Secure finances against a background of change

The projected performance for the higher education sector in England for the period to 2014-15 is sound overall, although this is heavily dependent on the sector achieving its student recruitment targets.
Recent information from UCAS and higher education institutions (HEIs) indicates that 2012-13 student demand is lower than forecast by the sector, and that some institutions are recruiting fewer students than expected. This suggests that enrolments will also be down, and increases the risk that financial performance for these institutions will be poorer than anticipated. We do not yet know whether the reduction in enrolments is a one-off or permanent, and we will monitor this closely over the coming year.
These findings are part of the summary of finances for universities and colleges in ‘Financial health of the higher education sector: 2011-12 to 2014-15 forecasts’, published today by HEFCE. Forecasts for 2012-13 reflect the first major reduction in HEFCE grant funding, which is countered by a significant increase in student fee income. This comes at a time when the sector is projecting increases in expenditure, and when many institutions are planning to invest substantial sums in their capital programmes to make improvements to their estates. The effect of this is a sharp reduction in surpluses and a fall in cash levels. Thereafter, surpluses and cash flow from operating activities are expected to rise. Some of this rise is attributed to the continued strong growth in fee income from non-EU students.
There is a risk that the revocation of London Metropolitan University’s Tier 4 licence to sponsor non-EEA students, which was widely reported in the national and international press, will adversely affect the reputation of UK higher education, leading to a decline in overseas applications. It is too early to predict whether this will in fact happen, but fees from overseas students are a significant source of income for many HEIs, and for the economy more generally, so this is an important issue.
In terms of short-term viability, the forecasts show that the sector is in a sound surplus position overall. However, this is against a background of an increasingly competitive environment and reductions in public capital funding. Some institutions will need to increase their surpluses beyond current levels in order to finance future capital investment and maintain their long-term sustainability. If surpluses do not increase, there is a risk to the quality of higher education infrastructure, which will harm the long-term sustainability of the sector. The financial forecasts suggest that no institution is currently at risk of insolvency. This is supported by independent going-concern opinions of institutions’ external auditors and the projected continuation of positive cash in-flows and healthy cash-backed reserves. Strong liquidity is necessary for HEIs to efficiently manage the potential increased volatility and unpredictability of the new funding system and the increasing competition from international higher education institutions.
Sir Alan Langlands, HEFCE’s Chief Executive, said:

‘Universities and colleges are projecting sound financial results to 2014-15. However, these forecasts were made in June 2012, prior to the latest student recruitment cycle. Some institutions have experienced difficulties in achieving their recruitment targets, and may face budgetary pressures as a result.
‘Despite this, the overall financial position is satisfactory, although reductions in public funding, especially for capital investment, mean that institutions will need to deploy more of their own resources to maintain their estates. This will ensure the long term sustainability of educational and research programmes and a high quality student experience.
‘HEFCE will continue to monitor the financial position closely as part of our commitment to supporting the students and institutions in adapting to the new higher education funding regime.’

Notes
‘Financial health of the higher education sector: 2011-12 to 2014-15 forecasts’ provides an overview on the financial health of the higher education sector in England. The analysis covers the financial forecasts for the period 2011-12 to 2014-15, as submitted by higher education institutions to HEFCE in December 2011 and June 2012.