What’s wrong with profit margins of Australia’s private VET providers?

| August 26, 2016

The private vocational education sector appears to sustain extraordinary profit margins of around 30 percent. CEO of Community Colleges Australia Dr Don Perlgut says it’s time to consider another way forward.

What do Australia’s bank profits have to tell us about the weaknesses of Australia’s battered and messy vocational education and training (VET) sector? As it turns out, a great deal.

In the Australian schools education sector, there are almost no “for profit” institutions. In the Australian university (tertiary education) sector, for-profit institutions enrol only 4% of Australian university students. Yet in the VET sector – according the National Centre for Vocational Education and Research (NCVER) – in 2015, some 3,012,100 of a total 4,524,600 (66.6%) VET students enrolled in private for-profit institutions. TAFE came in a distant second, with 932,300 students (20.6 %); and community providers trailed at third with 205,700 students (4.5%).

Last week, the Commonwealth Bank of Australia (CBA) led the annual charge of Australian banks to set new records for profitability and margins, with a $9.45 billion profit, representing a 16.5% return on equity. This was “way in excess of the 11 or 12 per cent typical of companies listed on the stock exchange, and far above the typical return for unlisted companies which is closer to zero”, writes Peter Martin, Economics Editor of The Age and The Sydney Morning Herald.

“There’s nothing wrong with profits”, but “sometimes it is the job of governments to restrain profits”, Martin writes.

Rod Sims, Australian head of the Australian Competition and Consumer Commission (ACCC), believes that “the only way that the community benefits” is if the market involved is truly competitive and “there’s appropriate regulation in place”.

So what are the profit margins in some of Australia’s publicly listed for-profit VET providers? According to a 2015 report by Serena Yu and Damian Oliver from the University of Sydney’s Business School:

Based on the results of the publicly-listed for profit providers, the for-profit VET sector appears to sustain profit margins of around 30 percent (Table E1, p. 5). This indicates that every dollar of public subsidy paid results in 30 cents of profit for distribution to the company’s shareholders. It is estimated that in Victoria in 2013, about $230 million in profits was generated across the for-profit VET sector, based on over $799 million worth of training subsidies. Just three companies are estimated to have extracted at least $18.3 million in profits from Victorian taxpayers in 2013. This rate of return well exceeds benchmark norms set by comparable industries, such as child care and transport.

Thus the 30% profit of these for-profit VET providers well exceeds that of the Commonwealth Bank of Australia 16.5% (an amount that is making substantial political waves in the media and fuelling the call for a Royal Commission) and that of the normal 11% to 12% for publicly listed companies.

With these profit margins, surely there is something wrong. Either the VET market is not sufficiently competitive, regulation is not sufficiently effective or the quality of educational delivery is suffering. Or perhaps it is some combination of these three factors?

Given that the for-profit VET sector already has two-thirds of Australian VET students, perhaps it is time to pause and consider whether or not this is good for our economy, our development of skills and our increasingly battered VET sector? Is there another way forward?

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