Analysis: The survival of the well-endowed?

November 10, 2000

With talk of 'privatisation' forced on to the education agenda, Claire Sanders asks if universities could raise enough money to stay afloat

The very mention of the word privatise sends vice-chancellors diving for cover.

Members of the Committee of Vice-Chancellors and Principals' funding options review group, which includes "institutional opt-out" as one of its options, have been told by chair Sir William Taylor not to talk to the press. Privately, individuals at a number of universities talk of privatisation "forcing itself on to the agenda" and say that the matter is being discussed informally.

Two major United States foundations have already approached Oxford and Cambridge, offering support, should they go private. Some in Oxford are talking about selling Oxford University Press to raise a sufficient endowment.

The Conservative Party raised the stakes in September when it announced that it planned to "free" universities from state control through endowments.

Guardian columnist Polly Toynbee termed the policy privatisation and described it as a "divine gift" to Labour. But is it?

Tim Boswell, shadow minister for further and higher education and a former higher education minister, is the man charged by the Conservatives with fleshing out the policy. "The first point I want to make is that it is not privatisation," he said. "Universities, both pre and post-92 institutions, are already private bodies."

Derek Wood QC, principal of St Hugh's, Oxford, and an expert in property law, agreed. "Privatisation is a most misleading word. It conjures up an image of the Thatcherite policy of selling off assets owned by the state to the private sector through the establishment of a private company - such as Railtrack. It is quite inappropriate to apply that model to the proposed separation of the university and the state."

Oxford and Cambridge were incorporated under an act of Elizabeth I. "They are private charitable corporations, with both the central university as well as the individual colleges owning their own land and assets. If Oxford wanted to sell the Sheldonian tomorrow, it could," Mr Wood said. "The civic universities, such as Bristol, were incorporated by royal charter. They are not state-owned organisations. Even the new universities, which were incorporated by act of parliament, have a separate corporate status."

What the Conservatives are talking about, and what the CVCP's review group outlined, is better termed institutional opt-out.

The Conservatives propose to endow universities progressively so that they are no longer dependent on government funding. Their pre-manifesto, Believing in Britain, says: "We will look at ways of directing future government receipts from, for example, auctions of radio spectrum and future privatisation proceeds and asset sales towards creating endowment funds for universities. Using one-off gains in this way would not only free the universities from dependency, it would also be better value for the taxpayers than using asset sales to reduce government debt." One of the terms of the endowment would be proper access funds for deserving students.

"There is no smoke and mirrors trick about this," said Mr Boswell. "We have not drawn up a list of institutions that we would endow. Institutions can apply to us. By having an endowment of say £1 billion, institutions would have an income of £50 million a year - and a far greater degree of certainty over their future funds."

He argues that it is not self-evident that such institutions would need to charge top-up fees. "These institutions should do at least as well out of their endowment as out of their current funding, and would go on doing well - something that cannot be guaranteed with reliance on government funding," he said. "We need to consult more with the National Union of Students and other bodies on fees - we have noted that the idea is not liked." He added that the Conservatives had already been approached by a number of universities interested in the idea.

The Taylor opt-out option went further and proposed that universities and colleges be given a one-off payment of a multiple of their funding council grant for teaching and no further government funding. Fees would be deregulated, there would be a requirement that capital provision be made to offer full bursaries and staff salaries would be individually negotiated. Many of those who support opt-out privately argue that it would have to be done with a deregulation of fees to give institutions the financial flexibility they would need to survive.

To date, no feasibility studies have been carried out to see if an endowed university could function in this country - at least no university will publicly say it is exploring the issue.

The best examples are in the US where Harvard University, despite a mixed year on Wall Street, has just raked in a 32.2 per cent return on its endowment, increasing the fund by nearly $5 billion (£3.5 billion) to bring it to more than $19.2 billion. It is followed by the University of Texas system with an endowment of more than $8 billion in 1999. Yale University came next at more than $7 billion, with Princeton and Stanford universities following with funds of more than $6 billion.

Sheldon Steinbach, vice-president of the American Council on Education (Ace), advises caution. "When I saw the Conservative proposals, I kept looking for details. They looked as if they had been drawn up on the back of a napkin," he said. "You'd want to try it out on a small scale somewhere first." He also points out that despite its huge endowment — thought to be the biggest of its kind in the world — Harvard still charges fees of $34,000 a year.

Ace has just produced a leaflet that explains why American universities still charge such high fees when they have seen huge returns on their investments.

An endowment is not like a gift that can be spent immediately. It is an aggregation of assets invested by a college or university to support its education mission in perpetuity. As the principal sum is not spent, endowments generate earnings year after year and provide institutions with a degree of financial stability.

While Harvard makes headlines, most US public institutions have no, or only nominal endowments, and two-thirds of private institutions have endowments of less than $5 million. The median endowment at private colleges and universities is about $10 million, which, at a typical spending rate of 5 per cent, supports an annual expenditure of $500,000. Of the 3,706 colleges and universities in the US, only 368 have endowments more than $50 million.

Ace points out: "Most institutions can cover only very modest fractions of their annual budgets with earnings from their endowments, and much of this spending is restricted to specific programmes, departments or schools for which endowed funds have been designated." Endowment income accounted for 23 per cent of Harvard's income in the financial year ending June 1999.

"To keep pace with the rising costs of education, research and campus life, trustees must reinvest some of each year's earnings and add new gifts as well," says Ace. This is why many colleges and universities spend endowment earnings each year equal to 5 per cent of their value.

Over the past decade, the average return for college and university endowments in the US has been 12.9 per cent; but in 1994, the average return was as low as 3 per cent.

What is clear from the US situation is that only a few universities in this country could raise sufficient endowments to survive. They would also need to replenish that endowment through reinvestment and alumni giving.

The Taylor opt-out option talks of universities receiving a multiple of their annual Higher Education Council for England grant for teaching and then no further money from government. The Conservatives also talk of replacing the block grant on teaching and say that for an institution with a recurrent teaching grant of £30 million, this would involve a transfer of £600 million, assuming a distributable income of 5 per cent. Is it feasible?

Take Imperial College, London. In 1998-99, the last year for which full accounts are available, its total income was £330 million, of which the Hefce recurrent grant for teaching accounted for £38 million. Its total Hefce grant was £99 million, which, as well as money for research, included capital grants, much of which would go on buildings used for teaching.

Rodney Eastwood, Imperial's director of planning, said: "It is hard to divide the teaching and research money as we also receive special funding that contains a mixture of teaching and research."

If Imperial was to replace its recurrent grant from Hefce for teaching, then based on 1998-99 figures the college would need an endowment of about £750 million. The Hefce recurrent teaching grant for 2000-01 is £46 million, requiring an endowment of about £900 million. "If you add on another £100 million for capital costs, then you are at the £1 billion figure," Dr Eastwood said. "You would then be reliant on the vagaries of the investment markets —  rather than the government — for your recurrent teaching fund. That is probably preferable as in the long-term the markets are more reliable."

But he does question whether any government would inject this sort of money into one institution.

Ron Oxburgh, rector of Imperial College and a member of the CVCP's review group, said: "As an institution there is no question that we could survive on an endowment of five times our recurrent teaching grant, but we would be a different sort of institution to the one we are today. We would have to fill Imperial with fee-paying students from overseas to keep going. It would almost certainly hit access."

What about Oxford? The 1997 Commission of Inquiry looked into privatisation and ruled it out. But it considered Oxford losing its entire recurrent grant from Hefce, not just the teaching element, and concluded that to raise the necessary endowment would take 100 years.

Today, the talk is just of losing the teaching element of the grant. In 1998-99 the joint university and college income was £462.7 million. Of this, the recurrent teaching grant from Hefce was more than £37 million. The overall Hefce grant was £87 million. To replace the recurrent teaching grant, the university would need an endowment of £750 million on that year's figures. Its recurrent teaching grant for 2000-01 was £49.5 million, bringing the endowment required to nearer £1 billion.

If the university was to sell Oxford University Press, raise money through US foundations, rake in money from its spin-offs and receive some form of multiple of its Hefce teaching grant, there are those in Oxford who believe that the university could raise at least £2 billion as an endowment. They also believe that they could go to the European Union for money, building on the idea of a "Harvard for Europe".

The £2 billion would provide an income of £100 million a year — way in excess of the current teaching grant. It would allow money for scholarships and would release the university from the year-on-year cuts it faces as the college fee is reduced.

What about smaller institutions, such as the London School of Economics? In 1998-99 the LSE had an income of £85 million, a Hefce grant of £17.4 million and a recurrent teaching grant of £6.7 million. Its recurrent teaching grant for 2000-01 is £6.8 million. To cover this, it would need an endowment of more than £100 million. The LSE is often cited as a possible test case, but the college stresses that it has no plans to opt out.

Finally, take Nottingham University. In 1998-99 it had an income of £195 million. Its Hefce grant was £62 million, of which £42 million was recurrent teaching grant. Its recurrent teaching grant for 2000-01 is £43 million, which would need an endowment of £800 million to replace. Vice-chancellor Colin Campbell is rumoured to support opting out, but has not said so on the record.

Could endowed universities raise money through gifts, as US universities do? According to US News and World Report for 1998, 67 per cent of alumni at Princeton gave to their alma mater, 46 per cent at Harvard.

Mike Smithson, director of the development office at Oxford, points out that philanthropy accounts for 2 per cent of gross domestic product in the US and 0.5 per cent here. "When donors give, they like to give to a specific project, to something new," he said. But he added that Oxford and Cambridge are in a position to raise money globally. Under section 5013c of the American tax code, UK universities can set up separate bodies in the US to which donations can be given in line with US tax law on charitable giving. Oxford and Cambridge have set up two such bodies each.

Since April this year, the UK tax regime has changed, bringing tax benefits more into line with those in the US. But, in the UK, if a donor gives £1 million to a university, the university claims back the tax. In the US, the donor does.

In the build-up to an election, few want to add privatisation to a higher education agenda already dogged by the fees debate. Questions are asked about whether any government would be prepared to make the short-term investment necessary to make it work - even if it could mean savings in the long run.

But many despair of the government ever funding higher education adequately. The CVCP's submission to the Spending Review 2000 called for an additional £5.05 billion to sustain core funding, continue expansion, enhance access, improve teaching infrastructure, build knowledge transfer capacity, sustain research and modernise pay. The July outcome of SR2000 went some way to meeting this, but by no means all the way. There is no detail on years two and three. Those in favour of opting out ask: "What are universities to do if the money is not forthcoming?"

CHANGE FOR ONE WOULD HAVE IMPLICATIONS FOR ALL THE OTHERS

"We would, of course, be happy to take part in a debate at the appropriate time about how to ensure that there is adequate funding to maintain and develop world-class teaching and research in our universities and colleges, while also securing wider access to higher education for all who can benefit, within a framework that properly balances autonomy and accountability."
The Higher Education Funding Council for England 

"We have no plans in Oxford for privatisation. Any substantial change in the status of one or more university would have implications for higher education across the UK and I cannot imagine such a decision being taken without government involvement."
Colin Lucas, vice-chancellor, Oxford University

"There is an unanswerable question about what privatisation would do to the culture of an institution in this country. And how a private institution was seen would have an enormous impact on whether people were prepared to give or not - there is just not the same culture of philanthropy in this country as there is in the US."
Tony Travers, director of the Greater London Group, the London School of Economics

"I would be worried if, say, Cambridge, Oxford, Imperial and UCL went private. It would not mean more money for the rest of the sector and would not tackle at all the general issue of underfunding for higher education."
Diana Green, vice-chancellor of Sheffield Hallam University and a member of the CVCP review group

"My own view is that the idea is entirely barmy. Institutions would need huge amounts of money to cover their recurrent teaching income. It would certainly be a divisive move. However, it does have to be recognised that the sector is diverse."
Gareth Williams, professor of education, Institute of Education, London 

"I intensely dislike the whole concept of 'privatisation' because it implies a split system. The system for which I have campaigned is a single one for the whole of tertiary education. Endowments (at least in the UK) will never be more than the icing on the cake."
Nicholas Barr, senior lecturer in economics, LSE, and one of the experts advising the CVCP review group

"The Conservative proposals will require huge sums of moneyI and will in any event be ineffective in removing institutions from government control, which can be exercised in a wide variety of different ways."
Robert Pearce, acting vice-chancellor, University of Buckingham

"It is inevitable that Britain will end up with some kind of privatisation of higher education in the future. There is a good social case for subsidising research and not a good social case for subsidising rich kids so that they get richer."
Andrew Oswald, professor of economics, University of Warwick

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