Scottish Funding Council (SFC) - Financial Sustainability of Universities

The report provides an aggregate picture of the financial health of Scottish universities, based on their annual accounts for academic years 2020-21 and 2021-22, and the latest forecasts for the period from 2022-23 to 2024-25. It does not take into account the most recent budget announcement for 2024-25. The analysis, based on financial returns from 18 universities, also considers key risks that could have a significant impact on universities’ financial sustainability. It is published alongside a similar report for the colleges sector.

The full report can be found here

At-a-glance:

• The sector is forecasting an underlying operating surplus of £226.5 million for 2022-23 – a 41 per cent drop on the previous year. Projections show a decline to a deficit of £3.3m in 2023-24, before partly recovering to a surplus of £44m in 2024-25. The main drivers for the changes are increases in costs such as staff pay, utilities and other operating costs; a reduction in income such as European income; City Deal funding; and capital grants, donations and endowments (universities tend to be cautious on forecasting - the actual results are often better than projections, the report says) (p5)
• The sector position is skewed by the financial results of the two largest universities. However, financial sustainability remains challenging for many universities. Five reported underlying deficits in 2021-22, increasing to six to ten universities projecting underlying operating deficits in the following three years (p5)
• Universities’ reliance on SFC grants reduced from 31 per cent in 2020-21 to 27 per cent in 2021-22 and is expected to reduce further to 23 per cent by 2024-25 (p5)
• Tuition fees now represent the largest source of income. International fee income has increased sharply, and this trend is expected to continue. International fee income is projected to rise from £1,144 million in 2021-22 to £1,617 million in 2024-25, a 41 per cent increase (p6
• The sector cash position is forecast to increase by 5 per cent, from £2,259 million at the end of July 2022 to £2,371 million by the end of July 2023. This reflects the improved operating position, delays in implementing capital programmes during the pandemic, and additional loans drawn down but not fully utilised. However, cash reserves are expected to reduce by 24 per cent to £1,791 million by the end of July 2025 due to the expected outlays on major capital programmes put on hold during the pandemic. No university is reporting a cash deficit throughout the period (p6)
• Sector borrowing is forecast to decrease by 3 per cent from £1,656 million at the end of July 2022 to £1,613 million at the end of July 2025. No bank covenant breaches are expected over the planning period. Total capital expenditure amounted to £468 million during 2021-22, 3 per cent lower than the previous year. Total sector capital expenditure for 2022-23 is forecast at £505m (p6, p24)
• The report warns of the sector’s “over-reliance” on income from international students, particularly when recruitment is heavily weighted to a single country, or where changes to UK visa and immigration policies can have a significant effect on target markets and approaches (p7)
• Other risk factors include an uncertain macro-economic outlook, with inflation reducing but remaining high and rising interest rates. Stock market pressures and wider economic challenges can also lead to significant drops in regular donations and income from endowments (p7)
• Rising energy costs may be an issue, with the centrally negotiated contract for university energy costs ending across 2022-23 to 2023-24 and universities moving onto a new contract. Government support that helps with universities’ energy bills may be less generous for 2023-24. Increasing staff costs are likely due to cost of living pay awards and increases in employer contributions to some pension schemes (p7)
• Cost mitigations being pursued by universities include staff restructuring, vacancy management or removing posts, and freezing non-essential spend. Universities have also been undertaking cost benchmarking exercises, reviewing course portfolios, delaying capital spend and reviewing estates strategies to ensure estates are used more efficiently (p9)

Implications for governance:

The indicators show an underlying operating surplus across Scottish higher education for 2022-23, albeit a significant decrease on the previous year’s figure.

The aggregate masks more challenging financial situations at a number of universities, with five reporting underlying deficits in 2021-22 and up to ten projecting operating deficits in the following three years.

As governors will be aware and as the report points out, there are a variety of factors behind this which will impact universities differently. For some institutions, the early data on international recruitment in Scotland could play a part. It shows a less positive position in 2023-24 than expected, due to the competitive nature of international markets and geopolitical changes.

Despite the vagaries of international recruitment, universities in Scotland are increasingly reliant on overseas fee income to remain financially sustainable and to support other areas, such as research which can be loss-making.

As a recent Institute for Fiscal Studies (IFS) report points out, funding for teaching domestic students has failed to rise in line with the costs associated with that teaching and learning, with Scottish universities receiving public funding of £7,610 per Scottish student, £2,020 (21 per cent) less than the tuition fees of students from England.

At the same time, the SFC shows multiple cost pressure, including increases in staff wages and pension contributions, high inflation and utility costs that are set to rise as contract arrangements end.

Universities also have to invest to meet public sector net zero targets, ensure that infrastructure is adequate, particularly accommodation for the increasing levels of international students, and be ready to react to the outcome of the Independent Review of Skills Delivery as the Scottish Government continues to develop its response.

To protect income levels, universities are continuing to expand digital delivery and develop overseas markets and partnerships, as well as focusing on income generating opportunities at home.

The report makes clear that the SFC expects university governors to be alert to the risks to their institution’s financial health and have scenario planning and contingency arrangements in place to address them.

University governance is expected to “constantly review and consider the range of options available so it can take corrective action rapidly as risks begin to emerge”. This includes “continuously reviewing operating models and considering options for reducing costs and maximising income in this challenging environment of increasing staff costs, inflationary pressures, high energy costs and interest rates, and flat cash settlements”.

The report recommends exploring opportunities for strategic collaborations and consolidation with other institutions or bodies which might allow for shared services, centralising costs and business process improvements.

While the SFC highlights increased efforts to recruit more overseas students, diversify markets, and explore transnational education pursuits, it points to the risks associated with a highly competitive and somewhat volatile international market and the time, investment and expertise required to assess and mitigate those risks.  

According to the SFC, universities are adopting competitive behaviours and more aggressive recruitment strategies, such as reconsideration of entrance requirements, or identifying areas of specialism in order to differentiate the university offer.

Some institutions are reviewing teaching provision, including the balance between on campus and distance learning, changing course delivery models, and rationalising curriculum, including the closure of courses that are considered to be financially unsustainable.

Other actions include rationalising research activity to focus on areas that generate greater cost recovery and leverage investment from other funders and reviewing estates to ensure the size and structure is right for the university, which could include downsizing and disposing of surplus buildings.

While the report does not take into account last month’s Scottish Budget for 2024-25, the announcement contained little to boost higher education coffers. As universities continue to adapt and respond to the challenging fiscal environment and other uncertainties, such mitigating measures could come into play more widely.