Better fiscal sense is needed

Improved procurement could be the secret to balancing the sector’s books in tough times, Nick Petford and Andy Davies suggest

April 11, 2013

Source: Jamie Jones

Universities recently received the news that, in 2011-12, income for English higher education institutions fell in real terms for the first time since collective records began.

According to an analysis of universities’ financial statements in this week’s Times Higher Education, the sector’s collective operating surplus dropped to 4 per cent of income, and it is expected to decline still further this year. No fewer than 12 English higher education institutions actually made a loss.

Meanwhile, the Higher Education Funding Council for England reports that total Hefce funding for institutions, including recurrent grants for teaching and research, fell to just 28.7 per cent of total income in 2011- 12 and will reach 22.7 per cent this year, as funding through increased student loans for home and European Union students ramps up. But it remains to be seen what the long-term impact of the higher cap on tuition fees will be on student numbers and, in turn, on university finances. And recent changes to the awarding of visas for overseas students are creating even more uncertainty over the sector’s income.

Moreover, it looks like worse news is on the way. A recent Hefce publication, Higher Education in England: Impact of the 2012 Reforms, paints a bleak picture for the sector in which even more pressure will be put on surpluses in future.

“Even small changes in income can have a material impact on [an institution’s] financial position,” the report says. “Increased volatility in income may occur because of the increased uncertainties relating to student income…A reduction in [public] funding for higher education could prompt a significant change in the sector’s financial position.”

And we now know that the Department for Business, Innovation and Skills will see a significant budget cut in the forthcoming spending review, which will result in perhaps another £1 billion being cut from the recurrent funding grant for universities. That could wipe surpluses clean away.

The report also warns that despite a spike in capital expenditure made by the sector this year, levels planned for future years will not be sufficient to address a shortfall of £2.7billion in investment in non- residential space.

Reduced Hefce grants for capital expenditure last year meant that many English universities had to dip into their cash reserves to invest for the new, competitive future in higher education. However, for all but a small number of institutions, discretionary reserves are severely limited, despite the Treasury being rumoured to believe the sector is “awash with cash”. And just as the cost of borrowing increases for those governments that lose their triple-A credit rating, so will the increased uncertainty make it far harder for universities to obtain funding at the rates of interest they have traditionally enjoyed.

Accordingly, the Hefce report concludes that “HEIs will need to increase surpluses to finance future investment and maintain their long-term sustainability”. But how can we even sustain surpluses in these uncertain times? With income under pressure, universities will have no choice but to look at further cost-reduction initiatives to make ends meet.

Universities have made some good efficiency improvements in recent years. In 2011-12, staff costs fell in real terms for the second successive year and now stand at less than 53 per cent of income. But we need to do so much more.

The answer lies with the next largest area of expenditure for universities after staff - what we spend on goods, services and works in the sector - or around 45 per cent of income, official figures tell us. If surpluses are to be protected - safeguarding future sustainability - then we need to do at least as much to reduce procurement costs as we have done for staff costs.

The good news is that help is at hand. Hefce is part-funding detailed Procurement Maturity Assessments, which estimate annually the level of collaborative purchasing and other metrics. These will highlight the process and practice improvements needed to meet the challenge. A new HE Procurement Academy is to be launched in the autumn with the goal of promoting better professional procurement practice, enabling managers and academics to get more for their money, all supported by the establishment of Procurement UK, a high-level group set up by Universities UK to oversee recommendations for improved efficiency on the back of UUK’s 2011 Diamond Review.

Most universities participate in a collaborative regional purchasing consortium, but in 2010-11, only 10 per cent of our non-pay expenditure was channelled through collaborative procurement arrangements. We need to use these deals much more, especially in our spending on estates management - even if it means changing our behaviour and, yes, changing our suppliers.

It may sound incredible, but it could be that humble procurement - the unglamorous practice of buying stuff and managing suppliers - holds the key to a more sustainable form of higher education in England.

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