Tertiary education: crisis and opportunity

The COVID-19 pandemic is disrupting and changing the tertiary education sector, with international students barred from most countries, but with the potential for increasing domestic demand and an opportunity to pivot to distance learning models. We discuss the challenges and opportunities currently facing tertiary education organisations (TEOs) and what they can be doing now.

Crisis: loss of international students and funding reallocations

The Ministry of Education reported 110,000 international student enrolments in 2019, 40,000 of which enrolled with private tertiary education facilities (PTEs).

Number of international fee-paying students

McGrathNicol_Image-Number of international fee-paying students

Source: Ministry of Education. Export education levy: Full-year statistics 2019.

International student numbers were already in decline, in particular at PTEs, following the historical crack down on fraudulent student visas. Now COVID-19 border restrictions have completely halted international student travel. With the pandemic escalating worldwide, restrictions are unlikely to be eased until 2022 due to the time required for vaccine manufacture and delivery.

We have also not yet seen the full economic impact of lost international students on TEOs, as students who arrived in January and February 2020 for full-year courses were allowed to stay. The greater impact will therefore be felt in 2021.

Compounding this issue is the Tertiary Education Commission’s (TEC’s) plans to reduce funding for tourism, hospitality and retail courses as these sectors contract due to the pandemic. Funding cuts will affect certificate and diploma level courses (levels 1-6), primarily impacting PTEs. The impact has already been seen with the closure of Auckland Hotel & Chefs Training School on 26 June 2020.

Finally, if domestic enrolments were impacted negatively by COVID-19 disruption this year, then TEOs may find themselves having underutilised EFTS (equivalent full-time students) with a repayment for over-funding due to the TEC in January 2021.

Opportunity: a domestic focus and the potential for international growth

Although there are clearly a number of challenges facing TEOs in the wake of COVID-19, there are also a number of domestic (and in the future, international) opportunities.

There is a close correlation between unemployment and education participation, as shown in the chart below. With the recent increase in unemployment, domestic education participation is expected to increase, especially as redundancies to date have disproportionately affected the young (in tourism, hospitality and retail), who are more likely to pursue further study as an alternative to employment.

Unemployment versus domestic education participation

McGrathNicol_Image-Unemployment versus domestic education participation

Source: TEC participation rates. Statistics NZ unemployment rate.

In addition, although the TEC has reduced funding to some areas, the 2020 budget, in response to the COVID-19 pandemic, allocated significant investment to education in the form of a $1.6 billion trades and apprenticeships package. PTEs that provide local trades courses to domestic students are set to reap the benefit of this.

In relation to international students, feedback from TEOs we have talked with indicate a 50% increase in international student enquiries, as students abroad look for safe countries to study in. If the Government can find a way to ease border restrictions for foreign students, this could have a significant impact on the profitability of the sector and contribution to the New Zealand economy. However, if borders only open when the world is vaccinated, then our point of difference as a safe haven may be lost.

What TEOs (and in particular PTEs) can be doing now

PTEs faced with international student and reduced funding challenges will be forced to adapt to the changing education landscape through the following actions:

Develop courses targeted at domestic students with education outcomes aligned to TEC funding. In particular, youth guarantee (YG) funding may be increased as youth are disproportionately impacted by increasing unemployment.

Develop online and distance learning facilities to manage through any future lockdowns and also potentially continue to serve international students remotely.

With the majority of PTE costs made up of salaries and rent, restructuring and rent negotiations may need to be considered. In more severe circumstances, a Creditor Compromise or Deed of Company Arrangement may be necessary to restructure liabilities.

Finally, it may be necessary to sell the business (leaving behind unwanted liabilities), with buyers still out there for the right PTE assets.

It is clear 2021 will be a challenging year for TEOs and in particular PTEs. Adapting early and using the tools available will improve the chances of survival and enable companies to capitalise on future opportunities.

AUTHORED BY

Kare Johnstone

Kare Johnstone
Partner, Auckland
T: +64 9 926 5125
E: kjohnstone

Martin Badenhorst

Martin Badenhorst
Manager, Auckland
T: +64 9 926 5117
E: mbadenhorst