According to education secretary Ruth Kelly, British universities will enter a “new era” when variable fees are introduced later this year. In truth, however, the real revolution is occurring within university finance departments as they look to more creative ways to meet the sector’s growing competitive demands.

The introduction of variable top-up fees, of up to £3,000, has forced undergraduates to think long and hard about which universities they hand their future debt to. And, while universities welcome the fees, most also agree that they come with some problems. In order to receive the available cash, they must first invest heavily in the facilities that will attract those students, for example.

It has presented the sector’s finance directors with an interesting challenge and led to many innovative financing schemes, the likes of which are only set to grow.

In January’s annual grant letter to the Higher Education Funding Council for England, Kelly spelled out how she expects business to become more involved in the higher education sector. She said she wanted the HEFCE to “lead radical changes in the provision of higher education in this country by incentivising and funding provision, which is partly or wholly designed, funded or provided by employers”.

Could this “new era” that Kelly refers to result in a Bristol University catering course, in association with McDonalds™, or a York University accounting degree, brought to you by Grant Thornton™? Well, actually, it already has. Lancaster University and Ernst & Young have joined forces to develop the ‘Ernst & Young Degree in Accounting, Auditing & Finance’, while BAE Systems has partnered with Glasgow, Southampton and Loughborough universities to deliver aerospace engineering courses.

Private sector

Andrew Neal, the finance director of Lancaster University, says that academia is only going to move closer to the private sector. “I think we will see a more porous border, both in terms of knowledge-passing between one another and in terms of people-passing from one another.” He says that the two sectors are increasingly meeting in the middle, as the education sector is being forced to become more business-like, while business is moving towards softer, more idealist issues, such as CPD. “To that extent I think there’s a lot that the organisations can learn from each other in terms of comparing experiences.”

Neal has a unique view of the situation, having joined Lancaster University from Unilever, where he was the finance director of its global research & development arm. It means he has seen the job from both sides of the fence. “I was very busy before I left Unilever, looking at how we could take better advantage, in terms of our research capabilities, of links with outside organisations, including universities,” he says. “The feeling was that we shouldn’t be insular in depending purely on our own research resources, but we needed to link those into the capabilities of other organisations.”

“There’s a huge potential that still remains to be unlocked in terms of the way in which the 4 knowledge that exists in places like that [could] stimulate broader economic development”. He was surprised to discover experts in accounting and finance in the university sector that he wouldn’t have imagined had he not seen it for himself. “I wish I’d known that resource was there when I was wrestling with things in the past [at Unilever],” he says.

Crossover skills

More recently, universities have become more proactive in taking their skills to the private sector. Lancaster University Business Enterprises Limited is an operating subsidiary that controls the organisation’s companies, patents and licences. It also holds minority stakes in various ventures. Neal is also looking to take advantage of the university’s intellectual property by offering consulting services.

A recent survey by the Times Higher Education Supplement illustrates how developed this particular vein is within the university sector. Some academics are supplementing their salaries by tens of thousands of pounds a year, with the organisations also benefiting both financially and through the associated increase in stature.

While the crossover of talent from the higher education to the private sector is booming, skills developed in the private sector are also being adopted by universities. Plymouth University signed a £30m “academic development partnership” with the Alma Mater Fund-backed (3i and Barclays Private Equity) University Partnerships Programme. Under the terms of the deal, a separate charitable company will be established, to keep the development costs of a “mixed use academic and student residential accommodation scheme” off balance sheet.

Clive Crawford, chief executive of UPP, describes the uptake of such financing deals as a “new wind blowing through the sector”. While the more traditional methods of raising finance, such as attracting high-fee paying foreign students, still exist, an increasing number of PFI-style deals are being signed up to by universities the length and breadth of the country.

UPP now maintains more than 16,000 student rooms on long-term leases and facilities management deals. It funds the construction of the accommodation and then operates the FM for an agreed period. So far, 11 universities have entered into deals with UPP, the biggest of which is Lancaster, which will soon have 4,400 rooms managed by UPP.

Under the £120m deal, UPP agreed to build the student rooms and maintain them for 38 years, after which their ownership will fall back to Lancaster. “We had to modernise our estate and our facilities,” explains Neal. “But how do you get a significant capital injection? We will have invested, over a period of less than five years, around £200m in our estate. And that’s got to be an investment that lasts over a good period of time. It would not have been either sensible or practical for us to go out and borrow £200m to do that work.”

The university has already been down the route of debt financing, having issued £35m worth of debenture stock on the London Stock Exchange at the now mind-numbing fixed interest rate of 9.75%, so the PFI deal offered a “more attractive model for this type of investment”. It has been so successful that Neal is investigating whether the model can be extended. “We’ve done it for residency; is that model applicable more widely to other university facilities: academic buildings, social facilities, things of that nature?”

Traditional funding

Universities would be foolish to turn their backs on more traditional forms of financing, such as bank debt and leasing arrangements. And public sector investment is also still forthcoming, at least to Lancaster University, from the likes of the North West Development Agency. The NWDA has just helped the university complete the development of InfoLab21, an information technology and communications centre, which was only possible with backing from the NWDA and European regional development funds.

“The building comes in two parts. There’s our academic wing, but there’s also the knowledge business centre, which is where companies can come and set up operations,” says Neal. “It’s trying to get leverage out of our research base and link that to the economic development of – particularly the region – but it can go wider than that in some cases.” The university has also built a leadership centre as part of its management school.

What you see in university finance is a diversity of funding streams and a diversity of investment strategies. And while none are easy to come by, the real task is to plug the most appropriate form of investment into the most appropriate activity. The transfer of assets such as accommodation and other bricks and mortar to the private sector is one good example of this, but nowhere is it more evident than with the rise of technology transfer companies.

UK plc should be interested in the health of our universities for a variety of reasons; after all, their students are the future of our knowledge-based economy. But they also provide a home for some of the world’s most advanced and competent research facilities – which can be and is taken advantage of by the private sector. An entire industry of technology transfer companies has risen to try and find a home for university research projects that could otherwise go completely unused.

One such company is Utek, which searches university research laboratories looking for technology that can meet the needs of its publicly-listed clients. Should it find some university-developed technology that proves suitable for one of its clients it will swap that technology for equity in the client company, while the university benefits from 100% of the royalties.

Michael Yuille, finance director of Liverpool University and chairman of the British Universities Finance Directors Group, says that the sector has been looking into a variety of finance initiatives for many years. “It goes back to the early 1990s with the first surge of corporate borrowing,” he says. “Universities were showing enormous ingenuity at that time to raise capital.”

But this is only going to grow. The Department of Education’s view means that university finance directors have to think more creatively if they are to remain successful.

“We have started from a point of view that financial sustainability is important for us in the long term,” says Neal. “And we can’t divorce academic endeavour from those issues. Somehow we have to integrate the two, because it’s our financial sustainability that will help ensure that we are still here in ten years’ time.”

Lancaster is one example of a university that has taken a modern and business-like approach to its operations. Neal has quite obviously taken some of his private sector experience and applied it to the challenges of the higher education sector. But, it is by no means a one-way road. Private sector FDs sho uld also be looking to see what their peers in the world of HE are doing. It could well prove educational.