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University challenge, by Stephen Court

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08 July 2005

A few UK universities have operating deficits. But most, Stephen Court finds, can expect sound finances to improve even further

Universities in the UK have impressive financial clout. Their assets and endowments are worth £26bn – and that's excluding the dreaming spires, property portfolios and wine cellars of the Oxbridge colleges. In 2003/04 UK higher education institutions' income was nearly £17bn – more than total UK public spending on transport services. HEIs generated an operating surplus of nearly £250m, and an historical cost surplus of more than £500m.

The universities' financial prospects also look good. The 2004 Spending Review envisages an increase in public funding for higher education in England of 18% to 2008. Next year, most HEIs in England and Northern Ireland are increasing full-time annual undergraduate tuition fees to £3,000. The extra income in England alone from variable top-up fees is estimated to be in the region of £1.4bn by 2010. Part of this will be earmarked for student bursaries, but most of it will be available for spending.

In Wales, the National Assembly will be introducing variable top-up fees of up to £3,000 for UK students from outside the principality from 2007, bringing in an estimated £40m a year by 2010. Although Scotland will not be taking the top-up fee route, the Scottish Executive is providing generous funding increases over the next three years to keep the country's universities competitive with rivals south of the border.

So how is it that stories of universities in financial trouble have recently hit the headlines? According to a report in the Guardian in April, based on files obtained under the Freedom of Information Act, there were 11 'at risk' institutions in England being monitored by the Higher Education Funding Council for England, although none was considered at 'immediate risk'.

Failure to recruit sufficient students, over-ambitious expansion plans and management weaknesses were some of the problems hitting the institutions, whose names were withheld by HEFCE. And in Wales, several unnamed institutions were reported in June by the Western Mail to be facing significant or serious financial difficulty. The Higher Education Funding Council for Wales would not comment on this story.

Although universities as a whole are in fair shape, a sizeable proportion have income and expenditure deficits. In 2004, 24% of 170 UK HEIs had operating deficits, the largest of which was nearly £9m, at Cambridge, followed by Aberdeen (£6.7m), Leeds Metropolitan (£4.9m) and Glasgow (£4.4m).

In May, Glasgow, which has ambitious capital investments planned over the next four years, announced a programme of savings to move back into operating surplus. This will come at a price – to the estimated 250 staff who stand to lose their jobs; to the university, which will have to find nearly £8m in voluntary severance and early retirement payments over the next two years if the plan goes ahead; and to the students, who will have fewer staff to teach them.

After tax, exceptional items and historical cost revaluation have been factored in, the overall picture for HEIs looks somewhat healthier. In 2004, only 20 of 132 institutions in England had historical cost deficits, as did two in Wales, five in Scotland and none in Northern Ireland. In England more than one-third of institutions had a historical cost surplus that was at least 3% of income – and so met the level of surplus recommended by HEFCE.

Exeter, with a 2004 operating deficit of £2.5m, is among a number of HEIs that have reacted to financial troubles by closing departments. This gave rise to an inquiry into strategic subject provision by the Commons' Science and Technology Select Committee. Its report in April said: 'Such closures have compounded the problem of declining student numbers [in science, technology, engineering and mathematics undergraduates]. If they continue unchecked, the system may find it difficult to cater for the future increases in uptake that are so fundamental to the realisation of the government's ambitions.'

In addition, the Department for Education and Skills asked HEFCE to investigate strategically important and vulnerable subjects. Last week, the funding council reported, however, that higher education in England was healthy, and said interventions should be kept to a minimum. It said it would 'seek wherever possible to work in partnership with those with an interest in protecting strategic and vulnerable subjects', but it would only intervene 'where we have a clear understanding of the nature of the problem, where it is located and where HEFCE intervention is appropriate'.

HEIs in England are forecasting a small operating surplus for 2004/05, rising to £95m by 2007/08. But these forecasts, made in July 2004, are likely to be conservative. They were made before the outcome of the 2004 Spending Review was known, and did not include the additional income arising from top-up fees.

In the three years to 2008, English HEIs have forecast increases of 2.4%, 1.5% and 2.5% a year in income from HEFCE grants. But last December the DfES announced increases in funding council grant of 6.9%, 5.5% and 5.1% for the same three years. And in overall terms, the aggregate forecasts of English institutions tend towards the prudent. For 2002/03, for example, the most recent forecast before the outturn was known was a historical cost surplus of £181m, but the outturn was £318m; in 2003/04, the most recent forecast was a £365m surplus, but the outturn was £448m.

The extent to which HEIs need to generate a surplus is open to debate. In the private sector, businesses need to generate profit for reinvestment and to reward shareholders. But all universities have charitable status, although some are companies limited by guarantee. HEIs have significant capital income streams from public funding and charities. The government is providing more than £600m a year through HEFCE for capital grants in England during the current spending review period. In addition, since 1998 the Wellcome Trust – the world's largest medical research charity – has invested more than £600m in UK universities' biomedical science infrastructure.

The government is taking other action to remedy past underfunding. Universities have traditionally underbid to win research grants and contracts. This has meant they have subsidised research losses from other income streams. Following the 2004 Spending Review, the government is providing an extra £120m a year to enable research councils to provide close to the full economic costs of university-conducted research. Overall, government funding for research through the research councils will be rising by 26% in cash terms in the same period to £2.8bn a year – approximately half of this will be channelled into the universities.

In recent years there has been substantial public investment in university–business links, to boost the economy generally, and to build up HEI finances. These links have generated spin-off companies, and while universities' intellectual property income fell by 22% in 2002/03 to £37m, income from consultancy rose by 38% to £168m.

The government is also keen that HEIs expand their income from voluntary giving. In 2003/04, they received £236m from endowments and investments, just 1.4% of total recurrent income. Last year a report commissioned by the DfES recommended that UK universities should emulate public universities in the US, which overall attract 1.8% of GDP as donations, compared with 0.7% in the UK.

The report, chaired by Eric Thomas, vice-chancellor of the University of Bristol, said: 'If we achieved this, even without increasing total giving, UK higher education would receive £600m per year in donations from individuals, which is over £400 for each UK undergraduate. This would make a significant difference to the future development of higher education in this country.' Over the next three years the government is providing £7.5m in pump-priming matched funding to help English HEIs increase donations.

The recent rises in public and private funding, and the prospect of higher levels of income from tuition fees and donations, mean that UK universities are on a better footing to face the challenges of the 21st century – not least the increase in demand for teaching, as the government aims for half of young people participating in higher education by the end of the decade, and for research, which is vital for the health of the economy and society as a whole.

Stephen Court is senior research officer at the Association of University Teachers

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