IP commercialisation and other next six months.1 These losses do wider Australian economy to auxiliary revenues. However, not include the wider economic international education, there is COVID-19 provides an exciting contributions delivered each year expected to be greater pressure opportunity for higher education from the international education on Australian universities to to diversify through the pursuit sector which is estimated diversify to reduce their reliance of joint investments and sharing to contribute $32.4bn to the on income generated from infrastructure. economy and is Australia’s third international students to ensure largest export.2 long term financial sustainability. Risks associated with the large amount of revenue derived from international students is being managed by the higher education sector with prudent financial and risk management.

1 Universities Australia, ‘Uni Viability Crucial to Economic Recovery’ (2020) (Link) 2 AFR, ‘Australia is ‘too reliant’ on a handful of countries for education exports: Labor’ (2019) (Link)

PwC | Reimagining the higher education sector 3 Collaborative investments This paper aims to discuss are capable of achieving the how collective pursuit by the mission and core focus of universities to diversify can Australian universities including yield new assets and business the enhancement of education opportunities that will contribute and research endeavours to to the long term financial service the communities in which sustainability and global they operate. As a byproduct, competitiveness of the sector as outcomes of these investments a whole. can include the creation of new income streams and infrastructure assets that can be capitalised across the sector. To achieve these outcomes, these opportunities will require:

• A collective pursuit and joint investment by higher education institutions in collaboration with both State and Federal Governments • Collaboration with business and private sector capital

PwC | Reimagining the higher education sector 4 Why collective investments in new assets and businesses is important for universities

With education and research term cash flow availability and students. Even before COVID-19, being an important cornerstone capital expenditure strategies. many universities offered of the Australian and global The reductions to balance distance learning for a range society, the financial strength sheet capacity and increasing of subjects, however students and sustainability of universities pressure on future operating generally prefer on-campus is increasingly important. With and capital funding budgets study and the benefits it provides the sudden reduction in foreign will place increased strain on in terms of social interaction, students and loss of revenues universities ability to fund future networking and culture. The caused by COVID-19, universities infrastructure. With reductions to traditional face-to-face teaching have shown that operationally financial resources, universities model will remain Australian they can respond effectively will need to increasingly look universities’ core offering, by moving classes online to towards new funding models that complemented perhaps by a adhere to social distancing rules, allow for joint investments and wider role for blended learning. adjusting admission policies to sharing of infrastructure. accommodate disruptions to high school exams, suspending While distance learning academic conferences and travel. has become the norm, it is In making these well thought unlikely that the crisis alters through operational responses, the fundamental appeal of on- strain has been placed on longer campus to both domestic and international

PwC | Reimagining the higher education sector 5 Historical approaches towards diversification in the context of the higher education sector have traditionally focused on alternative revenue generation activities through core education and research businesses including:

Securing non-traditional students through new course offerings 1 (executive education, foundation courses etc).

Commercialisation of Intellectual Property (consulting, 2 licencing, patents).

Utilisation of existing assets or property to generate 3 commercial income (student accommodation, retail and commercial income).

Creating ancillary income such as merchandising and 4 advertising.

Building endowments and investment portfolios through 5 capital management and philanthropy.

Although many universities across Australia and the globe have successfully maximised the revenues through traditional diversification strategies, most initiatives are still inherently linked back to the core demand for participation in higher education. Therefore, while providing a wider pool of revenues within its core business they are constrained in their ability to manage risks from international economic shocks and or structural industry changes.

PwC | Reimagining the higher education sector 6 This paper sets out how universities can grow new businesses and assets outside of their core education and research activities through pursuing joint investment opportunities that enable the sharing of infrastructure or utilising collective strengths which bridge market gaps and benefit the sector as a whole. These initiatives are in addition to traditional diversification strategies however leverage the collective strengths of the sector. These strengths include:

Australian universities are partly a product of the communities in which they operate and have deep ties not only to their current workforce and students but to a vast network of local and international alumni, suppliers and other customers. As an example, in 2018 the higher education sector had: • A national workforce of approximately 120,000 employees.3 A vast network • A total student population of 1.6m full time and part time students each year.4 of national and global The collective size and scale of the Australian higher education sector workforce and student stakeholders population provide reach across a diverse range of consumer sectors including food, hospitality and leisure, communications, banking, insurance, health and utilities.

If considered as a combined enterprise, Australian universities have significant financial capacity and in 2018 had:5 • Total annual revenue of $33.7bn per annum. Strong financial • Cash and investments of approximately $20.3bn. capacity • Total Net assets of $59.1bn.

Through leveraging the combined financial capacity the sector can create new assets and investment platforms with limited risk. Further, flexibility can be obtained through considering subsets of universities, for example a joint investment drawing on 3 to 4 universities across Australia who collectively draw upon $6bn of revenue.

Australian universities purchase considerable amounts of goods and services from the private sector each year and are a significant consumer within the Australian economy. For example as Australian universities spent $23.9bn in capital expenditure over the period 2013 to 2018.6 Other examples that demonstrate the significant scale of expenditure by the higher education sector include: Significant • $667m on utilities each year. purchasing • $715m in maintenance expenditure. power • $6.2bn on other goods and services.

The collective size and scale of the expenditure provide opportunities to leverage the combined purchasing power to create new businesses or investment vehicles.

Australian universities each have unique identity and specialist capabilities making previous attempts at partnerships or mergers complicated with the costs and benefits failing to provide a compelling case for change. There are many alternative options that could yield substantial benefits while ensuring that each university maintains their separate identity and specialist Similar capability, including: operating • Shared Infrastructure including collocation of teaching and research space structure • Shared Services including payroll, accounts payable, accounts receivable and Financial Services so that departments can focus on their core business operations. • Pursuing variations in strategic procurement capabilities, including whole of sector purchasing arrangements which are currency in place.

3 Department of Education, Skills and Employment, ‘2018 Staff Data’ 4 Department of Education, Skills and Employment, ‘2018 Student Data’ 5 Figures determined through consolidating Finance Publications from the Department of Education, Skills and Employment between 2013-2018. 6 Figures determined through consolidating Finance Publications from the Department of Education, Skills and Employment between 2013-2018.

PwC | Reimagining the higher education sector 7 Collective investments in practice – AARNet is a case study example

1963 – 1989 1989 1990 Development of AARNet established Backbone network from internet connection by AVCC Brisbane to Perth established in Australia (CSIRONET) by CSIRO

1999 1995 2000 AARNet becomes an independent 1997 AARNet1 network AARNet granted company with its member universities AARNet2 network sold to carrier license and CSIRO as shareholders established

2003 2006 2008 2001 Southern Cross Cable AARNet3 network Perth to Singapore Trans-oceanic contract signed, connecting established connection upgraded network developed Australia to the US to Canada

2020 Continued 2013 2019 expansion of AARNet4 network Indigo Project ( to network established Singapore) complete

Using the collective strength of the higher education sector to create new assets and businesses is not a new concept. A case study example is AARNet, a world class infrastructure asset created in 1989 through a collective investment across 38 Australian universities backed by Federal Government support.

PwC | Reimagining the higher education sector 8 What is AARNet? How has AARNet assisted the higher education sector The AARNet network is an respond to COVID-19? advanced infrastructure network serving Australian research and AARNet has played a key role in education institutions. Its ICT assisting Australian universities capabilities connect researchers, transition towards online course faculty, staff and students to delivery platforms throughout the commercial internet both COVID-19. Without a dedicated nationally and globally. The service provider such as AARNet, high-capacity network spans higher education institutions across metropolitan and regional would need to rely on third party Australia, with geographically commercial internet service diverse Network Access Point providers who lack dedicated sites in all Australian capital cities, resources to support the data Singapore (Indigo cable) and requirements of teaching and North America. research institutions. AARNet’s optical fibre network AARNet has also facilitated caters for high capacity advanced open-source data sharing research and community between research institutions. education through providing a This has enabled cross-border variety of network resources collaboration, contributing to from 10 to 100 gigabit per the global response effort to the second (Gbps) links. In addition pandemic. to this, AARNet’s business also involves the provision of bespoke collaboration services as well as enterprise IT services such as Zoom, Dropbox, Google Cloud and Amazon Web Services. How was AARNet created? In 1989, the University of built the network to distribute international internet feed to Australian CSIRO facilities and the Australian National University in . Over the next 30 years, AARNet has developed into its own independent company with international capacity and as a licensed telecommunications carrier.

PwC | Reimagining the higher education sector 9 How is AARNet funded? What benefits does AARNet provide the sector as a whole? Funding for AARNet is primarily derived from its shareholder AARNet has effectively removed membership costs - 38 Australian the higher education sector’s universities and the CSIRO which reliance on legacy commercial are beneficiaries of its services. In and residential networks. By FY19, membership subscriptions upgrading teaching and research amount to AUD$40m.7 In addition capabilities, Australian universities to standardised membership have been able to increase its fees, non-member entities are competitiveness and become able to use the AARNet network recognised globally. in return for a subscription fee. Surplus income that is generated Key benefits include: through its operations cannot • Specialist sharing of be distributed to its members, educational curriculums and and is retained within the entity research between institutions to fund network expansions and to enhance knowledge, development. AARNet is not academic co-development and reliant on government funding accelerated learning for its operations and therefore • Fast-tracking research projects operates as an independent, and computing experiments non-profit organisation.8 However, through collaborating with there is a portion of infrastructure international teams on data that has been funded via transferring, distribution and Commonwealth investments, processing such as the National Research Network Program and the • Facilitating greater network Education Investment Fund which connectivity between major have facilitated its funding for cities and regional hubs, specific projects.9 particularly between essential social infrastructures such as hospitals and research facilities • Driving digital transformation through educating students and providing resources to expand knowledge and experiential learning

Looking forward, the expansion

of the network will deliver faster

and more efficient connectivity

between Australia and other

nations, enabling international

research findings to be accessed in Australia and developed into solutions that service the community directly.

7 AARNet, ‘Annual Report 2019’’ 8 AARNet, ‘20 Years of the Internet in Australia’ 9 AARNet, ‘Financial Report 2012’

PwC | Reimagining the higher education sector 10 How will AARNet continue to and reputability. The Indigo transform the research and Project, a 9,000km subsea cable education sectors? connecting Singapore to Australia was executed by a consortium AARNet established a strategic of AARNet, Google, Indosat, plan for 2018 - 2022 balancing Singtel, SubPartners and Telstra. the interests of the Australian The project was delivered in late research and education 2019 and has been utilised to network, the community, transfer big data internationally AARNet customers, and the to assist in large international business’ financial position and research collaborations. Following organisational optimisation.10 its completion in 2019, AARNet Its objectives are: entered into a joint build for a • Develop a data-sharing cable system between Japan, ecosystem that is facilitated by Guam and Australia with RTI a global network. Connectivity and Google.11 • Deliver innovative and secure This project is anticipated to be network infrastructure that available in 2020. meets the collaboration and What are the learnings from connectivity requirements of AARNet that can be applied by the research and education higher education when creating sector. new assets? • Encourage the growth of The success of AARNet is innovation and research to attributed to the collaboration improve communities. between the higher education • Ensure investment into sector and the Federal government infrastructure are financially using their shared objectives and sustainable and contribute financial strength to: to the diversity of the infrastructure that is owned by • Create a world class AARNet. infrastructure asset that will not only provide financial To achieve this, AARNet regularly savings but also elevate the participates in large-scale competitiveness of Australian infrastructure projects. This universities at the international includes collaborations with level. the private sector to develop its telecommunications capabilities

10 AARNet, ‘Annual Report 2019’; AARNet, ‘2018-2022 Strategic Plan’ 11 AARNet, ‘Construction Begins on the Japan-Guam-Australia Cable System’ PwC | Reimagining the higher education sector 11 Conclusion

Events such as COVID-19 provide an opportunity for the higher education sector to innovate and transform the way they operate. While the mission and core focus of our Australian universities will always be focused on delivery of education and research to service the communities in which they operate, the creation of new income streams and assets that transform a traditional university balance sheet will require:

• A collective pursuit and joint investment by higher education institutions in collaboration with both State and Federal Governments. • Collaboration with business and private sector capital.

The vision to create AARNet in 1989, which is widely regarded as the founder of the Internet in Australia, provides evidence that through collective investment and alliances the higher education sector can create new assets and income streams that will benefit the sector as a whole. Through gaining support from State and Federal Governments and allocating capital towards the collective investment opportunities, there will be more and more opportunities, like AARNet, that can be formed to create new assets and income streams that removes the reliance of the sector on international students and ensure long term financial sustainability and global competitiveness of the sector as a whole. Implementing co-investment strategies must not be a short term pursuit but one that becomes an integral part of the higher education sector culture and sponsorship and allocation of resources by the State and Federal Government will ensure success over the long term.

PwC | Reimagining the higher education sector 12 The State and Federal Government can play an integral role in facilitating the Higher Education sector’s pursuit of diversification strategies. Initiatives that could be implemented include: • Incentives for Universities to undertake asset capital recycling initiatives. Obtain sponsorship • Matching financial contributions made by Universities towards co-investment platforms. from both State • Changes to legal and regulatory frameworks that restrict the higher education sector from and Federal pursuing diversification strategies, including removing restrictive covenants on University Governments land to facilitate a wider range of commercial uses.

The establishment of a dedicated co-investment platform will provide the most appropriate framework for the higher education to source and secure new co-investment opportunities through: • establishing a separate vehicle to source capital and secure assets. Create a co- investment platform • raise the market profile to attract and originate new opportunities. for the pursuit of • establish governance, reporting and investment committee approval processes. new opportunities • dedicated specialist resources who have their performance linked to investment outcomes.

Collaboration with the private sector will provide opportunities for the co-investment platform to secure and grow investments in assets, businesses or property. This results in outcomes such as university precincts and shared infrastructure assets that deliver quality education and research within Australia and globally. Source and create Furthermore, co-investment alongside private sector capital will ensure objectives are new assets, aligned, risks are managed and investments are set up for long term success. business and investments in collaboration with the private sector

PwC | Reimagining the higher education sector 13 Contact

Adam Graham Chris Matthews Managing Director Partner Infrastructure Lead Advisory Education and Skills E: [email protected] E: [email protected] T: +61 (2) 8266 7648 T: +61 (3) 8603 2013

Patty Huang Gill Cashion Consultant Director Infrastructure Lead Advisory Education Consulting E: [email protected] E: [email protected] T: +61 466 392 960 T: +61 428 284 915

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