Why there’s every reason to be confident about the future of HE

This blog is from Richard Robinson, Head of Education at Barclays:

Not all the press about HE has been positive this year, yet our perception at Barclays – as a major funder across the sector – is that UK universities have done incredibly well to manage the exceptional challenges they’ve faced. I think there are also plenty of reasons to be confident that the sector has a bright future.

Media attention may have focused on a few isolated incidents of Covid-related difficulties, and even talk of some universities going bust, but what I see is a sector in robust financial health – certainly in comparison with some other sections of the economy – that is well capitalised, with good access to liquidity and a world-class reputation for quality.

The fundamentals of the sector remain strong: it is strategically important to the UK’s economic development, benefits from largely stable and predictable income and cashflows, and I think it’s fair to say there’s still scope to improve operating margins. Yes, uncertainties exist, both short-term (will students return after Christmas, will there be a mass movement to recover tuition fees to account for an online teaching experience) and long-term (Government policy). I believe the sector is strong enough to deal with these issues and still thrive.

I see very little prospect of financial failures, despite the popular perception. Yes, some institutions will need to amend business and operating models, while others will go through restructuring to align cost bases with reduced income streams. However, I see this being largely voluntary, driven by managers and governing bodies, rather than mandated as part of some condition of a government bail-out.

Despite the challenges, I’ve been impressed by how HE has responded to Covid-19. Faced with the initial lockdown, universities moved teaching from face-to-face to online platforms within just a few weeks – a huge logistical achievement. Equally impressive has been how effectively institutions adjusted once students were allowed to return to campus.

Enrolment holding up

Despite initial concerns over enrolment figures, this hasn’t been reflected by the reality on the ground. Back in March and April, some feared that international students would disappear, and domestic student numbers would fall off a cliff. In fact, domestic numbers are up this year – despite the demographic dip in 18-year-olds (which is, incidentally, projected to be replaced by a demographic surge through to 2030).

Aggregated international student data isn’t out yet, but what I’m hearing is that the majority of institutions are close to their best-case budget estimates. Some have even grown their overseas student numbers. The difficulty for many international students has of course been getting flights into the UK. When flying opens up again, most universities we talk to expect their international students to be back on campus again.

So, despite some teething problems, I think the overall picture is that HE has managed the pandemic well and is achieving a balance between delivering some kind of university experience for students and keeping them Covid-safe. And the sector continues to respond to ongoing challenges, such as recent instruction, at short notice, to send students in England home during a week-long ‘student travel window’ before Christmas to minimise Covid risks.

Looking forward

With the onset of the pandemic, one of the first things the sector did was to tighten up cost control. Facing something like a 2% income impact in 2019/20, institutions reined in discretionary spending, pulled capital projects and reviewed their cost bases.

A combination of that cost control and upper-end estimate enrolment means most universities are in a far better financial position than they could have hoped for just a few months ago. The focus now is switching back to future investment. The conversations we’re having with universities have turned fairly rapidly from talking about access to short-term liquidity for Covid measures to investment in new buildings and facilities, which is really encouraging.

Adjusting the business model

Some have speculated that the effectiveness of online lectures during the pandemic could result in students preferring a permanent switch to online learning and an end to the residential HE model. However, all the signs are that while students accept the need for some online study, most still want an on-campus experience – ‘going to university’ means so much more than just face-to-face study.

At the same time, it’s clear universities won’t be returning to doing things exactly as they did pre-Covid. Forward-looking institutions will be reviewing the events of 2020 – what made them more effective and what they didn’t do so well – and will be adjusting their business model accordingly.

I think the lessons learned will mostly be around the use of technology and what students really value about their HE experience. There could also be a reappraisal of institutions’ estates, but the appetite for investment that I’m hearing from the sector suggests it’s confident that physical assets will continue to an important place in the future. At Barclays, we firmly believe the residential HE model is here to stay, although that model will go through an evolutionary leap as a result of lessons learned from the pandemic.

Reasons to be cheerful

There are plenty of other reasons to be confident about HE. The new regulatory regime in England hasn’t led, as some feared, to market disruption caused by an influx of scores of new providers lowering the quality bar and undercutting on fees. At the time of writing there are 414 providers on the OfS register, many of which are small with a niche offering or an offering that complements the provision from traditional universities. The OfS regulatory process is in fact ensuring the bar remains high for providers in England, allowing healthy competition and fresh ideas that can only serve to push that bar, and therefore the reputation of the UK’s HE, even higher.

And while the end of the Brexit transition period may see reduced access to research talent and research funding, the impact has already been factored into most institutions’ financial projections, while converting EU students to higher-paying international students will bring income growth for some.

The final outcome of the Review of Post-18 Education and Funding in England is, of course, still uncertain, but even if university fees are cut to, say, £7,500, we don’t see this as a disaster for the sector. Yes, it will see universities having to deliver high-quality higher education within a reduced income envelope, but the sector has shown this year that it can deal with challenges – both operational and financial – and I think it’s very unlikely to turn the HE sector into one that doesn’t continue to be attractive to funders and investors.

So, while the challenges of 2020 have been very real, on the whole, I believe the HE sector has risen to those challenges and we see every reason to continue supporting a sector with a very positive future. The level of interest in UK HE from international students, despite Covid-19, shows how strong an international brand we have. Clearly, they feel the same way as I do: we had a world-class HE sector pre-Covid-19, and we’ll have a world class HE sector post-Covid-19.