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English universities’ finances sound but big uncertainties ahead

The finances of England’s universities are stronger than predicted a year ago, according to the Higher Education Funding Council for England (HEFCE).

But, despite giving a clean bill of health for the next few years, it warns of serious questions over future student recruitment, especially in the international market.

HEFCE confirmed in a report published this week that the projected performance for 2014-15 is sound overall “although this is heavily dependent on the sector achieving its student recruitment targets”.

It said recent information from the university admissions body UCAS and universities themselves revealed lower 2012-13 student demand than forecast, with some universities recruiting fewer students than expected.

HEFCE predicts that this means enrolments will also be down, increasing the risk that financial performance for these institutions will be poorer than anticipated.

“We do not yet know whether the reduction in enrolments is a one-off or permanent, and we will monitor this closely over the coming year,” HEFCE said.

The year 2012-13 marks the onset of major reductions in central grant funding, offset by the increase in fees universities can charge – up to £9,000 (US$14,379).

With many universities planning “substantial” capital spending, HEFCE says the effect is a sharp reduction in surpluses and a fall in cash levels, although thereafter surpluses and cash flow from operating activities are expected to rise, partly from a predicted strong growth in fee income from students from outside the European Union (EU).

While the projected financial results for 2011-12 are not as strong as the results for 2010-11, they are significantly better than universities forecast in December 2011.

Overall income is now expected to be £370 million higher than predicted in the December 2011 forecasts. When additional expenditure savings are included, operating surpluses are likely to approach £719 million compared to a forecast of £270 million.

An improvement in liquidity indicates that many institutions have been building cash reserves ahead of public funding reductions and potential increases in income volatility from 2012-13 – average sector cash levels are expected to remain strong at 104 days in 2011-12 rather than an expected dip.

The financial forecasts suggest that no institution is currently at risk of insolvency. While most of the 130 or so institutions funded by HEFCE predict better financial outturns in 2011-12, 20 forecast a fall in performance against their earlier predictions.

Of these, seven say they face greater operating deficits in 2011-12 than they forecast in December 2011, while three admit to facing deficits when they had originally expected small operating surpluses.

This number is expected to rise, with 11 universities forecasting negative cash flows in 2012-13 and 10 in 2013-14. By 2014-15, when the transition to the new funding arrangements is substantially complete, the number of institutions predicting negative cash flows is expected to fall to five.

“Overall the financial outturn for 2011-12 looks manageable for the vast majority of institutions,” HEFCE says.

However, it goes on to warn: “In an increasingly competitive environment and with reductions in public capital funding, some institutions will need to increase surpluses even beyond those currently achieved to finance future capital investment and maintain their long-term sustainability."

Only five institutions had liquidity of less than 20 days in 2010-11 (compared to nine in 2009-10) but this number is expected to rise in the forecast period to 10.

The report adds: ”Strong liquidity is necessary for higher education institutions to efficiently manage the potential increased volatility and unpredictability of the new funding system and the increasing competition from international higher education institutions."

As well as uncertainties over domestic recruitment, the biggest cloud on the horizon is whether universities will be able to maintain the growth in students from outside the EU.

On average, fee income from overseas students has increased by 11.4% in real terms each year over the past nine years. In cash terms, the sector is expecting overseas fee income to rise 37.6% from £2,513 million in 2010-11 to £3,459 million by 2014-15.

HEFCE concedes there is a risk that the revocation of London Metropolitan University’s licence to sponsor non-EU students, now being challenged in the courts, could affect the UK’s reputation and lead to a decline in overseas applications.

“It is too early to predict whether there will be a reduction in demand in future, but fees from overseas students are a significant source of income for many higher education institutions, so this is an important issue for the sector.“

The degree of uncertainty over recruitment of UK-domiciled students was highlighted in a 7 November report from the independent Higher Education Policy Institute, which said it was too early to judge whether the government's higher education reforms taken as a whole have discouraged domestic students in general, and disadvantaged students in particular, but that there is no evidence “at present” that they have.

However, HEPI argues that although increased demand may be a necessary condition for widening participation and fair access, it is not sufficient. Both the total number of funded places, and the way they are distributed, may turn out to be more important than any changes in demand.

HEPI Director Bahram Bekhradnia said: “The government believes the new mechanisms for allocating places to universities will increase students' choice but, as we argued in our previous reports, the opposite is likely to be the case, particularly as funded places are to be reduced from 2011 levels.

“This makes it even more important to 'wait and see' before coming to definite conclusions about the overall impact of the measures introduced from 2012 on student numbers, on access and on widening participation.”
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