Download Securing a sustainable future for Higher Education

Securing a sustainable future
for Higher Education
Jim Port
J M Consulting
Ditchley Park 20 May 2004
The OECD project
Financial management and governance for sustainability
But sustainability of what and for what?
(Survival of existing institutions not necessarily an
objective)
Two big themes:
How can governments achieve their education and
social/economic goals through higher education
institutions?
How can institutions protect their long-term academic and
financial viability?
This project is about how to achieve both objectives in a
sustainable way: not one at the expense of the second.
National contexts
National reports from Australia, England, Germany, Ireland,
Japan, Netherlands, Sweden, USA. These show:
Diversity of HE systems:
– 40 to 4000 institutions
– National, federal, unitary, binary systems
– State-owned to private universities.
Common pressures in most countries:
– Broader roles of HEIs
– State funding declining as a % of HEIs income
– Core funding being replaced by contract or incentive funding
– Market pressures becoming more acute
– Activity growing faster than capital investment
– Accountability to a wider range of stakeholders
Autonomy of universities and
relationship to the State
The State in most countries appears to want:
 Lower cost to taxpayer per student
 HEIs serving a wider range of policy agendas and
contract funders
 Greater exposure to market pressures (e.g. international
student market)
 Generation of more non-state income
 Strategic planning and management by universities
 Efficiency and “better management” of resources
 Institutions managing own risk and investment
But are HEIs in a position to meet these
challenges?
The position in the UK
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Research costs exceed income
Teaching broadly funded at cost – overall – but some T costs
significantly more than funding
Institutions in deficit if include full economic costs
Capital investment backlogs: buildings, equipment etc
Lot of academic staff time is “unproductive”
Much infrastructure is inflexible, and poorly utilised
Leadership and management an issue
Few HEIs have real finance or capital asset strategies
Investment needed in people and modern working methods
Perverse incentives – would HEIs use additional funding for
sustainability or to increase current activity?
HEIs do an excellent job, but a long way from full strategic
management for sustainability
Relative growth in HE activity and funding (UK)
80
60
Student numbers
40
Sq metres
20
Books/jnls per FTE
0
-20
Unit of funding
(teaching)
-40
-60
%
1989/1990
1999/2000
Changing state and higher
education relationship
• It was once the role of Governments to provide for
the purposes of universities; it is now the role of
universities to provide for the purposes of
Governments
Fundamental shift in the relationship between the state
and higher education
Sir Howard Newby, Jan 2004
Possible models of a university
1. A public body which is funded by the
government and sets its own academic
agenda within the resources available
2. A public service organisation which manages
a portfolio of activity and financing to deliver
what its main stakeholders will fund, and to
ensure its own future
Changing university culture?
Pre-business
“Business” model
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Supply-led
Reactive, resist change
Depends on state
Cash-funded on needs
basis
• Administered
• Risk averse
Market-driven
Pro-active, strategic
Autonomous
Portfolio financing and
Investing for the future
• Managed
• Manages a range of risks
What does sustainability mean?
An HEI is sustainable if:
It is recovering full economic costs, managing its activity and financing
portfolio, and investing for the future in line with a strategic plan
(It also needs to maintain its quality and academic vitality)
It may not be sustainable if:
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It is losing on its main operations
It is relying on past investment
It is not managing its portfolio – e.g. it is investing in areas with no
future or not in the strategy
It is not adapting to changes in its environment
It is not responsive to national needs
Is this achievable in a university?
A business should do all these things, but they are not standard
skills in a public sector body. Are they compatible with an
academic culture and a public service ethos?
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Do they threaten academic freedom?
Will they damage the public service role of institutions?
Will government be willing to pay more?
Will activities be damaged?
Will foregoing current consumption (to invest) in fact be
penalised by loss of market share?
Achieving sustainability is a significant long-term culture
change for many HEIs. It needs consistent support by
government and planned strategic action by institutions.
How can government achieve its
aims through the HE sector?
– How far can market forces be allowed to shape
the HE sector?
– Does the state wish to determine the pattern of
provision and to invest as required to maintain
future productive capacity?
– How can the public interest and the values and
quality of higher education be protected?
– How can public policy goals be delivered without
undermining the integrity of higher education?
– How important is institutional autonomy?
Implications of autonomy
Autonomous and well managed universities can be more secure
and more flexible to deliver the range of services Governments
want over the long term
But they can also fail:
 Exposure to unplanned risk
 Vulnerable to market pressures
 Inadequate management, governance, or strategy
And a more autonomous and market-led system may mean that:
 Less popular programmes will close
 Public service activities may cost the taxpayer more
 Social goals may be sacrificed
 Institutions may become threatened
 Government has less scope to intervene
Securing institutional sustainability
Institutions have experienced: increasing demands; financial
pressures; and growth of activity faster than the capital investment to
underpin this.
Many have capital investment backlogs and some are overtrading.
Most still rely on public sector skills, values, systems and freedoms.
As the proportion of core funding declines, they have to manage a
portfolio of finance and activity in a more strategic way and to operate
in more complex market situations.
HEIs most involved in broadening student access may be the most
financially vulnerable.
How can institutions manage on a financially sustainable basis,
and respond to policy objectives without damaging their
traditional values?
Conditions for sustainability
Strategy: having a strategic plan to guide investment and
decisions (making choices, and saying NO to some activity)
Cost recovery: knowing full economic costs of activities, managing
portfolio of activity, and managing projects and activity to
recover full costs overall (involves academics, not just finance)
Funding: not generally accepting funding or prices below the costs
of the activity to the institution (needs government support)
Investment: investing enough to maintain productive capacity
Managing risk and opportunity: having the uncommitted cash
and freedom to act in a timely and flexible manner
An institutional strategy
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Integrates academic and financial objectives
Is realistic - not a wish-list
Can be financed – not a bid
Is understood and owned by staff and management, including
academics who drive costs and income
• Is informed by objective analysis – not “we can suddenly grow
overseas students faster than we ever have before”
• Makes important connections between strategies for T, R,
estates, HR etc
FEW INSTITUTIONS HAVE THIS AT PRESENT
Cost management
1. Understand full economic costs of activity – (academics not
just finance). TRAC is doing this. Some costs are difficult:
 Academic staff time
 Space
 Central costs
2. Manage costs and cost recovery. Methods to influence
recovery of costs:
 Portfolio management (avoid low-recovery activity)
 Pricing (where you can)
 Project management
 deliver at lower cost – dont “over-deliver”
 combine with other projects – share costs
 deliver so get other benefits
Pricing strategies (UK)
Type of work
Pricing
Research of high academic value and
prestige (RAE benefits, IPR etc)
At least all direct costs –
include space etc as per TRAC
(loss-leader)
Applied research (little addition to HE
knowledge base or IPR)
fEC (TRAC)
Consultancy (knowledge activity, but no
IPR)
fEC plus (never below)
Commercial (no academic benefit)
Market price informed by fEC
But don’t be afraid to ask for
much more – margin for subsidy
and for investment
Investment – future needs
• Going forward institutions need to plan to spend 4-5% of
asset value on an annual basis for renewal and
replacement
• Evidence for this: HEFCE study – 60 year lifetime with
two major refurbishments and some modest continuing
spend
• Sector is actually spending about 2.5-3%
• Plus of course investment in staff, systems, technicians,
travel, books etc etc
• How will institutions finance and prioritise this? – and
how will you evidence that you have done it?
So what can institutions do?
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Understand fEC, and always budget for whole-life costs
Integrate academic/finance/assets strategies (R and T&L
strategies which are also business strategies)
A masterplan for the estate
Maximise return on existing assets
Policy on staff/infrastructure balance (many staff with poor
capital investment and support, or fewer much better supported)
Make surpluses and invest on a consistent, planned basis
Culture change and communication internally (e.g. on the low
price culture, pricing opportunities, portfolio management etc)
Some academics will find this threatening – at first
And what do they need?
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Market awareness
A broader range of strategic management skills in the SMT
Governance and financial management structures which
support sustainability
Monitoring information and processes which give advance
warning of financial health
Support from public funders
An investing and strategic decision-taking ethos
Financial headroom
A culture which accepts (and rewards) these attributes
The support of the state in achieving all these
Is this a new model of the university?
Institutional Strategy
ACADEMIC
FINANCIAL
current
operations
future
operations
using
current
infrastructure
future
infrastructure
generating
surpluses to
re-invest in
Managing risk and
change
Tests of sustainability:
a. integrated strategy
b. portfolio of activity responsive to strategy and market
c. full economic cost recovery – cash to reinvest
d. investment in infrastructure and operations for future needs.
References
 On The Edge – OECD/IMHE report on the project on
financial management and governance 2004 – from
OECD or HEFCE/JMC
 Financial Management & governance in HEIs –
(England report to OECD study 2004– HEFCE website)
 Transparency review (www.jcpsg.ac.uk)
 TRAC Guidance Manual Vol III Full Economic costs
of Projects (HEFCE/JCPSG) – Note Sections A and
B2
 Financial Strategy in HEIs – HEFCE 2002/34
 Teaching & Learning Infrastructure in HE - HEFCE
2002/31