How precarious are universities in the UK?

There is little doubt that universities are facing a critical situation this summer. Many do not have enough reserves to ride out the crisis and stay solvent. Some have as little as a few days ‘net liquidity’ before they fail. However, the risk of insolvency is not evenly spread and some of our most prestigious institutions are not as safe as people tend to perceive. Those with high costs associated with research are more vulnerable. Others have learned to operate on less resource. The government will have no choice but to intervene further to avoid a total disaster. An initial focus on research should be widened urgently to ensure financial support for students across all institutions. This would be a better way to channel funding to the front line efficiently. This approach must also seek to help less advantaged students whose numbers will be rising fast in the storm of unemployment coming our way. 

There has been mounting concern about the precarious financial situation of our universities. This worry is not unfounded as many are colossal operations that rely on a regular income from fees and research grants. Today David Kernohan of WONKHE, with ‘Who decides the future of universities?’, calls on the government to intervene more urgently with “Liquidity is not the problem, solvency is”. Liquidity may be the problem for now, but insolvency is on the way down the line. 

But what could this mean and what are the dangers? Despite most universities holding large cash reserves, the stark fact is that some reserves are restricted and not readily available. One convenient way to measure the availability of cash reserves, and the ‘liquidity’ in financial terms, is to estimate how many days a university would survive if income stopped suddenly. This is known as ‘Net Liquidity’ (see note 1* below). This is a common measure of the health of a business that guides investors when looking at a business case. For universities now, this measure tells them how soon they will hit a wall of insolvency. Although it is not likely they would suddenly lose all income overnight, a substantial loss only prolongs the agony. However, too much reliance on fees paid by students from outside the UK has become commonplace. A sudden loss of such income means that maintaining the status quo involves releasing and deploying reserves. This becomes an urgent dilemma for those with low ‘net liquidity’ and little time available. The dilemma is between cutting costs and staff versus seeking out loans that may be at full commercial rates. By advancing fee income this year, the government is simply offering help akin to a ‘payday loan’. This is only a short term measure (see TEFS 4th May 2020 ‘Universities to get 'payday loan' sticking plaster’). Too often the reaction is to make staff redundant. In the past, this has afflicted those with greater teaching responsibilities in research elite universities. This may be the case now as it seems that the REF 2021 (Research Excellence Framework) ploughs on regardless. Holding onto staff whose research can be returned is akin to printing cash in the form of QR funding post REF in 2021. Not wishing to wait, Universities UK sought to double QR funding as the top priority. For most observers, this seems an illogical demand. But what is the situation for the most research-active universities? 

What reserves do universities possess? 

On the face of it, many universities have accumulated considerable reserves through maintaining operating surpluses over time. This is indeed a prudent strategy to prepare for ‘rainy days’ ahead. But things are often not what they seem. In many cases, recent increases in pension contributions have been absorbed using reserves. Also, the variation in amounts in reserve is somewhat surprising.

Figure 1 shows the latest HESA data recording for reserves across 125 universities in the UK in 2018/18. It is plotted against the Times Higher Research Power rankings from the 2014 REF exercise. This ranking reflects the universities gaining the most QR income overall since the last REF exercise. It becomes apparent that universities with greater ‘research power’ have also greater cash resources (plotted here as total reserves that are restricted and unrestricted). Note that the universities of Oxford and Cambridge, with reserves of £4.18 billion and £5.14 billion respectively, could not fit on the graph as scaled. One might think that they should be secure for some time. However, this may not be all it seems. Research-intensive universities have a greater extent of expensive facilities to maintain. Many buildings are devoted almost entirely to research provision and research-active staff are less likely to do much teaching. Therefore, bearing in mind the cost burden must vary between institutions, it is more informative to look at differences in ‘net liquidity’ as measured in days. 

Liquidity and loss of income: which are at most risk? 

Figures 2a and 2b show on the x-axis the spread of ‘NET Liquidity’ in days across UK universities. The size of the spheres relates to the relative size of each university as total student numbers. The first surprise is that there is a widespread of days. Secondly, many universities with large reserves also have relatively low net liquidity. The HESA data reports that one Russell Group university has under a week left in the tank. The potential loss of income non-UK students over the coming academic year is at the forefront of the minds of many university managements. If non-UK students fail to materialise, then the race to insolvency begins in earnest. Figure 2a shows the percentage of non-UK students plotted against net liquidity. Those most at risk occupy the top left quadrant. Despite having less in reserve, the post-92 universities tend to have fewer non-UK students and presumably lower operating costs. Oxford and Cambridge are hiding somewhere in the middle. Some of the more expensive research-intensive universities are in a precarious position. It explains why Universities UK felt it had to prioritise research in their plea to the government (‘UUK response to UK government announcement on a support package for universities’. Indeed this has been heeded as the Universities Minister, Michelle Donelan promptly chaired a meeting of its new Research Taskforce last week (Research Professional News 13th May 2020). 

The loss of income from non-UK students is a real and present danger. The potential loss of UK students, whether asking to defer or shopping around, is less certain. However, it will affect income to some extent as students weighing up what a year of online provision and restricted campuses means. Figure 2b shows the hypothetical effect of adding 25% of UK students to the potential loss of non-UK students. This plunges many institutions into an insolvency danger zone. If there is any doubt about how likely this is to happen then look no further than the results of a recent survey of 516 prospective students released this week by UCU and London Economics ‘Impact of the Covid-19 pandemic on university deferral rates and student switching – May 2020’. Although a small survey, it is notable that 24.4% said they are likely to switch universities and 17% were likely to ask to defer entry. As the summer progresses, many students will change their minds. Some will trade up to more prestigious universities in clearing and others will look closely at their finances. With unemployment rocketing and few jobs available, those who rely on income from part-time jobs will find themselves floundering. They may have little choice but to defer starting or ask for a year out if returning. The possibility of 25% not arriving is a real possibility for some universities. Most universities have little or no knowledge of their students commitment to part-time jobs (see TEFS 19th July 2029 ‘Students working in term-time: Overall pattern across the UK‘) and this dampening effect may come as a nasty shock. One dim light of hope might be that those graduating look to continue in a postgraduate position (see TEFS 15th May 2020 ‘Levelling down’ and a post-graduate boost for those of greater means’). 

Impact on students from low participation areas. 

The conclusion must be that a liquidity situation could become a solvency situation in the coming months. The access of students to university could be hampered if more coordinated action is not taken. In escaping from a burning crisis, it may be that notions of equality and widening access are left behind.

Figure 3 is a similar plot to figure 2a and, but the size of the spheres, in this case, denotes the percentage of students from POLAR4 Quintile 1 low participation areas (SIMD Quintile 1 in Scotland. See NOTE 2** below). It is striking that the universities they are likely to attend are also ones that are at less risk of insolvency. These students are more likely to attend the post-92 institutions. If they trade up to a Russell Group university, because of higher than expected exam grades or possibly lower grades being accepted, they could also get a nasty shock if the university fails. The prospect of thousands of students finding no university to attend is a real one. The notion of unfairness driven by the chaos of a market collapsing, and resembling the ‘wild west’, is a real issue. 

Some universities will be angry if the lions share of government support goes to prop up institutions that were more profligate than their own in the past. Prioritising research over student access is not the solution. It is only a small part of the solution. 

TEFS (1st May 2020) has called for the government to set up a working group to address urgently the likely outcome and impacts on students in the coming year with “Therefore, a working group involving students (such as NUS), staff (such as UCU) university managements (such as UUK and others) and the government must work now in advance of the spending review”. They may come to regret not doing this early as their top priority. 

Mike Larkin, retired from Queen's University Belfast after 37 years teaching Microbiology, Biochemistry and Genetics. He has served on the Senate and Finance and planning committee of a Russell Group University

*NOTE 1. Net Liquidity is defined by HESA as 'The Numerator is Current assets: Investments
plus Current assets: Cash and cash equivalents minus Creditors: amounts falling due within one year: Bank overdrafts. The Denominator is Expenditure: Total expenditure minus Expenditure: Depreciation.'

**NOTE 2. POLAR refers to Participation of Local Areas and there are now four versions. The data used here is based upon POLAR Version 3. The POLAR3 classification is formed by ranking 2001 Census Area Statistics (CAS) wards by their young participation rates for the combined 2005 to 2009 cohorts. This gives five quintile groups of areas ordered from ‘1’ (those wards with the lowest participation) to ‘5’ (those wards with the highest participation), each representing 20 per cent of UK young cohort. Students have been allocated to the neighbourhoods on the basis of their postcode. Those students whose postcode falls within wards with the lowest participation (quintile 1) are denoted as being from a low participation neighbourhood. See HESA Definitions and benchmark factors: definitions. HESA does not apply POLAR classification for universities in Scotland. Instead, the Scottish Funding Council (SFC) uses the Scottish Index of Multiple Deprivation (SIMD) that has smaller geographical areas.