Financial Sustainability of the UK Higher Education sector, January 2024

HEIs have an important role to play in the sustainability of their communities, as well as working to reduce emissions and minimise costs on their campuses. Whilst many institutions do critical research on sustainability and educate their students on sustainability as a matter of course, the reality of a net zero campus requires high levels of investment which many institutions are strategically committed to, but not financially prepared for.

Institutions often operate highly carbon-intensive estates, especially where on-site combined heat and power plants are in place and changing this requires leadership support and focus. We noted trends in:

• Sustainability governance structures being revised to sit centrally in institutions.
• The sector’s focus being on scope 1 and 2 emissions.
• A legacy viewpoint remains in that sustainability is an ‘estates problem’ rather than a university-wide responsibility.

The current energy crisis may also bring about positive change, as many universities are being driven by energy security requirements to focus on diversifying their energy sources. This clearly includes consideration of greater self generation, either alone or in partnership, as well as seeking to invest in green energy supplies.

One of the most complex challenges faced by universities is how best to quantify, monitor and report on scope 3 emission sources. Two of the key challenges in this area include:

• Student travel, where engagement with student travel surveys has been a challenge for the sector and therefore emissions data is often reliant on assumptions around student travel, which may not reflect reality.
• Supply chain, where the level of engagement with suppliers on scope 3 emissions is largely dependent on the skills and experience of institutes’ procurement teams. We have noted a lack of consistency in the inclusion of environmental sustainability questions in tendering and monitoring of carbon reduction as part of contract management processes. This is also impacted by a reticence to move away from the traditional ‘most economically advantageous tender’ and towards a cost-benefit analysis including long term benefits to the environment and alignment with institutional sustainability strategy.

It’s clear from our analysis that the HE sector is facing increasing financial challenges. The institutional cost base is increasing because of:

• Rising energy costs.
  
• Inflation on non-pay expense.
  
• Increasing staff costs which are needed to support staff through the cost of living crisis.
  
• The demand from the student population for increases in support services.
  
• Increasing pension costs.

At the same time, undergraduate tuition fees will be capped at £9,250 until at least 2024/25 and there is little political appetite to increase these fees in the medium term. This means that competition for students, from the UK and abroad, is rising, particularly for 2022/23 where the total number of home UK undergraduate applicants dropped unexpectedly by c2%.

The Government’s levelling-up ambitions will also impact where research funding is directed in future. This is a risk for some if the opportunity to work collaboratively within regions is overlooked.

To meet the financial challenges, institutions need to better understand:

• The drivers of their cost base and the relative income that is being generated on a more granular level for key activities (e.g. on a course by course basis, including resource allocation).
• How new income streams will contribute to an improved financial position.
  
• Where investments are being made, whether they will generate a sufficient return in an appropriate time frame.
  
• How effective ongoing controls over procurement activity, ongoing contracts and budgetary performance are operating.
  

This may need institutions to take some bold decisions e.g. course closure / stopping certain activities and to be brave at seeking out new / innovative ways in which income can be generated. In the long term though, these types of decisions can result in improved financial resilience.

During the Covid-19 pandemic, many institutions refreshed their estates strategies to ensure that the physical infrastructure was fit for new strategic plans, new ways of learning and teaching and the need to ensure the estate is environmentally sustainable. This highlighted a number of risks, which have been exacerbated by a historic lack of planning an investment across the estate.

Developing an estate which takes account of the changing ways that campus spaces are used to reflect current needs of students and teaching methods is complex. The continued move to blended tuition as well as more flexible working models has obvious implications on the estates’ footprint given the reduced need for physical space for professional services staff and the increased need for facilitation and co-working spaces for students, whilst also representing a challenge for institutions in ensuring ongoing, visible and active support services for students.

Investment in estates now represents a significant opportunity to redistribute space to right-size, better use facilities and in some cases sell spare capacity to raise additional finance. Devolved control of buildings and research facilities means that many institutions currently operate a number of spaces with very low usage rates and some have taken the step of building data models to fully understand the existing use of space to inform strategic decision making in this area.

The UK’s HE sector is entering a new digital age, where HEIs must effectively implement digital technologies in order to attract talent, promote growth and to survive. It is key to integrate systems and implement blended learning programmes whilst still maintaining the quality of the student experience and reputation. At the same time, the advent of AI technologies brings a whole new set of academic risks, which many institutions are working through.

There has been increasing focus and investment being undertaken across digital infrastructure to drive efficiencies. This is also enabling a new way of working, and teaching, driven in part due to the pandemic and changing expectations of students.

HEIs that are not adapting to the digital challenge may struggle to compete, in a world where students embrace and expect digital learning. This comes with a significant investment cost to create an increasingly digital campus, especially where that investment has been neglected in some institutions over many years either because they have been perceived as too complicated or too expensive to deliver.

Staff recruitment and retention

Attracting and keeping the best people is a pivotal issue for HEIs. This risk was highlighted in 100% of the risk registers we analysed and attracting and retaining talented, high calibre academics and professional service staff is a growing challenge. The sector’s inability to attract and retain diverse, high calibre staff is leading to increased workloads, increased staff turnover and a reduced student experience. This then may be detrimental to the mental health and wellbeing of staff and has played a role in the current industrial action taken by thousands of staff in recent months. If HEIs do not effectively manage change and national and local employment issues effectively, then it may result in more prolonged industrial action, which will increase the risks around organisational and financial resilience even further.

Policy and engagement

Government and Department for Education policy shapes the risk environment of HEIs. It also influences the way in which the Office for Students shapes its policies and regulations and can have an impact on an institution’s ability to achieve its strategic goals. If institutions fail to adequately prepare for, and respond to, changes in UK government policy in relation to HE, it may have consequential effects in the recruitment of students nationally and globally, and the regional economy.

Some institutions have already started considering future policy changes, including the drive towards more vocational education (e.g. apprenticeships) and the potential introduction of the lifelong learning entitlement.

Student recruitment

Student recruitment remains a key operational and strategic risk for many institutions. Changing student priorities represent both an attrition risk and an opportunity to target new demographics.

The recruitment market can be volatile, which can be challenging to accurately forecast student numbers. In recent years, the UK sector has seen continued growth in international student applications. This increase is despite of the turbulence caused by the pandemic, growing global competition for students and the current cost of living crisis.

The number of Chinese students coming to the UK is decreasing, but still make up the largest group of international students according to Higher Education Statistics Agency (HESA) statistics. Much of the current growth in international student numbers is driven by Indian and Nigerian students, with French and Italian students being the two largest cohorts from the EU. Changes in immigration policy and wider foreign policy and security could have a radical impact long term on sector viability.

Student experience/student welfare

Student experience is of paramount importance throughout the whole student lifecycle. From recruitment, learning and teaching, pastoral support and beyond, there are many touchpoints that are pivotal to ensuring students are experiencing the best the institution has to offer. It also has an impact on academic achievement, student wellbeing, the National Student Survey and league tables, which often impact institutions’ strategic goals and KPIs. This is therefore an area we would always expect to feature highly on institutions risk registers and we have noted one or more risks relating to student experience on the risk registers we have reviewed.

It is well known that an increasing number of students are suffering with their mental health while at university. Support for students is key to ensuring students have a positive experience, and the all-rounded support becomes increasingly important in the new digital hybrid learning experience, where students spend less time on campus and arguably, it is harder for institutions to spot those in need of support.

Many institutions are now considering how their structures and processes are set up to ensure student experience remains a priority in a new educational delivery model (e.g. hybrid/blended learning).