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Financial health report

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Sector surpluses

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.

At institutional level, surpluses range from a deficit of 28.6 per cent to a surplus of 21.5 per cent in 2017-18. 

Surplus as a percentage of total income

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Financial forecasts were prepared by institutions prior to the UK’s referendum on its membership of the EU and do not reflect the sector-wide view of the potential implications following the UK’s exit from the EU.

These forecasts are predicated on significant growth in home, EU and international student recruitment, and on sustained levels of government and EU funding.

Student recruitment

Student number projections submitted by institutions to support financial forecasts indicate that the sector is forecasting 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.

The sector is projecting fee income from international (non-EU) students to rise from £3.6 billion in 2014-15 to £4.8 billion in 2018-19 (equivalent to 14.9 per cent of total income) representing a real terms increase of 26 per cent over the forecast period.

Increasing competition from other countries and potential changes to student immigration rules suggest these projections may be difficult to achieve. In addition, there are indications that the sector may not have achieved the expected growth in international student numbers and fee income it previously forecast for 2015-16.

These challenges, taken together, would have a significant adverse impact on the sector’s financial projections. However the current weaker pound may assist the recruitment of overseas students.

Overseas fee income

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Capital investment

The sector is planning to invest over £17.8 billion in infrastructure projects during the next four years. This represents an average annual investment of £4.5 billion, 51 per cent higher than the previous four-year average. Despite this, nearly a quarter of institutions are planning to reduce their expenditure on infrastructure over the forecast period.

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

Funding breakdown of capital expenditure

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. If not addressed, this trend of increasing borrowing and reducing liquidity is unsustainable in the long term.

With reduced levels of publicly funded capital grants, institutions will need to generate higher surpluses in the longer term to sustain the necessary investment in infrastructure and student services to respond to increasing domestic and overseas competition.

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.

Two further factors are likely to impact on the sector’s future financial performance. The first is the increase in pension liabilities. The latest estimated valuation of the sector’s largest pension scheme, the Universities Superannuation Scheme, indicates a significant worsening of the deficit. The same is true of other schemes including Local Government Pension Schemes. These increasing liabilities will add to the pressure on institutions to address any funding shortfalls.

Second, as well as dealing with potential constraints on income, the sector may well face inflationary pressures on costs.

Page last updated 25 April 2016