- By Huw Morris, Honorary Professor of Tertiary Education at the Institute of Education, UCL’s Faculty of Education and Society, and Richard Watermeyer, Professor of Education at the School of Education, University of Bristol.
- Over the weekend, HEPI blogged on the possible consequences for universities and students of a new UK / EU agreement – see here.
The financial challenges currently facing UK universities, as revealed by last week’s report from the Office for Students, have focused attention among university leaders, government policy makers and media commentators, as well as higher education staff and students, on four things:
What has received less attention are variations between universities in the number of students recruited in general and international students in particular, as influenced by perceptions of institutional quality, and the wider incomes and costs of this provision. It is these things which impact on institutional margins, their surpluses and losses, and determine their longer-term financial sustainability. Most importantly, there are very big differences between universities when assessed by these measures. With a HM Treasury Spending Review and a Department for Education Higher Education White Paper expected imminently, it is these wider institutional economics and financial management issues which are the focus of this article.
Higher Education Statistics (HESA) data reveals a very mixed pattern of financial activity and performance among the 302 higher education institutions that filed accounts for 2022/23, the last year for which full records are available. Income from all sources, including tuition fees, research funds, government grants, endowments and other miscellaneous sources for these organisations, has ranged from £84,000 at the Caspian School of Academics to £2.5 billion at the University of Cambridge. Despite such wide variance, 88 institutions are responsible for over 80% of the income; within this group, the 24 members of the UK’s Russell Group of research-intensive universities account for the lion’s share (47.3% despite attracting only 25.8% of total student numbers). This mismatch between volume and income is explained by the financial margins of course provision.
The costs universities incur are similar. Salaries for academic, professional services and support staff vary, but national pay bargaining and pension arrangements mean that the differences are not great. Meanwhile, the costs of campus buildings per square metre and the unit costs of equipment are similar. So, while there are significant differences in the number of staff, size of university estate and scale of expenditure on equipment, most institutional leaders are alert to the key metrics that help to marshal these aggregate costs. The big difference in costs is in supporting research activity, with the Transparent Approach to Costing (TRAC) data revealing £4.6 billion a year of unfunded activity. This is a measure of the research activity undertaken by university academic staff, which is not supported by research funds and appears to be undertaken within hours nominally allocated to other things, such as teaching and administration. It is this and related figures that the Minister of State for Skills is referring to when she challenges universities to be more transparent with the information they provide on their use of public money.
At a UK level, information on this activity is not hard to find. Table C.1.2. of the OECD’s Education at a Glance reveals that the UK has a higher level of expenditure on research and development per HE student than the US, despite very much lower levels of Gross Domestic Product per capita. The proportion of unfunded research activity varies considerably between institutions and is lowest among Russell Group universities and highest among institutions that are seeking to increase activity from a lower base.
What is understood by most university leaders, but less commonly by policymakers and the media, is the vital role of operating margins in determining whether a university is financially sustainable. The role of margins is best illustrated by comparing two fictional universities.
University A is a large research-led institution that offers a wide range of courses to home and overseas students. In 2021/22, in keeping with the average Russell Group university, one third of its students were recruited from overseas and its position in the Chinese Academic World Ranking of Universities (AWRU) – and to a lesser extent the QS and THE World rankings – enabled the university to charge fees of £80,000 for its MBA programme, £60,000 per year for its Medicine degree to overseas students, and £20,000 per year for its doctoral programme. These high fees and the large volume of students applying for a limited number of places generated sufficient margins (gross surplus) to subsidise the costs of the less remunerative courses for home students in subject disciplines such as English Literature where the full-time undergraduate degree fee is £9,535 per year. This was important because the cost of these courses with the higher charging courses for international students was typically twice the £9,535 per full-time student income earned from UK students, not least because of the costs of the providing time and resources for staff research in these disciplines where there was no grant income to support this activity. These funds also provided the financial resources to underpin some of the research work of academic staff and their professional services colleagues.
The picture is less rosy at University B, a large former polytechnic, with a much lower ranking in international league tables and which is consequently less competitive in attracting Chinese international students. Instead, University B is dependent on recruiting first-generation international students; students typically from less wealthy families, unable to afford the premium fees charged at University A. At University B, the fee for an MBA is £20,000, although this is often discounted and then diluted by recruitment agency fees. The high sticker price and subsequent use of discounting is used because the advertised fee is a marker of quality and the discount fee is used to draw the student in by adjusting the amount to what they can afford and flattering them into believing the university wants them for their talents. University B does not have a Medical school and so a comparator fee is not available, but the fee for an international student on a science and technology degree is £18,000. When diluted by agents’ fees and discounted prices, this fee may drop below the costs of provision. Finally, the PhD course fees of £5,000 per year only cover half the running costs in order to attract students who will help to boost external assessments of the research undertaken by this university.
The net effect of the combination of different course prices and costs at University A and University B is that the former is making significant gross surpluses and the latter is making significant gross losses. It is important to note that this pattern of surpluses and losses is also evident in the financial performance of other university services, including, for instance, franchise courses in the UK and overseas, student accommodation, conference facilities, catering and other services. This is because the prices charged by institutions with less auspicious reputations and league table positions are lower than those of their competitors, but the costs are similar.
There are also issues associated with capital requirements (the need for funding to pay for the renewal and replacement of buildings and other assets) and risk exposure (the extent to which future activity is certain and predictable). The number of young British people wanting to study at UK universities has historically been predictable, and while there has been competition between universities, this competition has rarely led to institutional failure. Institutions may have got smaller, closed courses, and on occasion merged, but they have not been forced into insolvency. Such relative assurance may wane in future as risks rise and the need to renew and replace buildings and other capital assets grows.
We might, for instance, reasonably anticipate increased risk associated with international student recruitment where geopolitical and concomitant financial volatility impact the inward migration of students into UK universities. While we have already witnessed the inhibitory effects of visa rule changes, we can reasonably expect exchange rate fluctuations and changes to the proclivity of overseas governments to fund students studying in the UK to further increase these risks. In the medium term, a requirement to maintain a high ranking in international university league tables, as corresponding justification for high fee charges, compels sizable financial investment in buildings, equipment, and staff to maintain the research performance.
Assessment of university performance in the AWRU, QS and THE World University rankings is dependent on research performance measured by citations and, in the case of the QS and THE specifically, the reputation of the institution in the eyes of senior leaders in other universities and the opinions of employers. These ratings are influenced by past rankings and impressions of campus quality. In the long term, maintaining these league table positions is likely to become more demanding for three reasons.
- First, the drive by governments in many other countries to create their own ‘world-class’ universities leads to an increase in the costs of competing and a consequent decline in margins.
- Second, the growing prominence of philanthropy and alumni giving looks set to make up an increasing proportion of the funding of highly ranked institutions, though this is less of a feature in UK higher education. In the USA, for example, higher education endowment is around $800 billion and is growing by 150% per year. Endowments now account for 50% of the income of Harvard University and a very sizeable proportion of the income of other Ivy League and American research-led institutions. Of course, whether this remains the case in the face of challenges from President Trump’s new administration remains to be seen.
- Finally, in the longer term (10 to 30 years), it seems reasonable to predict that developing countries in the Global South will develop their own higher education provision, and the number of young people travelling overseas to study will reduce, as is being encouraged by the China-Africa 100 University plan and similar initiatives.
The lessons of this analysis for institutional leaders and their governing bodies and councils are that they should broaden their focus to consider the operating margins on all their activities, (that is, teaching, research, accommodation, conferences, room and equipment hire) as well as the investment requirements to maintain this performance in the medium to long term. Without engaging in these types of analysis, the risks of cashflow problems will grow and the longer-term sustainability of these institutions will be jeopardised.
The lesson for governments is that they should look at the real costs of different courses and focus the funding that is made available through student loans and grants on those activities which will provide the greatest sustainable private and public benefit in the long run. This means aligning the funding with future needs, as defined by assessments in the NHS Workforce plan and the analyses by Skills England, Local Skills Improvement Plans and the UK shortage occupation list and, where this is not the case, subject areas where it seems probable that the student loans will be repaid. If institutions wish to fund programmes that fall outside these lists, then they can subsidise these courses with surpluses made from other activities. The issues outlined above also mean that the pressures facing institutions are different, and it is probably beyond the capability of the Department for Education and the Office for Students to oversee the transitions that will be needed in many of the 452 higher education institutions in the UK. To handle these changes will require additional leadership, management and governance resource and ideally greater local and regional stewardship for most institutions.
