6 May 2020

Tales from the Darkside – a Covid exhortation

Recently the historian Lord Peter Hennessy, with typical acuity, has suggested that future history will be divided between “BC” and “AC”, Before Covid and After Covid. Even if this does not entirely materialise, since there may be many more Malthusian moments ahead of us, as the moral philosopher Toby Ord suggests in his disturbing new book The Precipice, it does underline the fact that, within a matter of weeks, our world has been turned upside down. Words like “unprecedented”, “unparalleled”, even “existential”, abound in the commentaries as experts, commentators, politicians and members of the general public equally struggle to comprehend the enormity of what has happened since Patient Zero in Wuhan fell ill with coronavirus on 1 December 2019.

No part of the economy is immune from the effects of the lockdown, but universities face a particular challenge and while uncertainty has been part of life for many institutions over the past few years, not least Brexit and the prospect of lower tuition fees, all of it seems relatively trivial compared to the potentially calamitous consequences of Covid.

Now a package of support from the government has been announced including the re-profiling of tuition fee payments from the SLC and bringing forward £100m of QR research funding. The Government has also confirmed that providers are eligible to apply for its support packages, including business loan support schemes, as well as access to the job retention scheme. The cap on student numbers has been temporarily re-imposed but permitting universities to recruit up to 5% more than last year.

While some have already welcomed the package there are, as always, conditions attached and a little sting in the tail with mention of universities being encouraged to take “steps to improve efficiencies and manage their finances in order to avoid cash flow problems further ahead.” Above all, this does not add up to the £2 billion of emergency funding which had been sought, the minimum needed to stave off widespread institutional failures. Indeed, London Economics, in a report on behalf of UCU, predicted a loss in tuition fees of £2.5 billion following a decline of 120,000 international students and a further 110,000 UK students.  While some of the assumptions in the report have been questioned by, for example, Nick Hillman of HEPI who wonders whether the figure for  UK students may be too pessimistic, Clare Marchant of UCAS (WonkHe, 26 April) has suggested  that many students may change their choices this year in response to parental concerns. Others have questioned whether students will be prepared to enroll this year if there is little more than on-line learning on offer while still having to pay the full tuition fee of £9,250. Either way, there are huge uncertainties about UK recruitment this autumn, although no-one doubts that international recruitment will plummet with an impact on general budgets but also on research, much of which is cross subsidised from overseas student income. All of this reinforces the case for a major package of support.

It had been reported  (Guardian 23 April) that Ministers were divided both over the scale and the components of any bail-out, but this announcement is essentially a rejection of the kind of support which had been sought and which has been provided to other industries; in short, there is little or no more money on offer. Allowing universities to increase numbers by 5% this autumn is hardly a generous offer since the anticipated reduction in overall student numbers is very much greater. Nor does bringing forward £100 million of QR research funding do much for those institutions who do little or no research. Cash flow may be eased a little by bringing forward tuition fee payments but there remains the longer- term problem.

The current government proposals fail to address the underlying financial problem because they overlook the capacity of individual institutions to deal with the crisis. Different institutions are in much better shape than others. Some universities have accumulated significant reserves which will cushion them in the short to medium term. Others have run deficits as student recruitment declined, largely through the lifting of the cap and the intensification of competition and have few assets to turn to. Others still have invested heavily in their estate and facilities and carry substantial debts on their balance sheets

The annual tables of university finances contain some telling insights into the condition of individual institutions. According to latest published figures, 2018/19, the total value of current assets, those cash and cash-equivalent entities on a balance sheet which can be converted into cash within a year, was £19.35 billion. Unsurprisingly, Oxford and Cambridge came top with a total of £3 billion, although this does not include individual Colleges, some of which are wealthier than most universities. Some distance behind, but with current assets in excess of £0.5 billion were UCL, Imperial, Edinburgh and Southampton. Thereafter, there are some surprises. The Open University was in the top ten, and among a raft of 21 universities with current assets of more than £200 million were two post-92s, Portsmouth and Coventry. At the other extreme, however, were 16 institutions with less than £20 million and a further 37 institutions with less than £10 million in current assets, nearly all of them small specialist institutions but including four much larger universities.

The debt level of institutions also shows marked differences. While some institutions have no borrowings, others have accumulated debts amounting in many cases to over 50% of their annual turnover, and with one extreme case having a debt equivalent to a staggering 238% of income.  Servicing these liabilities, even if they are longer term borrowings, will be an increasing challenge in the present climate.

The full economic impact of Covid on universities will not be felt for a year or so because fees have already been paid and the year’s work is nearly completed. There will be additional costs, of course, and no-one knows whether there will be an attempt at class action by students, especially overseas students, to recover some of their tuition fees. That would really throw a further spanner in the works.

However, it is important that support is calibrated according to the condition of institutions in order to ensure sustainability and stave off institutional failure, although there is no sign of this being on the agenda. We know that the financial health of an institution is an important consideration in student choice; even before this crisis, an opinion poll in 2019 indicated that 84% of students would not apply to a university known to have serious financial problems, (HEPI Policy Note11) and that certainly will not have changed. Being able to recruit an additional 5% of students may, in any case, be a major challenge for many institutions.

There may be another agenda, of course, an opportunity for the government to achieve the kind of sector-wide realignment which has been proposed over the years by organisations such as Policy Exchange. There has never been a time when cooperation and partnership  between universities is more needed, but the evidence is that, especially with the increased marketisation of recent years, they are not geared up to assist each other and the variable response to the crisis is not entirely encouraging. Yet, it is in the interest of the whole sector that, at this time of a potential ruinous crisis, we all pull together and act in concert to convince the government somehow that universities, however autonomous, are a key part of the wider economy just like any other sector. That would, indeed, be a welcome new normality. But is this just a lockdown daydream?

by Deian Hopkin