Our universities must rethink their broken business model or risk failure

Overdependence on anything is risky, and it's clear that the COVID-19 crisis has turned this risk into an immediate threat to the viability of some universities. The tertiary chickens have come home to roost.

In late 2019 there were 212,264 Chinese on student visas at all levels of education in Australia. Here is a remarkable contrast: at the same time there were 104 students from Timor-Leste. That's after 20 years of co-operation and development assistance, along with $2.44 billion in military stabilisation and peacekeeping operations.

Similarly, after many years of assistance to Afghanistan, which saw 41 Australian soldiers killed and 261 wounded and $8.47 billion spent on military operations, a mere 29 Afghan students studied here last year. One can only conclude that despite the effort and expenditure, what we are doing with those two countries is not translating into deep, enduring person-to-person connections.

Back to Chinese international students. After years of increasing revenues from skyrocketing international student enrolments, the vice-chancellors of Australia's leading universities get paid obscenely high salaries, like the CEOs of large private corporations. Unlike the CEOs of large private corporations, whose shareholders expect them to manage risk and not just blindly pursue low-hanging opportunity, the vice-chancellors don't appear to have had a viable strategy to manage the risks inherent in a business model that is excessively dependent on overseas students especially from the PRC.

Before the COVID-19 crisis, nearly one quarter of the higher education sector's revenues and students came from overseas - 37.3 per cent from the PRC. Some leading universities were drawing around 70 per cent of their international student revenue from the PRC. In late 2019 there 164,730 Chinese student enrolments in the higher education sector. These enrolments were concentrated in coursework master's degrees in management and commerce.

There have, of course, been warnings about this situation. Last year the Centre for Independent Studies' Salvatore Babones argued that Australian universities had reached "China max" and were massively exposed to risk.

The declining quality of education resulted in an imbalance between the high cost of studying in Australia and the arguably low quality of teaching and learning making Australian universities less attractive.

Macroeconomic factors such as slowing Chinese growth, currency controls and exchange variations proved to be a greater risk. To this we can add a political risk of the Chinese Communist Party using student numbers as another source of economic vulnerability through which to demand Australian political acquiescence to CCP priorities.

Unlike American universities, whose finances are less exposed to the foreign student, market Australian universities failed to protect themselves in case of a catastrophic fall in overseas student enrolments.

In Babones' assessment, the risk presented a moral hazard. That is, the universities' pursuit of international student dollars presented them with substantial benefits, but if the business model failed it would be the Australian government and taxpayers who would have to bail the universities out.

One could argue that this is a microcosm of a broader unfettered Australian pursuit of Chinese money and the view that sees it only upsides, with no impact on our sovereignty, resilience, or freedom of action.

With the COVID-19 crisis, these risks have been realised. The university sector could lose up to $6 billion in revenue, with some individual universities losing up to half a billion each. The Canberra Times has reported the Australia National University is expecting a $225 million financial hit this year, with similar cuts in revenue in coming years. No doubt the brunt will be borne by casualised staff. But the impact on education for Australian students and on research (which has benefited from the universities' increased foreign revenue) is not clear. Will the Australian public have to bail universities out and suffer the moral hazard created by the universities themselves?

But even if things soon could return to the "normal" of Australian universities' highly abnormal dependence on revenue from PRC students, would we want them to? There is an alternative.

The universities' current embarrassment presents an opportunity for an ambitious plan that will wean the universities off their dependence on PRC income while developing our other neighbours and strengthening our relationship with them.

The shape of a plan to cut our university sector's dependence on China could look like this: in return for the universities reducing their PRC student numbers by 100,000, the Australian government would fund every year 100,000 students from south-east Asia and the Pacific, where we should be investing in deep, enduring interpersonal connections. We should bias the award of these "scholarships" to countries that are democracies.

This would have some similarities with DFAT's Australia Awards program, but there are less than 2500 students in that, and 90 per cent of them are postgraduate students. Moreover, the Australia Awards provide living allowances, driving up the cost per student. The new, larger scheme would not provide this to all its students; there are no doubt many enterprising young people who would be motivated by the waiver of tuition alone.

The new scheme would offer a mix of undergraduate and postgraduate courses, as well as secondary or bridging courses for those who need help to be ready for the start of tertiary education. In place of the current preponderance of business and management studies, the Australian government, in consultation with the governments of the beneficiary countries, could develop a more rounded mix of courses driven by student requirements, not by the need to repay student loans. This would benefit medicine and nursing, education, engineering and IT, even liberal arts and social science degrees.

By using its buying power, the Australian government could require the universities to charge no more than the current average cost of a degree for an Australian student - around $20,000. This should be a take-it-or-leave-it proposition. To stop the universities saying "thanks for the extra cash, we'll take it, but we'll also keep pursuing as many fee-paying overseas students as we possibly can", part of this deal is that the government would impose caps on total overseas student visas, with subsidiary caps on individual countries and institutions.

To attract students from countries such Afghanistan and Timor-Leste, a proportion of scholarships would need to provide living allowances. But if the universities have a great product, a fee waiver should be enough inducement for many prospective students.

How much would it cost? 100,000 students per year at $20,000 tuition each is $2 billion. If we assume another $2 billion for a sliding scale of living allowances depending on need, plus $0.5 billion for bridging courses for students needing English and other preparatory training, along with program administration and overheads, that's $4.5 billion per year.

That's a lot of money for the government to find in this COVID-19 era. But in the shorter term it can in part be regarded as stimulus spending for the tertiary sector. Whatever one may think of the universities' commercial strategies over the past decade, their staff include many of our most talented people. We want them to stay and keep teaching and researching.

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In the longer term, as well-educated students start returning to their home countries, demonstrating the benefit of an Australian education, new markets could open up, allowing a reassessment of the balance between paying and scholarship students.

Another way to regard the funding is as a long overdue turnaround for our declining aid budget, which is now down to $4 billion per year - or only 0.21 per cent of GDP, a figure well below international benchmarks.

This program would be a major investment in the people of the broader region, one that will develop deep, human connections that will endure well after many Belt and Road infrastructure projects have crumbled.

An Australian investment to build the human capital of south-east Asia and the Pacific could become the centrepiece of an effort to lift our national engagement with the region, based on a foundation of people-to-people links. It is an infinitely more valuable approach than simply forever scaling up average-quality degrees for PRC students.

As we have seen from the earlier Colombo Plan, the long-term return on investment to Australia for building high-quality people-to-people relationships with our neighbours has been of enormous economic, social and strategic value.

This approach also gives our universities a one-time opportunity to rethink their currently failing business model, which is built on greed, scale and a less-than-optimal commitment to offering a high-quality educational and life experience.

Many academics who find themselves teaching in Australian degree factories would agree on the need to rethink the sector. In the post-COVID world, any business model built on a slavish over-reliance on a relationship with the PRC is irretrievably gone. Universities that rethink their approaches have a chance to design a solid future. Those that cannot make the break from dependence on money from the PRC will remain hostage to the fickleness of the Chinese Communist Party in ways that cannot be sustained.