/ Reading University in trouble

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Offwidth - on 09 Feb 2019

https://www.theguardian.com/education/2019/feb/09/reading-university-in-crisis-amid-questions-over-121m-land-sales

The idea of Universities as businesses,  rather than a not-for-profits for the public good, was discussed on Radio 4 on Thursday with two VCs and a researcher from Oxford specialising in HE policy.

https://www.bbc.co.uk/programmes/m0002cgm

Both VCs were adamant that the massive increase in infrastructure investment were due to current cheap loan availability and was very unfairly being descibed as due to being  rather flush with cash from 9k fees. This argument struck me as a massive red herring...under the new market arrangements English University executives have been acting increasingly as business leaders too often making risky decisions as they perceive it as necessary to keep up in a highly competitive environment (Evan pinned the Northampton VC on this... he saw himself as a business leader who had invested in a new campus but seemed reluctant to accept he might soon be bancrupt if fees drop to £7k ). The VCs also claimed any course now costs 9k to run, due to inflation and 50% fixed costs, which to me as more oversimplified spin. Fixed costs have been creeping up over the decades and they include these recent infrastructure investments and bloated central admin functions, which were a choice.  When I started my job in HE the central admin infrastructure was tiny. Polytechnic Principals were only paid about double the career grade academic salary. Department heads reported direct to the exec (we now have Deans and College Heads in between). We made do with shabby buildings, as the very tight governance arrangements (then under the LEA) were focussed on expenditure for teaching our students. I initially welcomed the 1992 act as our LEA seemed borderline corrupt and highly interfering but soon became appauled with the lack of independant governance following the change (all local council and academic input was removed). Old universities had much better governance arrangements in '92 but these have also been watered down since. Only Scotland has recently moved to try and halt this growing governance crisis.. we have made these almost unaccountable 'leaders' and now force them to respond to market conditions. In a time when teaching fees might drop 20% with no suggested corresponding increase in government grant income and the ongoing brexit mess, this could quickly become an utter disaster.

One of the points made in the radio show that I do agree with was the collapse of any institution could have serious knock-on effects to all  UK University  reputations and finances, especially in terms of major reductions of overseas students due to lack of trust. That graduates might not have any access to references wasn't even mentioned.

Another important point was the impact on local and national economies. Universities are sometimes the biggest local employer and a massive boon to local growth and innovation. The direct total business turnover is £35 billion and the estimated impact on the economy is as much as £90 billion.

Post edited at 12:09
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gethin_allen on 09 Feb 2019
In reply to Offwidth:

You have to accept the position of the VC who you say would be screwed if fees were to drop to £7k p/a. Which business could really carry on regardless if suddenly an external regulator were to impose a 23% reduction in their main income?

Regarding the seemingly excessive borrowing by universities, my employer claims that it is partially due to the (hushed tone) Brexit situation, and them wanting to secure the funds before they possibly disappear, which could be true to a limited extent as we are in an objective one funding area and the majority of the buildings that have sprung up in the last year do have massive funded by the ERDF signs all over them.

As a department, we are one of the ones where teaching the curriculum is very expensive (much more than fees) and we are growing rapidly bucking the trend of other departments and other universities.

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wintertree - on 09 Feb 2019
In reply to Offwidth:

It’s just as well that Jaguar Land Rover didn’t take out £0.5 Bn (or more) in private loans with a 30-50 year term in order to go on a building spree following a business case extrapolating growth from their 2010-2017 income from the Chinese market...

There’s currently about 100,000 students from China in the UK corresponding to perhaps £1.5 Bn in annual income in to the sector.  Leading chinese universities are marching ahead in quality and an increasing number of hostile games are being played between the Chinese government and western counterparts.  This income is far more volatile than UK student fees but is also central to a lot of the growth plans... 

Post edited at 14:13
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Offwidth - on 09 Feb 2019
In reply to gethin_allen:

I don't have to accept that VC position: he wants to play the business leader when things go well and fall back on public sector protections if fees drop. He reminds me of the leaders of the banks that wanted a bailout when their gambles, that were part of the 2008 crash, went wrong. I certainly don't want a return to the 'iron hand' of local council education leaders in post '92s but there must be some middle way where there is nationally more emphasis on cooperation and less on competition and at institutional level some wider governance input that can steer focus on expenditure more to academic purposes and put a brake on the most risky investments. I think post 92 Universities could run themselves better with input from an old fashioned senate than with modern VC led exec teams and their governors ... with usually no academic staff or local council input to governance. 

Just to be clear I'm fully aware some courses are very expensive... especially some STEM courses where the current fee and govenrment top up would fall short even if fixed central costs were lower.... but I'm not convinced that is the case with other much cheaper to teach courses. It seems ludicrous to me to suggest, as they did in that show, that all courses cost much the same taking the grant top-ups into account. Its also often irrelevant if fee income is proportionately low for departments, as for the top institutions. Those STEM departments with expensive teaching have to deliver income in other areas to meet the new KPI based regimes (more than average numbers of profit making overseas students, 3rd stream income, large research grants and high REF scores) or they risk closure.

The whole sector relies on overseas students and 3rd stream income to fill the big gap in home/EU fee income and state funding for HE activities (fee top-ups and research funding of which only a very tiny proportion is full cost funded). Placing existential threats to this crucial income generation from overseas students, by implying a mass reduction of student visa numbers to meet dumb immigration targets and saying institutions of the quality of Reading could be allowed to go bust seems like economic madness to me.

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Offwidth - on 09 Feb 2019
In reply to wintertree:

We are lucky that, although improving, the best Universities in China are still pretty poor in world ranking terms for the size of their economy.  My bigger concern is the competition for those chinese students: most of the EU now teach in English at MSc level in popular subject areas to add to the rest of the western economies in the English speaking world, who are not busy sabotaging their HE systems.

http://www.shanghairanking.com/world-university-rankings-2017/china.html

Post edited at 16:29
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pasbury on 09 Feb 2019
In reply to Offwidth:

To use business terminology; it’s become a very crowded sector with every tech college in every small town now affiliated to a university. It also seems, outside the top tier, quite undifferentiated to me. Though I’m happy to be enlightened.

In that environment you’d expect some casualties, a bit like the high street ones we’ve been having recently.

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gethin_allen on 09 Feb 2019
In reply to Offwidth:

"> I don't have to accept that VC position: he wants to play the business leader when things go well and fall back on public sector protections if fees drop."

But the reason why fees may drop is due to government intervention. In a world were universities have to appeal to the fickle nature of teenagers to get money it's no surprise that universities are building fancy looking facilities, if they didn't they'd have no students and no money.

And unless you are one of the lucky universities where the alumni give hundreds of millions of pounds to their alma mata (see David Harding's gift to Cambridge recently) , you are going to have to borrow money based on future projections of income.

"He reminds me of the leaders of the banks that wanted a bailout when their gambles, that were part of the 2008 crash, went wrong."

I see no similarities at all.

"Those STEM departments with expensive teaching have to deliver income in other areas to meet the new KPI based regimes (more than average numbers of profit making overseas students, 3rd stream income, large research grants and high REF scores) or they risk closure."

So we need to get loads of foreign students because they pay well? and they expect to see nice new buildings and facilities which we shouldn't be borrowing for and building?

And at the same time foreign student numbers are dropping a the students are feeling less welcome because a few years ago a load of people made a big fuss about the UK being full of too many foreigners.

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wintertree - on 09 Feb 2019
In reply to gethin_allen:

> So we need to get loads of foreign students because they pay well? and they expect to see nice new buildings and facilities which we shouldn't be borrowing for and building?

It would seem reckless in the extreme if the borrowing comes with multi-decade repayment terms.  It’s great for the current crop of VCs to show what visionaries they are to help them get to their next stop on the gravy train, but if there’s a small shift in our international competitiveness then there’s a shortfall of £xx m per year in an institution’s budget.  Nobody else is going to buy these fancy new buildings (*) so if the money dries up it’s the home students who will suffer amidst the vast layoffs.

(*) nobody will buy them even if they weren’t built by various outsourcing firms that themselves are under immense financial pressures and/or going bust and will probably bankrupt themselves out of warranty repairs on the buildings...

> In a world were universities have to appeal to the fickle nature of teenagers to get money it's no surprise that universities are building fancy looking facilities, if they didn't they'd have no students and no money.

Conversley it’s not hard to find students who resent seeing their large future debts being used to fund unnecessarily fancy buildings designed to look good on a prospectus.  

Post edited at 21:37
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Offwidth - on 09 Feb 2019
In reply to gethin_allen:

I'm sympathetic to what you are saying but the Northampton investment is huge for the size of the institution and might well break it. Northampton is my home town and losing the University after all the recent troubles... the bankrupt council, failing to get city status and better funding arrangements,  and the serious retail outlet loses, would be a disaster.  I don't know enough to be sure but such an investment looked very risky to me and I'm not convinced that with better governance it would have gone ahead. On being a bit like a banker... people can listen to the show.. he said he felt his was a business first but then backtracked when the possibility of bankruptcy was raised if fees drop. Plenty of bankers were not part of the sub-prime mortgage fraud but got caught up in the fall-out from the associated investments. It was wise they were bailed out and so should Northampton be, given the local implications of closure.

I think we desperately need something like the new Scottish governance laws, as you could say the same about almost any post '92 with recent major debt for build plans and quite a few pre '92s. I think some of these executive boards are out of control and reacting from panic rather than sound planning. In student surveys of why they chose their institution, current obsessions like shiny buildings and TEF are never top.

Post edited at 21:39
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gethin_allen on 09 Feb 2019
In reply to Offwidth:

> In student surveys of why they chose their institution, current obsessions like shiny buildings and TEF are never top.

The measure that we are always held to is the national student survey. Basically, someone gets a 2.1 or a 1st and they are happy and give us top marks. Someone gets a third or fails and they are unhappy and give us poor marks.

The results are usually dependent on the intelligence and application of the students.

Can you see the conflict between having a successful university that can recruit and survive financially  and a university that produces capable graduates which are a positive advertisement for the UK higher education system?

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Richard J - on 10 Feb 2019
In reply to Offwidth:

I have a fractional amount of sympathy with the argument that the capital spending in the sector does reflect the easy availability of loans.  In my last role I used to chat a lot with my university's CFO, and he very much gave the impression of constantly fending off unsolicited approaches by people wanting to lend us a few £100m's on easy terms.  At a time when interest rates are ultra-low and investment opportunities scarce you can see why.

But of course it's absolutely the duty of the management and the board to make sure (a) there's a really good reason for making the investment in the first place, (b) the scale of the repayments makes sense in the context of the overall revenue of the institution, and (c) the overall size of the liabilities don't bend the overall balance sheet out of shape.

So for Cambridge University to borrow a few hundred million, essentially to build a new suburb in one of the strongest city economies in the country, backed by very stable income streams and a huge cushion of reserves, is a pretty sound bet.

But Northampton, on the other hand, is a different story.  The level of borrowing compared with the overall balance sheet looks insane to me.  

It is worrying, because I completely agree with you on the importance of universities to local economies and the impact failures might have.

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Richard J - on 10 Feb 2019
In reply to wintertree:

Completely agree with you on the importance of overseas students - especially Chinese - to underpin growth plans.  And of course this makes the UK HE sector an important contributor to the country's balance of payments - in effect this is now a major export sector.

Roughly speaking, my understanding of the overall economics of an English research-intensive university is that home students more or less cover their costs (averaged over all courses), research loses money, and overseas students provide the margins required to subsidise the losses on research and underpin the expansion plans.

I must admit to being surprised as to how long this boom in Chinese students has gone on for.  Another worrying factor that you don't mention is that there is a strong peak in the demographics of China, so that the total number of uni aged students rose dramatically in the early part of the decade, and is now falling equally dramatically.  The bet that people are making is that in effect China's growing economy is bringing people into the middle classes more quickly than the total uni age population is dropping.

The other factors working in the UK's favour are any general sense of political uncertainty in China - educating your children overseas is a kind of capital flight, particularly as it is often coupled with Chinese families buying property abroad - and any fall in the pound relative to the US and Australian dollars especially.

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Offwidth - on 10 Feb 2019
In reply to gethin_allen:

The national student survey is a massive con trick and its use in TEF is thoroughly dishonest. The RSS looked at the research for correlation between teaching quality and such surveys and found none, except for some anti-correlations in difficult subjects. They put this in their feedback to TEF and were completely ignored. Its also why people should trust the heavily NSS based Guardian league tables the least (all league tables are combinations of dissimilar statistics so will be meaningless at the detailed level).

http://www.rss.org.uk/Images/PDF/influencing-change/2018/RSS-Evidence-Dept-Education-Teaching-Excellence-Framework_final-21May-2018.pdf

Pragmatic student feedback systems should be be more practically based (including small meetings),  running throughout a course to keep it on track and provide fair response times in that. We have individual feedback to tutors and module leaders, reps presenting to course managers and course commitees and anonomised surveys in all modules every term where module leaders need to address issues. In my experience the surveys are the most work and often the least useful.

The NSS scoring is nothing like as simplistic as you portray. I've had many students with low grades who told me they were glowing about the support they had in my institution in NSS and students with 1sts who were pissed off and negative in the survey. Many are under the impression the NSS is part of their ability to sell themselves in the future and just over score for that reason.

Post edited at 10:58
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Offwidth - on 10 Feb 2019
In reply to Richard J:

Loans are currently cheap so yes I too would  have had some sympathy if they hadn't massively exaggerate its importance... both of the VCs. They both agreed the cheapest courses now needed £9k to teach so they both disagree with your position (I'm very close to your view and think institutions might be making a smalll loss overall but you would have seen real balance sheets and I have to 'read' senior management). There is an acid test : If what they said was true many institutions would already have become bankrupt. I'd be interested on your view on the increases of fixed central costs... I know some of this was forced on Universities for various reasons but the current levels, sometimes over 50%, seem extravagant to me.

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Richard J - on 11 Feb 2019
In reply to Offwidth:

On the increase in University central costs, I think there are at least three different things going on;

There have been some genuine increases in spending on facilities that benefit students (and this, to be fair, was prompted by the rise in fees).  Our place really did put some proper money into the library, after years of neglect, for example.

There is a general tendency for the central administration to expand, following Parkinson's law.  Of course there are justifications for this in terms of increasing need for compliance activities, but they're probably overstated.

But perhaps the most important and most obscure element is "depreciation" - the cash the university squirrels away, in principle to maintain the estate.  This will be charged at a fixed proportion of the value of the estate, though how this valuation is done varies widely.  Of course, as more and more building work is done, the value of the estate increases, increasing the depreciation charge that's made to departments.

University accounting is a bit of a black art, the nominal surplus/deficit position doesn't tell you a great deal unless you understand some of these subtleties of how depreciation is handled. In some ways just looking at the raw cash position can be more illuminating.

A few years ago I did a bit of work in our place looking at how resilient our finances would be to various stresses - we modelled both leaving the EU and the Chinese economy collapsing (though not at the same time!).  This was actually surprisingly reassuring.  The question of when the university would in effect be bankrupt is less obvious than it seems - the best answer my CFO came up with was "when we breach the covenants on our bank loans".

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Offwidth - on 11 Feb 2019
In reply to Richard J:

Cheers.. I've never seen anything on the subject better put in a few lines. I'd stupidly missed the fact depreciation costs could increase a lot (proportionately with estate value) due to increased estate expenditure. It would clearly add even more to the risk of over-reaching with estate investment.

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Richard J - on 11 Feb 2019
In reply to Offwidth:

Yes, there's very much a potential self-reinforcing dynamic there, especially if the institution is using current cost (rather than historic cost) accounting.  In that case you don't even need to build anything new for the depreciation charge to go up, it's sufficient for there to be a general rise in property prices in your city for that to be reflected in the periodic revaluation of the university estate and thus feed into the depreciation charge.  

As a cautious person I do in principle approve of the current cost approach, as it does help you build reserves and gives you a cushion against potential shocks, like a cut in fees or big swings in overseas student numbers.  But you do have to make sure the cash doesn't end up burning a hole in your Director of Estates' pocket or contributing any further to whatever imperial tendencies your VC might be suffering from...

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