HEFCE Report 00/53

Analysis of 2000 financial forecasts and annual operating statements

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Annexes

Executive summary

Purpose

1. This report provides a summary of financial projections for the higher education sector covering 1999-2000 to 2003-04 and a summary of the sector's annual operating statements for 1999-2000 and 2000-01. It is based on the information provided by higher education institutions (HEIs) in July 2000.

2. Universities and colleges are encouraged to develop corporate plans to help deliver their strategic aims. Such plans should incorporate financial strategies and be underpinned by projections of the financial impacts of their strategic aims. Within these plans, targets and milestones should be set against which progress can be measured. Annual operating statements demonstrate how those targets have been met in the past year and set out priorities for the coming year. These, along with financial forecasts, form integral parts of the strategic planning and performance monitoring processes.

Key points

Financial forecasts

3. The financial forecasts were prepared by higher education institutions before the outcome of the Government's 2000 spending review was announced. As such the impact of the announced additional funding has not been included, and the forecasts need to be viewed accordingly. This additional funding is as follows:

• £100 million additional recurrent funding for 2001-02
• £1,000 million to support investment in the scientific research infrastructure for the three years from 2001-02 to 2003-04
• an additional £80 million for the Higher Education Innovation Fund for 2001-02 to 2003-04
• over £50 million of the £150 million for the Excellence Challenge for 2001-02 to 2003-04, to support widening student participation in higher education.

4. With this exception, the forecasts have been based on realistic assumptions, reflecting the economic climate under which they were prepared. Based on past experience, they are a reliable indicator of the future financial position, but tending to project a slightly worse position than is achieved in the event.

5. The trend for an increasing proportion of income to HE institutions being from non-public sources continues. The proportion could rise to 40 per cent by 2003-04, when non-public income across the sector should exceed £4,500 million.

6. Universities and colleges need to generate annual operating surpluses to provide the positive cash flow for reinvestment and to fund future developments. Across the sector we have assessed this as being in the region of 3 per cent to 4 per cent of total income. However, this level will vary between institutions; for some universities and colleges, which invest to maintain and replace their assets, the level will be close to zero.

7. Against this 3 per cent target for the sector as a whole the operating position is between £250 million and £300 million a year less than that considered necessary to provide for reinvestment and to fund future developments.

8. The actions to address the shortfall in operating surpluses should include:

1. Continuing to secure increases in public funding to address past under-investment and the erosion of the unit of resource.
2. Continuing to increase the level and range of non-public income sources.
3. Addressing the 'low price culture' that has developed across the range of activities and services provided by universities and colleges - that is, the tendency of some HEIs not to charge full costs for activities and services provided under contract to others.
4. Controlling recurring expenditure within affordable limits.
5. Sharing costs through increased collaboration between institutions, and improving asset utilisation.

9. The sector's ability to fund capital expenditure directly or through borrowing is constrained by the levels of its operating cash flows and by available capital funding. Here again, the increased capital funding for the scientific research infrastructure announced in the spending review should assist that area of capital investment. There is also a continuing need for sustained investment in the non-research infrastructure.

10. There continue to be marked differences between institutions in their financial strength, with a significant proportion of the sector's total financial liquidity and reserves concentrated in a small number of institutions.

Annual operating statements

11. This is the second year in which we have sought annual operating statements (AOSs) in their current form. The exercise has worked well. We will continue to evolve the framework, extending the principle of identifying the minimum range of information which we need for monitoring purposes, and collecting as much of it as possible through AOSs.

12. Our analysis of this year's AOSs focuses on the four HEFCE strategic initiatives on widening student participation in HE, raising the quality of learning and teaching, the HE Reach out to Business and the Community programme, and project capital.

Widening participation

13. Around four-fifths of institutions are either fully or mostly achieving the activities and targets that they set for themselves in their initial statements. In other cases progress was unsatisfactory because of significant slippage against an institution's plans, or the AOS gave inadequate information to enable us to make a judgement about progress in the 1999-2000 academic year.

Learning and teaching strategies

14. Around four-fifths of institutions reported that they were fully or mostly achieving the activities and targets that they had set for themselves for the 1999-2000 academic year. A few institutions had fallen behind in their plans, and others had not provided enough information for us to form a view about progress, and we will follow that up with them.

Higher Education Reach out to Business and the Community

15. The great majority of institutions have fully or mostly achieved the targets and activities described in their business plan for the first year. A small minority of institutions have fallen behind in their plans. In a number of cases this was due to the lead-times for recruiting staff. We will discuss with these institutions their plans to remedy slippage. Others did not describe their activities or targets in sufficiently specific terms to form the basis for monitoring progress next year, and we will seek further information.

Project capital

16. Of the 42 equipment-only projects, around half were fully or mostly completed on schedule by the end of the 1999-2000 academic year, seven were delayed and for the remainder there was insufficient information to make a judgement. Around half of the 26 building and mixed building-and-equipment projects were fully or mostly completed by the end of 1999-2000, four were delayed, and for the remainder there was insufficient information to make a judgement.

Follow-up work

17. We will follow up cases of insufficient information or apparently inadequate progress through our regular meetings between institutions and HEFCE Regional Consultants.

18. Through the review of AOSs we collected a number of examples of good practice. We have used these to provide case study illustrations which are at Annex F.

Action required

19. None. This report is for information.