1. Engineering Professors Council Congress: March 2005 University Finances: What will the next five years bring? Dr Jonathan Nicholls Registrar and Secretary University of Birmingham

2. The current state of university finances Latest HEFCE forecasts: 0.5% surplus on £16.36bn income in 07/08 (HEFCE recommends 3% surpluses for HEIs) Sector expects 9.6% increase in home students Sector expects 26.7% increase in overseas students Public funding at 60% of total income Staff costs rising well above inflation Borrowings increasing from £1159m to £3591m by 2008 Risks = student numbers, salaries, capital programme management (£7896m by 2008)

3. Postcards from the edge HEFCE monitoring 12 HEIs on a monthly basis A £120m HEI forecasting break even but developing a £4m deficit in one month An £80m HEI forecasting total illiquidity in nine months A £30m HEI with internal auditors whistleblowing on ineffective governance A £40m HEI with £140m of redevelopment and new debt of £50m An £8m HEI with £47m of redevelopment and a funding gap > £8m A £120m HEI with a deficit of £6m to be recovered from overseas student growth but no other strategy

4. Publicly planned HE funding 1989/90–2003/4

5. HEFCE settlement for 2005/2006 Headline cash increase of 5.6% over 04/05 (5.4% T and 10.8% R) But underlying real increase for T is 0.98% And R increase hides volume measure changes and further differential for top performers PGR new monies welcome but HEPI research implies higher costs than income Gershon efficiency savings to come

6. Rewards for research excellence Greater investment £1.25bn increase from 02/03 to 05/06 Greater selectivity – 6* departments, less funding for grade 4s Research Councils moving to full cost model (FEC) Emphasis on financially sustainable research More funding for RAE outcomes Capital stream of £500m pa to 2008 (SRIF and Project Capital) £50m pa by 05/06 for collaborative research Improved pay for researchers Arts and Humanities Research Council Higher Education Innovation Fund £90m pa by 05/06

7. Higher education and business Lambert Report did not reach the Governments expected conclusion that universities were the problem in inhibiting the exploitation of research Quite the reverse – the problem is on the demand side rather than the supply side Research Councils have played a key role in that success with the IPR assignment changes nearly 20 years ago Much more incentive for universities and individuals to exploit IPR Emphasis has been on Spin Out companies, but now shifting to licensing Inevitable tensions in universities in transition phase between research and commercialisation RDA approach is not yet as mature as Research Councils – they seek to have all IPR but have no mechanisms to exploit it

8. Elements of volatility and opportunity Variable tuition fees Full economic costing Introduction of HR reforms and pensions RAE 2008 A changing overseas student market Diversity of income streams

9. Variable tuition fees A significant transfer of risk for little immediate financial gain and more regulation After bursaries, investment in facilities, cost of salaries [and pension deficits?], little left for new staff or to redress the chronic underfunding of last 20 years The key factor is the principle of payment by the student for part of the cost

10. Source: The University Lifestyle Survey 2004 Students key reasons considered for going to university, grouped by subject

11. Full economic costing Will require more selectivity and judgement about what research to support Will eventually replace SRIF – may have impact on RAMs and devolution Must result in better pricing of HE services and demonstration of value-added Could be a more dynamic change than variable fees

12. HR reforms The Framework Agreement and – for some – Revised Model Statute Job evaluation and new Framework will add costs to pay bills Pay inflation at c.3.5% greatly ahead of real increases in government grants

13. RAE 2008 Is creating turbulence in recruitment and retention markets May be the last to be held in the current format May be the beginning of the end of dual support Will see a further distribution of resources from the weak to the strong

14. Overseas students Significant value to UK plc: £4bn per annum (>210,000 overseas students in sector in 03/04 + >100,000 from EU) PMI has had an impact in promoting UK as a destination However, recent data shows worrying signs of maturing markets (eg. China), revived competition from other countries and in-country and over-reliance on overseas students as a cash cow for universities

15. Diversity of income streams Autonomy comes from reduced dependence on state funding but privatisation not a realistic option HEIs must diversify their funding base: unregulated markets for students; range of research partners; commercial income; fund-raising But this comes with the price of high performance, responsiveness, new structures to exploit opportunity

16. Conclusions Most significant period of change in 40 years Clear financial risks but opportunities for the best prepared Stratification of HE in the UK will rapidly develop (some closures and further mergers are inevitable) HEIs must play to their strengths and adopt clear identities

17. Engineering Professors Council Congress: March 2005 University finances: What will the next five years bring? Dr Jonathan Nicholls Registrar and Secretary University of Birmingham