Funding options for UK varsities

October 15, 2012 Comments Off
                  

De Montfort University

In these crisis-ridden times, public funding of universities has come under stress. Hence, the recourse to long-term bonds.

De Montfort University (DMU), in the British city of Leicester, may not be the country’s best known university internationally, but earlier this summer it took an important step, likely to mark a turning point in the way the country’s prized academic institutions fund themselves at a time of economic uncertainty and cutbacks in government spending.

In late July, the university raised a total of £90 million (Rs 764 crore) through the issue of a 30-year bond, making it the first British university since the 1990s to do so. The funds would be used towards various building projects on campus, the university’s vice-chancellor, Dominic Shellard, said.

“We know that a large number of universities are looking for ways to raise funds — DMU is at the vanguard in this respect and we understand other universities are exploring similar funding opportunities.”

He wasn’t wrong — this week, Cambridge University announced a bond issue on an even grander scale: the 800-year-old institution is raising around £350 million (Rs 2,970 crore) through the issue of a 40-year top rated security, in an offering that was heavily oversubscribed. Previous to this, the only major bond issues (aside from the occasional private placements) had happened in the 1990s, and just by two universities (Lancaster and Greenwich).

FUNDS SQUEEZE
While a number of Ivy League universities in the US have turned to the bond market to top up investment losses, British universities have steered clear of bond issues — partly a reflection of the generous funding the sector has received until recently.

However, British universities have been squeezed in a number of ways: donations have been under pressure as a result of the crisis, while a tightening of bank capital requirements has made it harder for them to borrow funds — as it has been for businesses.

Policy changes at the government level are having a major impact, too. Universities are now allowed to charge up to £9,000 (Rs 7,70,000) a year to EU undergraduate students, three times more a previous cap, boosting their income by up to 20 per cent, estimates Matt Grist of think-tank Demos.

“Universities are actually better off under the new system,” he says.

However, the upper limit still lies well short of the actual cost of educating students, and the majority of universities have opted for fees well below the cap, amid a heated political debate in the country about the consequences of fees.

Since the introduction of tuition fees for undergraduates in 1998 — to widespread protests — attendance at British universities has been closely watched for fears that poorer students would be turned away.

The upshot of this is that fees remain well below the cost of educating students (Oxford University, which charges fees of just over £3,000 a year, estimates that the actual cost is in the region of £16,000 pounds a student — a gap that is only partially filled by public funding).

STATE SUPPORT
In addition, the increase in the fees cap has been accompanied by a sharp reduction of public funding for the sector — the government plans to cut funding for higher education in England by 40 per cent to £4.2 billion by 2014, as part of a wider cull of public spending.

With grants for capital spending facing big cuts, universities have been left with fewer resources to improve their infrastructure and resources.

This comes precisely at a time they need it most, as they face ever-increasing competition internationally, both for domestic and international students.

While a handful of the nation’s leading universities remain consistently near the top of the global university rankings, the rest of the sector tells a different story. According to the latest World University Rankings published by The Times of London, just 10 British universities made it into the top 100 — a development that the editor of the list described as a “collapse into global mediocrity.”

IMMIGRATION POLICY
Moreover, there are fears about the impact of immigration policy changes on a lucrative source of income for universities: international students. Curbs on non-EU students have been at the heart of changes to Britain’s immigration regime, and while the government has insisted that it is targeting the “bogus” students who are intent on using the student route merely to enter the country to work and settle, university bodies have repeatedly warned that the impact could be far-reaching.

Fears about the reputation of British universities abroad were heightened earlier this summer. A major London university lost its right to have non-EU students, after failing to meet some of the tough new requirements, leaving around 2,700 current students without a place to study.

While the impact of immigration policy is yet to be felt on student numbers or financing, Grist argues that it is a potentially major issue for the sector in the future.

In this context it is hardly surprising that universities are looking at new sources of funding. Quite how extensive their opportunities to raise funds on the bond market will be remains to be seen: not all may attract the interest that Cambridge in particular did, gaining a straight Aaa rating from Moody’s, which noted the university’s “outstanding market position, significant amount of liquid assets and strong governance structure.”

REGULATORY SYSTEM
At the same time, universities, heavily regulated by a government council — which not only distributes funds to universities, and tracks and monitors their financial and institutional health, but also must give the go-ahead for any borrowing including through bond issues that take place — are likely to be seen as an investment safe haven. Such oversight is likely to prevent them from taking the risks that have led some institutions in the US to overburden themselves with debt.

Tougher economic conditions have led British universities to innovate in other ways, too: pooling administrative functions in a bid to lower costs without affecting the quality of teaching. Grist foresees further changes in the future — including possible changes to policy that could enable universities themselves to become issuers of loans to students, enabling them to bring in higher tuition fees.

The global economic crisis, and the austerity programmes that have been forced upon nations, have presented a challenge to established public institutions across the world. It is early days yet to see how Britain’s educational institutions will respond, though the signs so far are encouraging. (The Hindu)

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