Engineering Professors’ Council Congress: March 2005

1. Engineering Professors’ Council Congress: March 2005 University Finances:What will the next five years bring? Dr Jonathan NichollsRegistrar and Secretary University of Birmingham

2. The current state of university finances Latest HEFCE forecasts: • 0.5% surplus on £16.36bn income in 07/08 (HEFCE recommends 3% surpluses for HEIs) • Sector expects 9.6% increase in home students • Sector expects 26.7% increase in overseas students • Public funding at 60% of total income • Staff costs rising well above inflation • Borrowings increasing from £1159m to £3591m by 2008 • Risks = student numbers, salaries, capital programme management (£7896m by 2008)

3. Postcards from the edge • HEFCE monitoring 12 HEIs on a monthly basis • A £120m HEI forecasting break even but developing a £4m deficit in one month • An £80m HEI forecasting total illiquidity in nine months • A £30m HEI with internal auditors whistleblowing on ineffective governance • A £40m HEI with £140m of redevelopment and new debt of £50m • An £8m HEI with £47m of redevelopment and a funding gap > £8m • A £120m HEI with a deficit of £6m to be recovered from overseas student growth but no other strategy

4. Publicly planned HE funding 1989/90–2003/4

5. HEFCE settlement for 2005/2006 • Headline cash increase of 5.6% over 04/05 (5.4% T and 10.8% R) • But underlying real increase for T is 0.98% • And R increase hides volume measure changes and further differential for top performers • PGR new monies welcome but HEPI research implies higher costs than income • Gershon efficiency savings to come

6. Rewards for research excellence • Greater investment £1.25bn increase from 02/03 to 05/06 • Greater selectivity – 6* departments, less funding for grade 4s • Research Councils moving to full cost model (FEC) • Emphasis on financially sustainable research • More funding for RAE outcomes • Capital stream of £500m pa to 2008 (SRIF and Project Capital) • £50m pa by 05/06 for collaborative research • Improved pay for researchers • Arts and Humanities Research Council • Higher Education Innovation Fund £90m pa by 05/06

7. Higher education and business • Lambert Report did not reach the Government’s expected conclusion that universities were the problem in inhibiting the exploitation of research • Quite the reverse – the problem is on the demand side rather than the supply side • Research Councils have played a key role in that success with the IPR assignment changes nearly 20 years ago • Much more incentive for universities and individuals to exploit IPR • Emphasis has been on Spin Out companies, but now shifting to licensing • Inevitable tensions in universities in transition phase between research and commercialisation • RDA approach is not yet as mature as Research Councils – they seek to have all IPR but have no mechanisms to exploit it

8. Elements of volatility and opportunity • Variable tuition fees • Full economic costing • Introduction of HR reforms and pensions • RAE 2008 • A changing overseas student market • Diversity of income streams

9. Variable tuition fees • A significant transfer of risk for little immediate financial gain and more regulation • After bursaries, investment in facilities, cost of salaries [and pension deficits?], little left for new staff or to redress the chronic underfunding of last 20 years • The key factor is the principle of payment by the student for part of the cost

10. Students’ key reasons considered for going touniversity, grouped by subject Source: The University Lifestyle Survey 2004

11. Full economic costing • Will require more selectivity and judgement about what research to support • Will eventually replace SRIF – may have impact on RAMs and devolution • Must result in better pricing of HE services and demonstration of value-added • Could be a more dynamic change than variable fees

12. HR reforms • The Framework Agreement and – for some – Revised Model Statute • Job evaluation and new Framework will add costs to pay bills • Pay inflation at c.3.5% greatly ahead of real increases in government grants

13. RAE 2008 • Is creating turbulence in recruitment and retention markets • May be the last to be held in the current format • May be the beginning of the end of dual support • Will see a further distribution of resources from the weak to the strong

14. Overseas students • Significant value to UK plc: £4bn per annum (>210,000 overseas students in sector in 03/04 + >100,000 from EU) • PMI has had an impact in promoting UK as a destination • However, recent data shows worrying signs of maturing markets (eg. China), revived competition from other countries and in-country and over-reliance on overseas students as a cash cow for universities

15. Diversity of income streams • Autonomy comes from reduced dependence on state funding but ‘privatisation’ not a realistic option • HEIs must diversify their funding base: unregulated markets for students; range of research partners; commercial income; fund-raising • But this comes with the price of high performance, responsiveness, new structures to exploit opportunity

16. Conclusions • Most significant period of change in 40 years • Clear financial risks but opportunities for the best prepared • Stratification of HE in the UK will rapidly develop (some closures and further mergers are inevitable) • HEIs must play to their strengths and adopt clear identities

17. Engineering Professors’ Council Congress: March 2005 University finances:What will the next five years bring? Dr Jonathan NichollsRegistrar and Secretary University of Birmingham