Special report: The problems of Wales' leading universities amid fears students are choosing English institutions

Falling applications, strikes, job cuts, and now reported deficits of more than £180m - Welsh universities have had a year of “turmoil” in one vice chancellor’s words.

They generate an estimated £5bn to the Welsh economy and support more than 50,000 jobs, but will this continue if lack of funds makes them unable to compete with better funded rivals across the border?

Applications to Welsh universities have been falling for the last four years and were the lowest in a decade last year, according to figures from admissions service UCAS.

While the number of accepted applicants fell by 2.2% in 2019 in Wales they rose by 2.1% in England. If figures for 2020 applications, out next month, don't show a brighter picture it will look as if higher education here is losing competitiveness with rivals across the border.

We’ve looked at the latest financial reports, data from admissions service UCAS and spoken to universities about the pressures they face as the landscape looks set to change once more with hard Brexit on the horizon potentially affecting EU admissions, research and staff.

The view from a Vice Chancellor

Universities in Wales need more money if they are to compete with rivals across the border, Cardiff Metropolitan University Vice Chancellor Professor Cara Aitchison believes.

She wants Welsh Government to raise tuition fees £250 a year line with England or plug the funding gap with grants.

Professor Aitchison, who has taken her own university through a major strategic review including losing 10% of staff to keep it in surplus and performing, said there was “no rationale” for fees being lower in Wales than England.

She estimated the £250 less in fees each year per student leaves institutions here many millions of pounds out of pocket making it even harder to equal rivals, sometimes only 50 miles away.

If raising fees would be unpalatable then the Welsh Government should make up the cash shortfall in other ways, she suggested.

“The new language across the sector is not how big is your surplus but how big is your deficit,” Professor Aitchison warned.

Her comments come as universities publish their latest financial reports for the 12 months to July 2019.

Most have recorded deficits, largely caused by the re-evaluation of the USS pension scheme which saw staff walk out last term on the second strike to hit UK universities in 18 months.

At March 2017, the USS national pension scheme for academic and professional staff had a deficit of £7.5bn. The scheme’s trustees  put in place a recovery plan of to which all university's in the scheme must put in a share.  To put this in context Cardiff University alone must put in a share of £141m, its chief finance officer Rob Williams explained.

As people live longer this is likely to be an ongoing issue as well as one which has prompted staff to strike twice in the last two years in  protest against paying more in for getting less out.

Cardiff University said its figures are also affected by the cost of severance payments after job cuts to make savings in the last year. Universities are also hit by interest on loans for developments as they fight to attract students with top facilities in an increasingly tight market.

Professor Aitchison said she felt more positive than she had done about Wales’ high education sector but there has been “turmoil” in Welsh universities in the last year and “creative thinking” is needed if they are to continue delivering the same service.

Raising fees would be one way to keep Welsh universities on a more equal footing with rivals, she believes.

Her comments were backed by Nick Hillman, director of independent think tank the Higher Education Policy Institute, who agreed fees in Wales should be raised or the gap padded with more funding.

He said: “I share Professor Aitchison’s concerns. If we want to convince the rest of the world that the whole UK university system is first-class, then every part of it needs to be well-funded.

“Any long-term gap in resources, caused by things like fee differentials, make life much harder in the under-funded institutions – as the new deficit figures show.

“The rationale for a slightly lower fee in Wales than in England seems to be more about petty party politics than about asking what level of resource a university needs to deliver the right environment for its students and staff.

“Policymakers should be leading rather than following on this issue, which means either raising the fees or finding the money from elsewhere to make up any funding difference.”

The  University of South Wales also cites lower fees here as a problem. Its latest financial report warns: “Full time home and EU undergraduate fees remain capped at £9,000 with no increase to reflect inflation.

“This presents challenges as we have a potentially flat income stream but are still subject to significant inflationary pressures from staff pay awards, additional pension scheme costs, and general inflation.”

Two of  Wales’ eight universities are yet to publish their results to July 2019 meaning the deficits could be higher once Aberystwyth and the University of Wales Trinity St David add theirs in the coming weeks.

How much universities made or lost financially in the year to July 2019 (losses in brackets)

Cardiff University (£117.4m)

Swansea University (£43.7m)

Bangor University (£19.8m)

Wrexham Glyndwr University (£615,000)

Cardiff Metropolitan University - £178,000

University of South Wales - £2.3m

Aberystwyth University - Financial report not yet published

UWTSD - Financial report not yet published

Universities point out that despite deficits there were many positives in the last year, including record research funding at Cardiff University. Much of the financial strain was caused by one-off matters, out of their control, such as pensions re-evaluation, some said.

But their financial reports all cite “risks” including tough economic times, increasing competition for students and the possible effects of Brexit on applications, staff and research.

A report from the Institute of Welsh Affairs has warned Wales has more to lose from a hard Brexit because of the disproportionate levels of EU funding for research and development here and comparatively lower funding from private business.

EU money represents roughly a third of the competitive funding distributed by the UK’s Research Councils and Innovate UK across the UK but for Wales that EU funding represents nearly two thirds.

Professor Aitchison - whose own university reported a modest £178,000 surplus after taking “tough decisions” -  predicted more job cuts at other institutions as universities continue to face uncertain times.

“Fees in England are £9,250 the impact on that for us is £3m to £4m less a year as fees in Wales are £9,000.

“One of our peer institutions is UWE, 50 miles away in England, who we have to compete with but have less resources.

“I struggle to see the rationale why you would not put fees up to £9,250.

I have not heard a persuasive argument as to why fee levels in Wales should be lower than in England.

“I think the Welsh Government needs to think seriously about how long we can sustain the current fee level.

“There are two challenges - fee levels are lower than England and have also stayed the same for years and take no account of inflation. Our costs increase by 5% a year but student fees do not.”

She accepted raising fees would be unpopular and a tough sell politically.

“If we want to deliver the same service we have to think creatively. There may be more creative ways that Welsh Government can help fund the system than putting up fees.

“There may be a political and social value for having lower fees in Wales, but that gap needs to be filled from, elsewhere. But raising fees should be looked at. It’s an option.”

Professor Aitchison urged the Welsh Government and the public to realise the value of universities to the Welsh economy and society as a good investment for funding.

“There’s much less talk in Wales about the economic value of universities than elsewhere in the UK.

“I’m not sure people get their heads around the economic impact universities have. They are still viewed as public sector, which they are not. I don’t think we are communicating that message, not so much to Welsh Government, but the population.”

She praised Wales’ university leaders and  called for more support.

“As eight universities we are keen to support the Welsh Government but we might like more support.

“There has been turmoil over the last year but Welsh universities now have an exceptional group of leaders.

“We have gone through a rocky patch. Things were difficult in the sector. I feel much more positive about the sector than I did a year ago, but I think there will be more job losses. I am not planning for job losses here but can’t guarantee that won’t happen somewhere, somewhere down the line.”

The view from students

 

The NUS Wales is opposed to any rise in fees and said universities must get their finances in order.

A spokesman said: “NUS Wales categorically opposes any rise in tuition fees. There is absolutely no appetite from students for any measure that would increase the financial burden placed upon them.

“We want to move towards a fee-free education system that is fair and works for everyone, but we recognise that the Welsh Government is constrained by the fees system rolled out by the Conservatives.

“That’s why we supported the Diamond student support reforms which represented a progressive compromise for students in Wales. Given that students have been willing to compromise, it’s unfair that universities’ first port of call is yet another fee hike.

“Universities must diversity their income streams to reduce dependency on fee income. Concerns about governance and financial mismanagement at our institutions must also be addressed.”

Fees account for  under half of universities income with the rest coming from research funding, grants and other sources. International students pay more than EU and home students and students in England pay £9,250 a year in tuition fees compared with £9,000 in Wales. 

What does the Welsh Government say?

More money could be on the way, Cardiff Bay indicated. A spokesman said: “In Wales we’ve led the way in providing students with the fairest, most progressive and sustainable support system in the UK, while also ensuring our higher education institutions have access to a sustainable level of funding.

“Our universities are major employers and vital to the local economy of many of our communities. We recognise the challenges higher education institutions face and the draft budget confirms our intention to significantly increase funding to Higher Education Funding Council Wales (Hefcw) in 2020-21.”

Is this just a one-off?

David Blaney, chief executive of Hefcw said the large deficits reported do not reflect a crisis in universities’ performance. They are mainly due to one-off pension charges for costs to be paid in future that have to be reflected in financial statements. These pension charges impact on many UK HE institutions in 2018/19 and are not unique to Wales, he said in a blog post.

However, university operating deficits of £16m were reported by Hefcw last March.

Hefcw’s forecast at that time showed the sector overall in Wales anticipates further financial deficits, at least in the short term.

It detailed how Wales’ eight universities had combined income of £1.5b in 2016-17 and a combined operating deficit of £16.7m compared with a £74.3m operating surplus in 2015-16.

Income from students (home, EU and international) was up by 5.5% but by the end of July 2017, the sector reported external long-term borrowings of £745.2m, which is equivalent to half of its income. Interest on borrowing reported was £29m in 2016/17, as against £23.4m in 2015-16.

Universities Wales, which represents the sector, said: “Whilst Universities have had to navigate a difficult operating environment in the short term, the funding profile for universities is moving in a positive direction.

"The Welsh Government’s ongoing implementation of the Diamond Review recommendations, as highlighted in the recent draft budget for 2020-21 and the revised HEFCW remit letter for 2019-20, are extremely important and will support the continued high level of delivery by universities to the people and places of Wales.

"The sector in Wales continues to focus on what differentiates Welsh universities from those elsewhere. We have, for the second year in a row, the UK's highest student satisfaction figures. The most recent Research Excellence Framework found Wales to have the highest proportion of world-leading research in terms of impact in the UK. We also have the UK's highest rate of graduate start-up businesses. These new businesses will be crucial to the future economic success of Wales.

"Universities in Wales also continue to focus on widening access to higher education and their civic mission.  Early indications are that last year saw significant increases in part-time and postgraduate students in Wales. As well as supporting students from all backgrounds to access higher education, we succeed in helping them complete their studies as Wales has the UK's highest student continuation rate. 

"As well as supporting Wales through the delivery of higher level skills and research and innovation, Welsh universities also make an important contribution the local and regional economies in Wales. As well as generating £5bn of output and nearly 50,000 jobs, seven universities are already accredited as living wage employers.”

The financial reports from universities in the year to July 2019

Swansea University

• Total £43.7m deficit
• Operating deficit £42.6m
• Income increased by 14.3%, from £308.2m in 2018 to £352.4m in 2019
• The proportion of the university’s gross income spent on financing debt (principal plus interest) went down from 3.66% in 2016-17 to 3.12% in 2018-19
• Interest paid on financing debt went up from £5m to £5.4m
• Loan repayments during the year - £3.3m
• Total cost of financing debt - £8.7m
• % of Total Income in 2019 - 2.5%
• Reserves fell £56m from £161.9m in 2018 to £105.9m in 2019.

During 2018-19 the university drew down a further £60 million loan from the European Investment Bank (EIB). This was for funding for investments and capital expenditure incurred by the university, a spokeswoman said .

Swansea said in a statement: “Swansea University has seen sector-leading growth and has one of the most successful track records of any University in recent years.

“The deficit was triggered by a number of one-off charges or movements, and pension liabilities in particular have seen large movements over a number of years, not just in Universities but across most industries.

“Also like all Universities in the UK, Swansea is not immune to the effects of a fall in 18 year- olds over the next few years which means increased competition.

“With Universities all competing intensely for a smaller number of students, it inevitable the income to almost all Universities will fall and Swansea is reducing its running costs accordingly.

“Our student recruitment remains very strong and buoyant and with Swansea being the WhatUni University of the Year for the second time, as voted for by students, it is not surprising. We do, however, need to take some sensible steps to reduce our costs in the next few years and have set about doing that.”

Wrexham Glyndwr University

• Deficit of £615,000
• Total income levels grew by £534,000

Wrexham vice chancellor Prof Maria Hinfelaar said in the report: “Financially, there are challenges for the university and for the wider HE sector...

“...“We find ourselves in times of great uncertainty. The ramifications of Brexit, possible changes to the funding of higher education and new legislation for the proposed new funding council for tertiary education in Wales are just some of the developments giving everybody in the sector significant food for thought.

“I am confident, however, that the university is strongly placed to face whatever lies ahead.”

University of South Wales

• The university ended July 31 2019 with an operating surplus down £5.6m to £2.3m
• Income rose 6.1% to £195.7m, but spending rose and cash generated from operations decreased by £3.9m to £26.5m
• Net assets also decreased by £18.5m to £75.6m.

USW’s report warns: “Full time home and EU undergraduate fees remain capped at £9,000 with no increase to reflect inflation. This presents challenges as we have a potentially flat income stream but are still subject to significant inflationary pressures from staff pay awards, additional pension scheme costs, and general inflation.

“We anticipate that realising student growth in the highly competitive home and international markets will be challenging.

“It is essential that we are able to continue to attract and retain talented students from both the UK and overseas.”

Cardiff University

• £117.4m total deficit. Within that the university’s operating deficit was £6.9m, a £16m improvement on 2017-18
• Income rose £20m to £538m
• Spending increased by 5.2% to £552m
• Record research income of over £116m
• Cardiff says it now contributes £3.23bn to the UK economy
• Borrowings at the year-end totalled £306.6m of which the public bond totalled £294.5m. This incurs interest of 3.1% a year and is repayable in 2055
• The two main sources of income remain tuition fees, which saw an increase of £14m to £279m, and research grants, which increased by £10m to £116m

The university explained that the large gap between its operating deficit and overall deficit was one-off pressures in the year, including £6.5m for a voluntary severance scheme as jobs were cut and a massive £92.9m bill for USS pension costs and 2017 national re-evaluation of the scheme.

A Cardiff University spokesperson said: “We believe that the last two years of financial deficits are now behind us and we look to the future with cautious optimism.

“The university is planning to return to an operating surplus in 2019/20. Major improvements to the university’s campus are bearing fruit with new facilities opening to benefit teaching, research and innovation.

“With a focus on sustainable investment to reinforce core activities, the university is in a strong position to weather the uncertain external climate and further build on its status as an ambitious and innovative institution.”

Cardiff Metropolitan University

• £178,000 surplus, this was reduced from mid-year forecast of £4.5m as a result of pension charges, the university said.
• Turnover £107m - up 7% in two years
• Research and innovation income £8.4m - up 42% in two years
• Cash generated for reinvestment - £13.1m

Bangor University

• £19.8m deficit

Bangor’s financial report 2018-19 highlights risks including Brexit research funding, student numbers and “inability to sustain the financial health of the insitiution and maintain liquidity at a time of significant economic constraints and heightened competition”.

The document goes on to warn that there is also a risk from “inadequate response to an increasingly competitive market, including our inability to achieve student recruitment forecasts in light of potential reform to student funding and the increase in marketing investment by competing institutions”.

Pension costs are also an impending drain and there is “the potential impact of the continued escalation in the cost of providing Defined Benefit pensions and in the case of the USS servicing the significant deficit. Another risks listed is ensuring meeting bank loans.

A Bangor spokesman said comparative figures for 2017-18 showing a £19m+ surplus included  a one-off credit of nearly £20m, mainly relating to capital grant funding for building the Menai Science Park. The latest report for 2018-19 also had the one-off effect of pensions liabilities.

Taking both these one-off situations away Bangor would have been close to break even both years, he said.