Jon Wakeford discusses the barriers to University expansion and investment and the potential solutions in Research Fortnight

Earlier this year, the Higher Education Funding Council for England brought out a review of capital expenditure that crystalised what many senior universities managers had known for some time: that investing in physical infrastructure and facilities is positively linked to growth, both in student numbers and in research revenue. But the review, by Frontier Economics, also identified something worrying: a small number of institutions was spending disproportionately large sums, while most were underspending, a situation exacerbated by the funding council’s general reduction in capital funding and competitive approach to allocating it. In a political environment in which the Treasury is seeking £450 million of further cuts to higher education, it is likely that this gap between institutions will widen.

The rush to provide new academic, research and social facilities over the past ten years was born out of the fact that student tuition fee income was replacing recurrent grant funding and the recognition by many institutions that student expectations would rise with fees. In the eight years to 2013-14, English universities spent £15.6 billion―77 per cent of their total capital expenditure―on buildings, despite the funding council making significant reductions in the capital funds available. This suggests that the remaining investment was leveraged off those institutional balance sheets running a surplus, with relationship banks or on the capital markets. But most universities are not running a surplus of sufficient size to provide the minimum investment required to maintain the condition of existing infrastructure. So the danger is that the facilities arms race is creating a two-tier sector, in which top-ranking institutions continue to thrive while others are left further and further behind.

Two other drivers could exacerbate the situation. First, credit-ratings agencies have raised concerns about regional universities; Moody’s has argued that ”regional” institutions are more likely to struggle under current reforms given their high dependence on domestic students and low market recognition. Borrowing from the capital markets to develop and maintain facilities may prove more difficult for these institutions as ratings fall and risk pricing increases, with those already disadvantaged by the funding council’s approach to capital allocation likely to face the greatest credit variation.

Then there is the impact of the research excellence framework and now the proposed teaching excellence framework. As institutions jockey for market position, it will be those with estates most in need of investment that will find their capacity to reconfigure most constricted. Institutions performing less well in these assessments may also find that they come under pressure to introduce more variable tuition fee structures to reflect these scores, reducing overall income.

There are steps that institutions can take to improve their financial position. In recent years, a number of universities have chosen to improve the efficiency of their estates by radically reconfiguring or relocating their campuses, disposing of city centre holdings in favour of new purpose-built campuses located on brown or greenfield sites elsewhere. This allows them to scale their operations more effectively and to future proof their facilities. Some, such as the University of Northampton, have linked these developments to wider economic and social regeneration projects, and have attracted Treasury backing. But such schemes require significant administrative time and often involve raising money from capital markets, establishing an institutional credit rating and fulfilling statutory reporting obligations, which many institutions find off-putting. An alternative is for universities to generate capital through disposing of land, although governing bodies can see this as “selling the family silver”.

Universities have also raised around £3.5 billion of investment over the past decade through working with the private sector. Public-private partnerships allow universities to deliver new infrastructure without the asset appearing on their balance sheets and can generate significant capital receipts that can be directed towards teaching, research or student support. But some universities find these partnerships raise issues about control, value for money and transparency.

Finally many universities have recognised the benefits of sharing infrastructure and/or services, and opportunities exist to establish many more such joint ventures, saving on staff, procurement and operating costs, especially where universities are located close together. However these arrangements require difficult decisions by each participating institution on what services should be jointly provided, the level of service specification required and how the venture should be branded.

Yet many smaller and teaching specialist institutions have little choice but to do something. Running little or no surplus, facing a reduction in fee income, unable to invest sufficient capital to maintain their facilities in good order, potentially unable to access cost-effective capital market funding and denied permission by the English funding council to raise more than five times their average earnings before interest, tax, depreciation and amortization, institutions without global appeal could find themselves unable to maintain or redevelop the facilities expected by students. This will widen still further the gap between those benefiting and those suffering from the government’s decision to lift the cap on student number controls.

The probable implications for the long-term global competitiveness of some institutions could prove profound. Although on average, its tertiary expenditure per student remains in line with the OECD average, British higher education has fallen behind when it comes to spending on capital. This underinvestment in facilities could well act as a disincentive to international students, particularly in an environment of stricter visa regulation for both students and universities. The number of students enrolling outside their country of citizenship has more than doubled, to 4.3 million, over the past decade and demand is projected to grow further. Failure to invest in facilities could affect the ability of the British universities to benefit.