6th August, 2017

It’s survival of the fittest as Britain’s universities head for trouble

This summer I attended four graduation ceremonies at different universities, and saw thousands of students full of hope and potential. But how safe are Britain’s universities? I think they are headed for trouble.

A number of problems — political and financial — are brewing, and I suspect the next few years will prove much more difficult for them than the recent past.

Our country still punches hugely above its weight in terms of the quality of our higher-education institutions. According to the QS Global Academic Survey, we have 4 of the world’s top 10 universities and 9 of the top 50. They generate £31bn of income and they are a vital national resource. But I believe the future of some of these institutions is in doubt, and their leadership is not blameless over the looming crisis.

First, universities have been on a building spree, partly funded by debt. They have borrowed billions — often via bonds, so the debt is long term and set at relatively modest interest rates. But the principal must still be repaid.

Overall, I estimate that the sector has approaching £10bn of debt, compared with a fraction of that a decade ago. It also suffers from the actuarial deficit in the university pension scheme, which is more than £7bn and rising.

Some universities have also entered a number of unwise PFI-type arrangements with funders for facilities, such as student accommodation. If income for the system drops, then a number of the roughly 160 higher- education institutions with weaker balance sheets and reputations may fail.

The confidence to carry out this expansion was fuelled by undergraduate fees of £9,000, which have provided a huge funding windfall for the sector. But the loan structure that, in effect, finances the fees is a shambles: students leave university with an average of more than £50,000 of debt each.

Interest rates on the borrowings are too high. The total amount of debt has doubled in four years to more than £100bn — and three-quarters of students will not even pay it off in full. Meanwhile, students are increasingly unhappy with the quality and value for money offered by their courses.

Leaving the EU may present both challenges and opportunities for British universities. Only 5.6% of their students currently come from EU countries, and that number is likely to fall because they will probably have to pay similar or higher fees than those paid by students from places such as India and China. Currently they pay the same as British students.

Non-EU overseas students, who pay much more to study here, contribute 13% of overall university funding. If British universities can maintain their reputations, that income could grow.

Meanwhile, the EU funds about 10% of university research, which may disappear — although we would obviously save on our budget contribution to the EU when we leave. As 16% of university staff are from the EU then, if some depart, this absence might generate staffing challenges.

The complications do not end with money. The government has published the new Teaching Excellence Framework, which rates universities on the quality of their instruction. Some apparently first-class institutions, such as the London School of Economics and SOAS University of London, received only bronze ratings. Students complain that too many lecturers spend their time researching — and not teaching.

We need a highly educated workforce to succeed in the modern world. Universities do not just provide the skills and qualifications for nations to prosper; they can also foster technological progress via their research and spinout activities.

Stanford University has always been at the heart of Silicon Valley, the global hub of the tech revolution; similarly Massachusetts Institute of Technology, Harvard, California Institute of Technology and New York University have all played important roles in boosting local innovation, employment and growth— especially in areas such as computing and biosciences.

Our universities need to stop borrowing and spending beyond their means, especially in a period when their incomes may be threatened. Vice-chancellors have increased their salaries rapidly in recent years, which has caused deep resentment; they should demonstrate more restraint, given that they are charities and largely funded by the taxpayer, directly or indirectly.

Only the best universities should focus on research — the others must concentrate on improving their teaching. They should consider shorter holidays and reducing the duration of degree courses from three to two years.

The universities have operated a cartel on fees, which must stop. And they will have to adjust their business model to succeed outside the EU.

Some frail institutions should merge with stronger ones. They should reform their pension scheme to make it more affordable.

As ever, the strong universities will get stronger but the weak will suffer.