Fitch Ratings says in a new report that the changes affecting the UK higher education sector since the UK general election in May 2010, are significant enough to affect the credit quality of English universities. The changes, primarily the expected rise in student fees, could lead to greater differences emerging between the wealthier and poorer universities.
While the changes could have a potential positive impact on those universities which are considered "top tier", such as the Russell group of Universities, which should continue to benefit from strong student demand, the cuts in grants and student fee increases are likely to have a negative impact on less established, newer universities.
Historically, the main providers of university funding have been UK governmental bodies. However, on 20 October 2010, the Comprehensive Spending Review (CSR) announced cuts of 40% to higher education funding. The spending review also announced plans to allow universities in England to charge tuition fees of up to GBP9,000 per year. In general, the increase in tuition fees will replace institutions' drastically cut teaching budgets. Student grants are unlikely to be sharply reduced, indicating that teaching funds are likely to be more severely affected.
Fitch expects there will be pressure on grants to all English universities from the Higher Education Funding Council for England (HEFCE). This may lead to a reduction of the standards and quality of tuition, particularly among the less well-off institutions, which will be most adversely affected as the potential for increasing student fees in these institutions will be more limited. However, universities remain highly government supported. The sector is politically sensitive and HEFCE closely monitors its financial position.
Universities' capacity to control operating expenditure growth will be crucial. Although most expenditure is made up of rigid items, more efficient methods need to be sought. Fitch expects growth in income to reduce this pressure. Nevertheless, revenue diversification such as fundraising and investment will become significantly more important for the long-term viability of the higher education sector. However, endowment funds through legacies and donations represent a very small amount of English universities' revenues.
The proposed reforms are intended to take effect from September 2012. The government's White Paper, due in the first half of 2011, will present the long-term and structural plans for higher education. Fitch will continue to monitor the impact of developments on the sector.