Ethics, Sustainability, Growth and Profitability in the VET.
February 24, 2016 2 Comments
I thought today I would explore some thoughts I have been tossing around since before the demise of Global Intellectual Holdings and the RTOs and other businesses it owned. The collapse and some of the comments, particularly around it; the effect of VFH caps where there had been large increases in student enrollment numbers in courses, reliance on particular sources of income and rapid growth, along with a lovely little article I read yesterday sort of bought all of these thoughts to a head. So what I want to explore a little bit is the concept of sustainable growth in the VET sector and whether or not the growth we have seen over the last few years was ever sustainable.
Firstly what is sustainable growth rate? While there is an accounting formula and definition for this, there is also shall we say a more humble explanation of what this concept means. Sustainable Growth Rate is to put it simply how much an organisation can grow without borrowing more money. Which in even simpler terms means if your organisation has a lot of cash on hand it can expand quickly. It is not simply enough to expand however endlessly, any expansion to a business, must at some point become a sustainable revenue stream otherwise all that is occurring is that the business is pouring more and more money in to expansion and not getting any return on that.
It is this issue of sustainability that intrigues me about the growth rates of some players in the sector over the last few years. We have seen small providers suddenly, seemingly over overnight become very large providers with a large number of campuses in high-profile locations and being promoted by footballers and other of the same ilk. New providers have suddenly appeared and in less than a year had multi million dollar revenues. I feel that a couple of questions need to be asked; did the small providers who rapidly upscaled to massive student numbers and campuses do so because they had squirreled away profits over the years until they had a war chest from which to grow, did they acquire massive debt from financiers to fuel this grow or did the money magically appear from somewhere else. Of the new providers we can well ask, did they have a business secret that the rest of us didn’t know.
We all know however in what it was in most cases that drove these expansions. VET FEE HELP – Commencement payments, linked to massive enrollment numbers generated by brokers and fees 3 and 4 times what they were 4 years ago. That is what fueled this growth and nothing else in most cases. Aside from the payments themselves from the government, these massive income streams gave businesses access to unheard of levels of financing, the ability to IPO and range of other things. Yet all of this growth was based on one simple premise, the premise that no matter how large the numbers got, VFH was a train that was simply going to continue on, on it merry way. The thing is though anyone looking at the sector and the explosion of growth could have and should have seen this.
I know that people should have seen it because in the early part of last year I did some consulting work with a private equity firm who were looking at VET sector investments on the back of what was still be sort of looked upon as a successful float by Vocation and high profitability of other players in the sector and while they were interested in the sector, they were worried about how long this uncontrolled growth would last. So much so that in the end they decided to not enter the market. As they said at one point; even if this doesn’t look like it on the surface this is growth based entirely on debt and at some point your ability to do that stops.
They were right of course VFH is a system based on debt, not debt at the provider end but debt at the government end. Now of course monies owed to a company or the government sit on the assets side of the register, however the larger that debt figure becomes, the more people become concerned about what percentage of debtors are actually going to pay off their debt and how, in this case, the government is going to deal with all those who default. Now of course as the figure started to really get into the billions of dollars and it started to look like the outcomes that were supposed to have been produced, just simply were not occurring, someone somewhere was eventually going to say STOP and as we saw late last year the government did say stop. Now we have seen caps on student enrollment based on student numbers from a point in time in 2015 (this is one of the causes cited for the Global collapse as, as reported by a Staff member they had 44 students enrolled in a course at the point in time the caps figures were based on, but enrolled another 1000 in the next 3 months). Now a number of providers who have been fueled by large-scale student recruitment processes have found themselves in the situation where they will not be able to access any more funding than they did last year.
The problem with this is that just having the same amount of money as last year is not enough, given the massive expansion in campuses and staff and students, some of these providers are reliant on a continuing stream of enrollments to ensure that their whole system keeps working at least at the scale it currently is. In addition it also just been suggested that the government is looking at a tiered system of loans for VFH which will limit the amount a student can borrow depending on the ’employment outcomes’ the course is likely to produce. This is in my opinion a fantastic idea and will limit in yet another way, by reducing the fees that are going to be charged, the amount of money flowing out from the government, which will in turn create regulation on growth.
What we are seeing now is a correction in the market. We are seeing system which saw rampant expansion, based on debt and unsustainable practices being reigned in. Will there be casualties as a result of this? Certainly. Perhaps more casualties then we would like to admit, but let us not kid ourselves, this is something that was inevitable and anyone who didn’t recognise this fact and prepare has probably made a serious business error.
The question which then still sits with me after I think about all of this is one of ethical and responsible behavior. But I might let you decide what you think in relation to those two subjects.
Anyway that’s my opinion.