Moody’s Warns of ‘Negative Impact’ on Universities After $2.2bn Funding Cut

Higher education institutions will have to review growth plans and sector’s credit profile could take a hit, ratings agency says.

Ratings agency Moody’s says the federal government’s $2.2bn cut to higher education will force universities to review growth plans and could have a “negative impact” on the sector’s credit profile.

In a report to investors, Moody’s said the government’s decision to effectively end the demand-driven university funding system by freezing the commonwealth grant scheme in its mid-year budget update would lead to increased “execution risk” for university budgets.

“Whilst manageable within existing cash flow operating margins, less established universities and those currently experiencing higher growth rates will be most affected by the changes,” the report stated.

That’s because small universities have “limited access to diversify revenue sources and have limited capacity to raise additional funds through donations” and less capacity to recruit international students.

But the report also pointed to increased “revenue volatility” for established universities because of the likelihood of increased reliance on income from international students.

“Managing international student load growth will fundamentally change the underlying credit profiles across Australia’s higher education sector,” it said.

“Whilst a structural shift toward higher international student loads will boost operating margins, experience has shown that international student enrolments introduces more volatility.”

The government announced in December that it would freeze the grant scheme at 2017 levels for the next two years before introducing a performance-based funding mechanism, part of an attempt to address attrition rates and improve graduate outcomes.

The education minister, Simon Birmingham, has also argued that the funding increase to universities since the introduction of demand-driven funding means the sector has enjoyed “huge growth in university revenues and finances”.

Universities Australia – which has lobbied against the government’s decision – seized on the report. Acting chief executive Catriona Jackson said the ratings agency was “simply stating the facts”.

“Moody’s makes it crystal clear. The funding freeze imposed by the government is risking the financial health and sustainability of Australian universities and that hits students and the national economy,” she said.