This guest blog has been written by Andrew Connors, Midlands Regional Head of Large Corporates and Head of Higher Education and Charities with Lloyds Bank Commercial Banking.
Andrew is among the speakers at this week’s HEPI Annual Conference, on Thursday 24 June, which Lloyds Bank and UPP are sponsoring – come along to hear from the Secretary of State for Education and the Chief Executive of the Office for Students and many others, and to hear the results of this year’s HEPI / Advance HE Student Academic Experience Survey. Free places are available for institutions that already support HEPI’s work.
In April 2020, I wrote a blog for HEPI which I called Another Perfect Storm where I tried to predict the likely financial impact of COVID19 on the higher education sector. This was a pre-pandemic headline that had stuck with me relating to an higher education sector that was facing into a declining student number demographic, turbulence surrounding Brexit, a looming pension crisis and the impact of the potential implementation of the recommendations set out in the Augar review. With the country and the higher education sector facing into the most challenging period since the Second World War, I also used the word ‘tsunami’ in my blog to describe the scale of the challenge facing the sector, given the huge wave of pandemic driven impacts we were seeing in our conversations with our higher education clients.
Just over a year on, as the country and the sector seek to emerge from the pandemic, and with our vaccination programme seemingly giving us a genuine opportunity to do that, now seems a perfect time to look back over this unique and most challenging of periods and share the experience my team and I from Lloyds Bank have gathered from working with over two-thirds of the UK’s universities.
So, how has the actual experience mapped that April 2020 expectation?
One thing that was immediately clear to the team at Lloyds Bank was that the higher education sector was likely to have a different pandemic experience to other sectors. In the second quarter of 2020, we were dealing with a significant quantity of urgent liquidity requests across a range of sectors who were hit immediately and extremely hard by COVID19. The scale of these liquidity requests was something we had never seen before and hope not to see again. What we thought, however, was that while the impact of the pandemic in the HE sector was likely to be slower, the overall impact could well be deeper and longer and this is exactly as it has played out, with the multi-year student cycle by definition driving multi-year financial impacts for institutions.
The good news, however, is that whilst the financial impacts of the pandemic on the sector have been wide ranging and significant, overall the experience has been much better than expected in those dark days of Q2 2020. For every institution we have talked to, performance for this financial year is ahead of those worst case financial scenarios that were produced over the summer. The largest income impacts have been as a result of lost student accommodation fees, loss of catering and other campus related income, the closure of hotels and conferencing facilities and the non-running of summer schools, with some of the larger universities experiencing more of an impact. Our experience is that the majority of our medium-sized and smaller universities have seen a less significant effect – in many cases because they typically recruit smaller numbers of international students, don’t own so much of their own accommodation footprint or have a significant conferencing or summer school infrastructure.
What we didn’t predict in April 2020
We’ve seen student numbers not only hold up but increase for many, and the income upside of these better-than-expected numbers has been significant. For UK students, with the traditional gap year opportunities not available and working options minimised, a less than full university experience appears to have presented as the best opportunity. The belated move to Centre-Assessed Grades last August also appears to have given more students the chance to take that opportunity. Whilst international students numbers have been more mixed with some institutions seeing numbers holding up relatively well and others steep declines, those worst case financial forecasts of reductions of 50% to 80% did not materialise. Overall, the biggest beneficiaries of increased student numbers were Russell Group universities and while we are aware of a number of institutions where student numbers did reduce year on year most institutions were ahead of, or at least very close to their base case UK student number scenarios.
Plan for the worst, hope for the best
The message in my April 2020 blog was that institutions should plan for the worst and hope for the best. This is exactly what we saw happen and an immediate consequence was institutions ensuring they had sufficient liquidity to meet regulatory requirements if downside financial scenarios played out.
For Lloyds Bank (and I’m sure other financial institutions) this has meant a volume of ‘in case of need’ liquidity requests across the Government schemes – we have supported institutions to access the Bank of England’s Covid Corporate Financing Facility and provided loans under the Coronavirus Large Business Interruption Scheme. Most commonly we have supported institutions with three to five year revolving credit facilities to support them through the multi-year impact. This support has equated to over £500 million of funding for the higher education sector since the start of the pandemic with new facilities for HE clients ranging from £5 million to £100 million.
This extra liquidity alongside the significant cost reduction programmes undertaken by many universities and the mothballing by many of ambitious estate development plans has seen many institutions now able to look to the future with confidence again. Indeed, many are now dusting off and reshaping their long-term strategic plans. There is no indication that any university has needed to access emergency funding through the Department for Education’s Higher Education Restructuring Unit.
In my April 2020 blog I did share my experience of the financial crisis of 2007/08 and that I saw many companies thriving in adversity and urged universities to be open to the opportunity a crisis can present to transform operating models, develop and grow people and future proof institutions. We have seen this play out through the period of the pandemic and we have learned that the sector is more agile and adaptable than we could possibly have imagined. Our universities have been able to transform their operating models and ways of working at pace and they have still been able to deliver for students. And, of course, the pandemic has given our universities an opportunity to demonstrate the world-class nature of our research and teaching programmes to a global audience.
All this means that I am confident that many institutions will emerge from this period with an enduring confidence that will serve the UK well in the years ahead. We have already seen that confidence in a number of universities once again accessing the capital markets this year to secure long-term funding. Long-term funding which can be used to transform estates, fund continued digital transformations and reshape existing financing arrangements but also support the journey to being a global leader in the area of environmental sustainability which will be an enduring legacy for our institutions into the future.
Of course, this is the UK’s higher education sector and it is not difficult to see a number of storm clouds on the horizon. These include rising pension deficits and the continuing focus on the ultimate cost to the public sector of higher education in the UK, including revisiting Philip Augar’s review of post-18 Education and funding. It may even be that the next perfect storm is just around the corner but I believe the sector can be proud of its response to the Covid-19 pandemic and confident in its ability to deal with whatever lies ahead.