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Victorian TAFE: risk factors continue to deteriorate

Victorian Auditor-General    |    5 August 2014

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Overall the financial sustainability risk assessment for the Victorian TAFE sector deteriorated considerably  in 2013, according to the Victorian Auditor-General, as shown by these extracts from the report, Technical and Further Education Institutes: Results of the 2013 Audits.

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Financial sustainability risk assessment

Overall the financial sustainability risk assessment for the TAFE sector deteriorated in 2013.

Figure 5A shows that the number of TAFEs with a high financial sustainability risk increased from none in 2012 to five in 2013.

Figure 5A  Two-year financial sustainability risk assessment

Figure 5A
Two-year financial sustainability risk assessment

Underlying result

The average underlying result for TAFEs has declined over the five-year period, with 12 of the 14 TAFEs recording a lower result in 2013 than in 2009. The decline highlights the difficulties faced by the sector during a period of reduced enrolments following changes to the funding model.

Figure 5B shows a sharp deterioration in the underlying result indicator, with the number of TAFEs moving into either the high- or medium-risk category substantially increasing in 2013.

Figure 5B  Underlying result risk assessment

Figure 5B
Underlying result risk assessment

Seven of 14 TAFEs generated an operating deficit in 2013 (four in 2012), with only three TAFEs reporting an improved underlying result. The deteriorating position indicates that cost savings are not being realised at the same rate as revenue is declining.

Advance TAFE was assessed as high risk in 2013, with an underlying result of negative 50.9 per cent. This means that the operating deficit was half of total revenue in 2013, indicating that this TAFE is in dire financial trouble.

Funding will be provided through the TAFE Structural Adjustment Fund to support Advance TAFE and its amalgamation with Central Gippsland and eventually, Federation University.

 Self-financing

Figure 5C shows the weakening of self-financing indicator results for the TAFE sector over the past five years. TAFE self-financing results have deteriorated since 2009, particularly over the past three years. The average result for the sector decreased from 10.6%  in 2012 to negative 0.8%  in 2013.

Figure 5C  Self-financing risk assessment

Figure 5C
Self-financing risk assessment

The majority of TAFEs (11 of 14) now have a self-financing risk of high, with just one TAFE in the low-risk category. This indicates that where TAFEs have not responded sufficiently to policy changes, and where they require net capital investment in the short term, they are finding it increasingly difficult to generate sufficient cash to fund asset replacement from their operating activities.

Capital replacement

Figure 5D shows that over the five-year period there has been a substantial decline in the ability of TAFEs to fund asset renewals, specifically highlighting a significant increase in the number of entities in the high-risk category.

 

Figure 5D  Capital replacement risk assessment

Figure 5D
Capital replacement risk assessment

 

In 2013, government capital funding to the TAFE sector decreased by 36 per cent to $37.9 million. The decline in the capital replacement results highlights the dependence of TAFEs on government funding for their capital programs. Nevertheless, TAFEs are now able to fund capital expenditure from their cash reserves, by borrowing, or by the disposal of surplus assets. The data illustrate that spending on capital works is not sufficient to maintain and upgrade existing infrastructure and equipment.

Eleven of the 14 TAFEs (79 per cent) are now in either the medium- or high-risk category for this indicator. If greater investment does not occur, assets will deteriorate at a greater rate than they are replaced or renewed. This presents a risk to the long‑term financial sustainability of TAFEs as their buildings and other infrastructure assets progressively become less functional.

Capital grants have historically been strategically allocated across the sector, with funds for asset replacement not provided until the government considered replacement to be appropriate.

Under the government’s competitive neutrality policy, all vocational training providers receive funding based on student contact hours and not for specific types of expenditure such as the depreciation of their assets.

TAFEs are faced with a new commercial and autonomous operating environment in which state government capital funding will be allocated on a contestable basis. In light of this, TAFEs will need to take advantage of any announced contestable capital funding that becomes available, more flexible financing arrangements and cash reserves in order to fund asset replacement.

 

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