The Rt Hon John Denham MP
Secretary of State for Innovation,
Universities and Skills

Tim Melville-Ross CBE
Chairman
Higher Education Funding Council for England
Northavon House
Coldharbour Lane
Bristol
BS16 1QD

6 May 2009

Dear Tim

1.   As you know, in the Budget Statement of 22nd April, the Chancellor set out the importance of delivering efficiency gains across the public sector whilst continuing to increase investment in public service priorities. I am writing to set out how the Budget affects Higher Education and how I would wish HEFCE to respond.

2.   The Government has resisted calls to cut public spending this year. We believe that to cut spending in a recession would harm public services and economic recovery now, and, by delaying recovery, would prove more costly in the long term. But the growth in public spending will need to be slower than in the recent past, and to protect public services it will be necessary to ensure that every pound is used as efficiently as possible.

3.   The settlement for my Department reflects the importance of our work. We received additional new funds for further education and skills. Equally important, the Research Councils budget was one of the few major public investment programmes that has not been asked to find cash-releasing savings, ensuring that the planned resource spend of £2.8 billion remains available to support research, most of which will be spent in HEIs.

4.   The Government has concluded that we need to go further to deliver efficiencies and reduce waste in public spending and has committed to delivering an additional £5 billion of efficiency savings in 2010-11, meaning that savings across the whole of Government will reach £35 billion by 2010-11. As a Department we need to find operational efficiency savings of £400 million. We are also continuing to work to stabilise student support spending. I am confident that we can find efficiency savings whilst protecting the quality of teaching and research. Within Higher Education, we are already well on our way to making nearly £500 million of efficiency savings over the last two spending review periods. These are being achieved through improved stewardship of public funds and a combination of reprioritisation of existing resources, changing the incentives in the system to lever in more co-funding from external sources and working with delivery partners to use money more efficiently and effectively. My first priority has been to identify efficiencies in spending programmes supported by DIUS which do not directly contribute to the frontline delivery of teaching and research, and the targets set out below reflect the significant savings I intend to achieve in these areas.

5.   Overall, funding for universities has risen in real terms by 24 percent over the past decade. After the catastrophic fall in funding per head in the previous years, we have worked hard to sustain funding per student so far as possible. By enabling HEIs to generate additional income from fees, commercial revenues and voluntary giving, overall university income each year is now approaching £20 billion, double the amount when we took office. This reflects an overall increase each year of around £1.8 billion public and private funding in recent years. It is now important that government, the funding council and universities work together to plan how we sustain the vital role of Higher Education in the current global economic climate.

6.   I shall set the final level of cashable savings to be delivered by the Council in 2010-11 in the usual way. But I recognise how important it is that HEIs should be able to plan ahead with as much certainty as possible. So I am writing to set out both my current assumptions about the efficiency savings you should seek, and the mechanisms which may be available to the Council.

7.   For now, I would like you to assume that you will seek cashable efficiency savings of about £180 million. This should be spread across your recurrent resources for teaching and your recurrent resources for research, which are outside the Science and Research budget ring fence. Our overall funding to the Council for teaching and research would grow by 1.7 percent between 2009-10 and 10-11, in addition to the 3.5 percent growth for 2008-09. I would understand if this means the Council needs to seek some savings in the 2009/10 academic year.

8.   The reprioritisation of resources in Higher Education inevitably takes time. In view of the slower rate of growth of public spending now projected, it is important that your initial decisions reflect a long term view of the priorities for Higher Education. As you know, I shall shortly publish the Government's forward framework for Higher Education. I am expecting to work closely with you on the drafting of this document and hope that your decisions will reflect some of the emerging conclusions I have already set out in my speeches at our conference on 24 February and then again at your annual conference on the 2 April.

9.   In reflecting the efficiency savings, I would ask you to bear in mind the following:

• the absolute priority of protecting and enhancing the quality of teaching and research, whilst sustaining progress in widening participation and the New University Challenge. This will require a rigorous examination of priorities by both institutions and the Council itself. I would like you to look critically at the funding you provide for bodies that do not directly deliver teaching and research.
• I can now authorise a total of 10,000 ASNs for 2010-11, to be confirmed in the 2010-11 grant letter in the normal way. It will be important to ensure that the additional funding is used to support innovative developments in Higher Education which reflect national economic priorities.
• The Treasury has revised down its inflation assumptions for 2009-10 and 2010-11 and this is reflected in the projected efficiency savings. You will want to consider how to reflect this in your allocation decisions. For my part, I believe that it is imperative that the sector delivers realistic and affordable pay settlements in the light of falling inflation, the broader spending climate, and the experience of those working in other sectors of the economy.

10.   I remain committed to the principle that institutions are autonomous and that they hold responsibility for decisions on the use of resources. I hope the Council will encourage institutions to enjoy autonomy in the allocation of resources, whilst also encouraging the further effective use of benchmarking data across the sector. The resources we are making available assume that this will be done.

11.   In the longer term, as I said at the recent HEFCE conference, the Council will need to consider further how resources can best be used to shape the sector more effectively; for example to ensure that universities are incentivised to maintain and grow the courses and programmes which are most in demand by employers and provide the best prospects for students. I would like the Council to consider whether, as I have suggested, a greater proportion of Higher Education funding might become contestable in order to promote innovative developments.

12.   You will come to a view on how far changes that respond to these principles can materially influence your funding decisions in the next year. Certainly I would expect that their impact would develop more fully over time. I am not looking to make sudden changes to a Higher Education funding system that has served us very well. I remain committed to the dual support system for research. I also firmly believe that the model where the majority of funding is allocated as a block grant to autonomous institutions, who decide for themselves how it is spent, and a smaller amount is held back by HEFCE to support strategic initiatives, is the right one. But we should now be thinking strategically about the long term outlook.

13.   I invite the Council to work closely with my Department over the next few weeks so that our thinking on these issues coheres in advance of the publication of the Higher Education Framework.

John Denham

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