AIDE MEMOIRE: FINANCIAL MODELLING OF ITP PERFORMANCE
9(2)(g)(i)
• This financial modelling is high-level and there is considerable uncertainty around future
viability and Crown funding requirements until other policy and operational decisions
are made.
Background
3.
Over the past two weeks we have worked with Te Pūkenga’s Chief Financial Officer and
Financial Advisor to develop financial forecasts for all 15 of Te Pūkenga’s former ITPs (we
have combined WelTec and Whitireia) for 2024, 2025, and 2026. These forecasts primarily
focus on financial performance (their net surplus/deficit position). Preliminary commentary is
also provided on the impacts of this performance on their respective balance sheets, should
they become standalone ITPs. This is to inform your understanding of recapitalisation
requirements necessary to ensure any standalone ITP is solvent on establishment.
4.
The paper begins by presenting key financial metrics to establish the financial position of
ITPs prior to the establishment of Te Pūkenga along with their respective EFTS volumes.
This is compared to their performance in 2023 based on unaudited results. Te Pūkenga’s
2024 budget is then presented (with the current unified funding system (UFS) rates) as well
as forecast performance in 2025 and 2026 9(2)(f)(iv)
5.
The outputs provided below are from the first stage of modelling based on the information
available to us currently. As decisions are made around the structure, operation, and funding
of the new vocational and education training system, further and more detailed modelling will
need to be undertaken – particularly to inform Crown funding requirements.
Financial performance between 2019 and 2023
Many parts of the sector were having financial issues in 2019…
6.
Prior to the establishment of Te Pūkenga, the ITP sector was experiencing significant
financial difficulties. Financial performance had deteriorated over the preceding decade for a
variety of reasons including a strong labour market, increased competition, demographics,
immigration policy changes, and minimal increases in tuition subsidies.
7.
Between 2016 and 2019, the ITP sector experienced a significant reduction in enrolments.
SAC and Youth Guarantee (YG) funded EFTS fell by 15 percent while ful -fee international
EFTS declined by 16 percent due to policy changes around visa settings/work-rights. These
declines had a considerable negative impact on revenue and the ITP sector was unable to
reduce expenditure by a commensurate amount.
…with the majority of ITPs reporting deficits…
8.
In 2019, 10 out of 15 ITPs reported a deficit with the ITP sector as a whole reporting a $49
million loss (see
Table 1). Of the five ITPs that reported a surplus, only EIT reported a surplus
of three percent of revenue or higher.
9.
The ongoing poor performance was impacting sector liquidity and reducing cash reserves. In
2019, the ITP sector had a net cash position (cash and short-term investments minus debt) of
$175 mil ion. Five ITPs, however, were carrying a total of $97 mil ion in debt, including $43
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9(2)(b)(ii)
9(2)(b)(ii)
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AIDE MEMOIRE: FINANCIAL MODELLING OF ITP PERFORMANCE
9(2)(b)(ii)
20. While the forecast results for 2025 and 2026 show an improving position,
Table 3 overstates
respective financial performance as it does not include all costs that are currently centralised
and incurred by head office. These total approximately9(2)(i)
and cover items such as
legal fees, audit fees, insurance costs, and software licences. These costs wil need to be
borne by the ITP network once individual entities are re-established and may increase given
the movement from one single organisation to many.
21. These forecasts also do not allow for the re-establishment of certain functions in ITPs that are
now undertaken by head office (finance and property, digital, HR) as well as the re-
establishment of senior management teams and Councils. These costs are difficult to
estimate as they are dependent on the number and structure of the future ITP network as
well as whether a shared services entity is established. However, a conservative estimate
would be that this may add an additional 9(2)(b)(ii) of expenditure across the network.
9(2)(b)(ii)
9(2)(g)(i)
9(2)(b)(ii), 9(2)(f)(iv)
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AIDE MEMOIRE: FINANCIAL MODELLING OF ITP PERFORMANCE
9(2)(b)(ii), 9(2)(f)(iv)
9(2)(g)(i)
9(2)(b)(ii)
…and further information is needed before we can accurately model future sustainability…
30. It is difficult to accurately model the future sustainability of the ITP sector until further
decisions are made around its future structure. Further modelling will need to be undertaken
once the following are known:
9(2)(f)(iv)
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AIDE MEMOIRE: FINANCIAL MODELLING OF ITP PERFORMANCE
9(2)(f)(iv)
• 2024 enrolment outcome. By April/May 2024, we wil have a good understanding of
enrolment trends across the ITPs and the associated financial impact. Early enrolment
data suggests Te Pūkenga may experience an increase in domestic funded enrolments
in 2024 (compared to a budgeted 4 percent decline). This data also suggests that Te
Pūkenga has strong full-fee international growth, which following price increases, would
drive increased profitability.
…but we consider a range of changes are likely to be needed to achieve a viable network
31. In our view, to achieve a financially sustainable ITP network wil likely require a range of both
structural and operational changes. These changes wil come at a cost and additional Crown
funding is likely to be required to fund them.
9(2)(g)(i)
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AIDE MEMOIRE: FINANCIAL MODELLING OF ITP PERFORMANCE
33. It is too early to provide an accurate assessment of such funding requirements, but our
indicative estimate is that an additional 9(2)(b)(ii), 9(2)(i)
may be required.
This estimate will be refined as further modelling is undertaken and decisions are made.
Recapitalisation of ITPs
Cash shortfal s across the ITPs have been managed by Te Pūkenga’s centralised treasury
function…
34. Around half of ITPs were in a poor cash position prior to the establishment of Te Pūkenga,
facing either imminent or medium-term liquidity challenges. Three ITPs were reliant on Crown
funding to ensure they could meet their operating commitments.
35. When Te Pūkenga was established, it created a centralised treasury function to manage the
losses being reported across the former ITPs. Cash reserves from WBL and the collective
ITP network (with the exclusion of ring-fenced reserves) have been used to offset those
former ITPs reporting cash losses (as well as those that had commercial debt when they
became part of Te Pūkenga).
…and the establishment of independent entities wil require recapitalisation…
36. The re-establishment of individual ITPs (the majority of which wil be loss-making without
significant change) and the removal of the central treasury function will require most ITPs to
be recapitalised to ensure they have sufficient financial resources to meet their obligations as
they fall due as independent entities. Determining the exact level of recapitalisation needed is
difficult, largely because of the number of unknowns that need to be worked through to
understand the future operating state. These decisions wil have a large bearing on how the
Te Pūkenga balance sheet (both its assets and liabilities), wil be reallocated back out to the
independent entities, and what additional capital would be required.
37. With any redistribution of assets and liabilities, there wil be technical elements to work
through (such as funding received in advance by Te Pūkenga for the delivery of services that
would then be conducted by the independent entity), but at a high-level view we consider
there are two main approaches that could be explored.
38. The first is to take a historical balance sheet view of Te Pūkenga’s business divisions. Under
this approach, business divisions would retain any assets and liabilities that were contributed
to Te Pūkenga’s balance sheet. They would also keep any cash reserves they have
generated from their operating profits during Te Pūkenga’s operation.
39. This approach would see those ITPs that have had to borrow from the network through Te
Pūkenga’s treasury function (half of all ITPs) requiring additional Crown support as they
would have no cash available to fund immediate day to day operations and future funding
losses. Some other ITPs would have less than desirable liquidity levels given forecast
performance. This approach, however, would see WBL retain its significant cash reserves.
40. The second approach is to take a forward-looking approach and for Te Pūkenga to distribute
cash (less ring-fenced reserves) through a targeted, needs based approach. This would see
more cash being allocated to the ITPs with trading losses and higher capital investment
needs. If we wanted to maintain equity in the distribution of cash, you could pro rata the
distribution with the Crown providing a ‘targeted top up’ for specific ITPs where required.
While ring-fenced reserves would be excluded from this process, we consider this approach
would require careful stakeholder management with regions as well as industry.
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AIDE MEMOIRE: FINANCIAL MODELLING OF ITP PERFORMANCE
…but we consider the Crown should only provide funding after Te Pūkenga has utilised al
of its own financial resources…
41. Our preferred approach would be to take a targeted, needs based approach which prioritises
the collective network needs rather than singular independent entities. At this stage, we
would not recommend taking an historical balance sheet view as we consider a more
nuanced approach is needed. Te Pūkenga is a single legal entity with multiple business
divisions rather than being comprised of many individual entities. The creation of Te Pūkenga
was designed to create a single, national network that would remove some of the volatility
associated with labour market and enrolment impacts on regions and sectors. Profitability
was to be managed across the network, not by individual division.
42. Taking a single view approach, a large proportion of Te Pūkenga’s cash balances at the end
of 2025 (minus ring-fenced reserves) would be available to be used to help recapitalise the
future ITPs on establishment. These balances are predominately reported against the WBL
business division but some ITP business divisions are also forecast to have positive cash
balances.
43. While there would be clear winners and losers in a targeted approach, it will significantly
reduce the level of Crown investment needed. However, WBL management and industry are
likely to consider that its cash reserves should be retained for use going forward as part of a
new entity or entities. While WBL will need to retain some cash reserves for future
investment, we do not consider cash balances of this size are required to operate
sustainability given its low capital needs. Furthermore, the large majority of this cash has
(and wil be) earnt while it is part of Te Pūkenga and is the result of government initiatives
(Apprenticeship Boost, Targeted Training and Apprenticeship Fund) and government policy
changes (i.e. a large funding rate increase through the UFS).
…with actual recapitalisation needs determined by views on future viability…
44. The level of recapitalisation and liquidity provided will ultimately be dependent on how
sustainable the ITP network wil be going forward. When profitability is low or deficits are
being reported, ITPs have less cashflow from operations to fund capital needs and/or rebuild
cash balances. If profitability is expected to remain low and/or we consider it will take time for
some ITPs to put in place a sustainable business model, then more liquidity should be
provided. Achieving desirable levels of liquidity across the entire network is unlikely to be
achieved just with Te Pūkenga’s financial resources and wil likely require further support
from the Crown.
45. This wil ultimately be dependent on financial performance (including how and when cost
reductions are managed), how the ITPs are to be re-established (including any groupings
that could occur), whether there would be any shared service subsidiaries (including whether
there is retention of some sort of centralised treasury function), capital investment needs, as
well as ultimately how well the ITPs perform over the course of 2024 and 2025. Decisions will
also need to be made regarding the $45 mil ion of outstanding Crown loans that exist across
the sector for Unitec, UCOL, and Otago Polytechnic.
9(2)(f)(iv)
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AIDE MEMOIRE: FINANCIAL MODELLING OF ITP PERFORMANCE
9(2)(f)(iv)
Next steps
48. We would like to discuss the key outcomes of this modelling with you as soon as possible to
support the key decisions you are making regarding the vocational education and training
system.
49. We wil continue to work with Te Pūkenga to refine the modelling and make updates as
further information becomes available and decisions are made.
Tim Fowler
Chief Executive
Tertiary Education Commission
01 February 2024
Hon Penny Simmonds
Minister for Tertiary Education and Skills
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