Opposition Senators' Report
Introduction
1.1 The Higher Education
Endowment Fund Bill 2007 and the Higher Education Endowment Fund
(Consequential Amendments) Bill 2007 were referred to the Senate Employment, Workplace Relations and Education
Legislation Committee for inquiry and report by 5 September 2007.
1.2
The Higher Education Endowment
Fund Bill establishes the Higher Education Endowment Fund, a perpetual
endowment fund to generate earnings for capital expenditure and research
facilities in higher education facilities.
1.3
The Higher Education Endowment
Fund (Consequential Amendments) Bill 2007 amends the Future Fund Act 2006 and
the Income Tax Assessment Act 1997 to support the implementation of the
Higher Education Endowment Fund. The Consequential Amendments Bill also
provides that investments made by the Future fund Board of Guardians will be
determined by the Future Fund Board of guardians, not by ministerial
direction. This bill also specifies that the responsible Ministers cannot
direct the Future fund Board of Guardians to use the assets of the Future Fund
to invest in a particular asset.
1.4
The bills are linked and will be
dealt with together.
Background
1.5
Labor Senators note that
Australian Universities have, by the Government’s own analysis, a significant
backlog of deferred infrastructure maintenance. According to a submission by
the Department of Education, Science and Training to the Productivity
Commission’s Report on Science and Innovation in 2006, this deferred
maintenance expenditure was estimated at $1.5 billion for the University
sector. This was a point made by several submissions, including the Federation
of Australian Scientific and Technological Societies (FASTS), the Group of
Eight Universities, and the National Tertiary Education Union. The Group of
Eight Universities estimated that total the deferred maintenance liabilities
was $1.53 billion in 2006 across Go8 universities alone.
1.6
Labor Senators note that the
principal reason behind this backlog is the fact that since it came to power
more than 11 years ago, the Howard Government has undermined the higher
education sector. Labor Senators note that a number of submissions pointed out
that the Commonwealth Government’s under funding of the University sector since
it came to power is a significant contributor to the current situation. The
submission by the Group of Eight noted that
While
$6 billion is a large amount of money it needs to be viewed in the context of
recent funding trends for Australia’s public universities, the recurrent expenses and
infrastructure challenges they now face...[1]
1.7
It is worth briefly recapping the
Commonwealth Government’s record on higher education investment since 1996. As
the Group of Eight submission note, the Howard Government’s first Federal
Budget in 1996 cut university operating grants by a cumulative six per cent
over the forward estimates from 1997-2000, resulting in a significant $850
million in cuts to the sector.[2] This had significant flow-on effects for subsequent
years as universities dealt with the impact of these cuts.
1.8
An associated factor was the
removal in 1995 of real increases in relevant wages in the indexation of
university block grants. This has meant that since that time the salary
component of university operating grants have been indexed against the Safety
Net Adjustment applied to lowest paid workers and non-salary components indexed
by the Treasury Measure of Underlying Inflation and more recently the Consumer
Price Index.
1.9
The Group of Eight submission
contends that had this indexation formula substituted average weekly earnings
for the Safety New Adjustment component then the university sector would have
received an additional $845 million in operating grants in 2003 alone.
1.10
Universities Australia have also
confirmed that Government funding cuts in university operating grants since
1996 have put greater financial pressure on university finances, with flow-on
effects to the way that universities operate. Recent work undertaken by
Universities Australia demonstrates that funding shortfalls by the Commonwealth
and an inadequate indexation formula has had direct impacts on teaching
quality. That work shows that since 1995 student-staff ratios have increased,
with the result that students today receive less time one-on-one with their
lecturer and tutor than their counterparts 12 years ago. According to
Universities Australia, student-staff ratio today is 20.4 compared to 14.6 in
1995. This assessment was reinforced by Group of Eight’s submission which
stated that the implications of funding pressures faced by universities today
include:
- large increases in student to
staff ratios, with implications for quality of teaching and learning;
- reductions in academic salaries
relative to average wages, with implications for the sector’s ability to
attract top talent; and
- the deferment of essential
expenditure on the maintenance of buildings and facilities, with long-term
consequences for the quality of essential infrastructure
1.11
Labor Senators note that Australia’s education system now relies more on private
financing than all other OECD countries except for the United States,
Japan
and South Korea. More than half of the cost of tertiary education
today is met from private sources – with dependence on private sources
increasing to 52 per cent from 35 per cent in 1995. As a proportion of total
revenue, Commonwealth grants to universities have decreased from 57 per cent of
their revenue in 1996 to 41 per cent in 2004. At the same time, university
revenue derived from fees and charges has increased from 13 per cent in 1996 to
24 per cent in 2004.
1.12
Labor Senators also note that
while the Government claims that tertiary spending has increased by 25 per cent
since 1996, enrolments have increased by more than double that since 1996. As
a consequence, the average amount of Commonwealth funding per student in real
terms has declined by nearly $1,500, while student HECS contributions have
increased by nearly $2,000, and fees and charges have increased by over $3,000.
Provisions
of the Bill
1.13
The provisions of the Higher Education Endowment Fund Bill have
been modelled on the provisions of the Future Fund Act 2006 (Future Fund
Act). The bill provides the Future Fund Board of Guardians with
statutory powers to manage the investments of the Higher Education Endowment
Fund (HEEF). The bill also provides that, as per the Future Fund Act, the
Treasurer and the Minister for Finance and Administration are the responsible
Ministers. In this capacity they will issue directions to the Board about the
performance of its investment functions. The Board is therefore
accountable to the Treasurer and the Finance Minister for meeting its
obligation to manage the HEEF in accordance with the requirements of the Act
and directions. The responsible Ministers will make the
determination to credit government contributions (initially of $6 billion) to
the HEEF and any subsequent Government contributions to the HEEF.
1.14
The responsible Ministers are also responsible for setting rules
to determine the maximum amount available for payments from the HEEF. The
HEEF Advisory Board (the Advisory Board) will be established to provide advice
to the Education Minister on grants.
1.15
Because of the different nature and intent of the HEEF compared to
the Future Fund the Education Minister, not the responsible Ministers, is
responsible for authorising grants of financial assistance to eligible higher
education institutions and for appointments to the HEEF Advisory Board.
Potential problems with the Higher Education Endowment
Fund
1.16
Labor Senators note the universal
support and welcoming the Higher Education Endowment Fund (HEEF) has received
from the higher education sector. Given the continued under funding of the
sector by the Commonwealth Government, this is unsurprising.
1.17
Notwithstanding the welcome
reception to the Higher Education Endowment Fund, the proposal is not without
concern. This is confirmed in the detail of the bills to establish the Higher
Education Endowment Fund.
1.18
A central concern expressed by a
number of submissions relates to the transparency of Ministerial
determinations.
1.19
Sections 40(2) and Section 40(3)
provide that the Minister determines who sits on the Fund’s Advisory Board,
while Section 40(4) sets out how the Board will operate and Section 41 determines
how the Board will undertake its functions. Section 45 provides that the
Minister for Education authorizes grants of financial assistance to eligible
higher education institutions in relation to capital expenditure. Section 50
outlines the terms and conditions of funding, including that the terms and
conditions on which financial assistance is provided to a higher education
provider be set out in written agreement between the Minister for Education, on
behalf of the Commonwealth, and the eligible higher education institution.
1.20
A number of submissions identified
the potential that funding allocations will be based on political factors
rather than on the merits of individual proposals or through, as the Group of
Eight identified, “...any
strategic consideration of the sector’s infrastructure needs.”[3] More
prosaically, the FASTS submission argued that in its current form, the Fund is
in effect
...a significant slush fund for
Ministerial pork-barrelling.[4]
1.21
FASTS noted that while directions and grant decisions are to be tabled,
they are not disallowable instruments. Equally, there is no requirement that
the Advisory Board’s recommendations or any variations to those recommendations
be made public. As FASTS argued:
FASTS
believes this is not a good governance model and recommends the legislation be
amended to ensure the Minister makes public both Advisory Board recommendations
and significant Ministerial variances from this advice.[5]
1.22
This concern was also expressed by
the NTEU, who recommended that the HEEF be amended to set out the functions,
responsibilities and appointment process of the HEEF Advisory Board.[6]
1.23
Universities Australia expressed
some concern that the legislation does not set out in any detail the rules by
which funding is to be distributed under the HEEF, and that these details are
being developed by the Department of Education, Science and Training in the
form of Guidelines and Administrative Information.
1.24
Labor Senators are particularly
concerned about this point. Section 49
provides that in the event of a bad year and the Fund returns little or no
income then the Fund will not release money. This potentially would have the
effect that the Fund would not discharge any of the $300 million forecast by
the Howard Government. This has implications for eligible higher education
providers that may be relying on being awarded approval for HEEF funds for
infrastructure projects.
1.25
This was confirmed by the
Department of Education, Science and Training’s submission, which stated that
...only
accumulated returns are made available each year for payment to higher
education institutions. The returns available for distribution to the sector
will be linked to the performance of the HEEF and in turn the market...in the
short term there may be some volatility.[7]
1.26
It is also unclear what is meant
by the term used by DEST that ‘only accumulated returns are made available
each year’. There is little detail provided as to the investment strategy
being considered by the Board of Guardians, including the time frame and scope
of investments being made on behalf of the Commonwealth. While Labor Senators
accept that the Board of Guardians must invest for the long-term benefit of the
Australian higher education sector, some clarity on the investment strategy being considered by the Board
would be useful. Given, for instance, that the legislation provides that the
release of funds is conditional upon accumulated returns being available, it
would be useful for the higher education sector to know if that means that the
Board of Guardians are considering an investment approach in the first few
years that will not allow for returns to be released to eligible higher
education providers. If this were the case, then that would be at significant
variance to the Budget Papers which forecast an estimated average 6 per cent
return per year.
1.27
In this context, evidence provided
by Mercer Investment Consulting to the Inquiry on 31 August is instructive.
Mercer Investment Consulting stated that
...the
grants which might be given in the early years might be low and, if there was
extreme market volatility in the first years, they could be nil compared to
what... is the general expectation of grants emerging from this fund[8]
and
...if in
the first year the money was invested and the return was, say, eight per cent
and there was an intention to distribute five per cent every year and inflation
was three per cent, then you could distribute five per cent and you could use
the three per cent to upgrade the value with inflation and everybody would be
happy and everything would work out perfectly. If, however, the money was
invested immediately in the long-term portfolio allocation with 60 per cent in
the share market and the share market were to fall by, say, 20 per cent in the
first year, then obviously the remainder is unlikely to make up that deficit
and you could see a return of zero per cent or less in the first year. My
reading of that clause is that if the valuation at the beginning of the
financial year 2008-09 showed the value to be less than the $6 billion that has
been put in, then no grant could be made in that first financial year.
1.28
An associated complication is the
fact that the Government has announced that for cash management reasons,
transfers to the HEEF will be made at the end of October 2007 ($3 billion) and
the end of January 2008 ($3 billion). Labor Senators are concerned at the
potential implications for the income stream that can be made available for
eligible higher education providers.
1.29
Concern was also raised as to the
structure of the Advisory Board. There is no direction in the legislation as to
the make-up of the Advisory Board. A number of submissions expressed concern
at this, with FASTS arguing that the Board should
“...contain
sufficient diversity of expertise to ensure the prospect of a credible process.
FASTS believe merit and expertise should be the key determinants as distinct
from a representative or formulaic structure giving representation to formal
university groupings.” [9]
1.30
Similarly, NTEU’s submission argued
that “...the interests of transparency and good governance would be better met if
the functions and responsibilities of the Board are set out in the Higher
Education Endowment Fund Bill 2007.”[10]
1.31
Submissions also expressed concern
that the HEEF will continue to be additional funding and not a substitute for
existing programs that provide funds for capital works and research
infrastructure in Universities. While Labor Senators note the Minister’s
commitment made during her second reading speech that “the Endowment Fund
investment is in addition to existing programmes...”, Labor Senators remain
concerned at comments made by the Minister in the media following the 2007
Budget that over time programs such as the Capital Development Pool (CDP) could
be folded into the HEEF.
1.32
A further concern relates to
philanthropic donations. During the May Budget Estimates, the Department of
Education, Science and Training stated categorically that philanthropic
donations made into the Fund would be directed to where those funds go. On 30
May, Senator Carr asked
DEST:
Senator CARR—So we have a private philanthropic
donor being able to direct where those funds go?Talk
Dr Arthur—Yes.Talk
Ms Paul—They are clearly within the objects of the
legislation, so for the purposes which the government has laid out and which
will be encompassed in the legislation and its attending instruments.
1.33
This commitment has now been
waived, departing significantly from the original intent of the legislation,
with both the Minister’s second reading speech and the DEST submission stating
that philanthropic donations can be made only on an unconditional basis.
1.34
Finally, Labor Senators note the
provision in the Higher Education Endowment Fund (Consequential Amendments)
Bill 2007 specifying that the responsible Ministers cannot
direct the Future fund Board of Guardians to use the assets of the Future Fund
to invest in a particular asset.
1.35
Labor Senators also note the
comments expressed by the Minister for Finance and Administration, Senator Nick Minchin, claiming that this amendment was to “stop the Labor Party robbing future
generations by raiding the Future Fund, taking its annual earnings and
dictating to the Board that it should invest its money in advancing Labor’s
political interests”.
1.36
Labor Senators reject this
characterisation. Labor has previously indicated its support for the
Future Fund, and supports the establishment in principle of the Higher
Education Endowment Fund. Labor is
also committed to the Future Fund objective of meeting public sector
superannuation liabilities.
1.37
Labor is committed to invest up to
$2.7 billion (from sold-down Telstra shares) in a National Broadband Network,
with earnings reinvested in the Future Fund. Along with contributions from the
private sector, the $2 billion Communications Fund will be used to contribute
to build the National Broadband Network.
1.38
Labor Senators note that the
Government is enmeshed in legal action over its decision to award OPEL $958 million to build a broadband network without
providing equal information to all participants. Labor has written to the
Auditor General following the Government’s announcement with concerns over the
probity of information provided to applicants and the selection process.
1.39
Labor Senators also note that the
Government has no plans for long term investment in infrastructure. In
contrast, Labor will invest future surpluses in the Building Australia Fund (BAF)
and make earnings available for infrastructure investment, with investment
priorities recommended by Infrastructure Australia.
Conclusion
1.40
Labor Senators note that the
submissions supported the establishment of the Higher Education Endowment
Fund. In light of the evidence presented by the higher education sector to the
Committee, the measure to establish a Higher Education Endowment Fund is a
welcome one. Indeed, the measure to increase Commonwealth funding for
infrastructure purposes is long-overdue and comes after years of neglect by the
Commonwealth of our higher education sector.
1.41
While supporting the establishment
of the Higher Education Endowment Fund, Labor Senators remain concerned at the
lack of transparency surrounding funding decisions and the scope available to
the Minister for Education to make funding decisions for political reasons
rather than on clearly defined criteria. Labor Senators believe that income
from the HEEF should be targeted to those higher education infrastructure
projects that genuinely advance our national interest. In its current form,
Labor Senators believe that the Minister for Education does not have a
sufficient check and balance when determining which projects the funds should
be directed towards. This amplifies the risk that those infrastructure
projects providing a political dividend to the Government of the day will be more
favoured than those projects meeting a long-term national interest objective.
1.42
Labor Senators believe there is
merit in the Government revisiting this issue and assessing the recommendations
made by submissions to this Inquiry to increase the transparency of decisions
taken by the Minister and the Advisory Board.
1.43
Labor Senators also question the
assertion made by the Minister for Education that the Higher Education
Endowment Fund will deliver an annual income of $300 million to be used for
university infrastructure purposes. Based on the evidence presented by the
Government’s own Department of Education, Science and Training, and by Mercer
Investment Consulting, the suggestion that the Fund will deliver $300 million
per year in the first years of its operations is misleading.
Recommendation
1.44
Labor Senators support the
proposed bill.
Senator Gavin Marshall
Deputy Chair
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