The cash crisis pushing Dundee University to the brink of collapse is a familiar tale of woe in UK Higher Education these days. An ‘expert taskforce’ and £22m of Scottish government support may have hauled Dundee back from the edge, but other institutions won’t be so lucky.
The specific reasons for this latest situation have been faced head-on by the new team. It cites financial mismanagement, poor investment decisions, a lack of discipline and inadequate oversight. Other contributing factors are common to a very high proportion of the UK’s 160 or so other universities: the modest recent increase in fees charged (3.1%) to £9,535 for a domestic university student is still well shy of the estimated £14,000 cost of their place; vital overseas students are staying away after visa rule changes; and higher National Insurance costs are making all staff more expensive.
As is unfortunately often the case, shady practices emerge in times of desperation. In March this year, Education Secretary Bridget Phillipson ordered an inquiry into the recruitment of foreign students to several universities through paid agents, with a generous slice of the annual tuition fee rerouted in commission to these and other independent ‘franchise partners’. The government suspects student loan fraud; several of the UK’s less discerning universities will find it hard to survive without keeping the back door open.
The franchise model underlines the complex economics and it’s hard to see the numbers ever adding up without capacity being removed from the market, either in the form of fewer places per institution or outright withdrawal. Scope for much higher fees is limited and, for government funding, almost non-existent. A key problem for organisations likely to fail, however, is the lack of a ‘special administration’ available for universities; an insolvency process for businesses that provide a statutory or critical public service or supply.
The last academic year ended with sector regulator the Office for Students predicting that 40% of UK universities could be in the red by this summer. That figure now looks a little light, as they remain saddled with debt and continue to compete unrealistically for bright students, with a solution for sustainable ‘trading’ no closer to being developed.
The huge growth in degree-level apprenticeships, including directly into the top professions, supports the view that universities may not necessarily be providing a critical public service. Among the roughly 150 universities, very broadly, the ‘original’ pre-1992 universities dominate the top 50 in rankings, followed by former polytechnics and others in HE. Nonetheless, virtually all charge domestic students the full capped fee. Lower status universities face a significant drop in applications, resulting in job cuts and strikes; by contrast, some of the more prestigious names are overrecruiting, increasing class sizes and stretching accommodation.
It is highly likely that a number of universities are close to breaking their banking covenants. Several are already in dire need of restructuring their borrowings to put them on a more sustainable footing. The government has already indicated ‘no bail out’; any support will be limited to temporary cash flow issues, not tackling a more fundamental lack of demand.
Of course, universities aren’t necessarily limited companies. They may be charities, trusts or other entities. The legal clarity of a ‘special administration’ route might provide welcome guidance and protection for lenders, trustees, students and trade creditors, but these are very different – and possibly conflicting – stakeholders from those in other service businesses which may be somewhat more transactional. A university’s obligation to a student, complicated by his or her expectations and subjective view of possibilities further down the line, has little in common with its duty to a major lending bank.
University managers and finance leaders face a list of serious financial issues to address immediately:
- Price / yield optimisation for overseas students
- Identifying a realistic timetable to an ultimate covenant breach
- Urgent talks with lenders, agreeing new financial targets
- Legal liabilities (including broader contract exposure) triggered by breaches
- Pension liabilities
- HMRC issues
These are just the tip of the financial iceberg. It may be that a reset of the model for British university funding is long overdue, but stricken individual establishments failing to act will harm tens of thousands of students already being educated there.
Higher Education leaders should waste no time in seeking professional advice to help address the list above, as well as other challenges unique to their own situation. Buchler Phillips is available for a no-obligation consultation to assess priorities and suitable courses of action.
This article is written by Jo Milner, Managing Director at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.