How can universities climb out of the coming financial abyss?

The UK higher education sector is “looking over the edge into a very significant financial abyss,” said University of Exeter vice chancellor Steve Smith at a UUKi event recently.

The scale and contours of the hole in university finances caused by the Covid-19 pandemic, and its likely effect on different parts of the UK and different universities are unpredictable – but we know it’s not going to be business as usual come September.

What are universities planning for?

There will almost certainly be a sharp and significant decline in international student demand for entry next year, even if the UK is not still in lockdown in September.

A 2017 London Economics model undertaken for Hepi found that a number of factors including global GDP, exchange rates and commodity prices are all important influencers on demand for international education. “Given that oil prices, for example, have dropped almost 50 per cent over the last 12 months, you could easily see 5-7 per cent decline in international demand before you even factor in the effects of the pandemic”, says Gavan Conlon, co-head of the education and labour market teams at London Economics.

There’s a question mark over the size of UK student demand, and the mobility of UK students. A UCAS poll last week found that the majority of school leavers are sensibly suspending judgement on whether to defer entry to university – but that picture could change as the lockdown wears on.

There are two possible scenarios other than the hoped-for one of everything returning to something close to normal. One is that we remain in lockdown and the first university term’s teaching will take place entirely online. The other is that restrictions are lifted to the extent that students could leave the house to attend essential classroom-based activities, but that travel across the country and entry to halls of residence is restricted. Essentially the majority of students become commuter students if they can be admitted to their local university, while some would potentially still plump for the fully online experience in the expectation of entering their preferred university in January, or at a later date.

In both scenarios young, full-time, students will face the choice of carrying on as planned, without the “rite of passage” experience of transitioning to university and leaving the family home. However, depending on the deferral rate, they would probably be part of a smaller cohort with guaranteed entry, and as Gavan points out, as a consequence, “those students may have an edge in the graduate jobs in three or four years’ time, though it’s not clear how many students, if any, will be making that wholly rational calculation.”

Mature, and part-time student demand is also in flux – traditionally an economic downturn corresponds to an uptick in demand for higher education, but the enormous scale of this one and the unusual measures put in place to protect workers in light of the crisis could dampen demand – especially if there’s a view that the economy will take so long to recover that it dents public confidence in the value of higher education in improving life chances.

Alongside with all of this, there’s likely loss of research income, especially among universities who work closely with business, though, as we know, most research is not funded at its full cost. There’s also the potential for increased rates of non-continuation, and a greater risk than usual – to put it mildly – of students bringing claims for compensation relating to services not being delivered as expected, as Smita Jamdar has explored on Wonkhe.

Commercial income from summer conferencing, catering, and, of course, student accommodation, has all but vanished. And many universities are already carrying repayments on existing debts from capital investment programmes. Some are mid-build, and incurring costs associated with halting construction and making alternative arrangements for facilities expected to be open in the autumn.

Universities UK estimates that the losses from commercial income over the summer could be in the region of £600 million. Exposure on international fee income could be as much as £6 billion – and that’s before you add the knock-on economic contribution of international students to universities and local communities.

Private finance options

“Universities are planning for everything between business as usual and absolute disaster”, says Marc Finer, Director and Head of Higher Education Debt Advisory at KPMG LLP. “But it’s not sufficient for universities to be taking only a sector-level view of the financial impact – all these issues will be affecting everybody to an extent, but not everybody will be under the same type of pressure or across the same timescales.”

Many universities will be sounding out private finance options, some of which are government-backed. Essentially, in most cases, universities will be asking banks for short-term bridging loans to manage loss of income until conditions improve. Major banks are currently scrambling to understand the impact of Covid-19 on the sector and put together potential financing packages.

“There’s no clear visibility at this point of what the sector looks like in nine to twelve months – the exact point when any short term funding solutions might need to be paid back”, says Marc. “The best thing to do is try to preserve the most cash you can from within the organisation. Once you’ve worked that out, if there’s still potential for a funding gap, that’s when you approach the banks or consider other options.”

But – and it’s a major but – even in the case of government-backed schemes like the Covid Corporate Financing Facility and the Business Interruption Loan Scheme, lending banks still need to assess the business merits of requests for financing.

“Bankers seem to be working really hard to be supportive of the sector, but they also have to go through rational credit processes that universities should expect to be every bit as rigorous as under normal market conditions, because they have to make responsible lending decisions,” says Marc. “The bar remains high for universities to demonstrate to lenders that they’re doing everything possible to help themselves before they start asking for more cash.”

Banks need to be confident that the money invested is making up a financing gap that could absolutely not be covered by other means, and that there’s a realistic likelihood of repayment in the future. So universities will be creating business cases based on their own specific circumstances, perhaps including taking a staged approach to seeking private finance in light of the developing situation.

The role of government

Gavan Conlon is not optimistic about the chances of some institutions in the private finance market. “Many institutions already have significant debt obligations to private lenders – there are many that are on the brink already in terms of day-to-day operations and, as well as debt obligations to private banks and organisations like the European Investment Bank. If there is a significant decline in fee income, there are many institutions that probably won’t be able to service their existing loans. Because of the debt terms, we could see the scenario where some universities either have to repay the entire outstanding debt balances almost immediately or find alternative sources of funding. Not a pleasant choice.”

The answer, he believes, is government intervention. “If the government is supporting the travel industry, why not universities? There’s no real argument as to why they should be lower in the pecking order. But if the government does get involved, there’s a likelihood that the institutions most in need of bailout will be those that are already operating in deficit, and this may result in pause for thought.”

If government intervention came in the form of individual institutional “bailouts” – realistically, more short-term bridging loans – it’s not impossible that a quid pro quo would be sought to support the government’s wider policy objectives. Universities are protected from interference in admissions and course content, but if the price of a bailout was a merger with another institution or a local FE college, or the imposition of number controls in some subjects, for example, it’s hard to see what choice boards of governors would have.

It’s this calculation that has led some in the sector to call for student number controls in England. As Chris Husbands and Natalie Day put it on the Hepi blog last week, student number controls offer a way of “suspending the market” for students that would see an unseemly scramble for students that some universities would win at the expense of others. It’s intended as a way of spreading the pain equitably among institutions, and giving everyone an equal chance of survival without unpalatable government strings attached. And there probably does need to be something in place to prevent a handful of universities from marketing aggressively to the UK market with a view to radically expanding home student numbers at the expense of everyone else.

One problem with this proposal is that without knowing the size of the September student intake, it’s almost impossible to set controls at a level that would guarantee that everyone got their “fair share” of students. Another issue is the public portrayal of the move, which has focused on the detriment to students who may not get their first choice of university under a controlled system. In a national crisis in which young people are already significantly disadvantaged, publicly calling for their preferences to be deprioritised could come back to bite the sector.

Options for sector-level government intervention

So what else might government do to cushion the sector? One important area is research funding – ramping up the overall size of the pot available and offering funding at closer to full economic cost would at least mitigate some of the impact of loss of international student fees, which have traditionally cross-subsidised research activity especially in research intensive institutions. The case is already made on the value to the economy of investment in research – and heaven knows we’ll need the prospect of economic returns in the coming years.

Another point of intervention is demand in the domestic student market. It’s more cost-effective, and far better for public wellbeing, for people to be in education than to be furloughed from their employment and twiddling their thumbs, or on universal credit. The government could expand eligibility for student loans, removing the restrictions on equivalent and lower qualifications, and making loans available for shorter courses, even those that don’t meet the current intensity threshold.

There’s also the option to reduce fees for students or increase maintenance payments for September 2020 entry, while retaining the current unit of resource to universities. If concerns about the risk of pressure selling students remains, there could be a sliding scale on the unit of resource returned to universities above a certain threshold of numbers, rather than an absolute number control.

In the medium term, it will be all about rapid recovery, particularly pledging measures to encourage international students back to the UK – something like the post-study work pledge, but on steroids.

The merits of approaches like these is that they act to create a (slightly) more congenial environment within which individual universities can make decisions tailored to their specific conditions and plans – and they give universities making a business case to private lenders ammunition to support their arguments.

Even with measures like these in place, it’s probable that some higher education providers would be unable to weather the storm, and would not make the cut to access private finance. In these circumstances there’s a question about whether the government would step in via regulators or funding agencies to bail out those providers directly. A pragmatic assessment suggests that a universal guarantee to protect all providers – such as that proposed by UCU last week – is unlikely. The government is much more likely to assess the case for bailout of individual providers.

In this case, though assessing the provider’s prospects for longer-term financial recovery may be part of the calculation, the civic contribution and role of the institution in supporting the government’s wider agendas on regional economic growth and science are likely to be also in play. One of the unexpected benefits of Covid-19 has been that government has seen up close the work that all kinds of universities contribute to the national effort – in searching for a vaccine, and in training and supporting the health professions, just to begin with. The role of universities as regional employers, as skills providers and in knowledge exchange will need to be part of the calculation.

When we come out of lockdown and start to rebuild the economy, there’s no doubt at all that universities will be a fundamental part of that effort – but it will take individual providers to make the case for their specific contribution, and it’s unlikely that the Treasury would be able to respond to every single plea for help given the enormous demand for additional support that is likely to be seen across the public and private sectors. Universities that have been on shaky financial territory for some time, and who therefore might look like a worse bet for public investment may need to consider earlier than later how they might do some things differently in a post-Covid-19 world.

There’s also a question here about the student interest. Student protection plans weren’t designed for a crisis of this magnitude, especially since the majority of HE providers have assessed their likelihood of financial collapse as low.

Given the genuine possibility that in September some students may find themselves studying at a provider that is facing serious financial shortfall – and in order to protect the sector, on balance, we’d like them to continue to enrol, there’s a strong case for government to step in with a national plan for student protection. We can’t reasonably expect students to carry the risks of provider failure, especially when they’re not being told which providers are carrying greater risk. Government could, for example, undertake to write off student debt incurred during the 2020-21 academic year for students whose provider has to close.

Through their response to the Covid-19 crisis universities have demonstrated that they are far more than “businesses”. But when it comes to the financial nuts and bolts, the business arguments really matter. In good times, financial sustainability creates the conditions for universities to serve the public. When that sustainability is threatened, so is the public good of universities.