Mary O'Kane, who is overseeing a new accord of higher education, said there were many significant issues in universities that needed to be addressed.
The accord, touted as the biggest reform to higher education in more than a decade, is set to be released by the end of the year.
In a speech to the Universities Australia conference on Wednesday in Canberra, Ms O'Kane said research still had to be improved.
"(On innovation), Australia is very weak in terms of its results against its OECD peers," she told the conference.
"There is something going wrong - we might be educating people well, but we may not be educating them for what is needed."
A discussion paper on the accord has been released, proposing a new long-term target for higher eduction and participation.
The current measure of bachelor degree attainment for people aged 25 to 34 is 44.6 per cent - above the average for OECD countries of 41.5 per cent.
But it lags behind the highest-achieving countries such as the Netherlands (54.3 per cent), Switzerland (52.3 per cent) and the UK (51.2 per cent).
This is despite increases in graduate numbers during the past two decades, the paper says.
"There are some scary estimates of what we need to produce in terms of the number of people getting a bachelor degree, we're certainly not where we need to be at the moment," Ms O'Kane said.
"We're trying to work out where we should be ... but we do know it's a big jump."
Seeking a higher attainment target will also drive universities to lift the proportion of students from under-represented groups, the paper argues.
In 2021, 17 per cent of higher education students were from a low socio-economic background, 2.4 per cent were Indigenous Australians, 21 per cent were from regional or remote areas, and nine per cent were students with a disability.
Ms O'Kane said the accord would also focus on what skills graduates would need for the future to meet demand in growing industries.
"Employers are telling us very loudly, and it's a strong refrain, that we need a lot more in the generic skills," she said.
Education Minister Jason Clare conceded more needed to be done to win back international students to Australian universities.
Mr Clare said it would take at least two years for international student numbers to reach pre-pandemic levels.
"Countries like the UK and Canada are eating our lunch. When the borders were shut and when the last government told international students to go home, there was an impact," he told ABC Radio.
"International education was kneecapped by the pandemic and by those decisions, but at the same time, as numbers here were dropping, in the UK they were going up, in Canada they were going up ... we've got to do more to encourage students to come and study here."
Mr Clare said it was likely there would be some form of higher education reform in next year's federal budget, following the report being handed down.
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