Leader: Charge of the elite brigade

In a sector beset by financial uncertainty, the gap between the richest and the poorest institutions looks set to widen

April 12, 2012

Into the valley of Death/Rode the six hundred...Storm'd at with shot and shell/Boldly they rode and well/Into the jaws of Death/Into the mouth of Hell.

When vice-chancellors raised the spectre of a "valley of death" during their lobbying of the Browne Review in 2010, the hope was that such apocalyptic language would protect them from dramatic cuts in funding. The rhetoric may have been over the top, but in the end they succeeded in avoiding their worst-case scenario of a cut in funding without a corresponding hike in the tuition-fee cap.

In our annual analysis of the financial health of universities, carried out with accountants Grant Thornton, we take a close look at what else was being done behind the scenes in 2010-11 to batten down the hatches and prepare for the funding uncertainty ahead.

The picture is set out in detail in our cover feature. Across the sector, institutions increased their collective surplus by 50 per cent to a healthy £1.2 billion. Look beyond that headline, however, and some interesting themes emerge that reveal the financial challenges that institutions were - and still are - facing.

The first is continuing uncertainty about the future of student recruitment, exacerbated by a lack of clarity from the government about plans for the AAB and core-and-margin policies.

This is a potential financial nightmare for universities. While most seem reasonably well prepared for 2012-13, the academic registrars responsible for planning recruitment are having to make near-impossible calculations, topped up with guesswork about what the government might do further down the line.

Miscalculations could be costly: if they under-recruit, they miss out on vital income; if they over-recruit, they face the exorbitant fines demanded by the government.

A second theme is the striking reliance of many institutions on overseas student fees.

This is hardly new, but our analysis shows it was the fastest-growing revenue stream in 2010-11, rising by 17 per cent to £2.8 billion and accounting for a tenth of all income.

In the new era of much-reduced public funding and continuing uncertainty over the level of replacement fee income from domestic students, universities treasure this cash flow.

Yet even this is under threat as the government pushes ahead with its drive to reduce net migration to the tens of thousands, leaving the Department for Business, Innovation and Skills (which understands how reliant the sector is on international fees) and the Home Office (which, it seems, could not care less) in near open conflict.

A third theme to emerge from the 2010-11 financial figures is the growing stratification of the sector, even before policies of greater research concentration and AAB and core and margin take effect. The Russell Group has raced ahead in terms of the capital expenditure that many believe is vital to satisfy students paying higher fees, and if its four new members are added to the calculation, the group accounts for 44 per cent of total sector income.

The UK higher education sector has long prized its diversity, but faced with financial divergence of this order, students at poorer institutions may start to smell a rat. The valley of death never materialised, but a valley of inequality lies just around the bend.

john.gill@tsleducation.com.

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