However, the report paints a more positive long-term outlook with a low-risk rating  based on the five-year mean for  underlying results, liquidity, debt-to-equity ratio and self-financing ability.

The Warrnambool-based institute and the 13 other technical and further education providers are grappling with a major efficiency overhaul by the state government, with less grants and more staff cuts.

Operating grants were cut by $102.9 million collectively last year including $2.33 million from South West TAFE.

The TAFE sector’s share of the vocational education and training sector dropped from 47 per cent in 2008 to 32 per cent last year.

South West TAFE’s grading slide from medium to high-risk was triggered by its net deficit last year of $4.36 million compared with a $650,000 deficit in 2012. 

Four other TAFEs were put in the high-risk category as facing immediate or short-term challenges.

Although South West TAFE’s government operating grants were slashed last year it will receive $7.7m “to undertake a number of projects to improve financial sustainability”.

Last year it boosted student revenue by $914,000 while expenses were cut by $34,000, described in the report as “marginal”.

South West TAFE chief executive Peter Heilbuth said the institute finished last year in a much better position than expected.

“Our operating deficit in 2013 was budgeted for and planned as a critical first step in our program of business transition and renewal,”  he said.

“We have a carefully planned  business renewal program that is being progressively implemented during the next two years.

“The Auditor-General report states we achieved a marginal reduction in costs — this was because in 2013 we absorbed about $2.3 million of one-off expenses as a result of out significant restructuring and campus rationalisation.

“South West TAFE is very confident in our ability to generate surpluses and replace assets.”

Mr Heilbuth said the $7.74 million special state funding announced recently would be spent on upgrading  technology and capacity to deliver education programs “anywhere, anytime and  on any device”.

It will also be spent on streamlining administration, leadership development and growth, plus better financial systems and business service, he said.

 Auditor-General John Doyle warned that if greater investment did not occur long-term sustainability could be at risk as infrastructure progressively became less functional.

His report called for TAFEs to adjust their marketing and course designs to attract more domestic and international students.

Labor’s higher education spokesman Steve Herbert said domestic student enrolments fell from 208,400 in 2012 to 196,500 in 2013 — a six per cent decrease — while domestic student fees increased by 125.2 per cent between 2009 and 2013.

Higher Education and Skills Minister, Nick Wakeling, used the report to fire a shot at the former Labor government’s attempts to reform the TAFE sector.

“The report shows Victoria’s TAFEs are still working through the reform process and some are struggling to adjust to the contestable environment introduced by Labor in 2008,” he said.