Category: finance

  • Seeing universities as others see us

    Seeing universities as others see us

    As the comparison between spending (per student) in Scottish and English universities comes into my argument later, Robert Burns’ famous lines from To a Louse seems a good place to start.

    O wad some Power the giftie gie us To see oursels as ithers see us

    We are very familiar with how we see ourselves. Higher education is facing an intolerable financial squeeze.

    In England the maximum fee which institutions are allowed to charge has only been been upgraded once, and only marginally, since the switch from state grants to tuition fees as the main source of funding for teaching 13 or more years ago. Its real value is barely 70 per cent of what it was then, although the Labour government has agreed to another – marginal – increase from 2025-26.

    In Scotland, where Scottish domiciled students pay no fees, public expenditure on higher education has similarly failed to keep pace with inflation.

    The substantial increase in full-fee paying international students, which many institutions relied on to fill the gap has ground to a halt because of less generous visa rules imposed as part of the backlash against large-scale immigration. The never-had-it-so-good years when growing your income was easy are over.

    Red ink

    Meanwhile costs have piled up. Higher education faces not only the standard inflationary pressures – higher wage, pension, energy, estates and other costs. As employers institutions must also pay higher rates of higher national insurance, without the possibility of passing on these extra costs (because of frozen fees and frowned-upon international recruitment). They may also face a levy on international students, although the Government has weakly promised that, if imposed, its proceeds would be redistributed within the system.

    As a result an escalating number of institutions are reporting deficits. The talk is all of transformation, a new code for everything from sharing back-office services to full-blown institutional mergers. The prospect of outright institutional failures cannot be excluded. Dundee has already come close, although not perhaps as close as initial alarmist scenarios suggested. Scotland, of course, still has a funding council able to intervene in such situations. In England the Office for Students has only recently begun to focus on financial sustainability, so it is far from clear what the fate of an English Dundee might be.

    That is our story – and we sticking to it. Rightly so, because it is almost entirely true, although it might help to convince others if it was not sometimes expressed in a spirit of aggrieved entitlement.

    The other side

    However, going back to Burns, we also need to think a bit more about how others see us. It is not simply that we are living in a post-truth world, so the marshalling of incontrovertible evidence while still necessary is now far from sufficient. This applies in particular to the toxically tangled issues of international students and immigration. No amount of evidence of the benefits of “soft power”, or economic multiplier effects, or of the way non-UK PhD students and post-docs have allowed us to punch above our weight in science and scholarship (same in the US, of course) will persuade those who fear they will have to live in, in the queasy but presumably deliberate phrase of the Prime Minister, “an island of strangers”.

    But there is no need to go down the post-truth rabbit hole. There are perfectly rational and plausible ways in which others can see us that are radically different from the way we see ourselves, ways that might appeal to politicians set upon from all sides by multiple clamouring claims for increased state support and to their officials focused on delivery and free-lance advisers thrilled by difficult choices.

    For example, these others might highlight the fact that spending per student on higher education, from all sources, is high by international standards. Among OECD countries the UK comes third, really second after the US because Luxembourg in the number-one spot is clearly a special case. In OECD’s book expenditure per student is substantially higher than in every other European country.

    Of course, international comparisons are notoriously unreliable because of the difficulty of making like-for-like comparisons and disentangling higher from wider tertiary education. Even the apparently simpler task of just comparing public expenditure and excluding private expenditure is fraught, as the difficulty of categorising expenditure on student loans in England has demonstrated. But, with all these caveats, it is still fair to conclude that UK expenditure per student is towards the generous end of the international spectrum.

    A counter ability

    The counter-argument is that this higher expenditure pays dividends because there are so many UK institutions among the top universities in global rankings. But there are clearly other factors that explain our stand-out performance, although Switzerland actually has more highly graded institutions in proportion to its population. Also our global eminence is essentially rooted in research not teaching performance, which is only relevant to expenditure-per-student in terms of cross subsidy. A better counter-argument is that, because of shorter course lengths – three-year undergraduate degrees and one-year Masters – and high completion rates, expenditure per graduate is pretty average by international standards.

    The same ‘others’, faced with evidence that funding per student in England is higher than in Scotland (spelt out, for example, in the recent report by London Economics for a Royal Society of Edinburgh conference), might not automatically conclude, as we do, that therefore funding in Scotland should be raised to the English level. On the contrary they might conclude that, because Scottish universities offer the same quality (whether measured by league tables, shares of competitively won research funding or external examiners’ and other reports on teaching) and the incidence of financial distress is not greater north of the Border, perhaps English funding levels may actually be (too?) generous…

    Of course, all Anglo-Scottish unit funding comparisons are compromised by the fact that undergraduate degrees are three-years south and four-years north of the Border. Historically the younger age of university entrants in Scotland, the lower intensity of Highers and persistence of “democratic intellect” general degrees may have justified the different course lengths. But there is now no difference in entry ages, Highers and Advanced Highers are clearly equivalent to A levels (as English universities acknowledge in their admissions criteria) and ordinary degrees have almost disappeared.

    Nor is it immediately obvious why, if an English system were to be adopted (which is not going to happen), Scottish graduates should be burdened with substantially more debt. The pressure for shorter, and less costly, degrees would clearly increase. But that is an argument for another time and place – and an educationally informed outcome could well be that English undergraduate degrees should also be four-year, which after all is the international standard in the rest of Europe, the US and almost everywhere else.

    Shiny new buildings

    The same ‘others’, faced with this prima facie evidence of  “inefficiency”, might also express some concern about the less-than-prudent management of some – English – universities since the high-fees regime was introduced 13 years ago. Was it really reasonable to plan, as the cranes went up on campus, on the basis that the tuition fees windfall would last for ever? Or that in crabby post-Brexit Britain the very considerable expansion in the number of international students would not provoke a populist backlash?

    They might even point back to historical precedents, and argue there is nothing fixed or sacred about any particular level of funding. Back in 1981 the former University Grants Committee bet on protecting the unit of resource – and lost. The student demand displaced by this vain attempt at protection flowed into the then polytechnics, creating the shape of higher education with which we are familiar today. When expansion really took off in the 1990s the unit of resource was further degraded, Better times only returned with the revival of public expenditure under Tony Blair and, crucially, Gordon Brown and, later, for a while, with high tuition fees.

    Finally they might channel, in a much more moderate way of course, Donald Trump’s threat to use the money he is withdrawing from Harvard to fund “trade schools”. There are plenty of influential people who argue higher education, and specifically universities, has been expanded at the expense of further education. This may demonstrate how little they know and understand about what actually happens in universities today, in particular post-1992 universities. But they represent an important strand of political, if not public, opinion which is hardly sympathetic to increased funding for higher education.

    To be clear, I am not endorsing this alternative viewpoint. My absolute preference is for a better funded higher education system, and also for increased public funding and a managed retreat from the narrowly transactional and crassly commodified regime imposed in England (do you really, Scotland, want to go there?). Nevertheless, surely it is important to remember Burns’ “giftie… to see oursels as ithers see us”. It can only only strengthen our arguments.

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  • University spending and cost recovery, 2023-24

    University spending and cost recovery, 2023-24

    If you are the kind of person who sits down to read analysis of the latest available TRAC (officially, Transparent Approach to Costing) data the last thing you would expect would be cautious optimism.

    The sector, after all, is circling the financial drain – and when you can read press releases from unions and sector representative bodies that say fundamentally the same thing you could feel confident that this is the situation.

    Much of what we’ve recently read in the press is about the impacts of measures taken to address this financial peril – course closures, job cuts, changes in terms and conditions, and a retreat from spending plans on everything from maintenance to recruitment.

    And what the latest TRAC tells us is that these measures are working.

    Who turned on the light?

    To be clear, it’s not time to quit lobbying for a better funding settlement.

    Based on 2023-24 submissions from 128 institutions in England and Northern Ireland the sector has an aggregate deficit of £2,003m – down substantially from £2,854m in 2022-23. The sector has made savings of more than £800m between two years – no mean feat where costs are rising and the value of income is falling.

    What’s going on under the hood is that institutions are getting better at recovering the costs of things they are funded to do – 95.7 per cent of costs were recovered in 2023-24, up from 93.6 per cent in 2022-23. Costs still exceed income (they have done since the pandemic) but the direction of travel is promising – providers are generating more income (up 5.8 per cent to £44,508m) while limiting increases in costs (up 3.5 per cent to £46,511m).

    This is good news, but counterintuitive. We know that staff costs are rising (there was an annual pay uplift, and pensions spending has increased substantially for those providers involved in TPS), we know that the cost of doing business (everything from maintenance to logistics to consumables is rising). And TRAC confirms this – staff costs are up 6.4 per cent, other operating costs are up 4.7 per cent, on last year.

    There are savings in the costs of finance (such as interest payments) – these have fallen 13.3 per cent over last year, though this does not make a huge contribution to overall spending.

    MSI (coming on like a seventh sense)

    We do, however, need to talk about the margin for sustainability and investment (MSI). It’s the most controversial part of the TRAC specification, and when you tell people that universities need to have at least some money for non-income generating fripperies like student support and estates maintenance within any calculation of the cost of doing business they will lose their minds.

    The calculation is done by institution and is based on an average of three years of data and three years of projections (the nerd in me wants to be clear that these are based on Earnings Before Interest Taxation Depreciation and Amortisation – EBITDA) expressed as a proportion of full economic costs. In 2022-23 this was £3,770m (8.4 per cent of FEC), in 2023-24 this was £3,548 (7.6 per cent of FEC) for the sector as a whole.

    The effect here is that the total costs of running a university (FEC plus MSI) looks lower than it did last year. This is more evidence of savings over multiple years – cutting spending on maintenance, sustainability, and student services. This will make cost recovery and the deficit look better: it doesn’t explain all of the improvements this year but it explains some of them.

    The document provides a fuller list of institutional decisions that would have an impact on the MOS calculation – inflationary pressures, a (regulator advocated) caution in recruitment income growth and research activity growth, variability in forecasts as more institutions design in large changes of focus to plans for future spending, and the usual weirdnesses around pension provisions.

    Spend less, earn more

    So institutions are making cuts, and look financially healthier for it. But there is still an overall deficit, and if cuts and efficiencies are the only answer to financial constraints there is a long and painful road left to walk.

    Within the overall £2,003m deficit, the £1,693m deficit on publicly funded teaching is a major contributing factor: for every £100 a university spends on teaching home students, it receives £89.20 from the public purse. This varies, as we will see, by the type of institution in question and what else it gets up to. In real terms income is actually up slightly (a slight rise in the number of students), but it costs more to pay staff and to do all the other things that teaching requires.

    Conversely non-publicly funded teaching (all overseas students, and some self-funded home students) has a 143.1 per cent recovery rate, generating at a £3,232m surplus. The recovery rate is actually down marginally on last year, but the overall income from this source is up by 7.8 per cent (to £10,727m).

    Research has never had a good recovery rate – we’re now down to 66 per cent for 2023-24, from 68.5 per cent the previous year, and again there’s substantial differences by provider type. Again we can point to staff costs and operating costs rising as the reason, but we should also recall that most publicly funded research returns 80 per cent, and some research has no income attached at all.

    We should also note that other (income generating) activities like catering and accommodation run a small deficit, while other non-commercial activity (investments, donations, endowments) have an on-paper surplus.

    Peer pressure

    While the sector level figures are useful, they disguise a lot of diversity in the sector. We still – in 2025 – do not get institutional TRAC data, which would genuinely be useful for understanding where providers have costs that are substantially higher than comparators.

    Instead, we are back with groups A-F:

    • Group A: Institutions with a medical school that get 20 per cent or more of their total income from research (pretty much the Russell Group)
    • Group B: Other institutions with research income constituting 15 per cent or more of all income (largely the big, research intensive, traditional universities that sit outside of the Russell Group).
    • Group C: Research income between 5 and 15 per cent of all income (larger and research focused post-92 providers with some pre-92s mixed in)
    • Group D: Research income less than 5 per cent of a total income greater than £150m (Other big post-92 providers)
    • Group E: Research income less than 5 per cent of a total income less than £150m (the rest of the traditional universities, plus specialist providers)
    • Group F: Specialist music and arts institutions (as you might expect)

    Here’s what they all spend money on, as a proportion of total expenditure:

    [Full screen]

    And here’s the proportion of costs they recover on each kind of spending:

    [Full screen]

    And here’s what happens when you drill down into research:

    [Full screen]

    It’s not usually a good idea to make blanket statements about sector finances – what’s true for one university is generally not true for another. But in this case the generality is valuable – it highlights that the problems facing the sector are less to do with autonomous decisions and more to do with the overall financial settlement. Individual, provider action is clearly helping the situation. But it won’t be enough.

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  • Plotting the impact of an international fee levy

    Plotting the impact of an international fee levy

    There’s not many in the higher education sector that would have welcomed any part of the recent immigration white paper.

    The reduction in the graduate route time limit would have been difficult enough. The BCA changes to duties on providers in order to sponsor international students will cause many problems. The possibility of financial penalties linked to asylum claims for those on student visas was as unexpected as it is problematic.

    But it is the levy that has really attracted the ire of UK higher education.

    The best form of defence

    On one level it is simply a tax – on the income from international student fees, which is one of a vanishingly few places from which universities can cross-subsidise loss-making activity like research and teaching UK-domiciled students.

    Yes, the funds raised are promised variously to “skills and higher education” or just “skills”, and the suggestion seems to be that the costs will be passed on entirely to international students via rises in tuition fees. There’s not any real information on the assumptions underpinning this position, or credible calculations by which the proportion of students that may be deterred by these rises and other measures has been estimated.

    But details are still scant – the government has, after all, only promised to “explore” the introduction of a levy – and used the idea of a six per cent levy on international tuition fees as an “illustrative example”. We have to look forward to the Autumn statement (not even the skills white paper – remember joined-up, mission-led, government?) for more – and do recall that the white paper is a consultation and responses need to be made in order to finesse the policy.

    Thinking about impact

    There’s no reliable way to assess the impact of this policy with so little information, but we do know a lot about the exposure of each university to the international market.

    For starters here’s a summary of provider income from overseas fees since 2016–17 – both for individual providers and (via the filters) for the sector as a whole.

    [Full screen]

    The story has been one of growth pretty much anywhere you care to look – with only limited evidence of a cooling off in the most recent year of data. Some institutions have trebled their income from this source over the eight years of available data, with particular growth in postgraduate taught provision.

    In considering the financial impact of a potential levy I have used the most recent (2023–24) year of financial data – showing the total non-UK fee income on the vertical axis and the proportion of total income represented by the value of the levy on the horizontal. By default I have modelled a levy of six per cent (you can use the filter to consider other levels).

    [Full screen]

    Who’s up, who’s down?

    In the majority of large universities the cost of levy is equivalent to around two per cent of total income. In the main it is the Russell Group that sees substantial income from international fees – the small number of exceptions (most notably the University of Hertfordshire and the University of the Arts London) would see a levy impact of closer to three per cent of total income.

    What we can’t realistically model is university pricing behavior and the impact on recruitment. Universities generally charge what the market will stand for international courses – and this value is generally higher for providers that are better known from popular league tables.

    Subject areas and qualifications also have an impact (the cost of an MBA, for example, may be higher than a taught creative arts masters – a year of postgraduate study may cost more than a year of an undergraduate course), as does the country from which students are arriving (China may be charged more than India, for example).

    Some better off universities in the middle of the market may choose to swallow more of the cost of the levy in order to increase their competitiveness for applicants making decisions on price – this would put pressure on the currently cheaper end of the market to follow suit as well as direct competitors, and may lower the overall floor price for particular providers (though, to be fair, private providers are still better positioned to undercut should they have access to funds from investment or other parts of the business).

    There is an obvious impact on the quality of the provision if providers do cut the amount of fee income – and this as well could have an impact on the attractiveness of the whole sector. For more hands-on courses in technical or creative subjects, provision may become unviable overall – surrendering the soft power of influence in these fields.

    A starting point

    It’s not often that we see a policy proposal on university funding launched with so little information. Generations of politicians have learned that university funding policy changes are the equivalent of poking a wasps nest with a sharp stick – it may be something that needs doing but the short term pain and noise is massive.

    It could be that it is a deliberate policy to let the sector (and associated commentariat) go crazy for a month or so while a plan is developed to avoid the less desirable (for ministers) consequences. But the idea that international students will gladly pay more to support an underfunded sector is one that has been at the heart of university activity for decades – the only real change here is that the government feels it can put some of the profits to better use than some of our larger and better-known providers.

    In all of this there appears to have been little consideration of the fairness of putting extra costs onto the fees of international students – particularly where they personally don’t see any value from their additional spend. But this has been an issue for a good few years, and it seems to have taken the possibility of a tariff (which could be considered unfair to cash-strapped universities too) to drive this problem further up the sector’s agenda.

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  • The five things universities do to cut costs

    The five things universities do to cut costs

    Incoming Office for Students chair Edward Peck would have expected that many of the questions he would face at his pre-appointment Education Committee hearing would concern the precarious financial situations that are the reality at many higher education institutions.

    His answer to this line of inquiry was instructive. As a part of an urgent briefing with the current chief executive he would want to know:

    the extent to which those universities have done all the things you do as an organisation when you face financial pressures. There are five or six things that you routinely do. To what extent have they been done by those organisations? To what extent is the financial pressure they are facing particularly acute because they have not yet got through all the cost reduction measures that would have enabled them to balance income with expenditure?

    To many with an interest in universities – as places to study, as employers, as local anchor institutions – this idea of “five or six things” would have been confusing and opaque. Is there really a commonly understood playbook for institutions facing financial peril? If there is, why would there be any doubt as to whether senior leaders were following these well-worn tracks to safety? If there genuinely is a pre-packaged solution to universities running out of money, why do so many find themselves in precarious financial situations?

    It would help to take each of these “five or six things” (I’m going to go with five) in turn.

    1. Size and shape

    If your university is smaller than expected in terms of students or income this year, the chances are it has been this size before.

    The sector has grown enormously over the last few years, and the way that funding incentives currently work (both in terms of boom and bust in international recruitment, and the demise – in England – of the old HEFCE tolerance band) has meant that the expansion needed to teach more students, run more estate, or conduct more research has had to happen quickly – taking action when the money and need is there, rather than as a part of a long term plan.

    Piecemeal expansion suffers when compared against strategic growth in that the kinds of efficiencies that a more considered approach offers are simply not available. Planned growth allows you to build capacity in a strategic way, in ways that take into account the wider pressures the institution is facing, the direction it wants to head, or plans for long term sustainability.

    Often senior leaders look back to the resources needed in previous years for a similar cohort or workload in determining costs at a subject area or service level of granularity. If we could teach x undergraduates with y academic staff and z additional resources in 2015–16, why do we need more now? – that’s the question.

    It’s a fair question – but it is a starting point, not a fully formed strategic plan for change. You may need more resources because there is more or different work to do – perhaps your current crop of academics are bringing in research contracts that need specialist support, perhaps the module choices available to undergraduates are more expansive, perhaps the students you are currently recruiting have different support needs. There’s any number of reasons why 2024-25 is not a repeat of 2015-16, and the act of comparison is the start of the conversation that might help unpack some of these a bit.

    2. Pausing and reprofiling

    Imagine that at your university the last few rounds of the national student survey have seen students increasingly bring up the issue of a lack of library capacity as a problem. In response, the initial plan was to increase this capacity – an extension to the existing building paid for with borrowing, refurbishment and update of the rest of the building, and more money for digital resources.

    A sound plan, but three years of lower than expected recruitment, declining income elsewhere, and an increased cost of doing business (construction costs are way up, for example) mean that the idea of putting the plan into action is keeping the director of finance up at night. It may be a necessary improvement, but it is no longer affordable.

    In other words some or all of this valuable work isn’t going to happen this year, as things stand. One decision might be to redesign the project – perhaps covering some of the refurbishment and the content subscriptions but not the new build (and thus not the new borrowing). Even these elements would still have a cost, and with no new finance this would be coming out of recurrent funds. And there’s not as much available as there used to be.

    So the other end of this point is reprofiling existing debt. For even a moderately leveraged university the repayment of capital and interest (under 6 per cent is pretty decent for new borrowing these days) takes up a fair chunk of available recurrent funding each year. If you are able to renegotiate your repayments – extending the loan term perhaps, or offering additional covenants, or both – this frees up recurrent funding to meet other needs.

    Both of these solutions are temporary ones – one day that library will need sorting out, and paying less of your loan back now inevitably means paying more back later. But sometimes suboptimal solutions are all that are available.

    3. Bringing things together

    There may well be cases where the same thing is being done in multiple ways, by multiple teams, across a single institution. There might be benefits in every faculty having an admissions team and a research manager, but in a time of financial constraint you have to ask whether a central team might be more efficient – and whether this efficiency is more important than the benefits being realised from the current configuration.

    Again – the calculus here differs from institution to institution. Where faculty autonomy is the norm, it may be that benefits are being realised that the centre doesn’t know exist, much less understand. As I am sure is becoming increasingly clear, questions like these are the start of a conversation – not the end. Even if in bald resource terms centralisation is a saving, you may not be taking all of the variables into account.

    Conversely, where there are clear savings and no meaningful reduction in benefits you are still entering into a course of action that could prove hugely disruptive to individual staff members. For some, your plan may represent a long hoped for chance for progression or role redesign – for others it may be the push that means that their years of experience are lost to the university as they retire or move to another role. With campus redundancies in the news each week, staff are rightly suspicious of change – bringing people along with new structures requires a huge investment of time and effort in communication, consultation, and flexibility.

    4. Focus

    There are many, many more effective ways to run a surplus than being a university. The converse of this is that people who run universities probably have non-financial reasons to want to run universities rather than running something else. In some of the wilder us-versus-them framings of campus industrial relations we can lose sight of the fact that pretty much everyone involved wants a university to keep on being a university, despite the benefits that would come alongside a sudden pivot into, say, rare earth metal extraction or marketing generative AI.

    That’s an admittedly flippant expression of something that is often forgotten in university strategising. We all have our reasons to be there. Expressing these is often the start of understanding which are the things a particular university does that are non-negotiably essential, and which are the things we do that are either generating income to subsidise these, or facilitating these things being done.

    If there is something that a university is doing that is non-essential, is not helping essential activity to get done, and it is not generating income to subsidise the things that are essential, why is it being done at all?

    Of course, this presupposes that everyone agrees on what activity fits into each category. Even posing the question can be painful. Once again, we are at the very beginning of a journey that probably took up a large part of governance and management meetings over the past few years.

    5. Addressing underperformance

    A couple of years ago, my party trick at conferences involving senior university staff was to show them my “fake subject TEF”. Confronted with a by subject analysis of student progression and satisfaction at their own provider, many of the staff I talked to would give me a similar answer – and it started “ah, I know why that is…”

    The problems our universities face are already known to those who work there. External datapoints only confirm things that are pretty well understood, and usually confirm an instinct to act on them sooner rather than later – a reason why OfS investigations have tended to find the smoking guns already put beyond use by the time they get on campus.

    If the problems within your institution are less obvious, a well-judged comparison with a competitor could help make things clear. A lot of the data you might want to play with is closely guarded, but there are ways in which you might use HESA’s public data to make a start (my tips – Student table 37, Staff table 11, Finance table 8). Otherwise, your staff will have a rich experience of working at other universities – what are the key differences. What is special about the way your place does things – and are there ways you can learn from the way things are done elsewhere.

    Bring to the boil and mix well

    If you are a university governor hoping for the mythical playbook, I can only apologise. If there was an easy way to make university books balance, we wouldn’t be where we are now.

    What is on offer is the hard choices and difficult conversations that will very often lead to arguments, mistrust, and conspiracy theories. At boards and councils up and down the UK, variations on the above conversations are at the root of everything you feel is going wrong on campus.

    You’ll be learning just how good your senior executive and governors actually are at running large, complex, beautiful organisations like universities. Parts of the university you may never have given a second thought to – the planning team, the finance department, the data analysis directorate, internal audit, procurement – will be coming up with ever more ingenious ways to make savings while preserving the university as a whole.

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