Responding to the financial sustainability challenge in Higher Education

This is a guest article, written by Kitty Kent at PwC.

Increasing financial pressures

Our review of institution’s regulatory forecasts showed that 40% of institutions in England and NI were expecting to be in deficit^[1] at the end of this academic year 2023/24. From then on, the majority of institutions are relying on an increased dependency on international students, and on expenditure growing more slowly than the historic average, in order to bring themselves out of deficit by 2026/27.

The sensitivity analysis that we ran on institutions’ regulatory forecasts demonstrated the vulnerability of these assumptions - if expenditure grew 2ppt faster than currently forecast, c.65% of members would fall into deficit within 2 years, and a sharp contraction in international student growth would result in up to 80% of members in deficit. And yet, following our analysis, both of these scenarios may have materialised already for some, with recently announced increases in Teachers’ Pension Scheme (TPS) contributions and early indications of a fall in international enrolment for the current academic year.

Transforming the “right” way

Looking forward, with no sign of changes to government policy to material increase domestic fees in the run up to the general election, institutions will need to look inward at what levers they can pull to improve their long term financial position, and to transform their organisations to make them fit for future.  Sustainable transformation 

As purse strings tighten, short term tactical decisions are often made in order to protect cashflow and liquidity. As noted by the Office for Students (OfS) in their Financial Sustainability report, delaying much needed capital investment was fairly widespread across the sector during the COVID-19 pandemic, and that decision can be seen again in institutional forecasts going forward, with CAPEX per FTE forecast to fall below 2020/21 levels.

Such decisions are not sustainable in the long run and will have implications on recruitment and retention if institutions are unable to maintain the quality of their provision or to invest in their digital and physical infrastructure. An increasing number of university estates require investment, with some no longer fit-for-purpose in a post-COVID world, and many requiring retrofitting to meet net zero targets. As construction inflation and borrowing costs continue to rise, this is resulting in an ever increasing capital expenditure backlog that is becoming harder and harder to fund.

Transforming from a position of strength

In an extremely diverse sector, these financial pressures will not be felt evenly, however even institutions with more headroom should be considering the measures they could take for a more sustainable future. Transforming from a position of strength allows institutions to make meaningful changes in a measured and controlled way, and to embed transformation into their long-term strategy. Delaying making significant changes until it becomes critical, limits the options that are available, and is more likely to result in decisions that impact provision.

Collaborate to transform

Whilst for some, there will still be a range of measures that they can adopt individually, other institutions will feel that they have already exhausted institution-led measures, and will be looking further to collaborate with other institutions and regional parties (Further Education colleges, businesses and local government). Similarly, some institutions may choose to respond by focusing on their areas of strength going forward, rather than breadth, which could drive more desire for collaboration and partnerships. Institutions could collaborate to differing degrees across a spectrum, from ad-hoc opportunistic projects (such as joint commercial ventures, to shared and/or outsourced services (such as shared finance, HR, or regulatory functions). Or, on the other end of the spectrum, some institutions may consider opportunities for deeper strategic partnering or consolidation to remain viable or as they focus on strength rather than breadth - through joint ventures, federated models and mergers. This is by no means a new concept for the sector, but with more of a burning platform, institutions may now be more willing to take the leap now to ensure the viability of the sector in the long term and ensure that the right provision remains available to meet the demand and needs of the local economy.

Culture to transform

Organisational culture and behaviours are often critical barriers to transformation and in a sector steeped in history and tradition, senior leadership’s biggest challenge may be bringing stakeholders on the journey to embed a more cost-conscious culture whilst reassuring them that quality will not be impacted. Lessons may be learned from models of Higher Education institutions that have emerged more recently (e.g. New Model Institute for Technology and Engineering (NMITE)), or from other sectors, or other international education systems.

Looking forward

The sector is at somewhat of a turning point. With little prospect of more public funding in the near term, sector leaders will need to consider what they want the shape and size of the look like in the future, and what sustainable and meaningful changes they can start to make now, both in their own institutions, and in collaboration with others, to ensure the continued success of the UK Higher Education sector.