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Executive summary

Purpose

1. This report provides an overview of the financial health of the higher education sector in England. The analysis covers the financial forecasts for the period 2012-13 to 2015-16, as submitted by higher education institutions to HEFCE in December 2012 and July 2013.

2. The report is being published to provide universities and higher education colleges with feedback on the sector’s projected financial performance. The analysis also provides other stakeholders with information about the sector’s current and future financial health. It supersedes our previous analysis published in March 2013 (‘Financial health of the higher education sector: 2011-12 financial results and 2012-13 forecasts’, HEFCE 2013/04).

Key points

3. Higher education institutions (HEIs) in England are required to send us their annual accountability returns in December each year. These returns form a significant part of the way in which HEIs can demonstrate accountability for the public funds distributed to them. The accountability returns enable HEFCE to reassess HEIs’ overall risk assessments and to provide evidence that HEIs are meeting their accountability responsibilities.

4. This year’s financial forecast data consist of updates to the 2012-13 forecasts, and forecast data for the academic years 2013-14 to 2015-16.

5. As previously reported, the overall financial results for the sector in 2011-12 showed a sound position overall. The projected sector performance in 2012-13 is not as strong as the results for 2011-12, with projected operating surpluses of £659 million (2.7 per cent of income), which are £314 million less than the level reported for 2011-12 (4.2 per cent of income).

6. Cash flow from operating activities is also expected to be lower at 6.4 per cent of total income, compared with 8.1 per cent of income in 2011-12, although liquidity levels are expected to remain strong at 118 days (the level reported in 2011-12).

7. Overall, across the remainder of the forecast period up to 2015-16, the sectoris forecasting sound surplus levels, good cash balances and healthy and increasing reserve levels. However, across the sector there continues to be a wide variation in the financial performance of institutions. In 2013-14, the second year of the new funding arrangements, forecasts show that the increase in fee income from home and European Union (EU) students outweighs the fall in public grant funding as long as student recruitment levels hold. While total income is expected to rise, the sector is also projecting increases in staff costs in 2013-14 (arising primarily from staff recruitment) which will cause surpluses to fall. Thereafter, surpluses and cash flow from operating activities are expected to increase.

8. Some of the rise in income is attributed to the continued growth in fee income from overseas (non-EU) students, which is expected to remain strong, despite the changes in visa regulations introduced from 2011. This growth is expected to be from higher fees as well as an increase in overseas students from 2013-14 to 2015-16. However, there is a risk that growth will not materialise at the level forecast, particularly as the sector expected overseas numbers to fall in 2012-13. Any reduction in the growth forecasts could have a major impact on the financial forecasts.

9. The sector is forecasting high levels of capital expenditure during the next four years. The average level of annual investment for the period 2012-13 to 2015-16 is expected to be £3,105 million, £580 million greater than the previous four-year average (2008-09 to 2011-12) of £2,525 million. This is despite a significant reduction in public capital funding which has seen HEFCE capital grants falling from an average of £825 million per annum over the period 2008-09 to 2010-11 to £299 million in 2011-12 (a reduction of 64 per cent).

10. Forecasts show that the sector is now funding a significantly higher proportion of capital expenditure from internal cash reserves or through other sources to help maintain the quality of infrastructure. The forecasts may have been influenced by the government spending review announcement of increased capital grants in June 2013. In 2012-13, forecasts show that the sector requires £1,499 million from its own cash reserves, equivalent to 6 per cent of total income, to help fund the capital investment planned for that year. While short-term health is not a concern, some institutions will need to increase surpluses in future years, especially if the increase in public capital funding does not materialise. Any reduction in capital expenditure could risk the quality of the infrastructure in the higher education sector.

11. As well as including assumptions about capital grants, the financial forecasts will have included other public funding assumptions derived from the spending review announcement and previous government announcements of indicative funding levels. These confirmed that funding for research would continue at broadly the same levels as previous years but that in 2015-16 (financial year) there would be at least a £45 million reduction in HEFCE teaching funding. This is in addition to the £300 million reduction in direct grant funding as a result of the substitution of grants for fees following the higher education reforms starting in 2012. There is an on-going risk that future public funding of higher education could be constrained if the overall economic climate does not improve.

12. The sector has shown over recent years that it can deliver efficiencies. For exampleit has reduced its cost base, with pay costs being curtailed after a period of strong growth. These efficiency measures have helped support the current financial performance of the sector. It will be important for the sector to maintain this efficiency drive in order to deliver long-term sustainability in the future.

13. The sector continues to operate on fine margins, which means that even small changes can have a material impact on its financial performance. Despite the small margins, the short-term viability of institutions is not a concern presently, and no institutions are close to the risk of insolvency. This is supported by independent institutional audits and the sector’s own projected continuation of positive cash in-flows and healthy cash-backed reserves.

14. Continued uncertainty over future student recruitment, at home and overseas, could result in increased volatility of forecasts and a widening of financial performance between institutions. Strong liquidity is necessary for HEIs efficiently to manage the potential increased volatility and unpredictability of the new funding system and the increasing competition from international higher education institutions.

Action required

15. No action is required: this report is for information.

Date: October 2013

Ref: 2013/29

To: Heads of HEFCE-funded higher education institutions

Of interest to those
responsible for:

Audit, Estates, Finance, Governance, Management, Planning

Enquiries should be directed to:

HEFCE assurance consultants or assurance advisers