Drawing a link between 457 Visas and Space Use: Economics

I recently sat and listened to KPMG’s Chief Economist discussing the “State of the Nation” in terms of Trump’s new tax cuts and the impact it will have on the Australian Economy. To listen to him, all will be rosy for the next 4 years or so and then over the next decade the impact on Australian GDP will take a downturn to the tune of 0.3% - very minor he says. This impact will be felt in increasing interest rates, lower wage growth, higher imports (costs), lower export rates, lower balance of trade and lower consumer confidence.

Australian GDP growth has been trending down for over forty yearsSource: Trading Economics, ABS

I also watched the federal treasurer, Scott Morrison – in November 2017, proudly proclaim that Australia was in “surprisingly good shape”. - These guys must have gone to the same economics school!

Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970.

I was pretty shocked at the complacency of Morrison and KPMG’s economist, because after twenty six years of economic expansion, the country has very little to show for it.

For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour………..China. Thirty percent of our “eggs” have been sitting in one basket and we have been resting on our laurels.

With GDP in decline - and forecast to remain to remain so with the advent of technology replacing some jobs, rising oil prices (30% over the next two years) and sluggish wage growth, the Federal Government has just served up a triple whammy for the Higher Education Sector.

Recent changes by the Federal Government abolishing the 457 Visa which allowed international students a path to Permanent Residency via a transition stage has just seen a 50% drop. This is (was) a key money-making machine for the sector, and the trend appears to be a year on year statistic – not one off. According to Universities Australia, International Students account for about 28% of enrolments. Simplistically, this 50% reduction in transitions translates into a 14% reduction in direct funding…….and because the carrot of permanent residency is no longer there, the flow on impacts the economy in areas such as ICT, construction industries, etc. Scott Morrison & Co (including KMPG’s economist have not taken this into account in their rosy outlook of Australia’s future.

The Education Sector is the “central pillar” of our “five pillar” economy. Depending on who you talk to, it is our third or fourth largest export generator. International Education generated $20.3 billion for Australia in 2016 [1] and bought in 132,000 students from over 130 countries. The flow-on impact to economy of students who convert to Permanent Residency over their life time (impact on GDP Growth) cannot be understated. Yet, the Government, in its wisdom has decided to cut its own revenue stream by 50% (year on year, I might add).

Additionally, the Government has defunded the University Sector by “granting” it a 2.5% “efficiency” dividend – which in essence is an across the board funding cut of about $2.8 billion across the Sector. This translates into about a $682 million cut per University. Course won’t be cut. Student Services will be slightly impacted. Executive bonuses hardly touched at all. You can guarantee the lion’s share of cuts will have to be ponied up by Property and Facilities. I suspect Regional Universities will suffer more that Metropolitan Unis.

And this brings up another whammy for Institutions.

With declining International Students, there will be a natural (yet delayed) reduction in enrolment in local applicants. With Local Students now having to pay a higher proportion of their cost of study (up to 46%), an increase in course fees (7.5%) and repayment threshold reduced (down to $42,000 by 2021, other “education” opportunities are looking more appealing. Thus, Universities need to become more creative for funding as they can no longer rely on student fees as a major funding source.

After a couple of decades or so of ever increasing space restrictions in the sector and the need for clever space utilisation techniques, I think we are on the threshold of a space glut – an excess of space like we have never seen. A COO of a major Sydney University once told me that there were four things that kept him up at night – wasted space, wasted cost, wasted energy and wasted time. Wasted space is the driver of all of his nightmares!

This is not a one-year problem for the sector. The impact on space requirement could be as little as 10% (per year) to as much as 15% (per year) depending on diversity of courses. It’s not going to happen over night – more like the frog in hot water – you won’t see it coming unless you are planning for it. Assuming a minimum of 10% (and this being cumulative for the foreseeable future), Campuses will be faced with excess space (or wasted space, cost and energy) of 24% over 10 years – a significant nightmare.

This is not a one-year problem. Assuming a diversity of courses studied by International Students, the impact on space requirements could be as little as 10% to as much as 15%. Assuming a minimum of 10%, and this being a cumulative issue for the foreseeable future, Campuses will be faced with cumulative space loss of 24% over ten years – a significant waste of resources.

Even as space is decanted from the portfolio, one must still ensure it is maintained to optimal standards to ensure its lifecycle potential and OH&S requirements, etc.

Expect the best, plan for the worst, prepare to be surprised.

Interested to hear thoughts from fellow FM Leaders in the sector

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