Results of 2019 Audits: Technical and Further Education Institutes

Tabled: 30 June 2020

3 Financial sustainability

To be sustainable, TAFEs need to efficiently manage their resources to respond to future changes and foreseeable risks without compromising the quality of services, and avoid large fluctuations in expenditure.

3.1 Conclusion

We assessed that at 31 December 2019 the sector was financially sustainable in the short term, based on its historic performance and reserves.

However, there were signs this year that revenue and expenditure policies require review and possible reconsideration. The subsequent COVID-19 emergency has only sharpened the need for this. Figure 3A gives an overview of the 2019 financial results.

Figure 3A
Overview of financial reports

TAFE Figure 3A.png

Source: VAGO from TAFE financial reports.

3.2 Financial results

In 2019, the sector generated a net deficit of $43.8 million. This is a significant decline from the prior year, when a surplus of $67.7 million was generated.

Of the 12 TAFEs, only four generated a net surplus in 2019 compared to 11 in 2018.

Sector revenue decreased by $11.3 million to $1 206 million (less than 1 per cent); however, sector expenditure increased by $100.4 million (8 per cent) to $1 253 million.

The 12 TAFEs received $418.6 million in contestable funding in 2019, $78.0 million more than in 2018 due to higher student contact hours and higher enrolments than last year, predominantly due to the introduction of Free TAFE for Priority Courses (Free TAFE).

The increase in contestable funding has been partially offset by a reduction in operating grants provided to the sector. Operating grants in 2019 of $191.3 million compare to $276.4 million in 2018—a 31 per cent decrease.

Fee-for-service revenue increased by $25.0 million (7 per cent) during 2019. The sector continues to increase its fee-for-service revenue from several streams, including government, and international onshore and offshore sources. Fee for service revenue has increased steadily between 2015 and 2019. TAFEs have been diversifying their revenue streams and relying less on state government funding. This may help TAFEs mitigate funding risks that might occur from changes in funding models or declining government subsidised enrolments.

Figure 3B shows the trend in contestable funding against fee-for-service revenues over the past five years.

Figure 3B
Contestable funding and fee-for-service revenue for the years ended 31 December 2015–19

TAFE Figure 3B.png

Source: VAGO.

The increase in expenditure was mainly from a $76.9 million (11 per cent) increase in employee benefits. More staff were employed across the sector to meet the higher service demand in relation to Free TAFE and fee-for-service revenue, combined with applicable award increases. We discuss Free TAFE in more detail in Section 3.4.

3.3 Student enrolments

Figure 3C shows the trend in total government-funded enrolments across the 12 TAFEs over the past five years.

Figure 3C
Total government-funded enrolments and annual growth rates across the 12 TAFEs for years ended 31 December 2015–19

TAFE Figure 3C.png

Source: VAGO.

Commencements

Figure 3D shows the trend in government-funded commencements for the TAFE sector over the past five years.

Figure 3D
Government-funded commencements across the 12 TAFEs for the years ended 31 December 2015–2019

TAFE Figure 3D.png

Source: VAGO, based on data supplied by DET.

From 2015 to 2017, government-funded commencements remained steady, with a marginal decrease over the period. In 2018, commencements declined significantly, largely because students deferred enrolment so they could access the incoming Free TAFE initiative.

The introduction of Free TAFE has reversed the downward trend in commencements and has resulted in more contestable funding for the sector. This will help alleviate long-term sustainability risks for TAFEs. However, the sector must continue to increase other revenue streams.

3.4 TAFE funding

Funded courses

Annually, DET issues a funded course list. This represents the courses for which eligible students are able to access government-subsidised training.

The funded course list only includes courses that:

  • align with industry needs and workforce demands
  • represent government priorities, including rolling out the National Disability Insurance Scheme, responding to family violence, and completing Victoria’s infrastructure projects
  • have strong job outcomes, such as apprenticeships
  • meet other social needs, such as foundation skill courses.

Figure 3E shows the number of funded courses over the past three years.

Figure 3E
Number of funded courses 2017–19

TAFE Figure 3E.png

Source: VAGO, based on data supplied by DET.

The decline in the number of funded courses over the period is attributed to the introduction of the Skills First model, which prioritises funding for courses that align with industry needs and workforce demands and linked government priorities. We note that there is a further decline in the number of courses for the 2020 year. In 2020, 819 courses will be funded. While the number of funded courses has reduced, the amount of contestable funding provided to the sector has increased due to increases in student numbers.

Free TAFE for priority courses

The 2018 Victorian State Budget included $172 million for Free TAFE, an initiative to subsidise the costs of 40 existing non apprenticeship courses and 20 existing pre-apprenticeships in areas deemed high priorities for future growth. Under the Free TAFE initiative, the government will pay course tuition costs for eligible students. However, individual TAFEs may charge students for other fees, such as student amenities or materials. Free TAFE commenced on 1 January 2019.

Any Australian citizen, permanent resident or a New Zealand citizen is eligible to undertake Free TAFE for priority courses in Victoria, if they meet one of the following criteria:

  • under 20 or upskilling—
    • applicants who are aged under 20 (regardless of any other qualifications they might hold)
    • applicants who are aged 20 or older and enrolling in a course that is a higher qualification than any they have previously attained.
  • Victorians who need additional support—
    • unemployed and clients of the Jobs Victoria Employment Network
    • retrenched workers
    • automotive supply-chain workers

A student may only enrol in one subsidised Free TAFE course.

Figure 3F shows the comparison of Free TAFE course commencements versus all other course commencements over the past three years.

Figure 3F
Free TAFE course commencements as a percentage of government funded commencements (2017–19) with the introduction of Free TAFE in 2019

TAFE Figure 3F.png

Source: VAGO.

From 2017 to 2018, enrolments in courses earmarked to be included in the Free TAFE program decreased. The introduction of Free TAFE in 2019 resulted in a significant increase in commencements in these courses. However, it was countered to a degree by a reduction of commencements in all other courses.

The overall increase in commencements due to Free TAFE has resulted in more students starting further studies and has encouraged a transition to courses designated as high priority for future growth, with Free TAFE courses making up 44% of commencements in 2019.

3.5 Sustainability

To be sustainable, TAFEs need to efficiently manage their resources to respond to future changes and foreseeable risks. TAFEs should achieve this without compromising the quality of their services and avoid large expenditure fluctuations.

The short-term health of the TAFE sector can be judged by evaluating:

  • annual financial results
  • financial position at the end of the year
  • patterns and trends in financial results over time

We have assessed the sector's short-term financial sustainability against two key indicators over the past five financial years:

  • Net result ratio—a positive net result ratio indicates a surplus. The larger the surplus, the stronger the result. A negative result indicates a deficit. Operating deficits cannot be sustained in the longer term.
  • Liquidity ratio—a ratio of one or more means there are more cash and liquid assets than short-term liabilities.

Figure 3G shows the combined sector average net result ratio over the past five years. Figure 3H shows the combined sector liquidity ratio over the past five years. Both have started to trend down.

Figure 3G
Combined TAFE sector average net result ratio for the years ended 31 December 2015–19

TAFE Figure 3G.png

Source: VAGO.

Figure 3H
Combined sector average liquidity ratio for the years ended 31 December 2015–19

TAFE Figure 3H.png

Source: VAGO.

Despite the net result of the sector this year, its liquidity ratio remains well above 1, which means there were no immediate concerns at balance date about the sector meeting its short-term financial obligations as they become due. The ongoing COVID-19 pandemic may change this position.

Efficiency and effectiveness of operations

TAFEs measure and report on their efficiency and effectiveness through two KPIs included in their audited performance report:

  • employment costs as a percentage of training revenue
  • training revenue per full-time equivalent training member.

Each TAFE board sets its own targets for these measurers before the start of the financial year. Most TAFEs did not achieve their set targets for 2019, so were not operating as efficiently or effectively as planned. This was partly caused by increased employee expenditure for the sector.

Figure 3I provides a summary of results of these two measures against the targets for each TAFE.

Figure 3I
Target and actual 2019 efficiency and effectiveness indicator results by TAFE

 

Employment costs as a proportion of training revenue

Training revenue per teaching FTE

Target

Actual

Target

Actual

Bendigo Kangan Institute

87.2%

79.8%

$268 986

$285 595

Box Hill Institute

87.0%

86.6%

$205 000

$217 400

Chisholm Institute

72.0%

73.5%

$208 000

$225 391

Gordon Institute of TAFE

105.4%

106.8%

$151 930

$152 117

Goulburn Ovens Institute of TAFE

117.0%

125.1%

$140 394

$139 893

Holmesglen Institute of TAFE

<80%

87.4%

>$195 000

$194 507

Melbourne Polytechnic

94.0%

91.5%

$205 000

$250 000

South West Institute of TAFE

119.7%

126.0%

$140 920

$150 018

Sunraysia Institute of TAFE

123.0%

131.7%

$127 593

$134 706

TAFE Gippsland

104.0%

106.0%

$192 168

$189 315

William Angliss Institute of TAFE

<78%

76.8%

$234 700

$226 179

Wodonga Institute of TAFE

96.0%

98.5%

$175 372

$173 089

Note: Green actual results mean the target was achieved. Red actual results means the target was not achieved. 
Source: VAGO.

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