"Effectively, Tai Poutini Polytechnic is in a receivership situation, but the Crown is continuing to provide support because it is critical for tertiary education provision on the West Coast," the Cabinet paper says.
"There have been a number of other investigations into the operations of tertiary providers (including Western Institute of Technology at Taranaki, Lincoln University's Telford division, Taratahi Agricultural Training Centre and BEST Pacific Institute of Education).
"The under-delivery at Tai Poutini Polytechnic was by far the largest, with the highest previous [over-funding] recoveries being around $7.6m."
The paper says Tai Poutini was cross-subsidising its courses on the West Coast by running courses in specialist fields such as mining, scaffolding and search and rescue in Auckland, Manukau, Waikato, Christchurch, Wanaka and Southland.
Ministry of Education data shows that its domestic equivalent fulltime students dropped by a quarter, from 2245 in 2010 to 1715 in 2016 - at the extreme end of a nationwide 11 per cent decline in polytechnic numbers in the same period as the buoyant economy sucked people out of training and back into work.
The Cabinet paper says the Government is now funding only 750 equivalent fulltime students at the polytechnic - only 350 on the West Coast and 400 elsewhere.
A Deloittes audit, dated last April but released only today, found that the polytechnic was actually delivering only between 10 per cent and 40 per cent of the number of hours for which it was claiming government funding in nine courses including scaffolding, quarrying, load-lifting, crane use and occupational health and safety.
Altogether, the audit found "significant under-delivery of learning hours" in 13 of the 14 programmes it examined.
Tertiary Education Union president Dr Sandra Grey said the polytechnic's managers appeared to be charging for more hours than they should have in a desperate effort to keep the institution afloat.
"People then struggle to find ways just to help their institutions survive," she said.
"That never excuses them from behaving badly. It's about how do we make the system work for us."
The Cabinet paper says Tai Poutini's over-charging has now been stopped - but that has made its financial position even worse.
"A large portion of the under-delivery related to education delivered outside of the West Coast. Now that the funded teaching hours have been rescaled, this provision no longer provides extra revenue to cross-subsidise Tai Poutini's West Coast provision," the paper says.
"Tai Poutini's West Coast delivery is too small to make it viable as a stand-alone tertiary education institution."
The paper provides two options - either transferring Tai Poutini into joint ownership by the Crown and "local stakeholders", or merging it with another polytechnic, possibly Invercargill's Southern Institute of Technology which has already taken over Tai Poutini's Music and Audio Institute of NZ.
However Hipkins has deferred a decision on its future pending a wider "programme of change" for the whole sector which he will take to Cabinet in the coming month.
Tomorrow's meeting in Manukau has been organised by the Tertiary Education Union, the NZ Union of Students' Association and Manukau Institute of Technology.
Grey said the current funding system based purely on equivalent fulltime student numbers clearly needed to change if the polytechnic sector was to survive through business cycles.
She also hoped that Hipkins would reverse a decision by the previous National Government to put foundation-level courses up for tender, which had led to many courses being lost to privately owned providers.
The last published financial data, for 2015, shows that only three out of what were then 20 polytechnics were then losing money - Tai Poutini (-$1.3m), Waikato Institute of Technology or Wintec (-$1.8m) and Timaru's Aoraki Polytechnic (-$3.6m).
Aoraki has since merged with the Christchurch Polytechnic, and other mergers in the Bay of Plenty and East Coast and a takeover of Telford farm training school by Lincoln University have reduced the number of polytechnics to 16.
Overall, domestic equivalent fulltime students dropped by 8010 from 72,290 (excluding Telford) in 2010 to 64,280 in 2016.
The biggest declines were at Auckland's Unitec (down 1845), Aoraki/Christchurch now known as Ara Institute of Canterbury (down 1075), the Lower Hutt-based Open Polytechnic (down 865) and Nelson-Marlborough Institute of Technology (down 705).
