Augar’s understanding of university finance is woefully lacking

In his evidence to the Lords Select Committee on Science and Technology on 25 June, Philip Augar emphasised the factual robustness of his report on the future of post-18 funding in England. However, his comments cast further doubt on the basis for his recommendation that tuition fees be reduced to £7,500.

An independent KPMG costing study, prepared for the review under a robust and accepted methodology, indicated that even the cheapest classroom-based courses currently cost £8,800 to deliver. Yet in Augar’s evidence, we were astonished to hear that “further analysis of the data” had “revealed that £8,800 contains a 10 per cent margin called the ‘margin for sustainability and investment’, which is effectively a discretionary provision against future expenditure…In our calculations, therefore, we thought that simply adjusting for this would take the base cost down to £8,000 or just below.”

The MSI is a relatively straightforward concept, although it looks to have been profoundly misunderstood in this instance. It acts as a proxy for the additional revenue that needs to be generated for the provider to be able to invest in future requirements, such as capital. It is not merely a “nice to have”: its removal would have profound implications for the sector’s long-term sustainability.

As long ago as 1997-98, it was recognised that the financial statements of universities do not include the full costs of operating, and the current financial model has been an accepted part of the transparent approach to costing (TRAC) methodology since 2017. It is forward-looking, but based on the audited financial statements and financial forecasts approved by the provider’s governing body. It is certainly not “a discretionary provision against future expenditure”, and Augar’s suggestion of “simply adjusting” costs for it was entirely inappropriate.

It is imperative to discuss cost management while protecting students’ interests and the ability of institutions to support the UK’s government and industry. Under the terms of their registration with the Office for Students, all English universities are required to plan to be financially sustainable. Many will have this obligation under charity law, too, and it is a natural extension of the now-defunct Higher Education Funding Council for England’s official stance that “we normally expect an HEI will make a surplus in line with its financial strategy for sustainability”.

All this is just common sense. It means that students can be confident about the standing of the award they will have on their CVs for life. Capital spend is about simple sustainability, associated with significant positive changes in a number of outcomes, including student and research numbers and research income, for example.

Despite fluxes in the financial health of the sector, the margin hasn’t much changed. In 2013, a Universities UK report indicated that this sustainability margin needed to be about 10 per cent: quite a close match to KPMG’s figure. The report also noted that some private sector firms report targets of 10 per cent or more in order to fund capital investment and to act as a buffer for uncertainty. Given his private sector background, Augar may find that to be of interest; with respect to financial discipline, there is no reason why the public sector should differ from the private sector.

It should also be remembered that new cost pressures, such as pensions and recoveries from research falling even further behind its cost, have ramped up considerably since 2016-17. In May, the OfS released TRAC data showing that university deficits are growing and that, within this, costs exceeded income by a growing margin for publicly funded students in 2017-18. This position is likely to worsen further in 2018-19 as universities face unprecedented cost pressures and wider uncertainties, against a backdrop of growing global competition and Brexit.

The greatest worry is that if Augar’s understanding of the MSI is so far off the mark, how much of the rest of the report is based on such misunderstandings?

Mark E. Smith is vice-chancellor of Lancaster University and chair of the Financial Sustainability Strategy Group. Sarah Randall-Paley is director of finance at Lancaster and chair of the British Universities Finance Directors Group. Andrew McConnell is director of finance at the University of Huddersfield and chair of the Sustainability Metrics Steering Group.