Perfect Storm

An edited version of some recent correspondence with friends and former HE colleagues concerning the impending financial implosion of many of our universities in the UK and the strangely muted discussion in the media surrounding it.

PwC were asked to carry out a review of the financial sustainability of universities in England, Scotland and NI (I'm unsure why Wales was left out) on behalf of Universities UK. Link to UUK report below. Much of what follows here is taken from the UUK report, with my emphases and comments.

What assumptions do PwC say that universities are making in their financial planning?

• Analysis of financial forecasts shows that universities of all sizes expect to rely more on international fee income in the coming years.
• Many universities are assuming numbers of UK undergraduates will also increase.
• Universities are also assuming that annual growth in their spending will fall to approximately 3–3.5%, significantly below recent trend and income growth projections.

All of these assumptions are demonstrably optimistic, to the point of being in completely the wrong direction. How can anyone involved in planning the future financial security of an institution of higher education possibly buy into such Panglossian notions?

Potential sensitivities and their impact (England and Northern Ireland only).

If growth in international student numbers decreased:

• If the growth rate for international students were to decrease by 20 percentage points relative to university forecasts in 2024–25, 80% of universities could be in deficit in 2025–26, 61 percentage points higher than forecast.
• Even if international student numbers remain the same from 2024–25, without declining, 27% of institutions could be in deficit in 2025–26, 9 percentage points higher than forecast.

If growth in domestic student numbers decreased:

• If the rate of growth of domestic undergraduate students were to be 5 percentage points per year lower than forecast by universities from 2024–25 onwards, 56% of universities could be in deficit in 2025–26. This would be 37 percentage points higher than in the base case.

If universities’ costs increased at a higher rate than in current models:

• If university expenditure were to increase by 2 percentage points per year above the levels that universities forecast from 2024–25, 63% of universities could be in deficit in 2025–26. This would be 44 percentage points higher than in the base case.

UUK notes that "although PwC’s analysis considers these sensitivities individually, it is possible that they could happen at once [my emphasis]. For example, if international student numbers decreased and expenditure also increased, universities would face even more pressure." I note: for possible read probable in such reports - as any fule kno.

Further comments

Many universities borrowed heavily following the tuition fee rise in 2012 to finance their expansion plans. (The expansion was further fuelled by the Chancellor of the Exchequer's autumn statement in 2013, which announced the removal of the cap on student numbers from 2015/16 for publicly funded and alternative providers of higher education in England.) They now face these loans - issued on five- or 10-year deals - maturing in the coming years, forcing them into expensive refinancing agreements. Institutions will face stricter terms and conditions on new loans, with those already in the worst financial state the hardest hit. One university CFO has been quoted saying that the rest of the decade would see a “wall of debt maturing” that looks very difficult to refinance.

Universities that were in a stronger financial position probably financed expansion using longer-term debt instruments, so - for the moment - they are probably safe (and may well have better terms in place thanks to their stronger financial situation at the time).

A report from the Office for Students in December last year found that 40 per cent of English universities may have less than 30 days’ liquidity by the next academic year [25/26, see point above re refinancing] - see THES article linked below.

Also from the THES article: It's difficult to get a full picture of the types of covenants attached to bank loans for universities, but most [are] cash flow-related, with declines in international student numbers among the factors negatively influencing banks’ views of institutions. A breach of a covenant can allow a bank to change the interest rate attached to a loan or, in extreme cases, recall the debt in full or seize the assets of a university. [Me: no surprise there, but many will be surprised.]

The Secretary of State for Education announced in the House of Commons on 4 November 2024 the first university fee increase for undergraduate students in eight years. Yet the Chancellor had increased Employer National insurance a few days before from 13.8 to 15 percent. The net effect is a further loss of £59 million for universities in the UK from the 2025/26 academic year. [Me: well done KS/RR.] See link to SOAS blog article below.

My email sign-off on this:
Apologies for this somewhat low-effort email, but I felt that it’s helpful to have some figures in here to fully comprehend the breadth and magnitude of the UK university crisis, although this surprises none of us here in this conversation. Although this is not [yet] much talked about in the mass media, the blogosphere and other parts of the online community concerned with HE is awash with analysis and commentators calling for wider and higher-profile discussion. The impending crisis is real and nearly upon us, and will upset a lot of people when they realise just how badly managed this has all been by all of the stakeholders. What a bloody mess. We used to have a sensible system of HE in the days of local polys and colleges of FE.

References
Financial sustainability of UK universities: PwC findings. Last updated on Tuesday 1 Oct 2024 at 3:34pm. Link here.
Banks get tougher as UK universities’ debt issues mount, Tom Williams, 19 December 19, 2024, THES. Link here [paywall].
Rethinking the Financial Challenge of English Universities, 21 January 2025, Adam Habib and Michael Hastings (Vice-Chancellor at SOAS University of London and Chair of the Board of Trustees at SOAS, respectively). Link here.