While COVID-19 has exposed the fragility of UK university finances, it has also provided a once-in-a-lifetime opportunity to reshape the public purpose of higher education so it goes beyond education and research to include a broader contribution to society.

The financial impact of the coronavirus pandemic is stark: long-run losses to UK universities due to COVID-19 will total £11 billion, according to an Institute for Fiscal Studies estimate, equating to about 29 per cent of the sector’s annual income.

The largest financial impact (£3.8 billion) relates to increases in the deficits of pension schemes that universities will eventually need to cover, while the second-largest impact (£2.8 billion) is the anticipated fall in international student enrolments.

This financial plight leaves universities occupying a burning platform. In taking action the time is ripe to address the structural flaws that have been exposed.

Cross-subsidies are entrenched in the funding model

The existential impact of declining international student numbers on university finances is unsurprising to higher education policy wonks. Cross-subsidies from international students have covered loss-making research activity for a generation. Indeed, one could probably claim that the UK’s world-beating science and research has been built on the shoulders of those international students.

Government data shows a research deficit of nearly £4 billion, or 44 per cent of research income, in England and Northern Ireland in 2018-19. This deficit is largely plugged by international students. Indeed, a few years ago Vicky Olive, in a report for the Higher Education Policy Institute estimated that each non-EU student contributed more than £8,000 to UK research on average during their degree.

As Olive concluded in that 2017 report, underfunding research in the UK challenges “both the long-term sustainability of the higher education sector and the UK’s position as a global competitor in research and higher education”.

To be clear, this is not an issue of mismanagement on the part of universities: rather, these internal cross-subsidies are a rational response to institutional incentive structures.

Many international students use league tables to help choose which universities to apply for, given they have limited knowledge of foreign universities. Given that about 60 per cent of the weights in these league tables assess research, it makes sense to subsidise such loss-making activity as it helps attract international students – who typically will pay two to three times as much as domestic students in tuition fees.

Put simply, universities need to subsidise loss-making research activities to drive performance on league tables, which attract students paying premium tuition fees, who provide the income to support the research activities. And so the cycle continues.

COVID-19 can be the circuit breaker

COVID-19 provides an unexpected opportunity to break this cycle because ministers have finally recognised research sustainability as an issue and put it back on the agenda after a near 20 year absence.

For example, the UK government has introduced a research stabilisation package for universities that will cover up to 80 per cent of a university’s income losses from a decline in international students, up to the value of its research activity from non-public sources. Additionally, the government has established a ministerial university research and knowledge exchange sustainability task force with the aim of “sustaining the university research base and its capability to contribute effectively to UK society and economy in the recovery to coronavirus (COVID-19) and beyond”. And the recent research and development roadmap commits the government to “work with other funders to consider opportunities to fund a greater proportion of the full economic cost of research projects in universities. This includes asking whether government should fund at a higher rate, to safeguard the sustainability of the research we fund.”

The sector should enthusiastically welcome this activity, not because it implies more cash for universities but because it will liberate them to revive and enhance neglected elements of higher education’s public purpose, and reimagine some new ones, which helpfully also progress some broader government policy priorities.

The changes, which will cost about £4 billion a year (to cover the current research funding deficit), will be considered in this year’s expected Comprehensive Spending Review. In anyone’s language, that’s a large amount, but to put it in perspective, it’s not quite half the £9 billion increase in public investment needed to meet the government’s target of 2.4 per cent of GDP to be spent on research and development by 2027.

There are three funding channels through which government can invest to meet its targets: by directly funding the full economic costs of research, in line with a £1 billion annual commitment made nearly two decades ago; by supporting and/or requiring charities to pay the full economic costs of the research they fund (a further £771 million to cover the deficit associated with such funding); and by increasing block grant/quality-related research (QR) funding from the current level of about £1.6 billion a year.

The mix of these three funding streams can be debated, but the bottom line is that this substantial increase is required to break once and for all the cross-subsidies that flow from international students to university research.

These changes can benefit universities, government and society

These changes would clearly be good for universities because they put them on the path to financial sustainability. For government, the benefits may be less obvious, but the changes could unlock its broader aspirations for universities.

As universities move into a COVID-19 recovery phase they may start to make a surplus from the premium fees they can charge international students. That surplus can be applied to expand and revive universities’ public purpose while delivering the government’s university reform agenda at the same time.

Benefits could include lowering domestic fees (in particular for the humanities and social sciences), contributing to the civic university agenda, partnering with schools and further education institutes and helping in “levelling up” the country. All of this while delivering world-beating research on a sustainable basis.

Instead of reflexively resisting the government’s change agenda – as occurred when Theresa May suggested universities should sponsor schools – universities should embrace it as an opportunity to refresh and strengthen their social contract, which has been under threat.

Spanish philosopher José Ortega y Gasset put it well in his pamphlet from the 1930s, Mission of the University: “Any alteration, or touching up, or adjustment about this house of ours, unless it starts by reviewing the problem of its mission – clearly, decisively, truthfully – will be love’s labour lost.”

As we debate research funding in the forthcoming Comprehensive Spending Review, we must keep in mind that nuanced reforms could lead to a radical realignment of the social purpose of higher education in the twenty first century, and significantly greater benefits for society as a whole.

Get in touch to discuss how Nous can support your institution adapt to changes in the operating environment.

This item was first published on Wonkhe on 28 September 2020.

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