EUROPE: The challenge of financial sustainability

Financial sustainability is one of the key challenges facing Europe's universities and constitutes a strong focus of the European University Association's work. Despite the tremendous diversity that exists in Europe, all higher education systems are increasingly under pressure due to rising student populations and mounting costs of undertaking research. They therefore face the same challenge of designing sustainable funding models.

The EUA's recently published EUDIS study highlights a number of challenges related to public funding that need to be overcome if Europe's universities are to continue to provide high quality teaching and excellent research.

1- Universities are highly vulnerable to changes in public funding

Almost 75% of European universities' income comes directly from public sources. As governments struggle with austerity measures to balance their budget deficits, many have reduced their investment in universities. The high level of public funding in the overall university budget means that any reduction is bound to have the highest impact on their financial sustainability.

The EUDIS study showed that Europe's universities are already diversifying their income structure. Additional sources (excluding tuition fees) such as contracts with the business sector, philanthropic funding and income from commercial activities represent more than 10% of the budget of the majority of universities.

However, while there is potential to increase additional funding from private sources, the study showed that these simply cannot replace sufficient public funding. Furthermore, increasing revenue from additional sources often requires 'upfront investment', which is particularly difficult when public budgets are being reduced.

Although tuition fees can constitute another major source of income, their role in higher education funding models varies quite considerably across Europe.

2- Managing multiple funding streams remains a complex task

Developing new funding streams often translates into complex financial management. Some universities have well over 100 different income sources, which have, in many cases, very diverse accountability regimes. Nor does the higher education community expect this trend to slow down or reverse. If anything, a majority of the respondents in our survey believe that the overall number of sources will increase.

Universities need to invest a lot, both in time and resources, if they want to obtain these funds, whose application, contractual, reporting and reimbursement procedures often differ widely. In reality, 'small income sources' can often generate a disproportionate amount of paperwork and administration which in turn raise the operational costs for universities.

3- Co-funding requirements are widening the funding gap

All of the above should give a sense of the scale of what is probably the most underestimated challenge to universities' financial sustainability - that is, the increasing trend to resort to co-funding requirements. Co-funding requires that a university raise a proportional amount of the full cost of the activity or project being funded from its own budget or from another public or private source.

Data from our study showed that a majority of universities deal on a daily basis with co-funding requirements, whether for most or part of their public funding. Both European and national public funders increasingly use co-funding requirements by either funding only a certain percentage of the direct costs or just a part of the indirect costs of an activity (especially in competitive funding schemes).

This is a threat to the universities' financial sustainability, especially if it affects a significant part of their public funding. Indeed, co-funding does not necessarily lead to leveraging funds from other sources; in most cases, universities have to resort to using resources from their core budget.

The EUDIS survey revealed that 65% of the respondents co-funded these activities from core public funding, while 35% resorted to a mix between public and private funds. The reason for this is clear - it is very difficult to raise funds from private funders to cover a part of the indirect costs of a project whose core activities are already funded. This, in turn, reduces the university's capacity to invest in its future, diminishing the amount of 'unconstrained' funds available to finance facilities, equipment or staff.

This issue is all the more relevant as there is a strong link between the frequency of co-funding and the degree of diversification of funding sources. Additional income sources rarely fund activities on a full cost basis.

Universities that have been very successful in attracting additional funds through competitive research funding schemes face major problems as a result. Thus, co-funding has become a risk associated with income diversification which needs to be solved through appropriate funding schemes.

Creating the conditions for successful diversification

Public authorities have to play a key role in helping universities overcome all of these challenges.

Governments and other funders, particularly at the European level, need to streamline the modalities and requirements of their funding programmes, while reducing the complexity of rules and excessive reporting.

Simplification of the rules will ensure that financial and human resources are released for the primary objectives of high quality teaching and research. This should be underpinned by proportionate accountability measures as well as consistent rules and terminology across programmes.

To overcome what we believe may be one of the biggest threats to the financial sustainability of European universities, funders need to resort less to co-funding requirements and replace them wherever possible by funding on a full cost basis.

Public authorities also need to provide the right framework conditions, remove barriers and set appropriate incentives. For example, matched funding schemes designed to increase philanthropic giving, which can be highly successful for increasing donations to universities, remain a much-underused instrument.

We also believe that universities themselves need to continue to seek to further diversify their income. This requires a proactive approach on several levels.

To position themselves in an increasingly competitive environment, universities need to identify their strengths and specialisms, allowing them to develop an adequate branding strategy. This should be complemented by an analysis of their activities in relation to the potential for income generation.

To turn the strategy into reality, universities will also need to invest in the development and professionalisation of their support staff. None of this is possible, though, without the university leadership's experience and commitment to the process.

* Thomas Estermann is Head of the European University Association's governance, autonomy and funding unit, with responsibility for the EUA's work aimed at strengthening universities' autonomy, governance, management and financial sustainability.

* The report "Financially Sustainable Universities II: European universities diversifying income sources", is available here.

* Thomas Estermann is Head of the European University Association's governance, autonomy and funding unit, with responsibility for the EUA's work aimed at strengthening universities' autonomy, governance, management and financial sustainability.