Opinion- 30 August 2007



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Peter Hall*: Oz vs the Richest Academic Kid on the Block


A recent New York Times article notes, among other things, the runaway investment success that Harvard University enjoyed with its

John Harvard (1607 - 1638)

 endowment fund during 2006-7. A 23 percent return, substantially higher than the levels (generally in the high teens) that tend to be the norm for Ivy League universities, took Harvard's endowment fund to US$34.9 billion by June 30 this year.

Harvard invariably leads international university league tables. The poor performance of Australian universities in these competitions is frequently lamented by federal ministers, most recently by the Treasurer, who has had more opportunity than most politicians to put our money where his mouth is. How does Australia's total investment in our universities rank with Harvard's, using only the interest earned from Harvard's endowment fund? Let's forget all the other sources of income that Harvard attracts each year, and consider what we might do if, as a nation, we had access to just the interest from Harvard's endowments.

Let's assume that Australia's GDP will equal A$975 billion in 2007-8. (It was A$891.5 billion in 2004-5, and according to the ABS Yearbook for 2007, it has been growing at about 3.2 percent per year.) Australia invests, from both public and private sources, about 0.45 percent of its GDP on research and development in our universities. Therefore it's not unreasonable to suppose that in 2007-8, our universities together will spend about A$4.4 billion on university R&D. That's about US$3.7 billion, and less than half the amount that Harvard can expect to earn from interest on its endowment fund in the same period.

Back in 2002, after the May federal budget was released, Education Minister Brendan Nelson proclaimed that "funding for higher education will total A$20.6 billion over [the next] four years." This outlay was a source of considerable pride; it represented, said Mr Nelson, the government's determination to "continue its commitment to the vital education, science and training sectors which underpin so much of Australia’s future success and prosperity." The funding amounted to an expenditure of A$5.15 billion in 2002-6 dollars, which is approximately equivalent to A$6.0 billion in 2007-8 terms, or about 60 percent of what Harvard might expect to gain from its endowments during that year.

These are all crude, back-of-the-envelope calculations. For example, they take no account of any taxes that have to be paid on Harvard's investments, and they assume that Harvard's endowment fund will attract interest in 2007-8 at the same rate it did in 2006-7. Additionally, Mr Nelson's figure for federal government investment in Australian universities ignored a number of factors, such as depreciation of fixed assets. But no matter how you look at it, if you could take just the annual interest that Harvard earns on its endowments, and omit all of Harvard's other income; and if you could invest that interest across all Australian universities; you would increase the total budgets of our universities by a substantial amount. Indeed, the new funding would approximately match the federal government's contribution to all of Australia's universities.

*Peter Hall is Professor in the Department of Mathematics and Statistics at the University of Melbourne. He is the current president of the Australian Mathematical Society.


 Editor's note: Bernard Lane in the September 12, 2007 Australian wrote regarding expected returns from the government's Higher Education Endowment Fund: "Although budget papers have the Fund yielding a notional return of $300 million a year from 2008 to 2011, the senators said the Government had accepted it could take five years for there to be predictable returns. Bruce Gregor, of Mercer Investment Consulting, told the Senate inquiry into the HEEF Bill that a provision designed to preserve the Government's initial cash contribution would impose a "very defensive" investment strategy, possibly leading to no returns at all in the event of extreme market volatility in the early years."