Report 01/71

Analysis of corporate plans, outcomes of 2001 financial forecasts and annual operating statements

To:	Heads of HEFCE-funded higher education institutions Heads of universities in Northern Ireland
Of interest to those responsible for:	Finance, Planning, Management
Reference:	01/71
Publication date:	December 2001
Enquiries to:	Corporate plans HEFCE Regional Consultants (details at Annex F) Annual operating statements Kate Nickols tel 0117 931 7333 e-mail k.nickols@hefce.ac.uk Financial forecasts Ian Lewis tel 0117 931 7336 e-mail i.lewis@hefce.ac.uk

Executive summary (read on-line)

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Executive summary

Purpose

1. This report sets out the key points from our analysis of the first cycle of institutions' corporate plans. Institutions were asked to submit corporate plans within a three-year cycle beginning in July 1999 (see HEFCE 01/23).

2. We are now requesting corporate plans for the second cycle of plans, beginning in July 2002. In doing so we invite institutions to take account of the key issues for development arising from the first cycle of plans, as set out in this report.

3. This document also provides a summary of financial projections for the higher education sector covering 2000-01 to 2004-05 and of the sector's annual operating statements for 2000-01. It is based on information provided by higher education institutions in July 2001.

Key points

Corporate plans

4. All HE institutions are asked to provide the Council with their corporate or strategic plan, which describes the institution's mission, sets out their overall strategy and long-term objectives, and explains how these are to be achieved.

5. Following consultation in 1998, we revised our approach to institutional corporate planning. To reduce the burden on institutions, we no longer asked for a full corporate plan to be provided every year, but asked for plans on a three-year cycle. The first cycle began in July 1999.

6. HEIs are required to provide summary annual operating statements and financial forecasts in July of each year. We also require specific strategies in return for HEFCE special funding for strategic areas (for example, widening access and participation, learning and teaching, and human resources).

7. We now invite institutions to submit plans for the second three-year cycle beginning in July 2002. To enable planning and reporting to be more effective in the future, we encourage a stronger focus in plans on the following:

a. Clearer identification of institutional missions and priorities.

b. More specific objectives and measurable targets.

c. Improved financial strategies to underpin plans, with associated risk assessment.

d. More effective integration of subsidiary strategies within the overall plan.

Annual operating statements

8. This is the third year in which we have sought annual operating statements (AOSs). Our analysis of the 2000-01 AOSs has focused on the three key HEFCE strategic initiatives of widening participation, learning and teaching, and Higher Education Reach-out to Business and the Community, looking particularly at the second year of activity under these initiatives.

9. We will continue to evolve the framework, seeking to identify the minimum range of information that we need for monitoring purposes, and collecting as much as possible through AOSs. In April 2002 we will extend the AOS request to collect information on human resource strategies and the Higher Education Innovation Fund in addition to the three initiatives mentioned above.

Widening participation

10. Over four-fifths of institutions reported that they are either fully or mostly achieving the activities and targets that they set for themselves in their initial statements. This was a slightly improved outcome compared to last year. Only a very small number of institutions reported a lack of progress against their widening participation plans.

11. In a small minority of cases the AOS gave insufficient information to enable us to make a judgement about progress in widening participation in 2000-01, but overall reporting on progress in widening participation has improved compared to last year.

Learning and teaching strategies

12. Almost all institutions were fully or mostly achieving the activities and targets they had set for themselves for 2000-01 (compared to around four-fifths last year). This is a very good result and shows that some institutions with earlier slippage in their plans were back on target. A very small number had fallen behind in their plans, and a few others had not provided enough information for us to form a view about progress.

Higher Education Reach-out to Business and the Community (HEROBC)

13. As last year, the great majority of institutions have fully or mostly achieved the activities and targets that they had set for themselves for 2000-01. Most institutions had provided sufficient information for us to form a view about their performance. A few institutions had fallen behind with their plans. A number of these had received funds only through the second round of HEROBC funding, and therefore 2000-01 was the first year they had received funding. Delay in making appointments was a significant factor for these institutions.

Follow-up work

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

Financial forecasts

15. The sector forecasts have a history of reliability with actual results being close to forecast.

16. The operating position is forecast to be at break-even for 2000-01 and 2001-02, rising thereafter. The break-even forecast is substantially below the actual results for recent years, all of which exceeded £100 million a year.

17. Within the 2001 forecasts some assumptions (such as on funding council grants) are prudent, while others (such as on overseas fee income and rates of pay increases) will be more challenging to achieve. Overall the assumptions of increases in total income and expenditure are considered to be reasonable.

18. Universities and colleges are forecasting to keep income and expenditure in balance, but this is at a cost of, among other things, increasing student:staff ratios. Increases in income generation are forecast, but these carry risks and markets are becoming increasingly competitive.

19. There remain financial risks facing universities and colleges. These need to be managed, and include:

a. The increasingly diverse range of income sources, both public and non-public, and the increasing competition in markets. (Although in some respects greater diversity is a means of reducing risk, the new income sources may be less stable and reliable than established sources such as HEFCE grants).

b. The reduction in financial flexibility in some institutions as liquidity reduces and fixed costs (such as from higher borrowing) increase.

c. The constraints on funds being generated, both to keep income and expenditure in balance and to reinvest in developing the physical and human capacity.

20. Actions which could address the projected financial situation include:

a. Real increases in public funding to reverse past under-investment and the erosion of the unit of resource.

b. Continuing to diversify income sources.

c. Securing the right price across the range of activities and services provided by universities and colleges that reflect full costs and value to the customer.

d. Controlling recurring expenditure within affordable limits.

e. Removing duplications in expenditure through increased collaboration and improving asset utilisation.

21. The financial strength of the sector is satisfactory when viewed in aggregate, but a small number of HEIs are facing a tough operating situation with limited financial resources.

22. The level of capital expenditure is forecast to be considerably higher up to 2003-04 than in previous forecasts. This reflects increases in capital grant funding to supplement the limited funds being generated from operating activities.

23. The level of capital expenditure from 2004-05 will depend on the capital grants to be announced under the Government's 2002 spending review.

Action required

24. Institutions should review their corporate plan in the light of the feedback in this report. Regional Consultants will be writing to institutions to determine when in the second three-year cycle (beginning in July 2002) they wish to submit corporate plans.