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Why UK universities must win a better funding settlement

  • 25 May 2020
  • By Lucian J Hudson

This blog was written by Lucian J. Hudson, Lead Author, Universities at the Crossroads, and past Director of Communications, University of Oxford and The Open University.

In my report for Policy Exchange published in February before Coronavirus moved centre stage, I warned that the higher education sector was not yet in a crisis but was facing one. The epidemic and its economic impact has brought that crisis forward. There is not immediate panic necessarily, but there is real fear for the survival of many institutions in the coming year. Before Coronavirus, some universities might have thought themselves financially strong enough to weather any storm. But many more institutions are now vulnerable. This requires not only the ongoing negotiating efforts by the sector to persuade the Treasury to make more temporary funding available to stabilise the sector, but even more of a realisation by the UK Government, especially the Treasury, that the sector is critical to the economic recovery, especially through spending on research.

My financial analysis in February was that 20 or more institutions were financially vulnerable. This analysis was supported by many vice-chancellors and chairs of governing bodies off-the-record and by some on-the-record. In the light of Coronavirus and its impact, that number could now be double.

Much as it is tempting to separate the sector between research-intensive institutions and the rest, the underfunding of higher education – and the continued decline in the value of student fees in real terms – has preceded this crisis and affects all institutions. Russell Group universities, who depend on high numbers of international students as a proportion of their income to cross-subsidise research, are also vulnerable. Income from international students contributes significantly to research, and with that income likely to fall significantly this year, many institutions will have not only to draw on cash reserves but start cutting costs significantly – including making redundancies. Even if universities try to make good the gap between what they were expecting from international student numbers and any reduction this year, the task could be Herculean. Even if more domestic students are recruited, the financial loss of any one international student has to be met by the equivalent of two domestic students. It is difficult to see how our campuses and cities could accommodate that – and anyway the new student number cap precludes it.

The financial stabilisation package that was recently announced was designed to stop competition for UK students that would have made survival even more difficult for some of the most financially vulnerable universities. But it was far from being the total package that Universities UK, supported by the Russell Group, is seeking. One vice-chancellor told me, ‘If there is no deal on research, the damage to the UK economy is going to be massive. What is going to pull the UK out of the economic doldrums is knowledge-based activity.’ The expectation at the moment is that if and when there is a second tranche of funding from Government, it will try to meet the sector’s need for an additional £2 billion or more for research. Senior university leaders are braced for a lower amount.

Other university leaders whose institutions rely less on research are privately very concerned about the financial health of the sector over the next year to 18 months, with some universities perilously close to going to the wall. The Department for Education package stated, contrary to previous statements, that any institution at risk of closure might receive additional support. The UK Government has moved significantly on this. But according to one senior contact in the sector, the impact of a failed university is not yet fully appreciated by some:

We have not got across the message across to some in Government that we should be horrified by the prospect of even one university going under. We are facing a worse prospect than that. The shock waves that will send, and the blow to confidence to our international reputation, will be a lot worse than people realise.

This can only be avoided if the sector can secure a better deal with the UK Government, not just in the coming months, but going into next year. Effective negotiation between the bigger players in the sector and Whitehall is not a substitute for a longer-term view of the sector’s strengths, weaknesses and potential.

As well as responding to the national emergency and adapt to lockdown and its easing, higher education institutions are already planning for alternative scenarios for the year ahead, all while trying to ensure that they remain financially viable in the short and mid term. The smarter institutions who did scenario planning on the basis of a cut in fees recommended in the Augar review, are now adapting their strategy to factor in the Covid-19 economic impact and assuming the cut in fees – and therefore a possible cut in funding – does not materialise. We are already seeing some institutions take more drastic action in terms of reducing their costs in anticipation of a fall in income.

Whatever arguments there are in favour of an announcement in next few weeks about increased research funding, it is in the interests of the wider sector and of UK Government to wait for a clearer picture on student enrolments this year, and plan for another tranche of government funding, depending on those student numbers. Any ask for more funding that goes beyond research might fall on deaf ears for the time being, but an ask to review funding later this year is not unreasonable. There is little optimism in the higher education sector that any such funding might be made available for financially vulnerable higher education institutions. The suspicion is that that the UK Government will want to prioritise any other funding to address under-funding in further education.

In a HEPI blog a year ago, I argued, ‘We need to resist funding reductions to the sector unless implications have been worked through and plans are in place to manage change.’

UK higher education’s unique selling point is not just its research excellence. It is the combination of excellent teaching, research and learning, widening access, positive student experience and demonstrable civic leadership. It matters that so many universities are part of the success of their communities. Do we want communities impoverished because we failed to support a university at a moment of greatest need? Thinking beyond this crisis, the UK Government will want to return with vigour to levelling up the UK, address regional disparities and enable universities to work with other sectors to close skills and knowledge gaps. Giving universities greater priority in relation to their economic, social and cultural contributions should be become more important, and is worth increased investment. Universities have responded wholeheartedly to the Coronavirus crisis. They are critical to any sustained recovery.

Negotiations with UK Government need take an even more strategic turn. If there is a strategy, it is not explicit. We need a change in mindset and language from UK Government to move the debate from emergency response and bail-out to recovery plan and a focus on investment in the future. If the UK is to have a strong economic recovery that benefits people from across the country, it needs a UK higher education sector that collectively is surviving and thriving, and playing an integral of role in the UK’s future global success.

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