notes on HE finance: nothing is sustainable

<for some to succeed, some have to fail>

The government is trying to create a market in the education system. This … is the right track for reform, but at the moment there’s a risk that we’re building in the potential for market failures too. A functioning market needs enough genuinely new entrants to challenge existing providers, enough capacity for competition to be meaningful, enough information for providers and users alike, ways of breaking up failing or monopolistic providers, and exit points for providers that aren’t doing a good enough job. The direction of travel is the right one, but there’s a lot that still needs to be done.

Nick Timothy. 2016. Talk at the Centre for the Study of Market Reform of Education.

<higher education and market downgrades>

Moody’s considers that policy predictability and effectiveness of economic policy-making — an important aspect of institutional strength – might be somewhat diminished as a consequence of the [Brexit] vote. The UK government will not only need to negotiate the UK’s departure from the EU but will likely also aim to embark on significant changes to the UK’s immigration policy, broader trade policies and regulatory policies. While we consider the UK’s institutional strength to be very high, the challenges for policymakers and officials will be substantial.

As a consequence of the weaker GDP growth outlook and institutional strength, the UK’s public finances will also likely be weaker than Moody’s has assumed so far. In Moody’s view, the negative effect from lower economic growth will outweigh the fiscal savings from the UK no longer having to contribute to the EU budget.

Moody’s changes outlook on UK sovereign rating to negative from stable, affirms Aa1 rating

“We would downgrade the UK’s sovereign rating if the outcome of the negotiations with the EU was a loss of access to the Single Market as this would materially damage its medium-term growth prospects”, said Kathrin Muehlbronner, a Moody’s Senior Vice President and the report’s co-author. “A second trigger for a downgrade would be if we were to conclude that the credibility of the UK’s fiscal policy had been tarnished as a result of Brexit or other reasons.”

Moody’s: UK sovereign rating would be downgraded if the UK was unable to conclude an agreement with the EU that protected core elements of its access to the Single Market.

Overall, the forecasts demonstrate a continuation of the themes raised in previous analysis.

<financial capital, volatility and competition>

a. The latest forecasts, for the period 2015-16 to 2018-19, show a widening gap between the lowest- and highest-performing institutions and increasing volatility of forecasts in the sector.

<tightening margins>

b. Sector surpluses are projected to be between 2.3 per cent and 4.3 per cent of total income in the forecast period; these are relatively small margins in which to operate. However, at institutional level, these range from a deficit of 28.6 per cent to a surplus of 21.5 per cent in 2017-18, equivalent to a range of 50.1 per cent (compared with 30.4 per cent in 2014-15).

These are relatively small margins in which to operate, and mean that even small changes in income or costs could have a material impact on the financial performance of institutions and the sector.

<a looming crisis of liquidity and debt>

c. The trend of falling liquidity (cash) and increasing sector borrowing continues in this forecast period. Borrowing levels are expected to exceed liquidity levels in all forecast years, by £49 million at 31 July 2016, increasing to £3.9 billion at 31 July 2019. This trend of increasing borrowing and reducing liquidity is unsustainable in the long term.

Strong liquidity is particularly important given the growing level of uncertainty and risk in the sector and wider economy.

<the rule of recruitment, retention and progression>

d. The sector is projecting fee income from non-EU students to rise from £3.7 billion in 2015-16 to £4.8 billion in 2018-19 (equivalent to 14.9 per cent of total income). Increasing competition from other countries and proposed changes to student immigration rules suggest these projections may be difficult to achieve. This would have a significant adverse impact on the sector’s financial projections. However, the weaker pound may assist the recruitment of overseas students.

e. The sector is projecting high levels of growth in numbers of total home and EU students (10.3 per cent over the forecast period). This level of growth may be a challenge given the decline in the 18 year-old English population, uncertainties over the impacts of Brexit and increases in alternatives to undergraduate courses, such as degree apprenticeships.


f. Significant increases in capital investment are projected. At over £17.8 billion, this represents an average annual investment of £4.5 billion (2015-16 to 2018-19), 51 per cent higher than the previous four-year average. Despite this, nearly a quarter of HEIs in the sector are planning to reduce capital expenditure over the forecast period.

<never-ending fixed capital lulz: surplus, investment, competition>

g. Investment in infrastructure is particularly important given that, in July 2015, the sector estimated that it still needed to invest £3.6 billion into its non-residential estate to upgrade it to a sound baseline condition.

At a time of lower public capital funding, institutions must deploy more of their own resources or raise finance through external borrowing in order to maintain and enhance their infrastructure. This places greater pressure on HEIs to generate higher surpluses to maintain their sustainability.

<tightening of liquidity/access to capital>

h. The uncertainties faced by the sector as a result of the UK’s decision to leave the EU, coinciding with increasing competition in the global HE market, will lead to a greater focus from investors on the underlying financial strength of HEIs. Consequently, any fall in confidence levels could restrict the availability of finance in the sector and put significant elements of the investment programme at risk. Falling confidence levels are also likely to lead to a rise in the cost of borrowing.

It is also important to recognise that the forecasts assume that the capital markets continue to have confidence in the sector, which depends upon their risk assessment of the sector and individual HEIs.

<contexts for labour arbitrage>

i. Aside from the challenges associated with income generation, the sector will face inflationary pressures on costs, particularly staff costs, operating costs and capital investment costs. j. Pension liabilities are expected to increase from £4.9 billion at 31 July 15 to £7.2 billion at 31 July 2016; an increase of 45.8 per cent. This is due to FRS102 which requires liabilities relating to the deficit recovery plans for multi-employer pension schemes to be reflected in institutional balance sheets. However, the latest estimated valuation of the sector’s largest pension scheme, the Universities Superannuation Scheme (USS), indicates a significant worsening of the deficit, implying further increases in liabilities are likely

<stranded capital and market exit: thanks for playing>

The significant level of uncertainty in the HE sector and UK economy, as well as the need to sustain a higher level of capital investment to respond to growing competition, will require institutions to aim for higher surpluses in future.

This uncertainty is likely to lead to continued volatility and growing variability in the financial performance of institutions, together with a widening gap between the lowest and highest performing HEIs.

HEFCE. 2016. Financial health of the higher education sector: 2015-16 to 2018-19 forecasts.

<de-regulated and beholden to the financial markets>

The report is damning, and the irony won’t be missed that it comes at a time when the role of the funding council in safeguarding the financial sustainability of the sector is being replaced by a ‘let the market decide’ approach. While the government has its oen [sic.] logic for this approach and is implementing some measures to protect students in the case of ‘market exit’, it will come as a shock to universities that the oversight, guidance and practical – financial – support previously offered by HEFCE may no longer be available in their hour of need.

Indeed, it is new for HEFCE to use such strong and foreboding language about the overall state of HE. Previous iterations of these forecasts have been far more positive about the sector’s financial situation and have smoothed over cracks with reasonable rhetoric. But HEFCE is either no longer willing, or no longer able, to spin such a rosy picture.

The HEFCE report shows the grim state of affairs in which universities find themselves: the short-term diagnosis is one of stability – the 2014-15 numbers were healthy enough – but the prognosis is poor. Expect a need for some serious remedial action in board rooms across the land.

Bagshaw. A. 2016. Getting worse: HEFCE’s bleak prognosis for university finances.

<global labour arbitrage>

Insecure working practices now permeate every section of our society. Although students probably don’t realise it, most of them are taught at some point, perhaps even for majority of their time at university, by people on insecure casual contracts. Some universities have been accused of trying to ape the worst practices of the likes of Sport Direct.

The exploitative use of casualised contracts – including hourly-paid, part-time and even zero-hours ones – breeds insecurity and stress, and forces people to work long hours for poor pay. Many work for more than one university to make ends meet. It cannot be right that the people teaching our students are constantly anxious, not knowing from year-to-year, term-to-term, or even month-to-month, whether they will have a job or how much they might earn.

Inevitably, casualisation has an impact on education. US research demonstrates that students who take large numbers of courses with teachers employed on insecure contracts, or who are in institutions with large numbers of non-permanent staff, tend to graduate at a lower rate and are more likely to drop out of college.

Hunt, S. 2016. Tef: dump the pointless metrics and take a hard look at casualisation.

<fuck college>

as the terms innovation and disruption become mainstream there are still pockets of discovery value for investors in the world today. From curing cancer with the cloud to solving space to creating an alternative to fossil fuel in lithium, opportunities abound for those willing to look beyond today’s headlines. The world is changing as a new generation (Gen-Z) is poised to take the mantle from Millennials while the payback for college becomes harder to justify.

The average return on going to college is falling. For the typical student the number of years to break even on the cost of college has grown from 8 years in 2010 to 9 years today. If current cost and wage growth trends persist then students starting college in 2030/2050 will have to wait 11/15 years post college to break even. 18 year olds starting college in 2030 with no scholarship or grants will only start making a positive return when they turn 37.

Graduates studying lower paying majors such as Arts, Education and Psychology face the highest risk of a negative return. For them, college may not increasingly be worth it.

<enterprising human capital>

Corporates may have to do more themselves and develop their own talent identification systems. New entrants and business models are emerging to meet some of these challenges.

the vacancy rate does imply that the increased need for specialization is a factor and that the labor market is moving faster than education can respond. Arguing against this is the threat from artificial intelligence to pattern recognition and human decision making jobs (47% of total US employment is at risk from computerization according to a recent Oxford University study). This hollowing out of the labor market risk makes future-proofing very difficult, but there is a clear growth opportunity in professional training.

When it comes to money and finances, Gen-Z and Millennials hardly resemble one another. While Millennials are often cast as the “follow your dreams at all costs” generation, Gen-Z appears acutely focused on the financial consequences of their decisions. TD Ameritrade’s 2nd Annual Generation Z survey, for example, revealed that 46% are worried about accruing student loan debt while a study by Adecco showed that Gen-Z’ers are more concerned about the cost of education than Millennials. Meanwhile, sixty percent of Gen-Z believes that “a lot of money” is evidence of success, while only 44% of Millennials believe the same (Cassandra Report).

In combination with their financial conservatism, Gen-Z is also entrepreneurial.

Boroujerdi, R.D., and Wolf., C. 2015. Themes, Dreams and Flying Machines. Goldman Sachs Equity Research.

<against the stagnation of immobile capital>

We’ve written before that despite the protestations of academic insiders, MOOCs have real promise—not just as supplements to brick-and-mortar degree programs, but as viable alternatives for large numbers of students. And a “new system of signaling and talent identification” is sorely needed. A national exam system, in particular, would help level the playing field for students who didn’t want to attend an elite college, or couldn’t afford to.

The current American higher education regime is not working for a huge number of students, and, as this report suggests, those who continue to cling to the status quo are in denial. The system has to change, and it will.

The American Interest. 2016. Goldman Sachs: Higher Ed Ripe for Disruption.

Leave a Reply

Your email address will not be published. Required fields are marked *