University rankings questionable

Perhaps it's being part of an industry with financial challenges, so to speak, or perhaps it's just jealousy, but Chalkie gets twitchy around persistent price rises.

If an outfit can crank up its prices with impunity year after year it can be a sign its customers are captives to be milked like cows on a herringbone, rather than free spirits who may buy, or not buy, as they please.

Hence the idea of a university bent on raising fees by the government-imposed maximum 4 per cent a year, when inflation is consistently below 2 per cent, makes Chalkie anxious.

Interviewed on Morning Report a few weeks ago, Auckland University vice-chancellor Stuart McCutcheon was asked whether there was scope to avoid the fee hike given it was poised to top $1 billion in revenue this year.

No there wasn't, he said.

"The small increase that the government makes in some of the tuition subsidies and none in others, combined with limits on tuition fees, mean that our income per student in real terms, in other words relative to our costs, declines each year, and it's income per student that is the single biggest driver of international ranking."

This sounds like universities are incentivised to be as expensive as possible, which is surely not what we're aiming for.

McCutcheon didn't mean it like that of course. As he explained: "If we want to have high-quality and well-ranked universities in New Zealand then we have to have the revenue to support the top-quality staff, scholarships and facilities that make that."

Rankings were important because they influence where international students chose to study.

"The domestic part of our operation now is not really profitable and therefore our ability to reinvest for the future is driven significantly by the numbers of international students," he said.

Chalkie reckons there are some issues here. One is that you can drive a bus through the holes in world-ranking methodologies, so aiming to climb the ranks makes as much sense as asking an astrologer for financial advice.

Another is that the university is more profitable than McCutcheon's remarks imply.

Taking the last point first, it's difficult to tell from the university's financial statements how much money it makes from domestic versus foreign students, but make money it does.

Revenue in the last financial year was $973m, about two-thirds of which came from government grants and tuition fees. That revenue has grown fairly steadily over the years, typically at a rate of about 5 per cent.

At the other end of the income statement, the university's bottom line surplus was around $29m, which is effectively the same as its pre-tax surplus because the university doesn't pay tax.

The bottom line has been variable over time but has increased from about $25m in the last six years.

At first glance, it would seem the university doesn't have vast riches at its disposal.

However, at an operating level it pulls in a lot of cash. Last year's operating cashflow, which is the amount it took in after all its costs, was $148m. The figure has been consistently north of $110m in each of the last six years.

An alternative measure, earnings before interest, tax, depreciation and amortisation, produces a similar figure. Over time, the university ebitda margin has varied from 13.5 to 15.8 per cent.

However, the figures Chalkie looked at do not support the vice-chancellor's contention that income per student after costs has been declining in real terms. Between 2008 and 2013, ebitda per student rose from $3708 to $4249, representing an average increase of 2.9 per cent a year, which is a bit more than inflation.

What this means is the university has easily been generating more than $100m in cash to splash every year.

The difference between this operating profit and the bottom line is mainly accounted for by depreciation.

The function of depreciation is to account for the long-term cost of the assets used in the operation and the university's treatment is conventional.

However, depreciation numbers are subject to several assumptions and when it comes to property the concept can get a bit shaky, because the assets' useful life can be long and the residual value can rise rather than fall.

The effect is visible in the last financial statement, which shows depreciation of $101m and an increase in asset value of $109m.

What can happen is that assets go through a regular cycle of being written down, only to be written up again on the three-yearly revaluation, so depreciation doesn't reflect the genuine cost of using an asset.

This is a handy outcome when you want to justify investing very large sums on more land and buildings, which is what the university does.

Over the last six years its accounts show investment in hard assets such as property of $890m.

Thus the university manages to appear financially constrained while simultaneously spending big time on upgrading its facilities. Having flash new buildings is obviously good for attracting the best students and staff, particularly from overseas.

Having lots of overseas staff and students is also good for a university's international ranking.

In the widely quoted Times Higher Education rankings, for example, the ratio of domestic staff and students to those from overseas accounts for 5 per cent of the overall score.

According to the methodology, this is a measure of "international outlook".

"The ability of a university to attract undergraduates and postgraduates from all over the planet is key to its success on the world stage."

So the more foreigners you have at your university, the higher your ranking, so the more foreigners want to come to your university, so the higher your ranking and so on.

The circularity of this process seems obvious and Chalkie reckons it is a symptom of its underlying flaw, which is that there appears to be no objective evidence linking the criteria measured by university rankings to the supposed aims of universities - supplying quality education to produce high-quality graduates and research.

Instead, it appears the rankings are a well-meaning attempt to measure a few things that people think might be significant.

On the Times rankings, much of the research score is measured by a reputation survey, a highly subjective assessment that is likely to reinforce the well-known names. How can someone even be aware of the research output of thousands of universities, let alone have a valid opinion about them?

The ranking also uses a reputation survey for teaching quality, along with a measure of staff to student ratios. The former is hopelessly vague and the latter is open to manipulation. One 2009 study found that simply defining academic and students differently could alter the ratio from 6:1 to 39:1.

Chalkie won't go through all the holes in the rankings because there are too many and there is already a large amount of critical literature, but you get the drift. It would be as useful to have each university nominate a professor to express its qualities through dance, using a two-minute soundtrack of their choice, on ice.

It would surely be inappropriate to use international rankings as any kind of policy tool, but it appears they play a big part in management thinking.

Auckland University's current annual report carries the subtitle "An internationally ranked university creating value for New Zealand" and the vice-chancellor's review made frequent reference to world rankings. The underlying attitude seems to be ‘yes we know the rankings are guff, but other people think they're important so we have to play along'.

As a result, it seems universities such as Auckland aim to raise student fees so they can boost their ranking, in order to attract more international students to make more money to, um, help minimise fees to domestic students.

Chalkie reckons there is something less than academic about this strategy. In fairness, it is true that Auckland University doesn't have as much money as some other universities and delivering quality services is obviously easier with more moolah. But that doesn't mean it's OK to sock students for ever-increasing fees.

- Chalkie is written by Fairfax business bureau deputy editor Tim Hunter.