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Path from the pandemic: Weathering the storm

How pandemic forecasts of financial doom for universities have played out in reality

When the first Covid-19 lockdown for the UK was announced on 23 March 2020 the financial implications for the country’s universities were worrying.

UK higher education is an inherently international operation. On top of the likely disruption to the recruitment of domestic students, restrictions on international travel would hit it hard.

In April 2020, the London Economics consultancy forecast a £2.6 billion shortfall in university finances in the 2020-21 academic year, with £1.85bn of this incurred as a result of income lost from international students.

The forecast made unhappy reading. But to what extent has this gloomy prediction materialised? 

Though it is too early for a final verdict, as institutions are still finalising their 2020-21 accounts, England’s university regulator, the Office for Students, says the sector has weathered the initial coronavirus storm a lot better than many were initially expecting.

Its annual financial health check—published in June—concluded that almost all higher education providers were managing their financial risks well, although the OfS was still concerned about the future impact of the coronavirus pandemic on income streams.

The OfS found that overall income for registered providers is projected to increase from £34.7bn in 2018-19 to £40.7bn by 2023-24—despite an expected “decline in financial performance and strength in 2020-21, relative to 2019-20”. 

Adam Tickell, vice-chancellor of the University of Sussex, tells Research Fortnight that the current financial picture for UK universities is “on the whole, a lot better than any of us thought it was going to be”. 

“The reason for that is that a lot of things just stopped when the pandemic hit—and by that, I mean that universities just turned the taps off in terms of capital [spending],” he says. “When you look at [financial] performance at year end this coming year compared to last year, then I think you’ll find that in most cases it is really not that different. But that was a function of reduced expenditure, rather than income being much better than expected during the pandemic.”

While universities reduced outgoings, income streams that were initially expected to dry up—such as rent from students in university accommodation—also continued to flow to some extent. 

“Overall, surpluses [for 2020-21] will be lower than might have been predicted before pandemic,” says Tickell, “but I suspect we have all done better than we would have expected. At one point we thought we’d have no income from accommodation, but after Christmas, students returned to their accommodation in large numbers.” 

The OfS analysis found that higher education providers had, in general, responded to the challenging circumstances through sensible and prudent financial management—including “good control of costs and the effective management of cash flow to protect sustainability”.

But it observed that the amount that providers hold in cash is forecast to be low in 2020-21 and 2021-22, as they “manage the financial implications from coronavirus”. 

Ultimately, the OfS analysis concluded that “the likelihood of multiple providers exiting the sector in a disorderly way because of financial failure is low”.

Nolan Smith, director of resources and finance at the OfS, said the data showed “continued evidence that the higher education sector as a whole is well placed” to recover.

“While this is a positive set of projections,” he says, “a number of factors may affect the financial performance of universities in the coming years. The pandemic…continues to cause significant uncertainty given that many income streams for universities require fully open campuses.”

Scattered showers

Even before the pandemic there was concern about university finances in the corridors of power. In 2019, for example, the Department for Education in England set about recruiting a “policy expert on financial sustainability”.

In worrying language for the sector, the job advert said the successful candidate would take a lead role in addressing “how insolvency arrangements work for higher education providers”. They will develop the DfE’s policy position “in relation to potential intervention in face of the risk of provider financial failure”.

And while the overall picture might be healthy, there are huge differences between institutions, with some posting big deficits. 

According to the figures published by the Higher Education Statistics Agency for 2019-20, which for most institutions runs to July 31, the University of East London (UEL) posted the largest annual deficit of more than £69m. It was followed by Leeds Beckett University (£9.9m) and the University of Brighton (£9.7m).

There is no suggestion that these institutions are in any financial difficulty, as income statements in isolation do not accurately depict an organisation’s financial position. But they all told Research Fortnight that Covid-19 had been a factor in the deficits. 

UEL’s accounts said in February 2020 it had “forecast an operating surplus of £5m”. The accounts said its £69m deficit “ignores a valuation gain of £71.1m on the value of its land but includes an impairment loss of £69.2m on buildings” meaning the university actually “achieved a break-even operating position of £0.2m”.  

“During the worst period of the Covid-19 lockdown an operational deficit of £8.5m was forecast,” UEL said. “The outcome is therefore a substantial recovery from that point.” 

A spokesperson for Leeds Beckett said it had maintained a robust financial position because of early decisions at the start of the pandemic to collectively manage its costs in “this constrained income environment”.

A spokesperson for the University of Brighton said that in 2019-20 it lost income from student residences, catering, conferences, and sports memberships, which suffered “a gross loss of income…in the region of £8m due to lockdown”.  

Steady spells

One of the big concerns for universities when the pandemic broke out was what would happen to lucrative fees from international students, estimated to amount to nearly £7bn—around 17 per cent of the total income of the sector. This income is vital for subsidising activities including research.

With planes grounded as the pandemic stuck, there were widespread fears that international students would shun the UK as lectures were forced online. But UK universities recorded a 9 per cent increase in the number of undergraduates from outside the UK and the EU starting in September 2020. 

“The international demand for UK higher education continues as very robust,” says Simon Marginson, professor of higher education at the University of Oxford. 

But he warns that the UK relaxing its restrictions amid high case levels could send the wrong signal to students considering the UK and creates a further uncertainty. 

Domestic student recruitment, meanwhile, has also been buoyant. Ucas data show the number of UK 18-year-olds applying to university this year was up 10 per cent year on year—at 311,000. 

Clouds ahead?

Overall, it seems that financially the sector is in a better place than was expected this time last year—but, according to Nick Hillman, director of Higher Education Policy Institute, many underlying problems remain.

“While in the short term the government was probably right not to give the sector all the financial support they asked for early in the crisis,” he said, “in the medium to long-term, universities are going to need more support if they are to retain their quality.”

The worst forecasts may not have come to pass, but things are not looking sunny just yet.  

Flat-cash fall

On 21 July, Research England told universities it could not give funding allocations for the coming academic year yet as it is awaiting confirmation of its budget from the government, meaning crucial research income will be based on last year’s payments from August.

This will apply to at least the first three months of the roughly £1.6 billion of annual quality-related research funding that provides most of the research income. 

The move means universities across England will receive no increases in crucial income streams even as inflation surges. 

Path from the Pandemic

The Path from the Pandemic initiative from Research Professional News is focusing on six critical areas where momentum is building for long-term change in the wake of the pandemic. These are: financial sustainability; a fairer sector; online opportunities; international partnerships; open research; and trust in science. Through the initiative we hope to help the sector explore a sustainable way forward. Have your say: #PathFromThePandemic on Twitter or email news@researchresearch.com.

This article also appeared in Research Fortnight