Europe

University challenge – the international edition

The UK higher education sector is bracing for a multibillion-pound loss come September, when a sharp fall in international student enrolments caused by Covid-19 will wreak havoc on universities’ finances. With a spate of potential mergers looming, Josh O’Neill wonders if it is time for the sector to think small – and agile

Adecades-long shift to a market-based higher education system in the UK – mirrored in Australia, Canada and the US – began in the 1980s with the introduction of full tuition fees for international students. Now, three decades on, a dearth of foreign admissions poses an existential threat to some universities’ very existence.

Locked in their home countries due to widespread travel bans as the Covid-19 pandemic shows little sign of abating, and unwilling to pay full whack to undertake online degrees, hundreds of thousands of international students are rethinking their study-abroad plans.

This is a major problem, because, over the years, the government has withdrawn financial support in the form of grants in favour of higher tuition fees. Meanwhile, propelled by burgeoning middle-classes across the world, the international student market has grown at around 6% a year – even throughout former crises. Many institutions are now hooked on income from lucrative foreign students – who sometimes pay three-times that of their domestic counterparts for degrees – and withdrawal symptoms could prove fatal in due course.

According to London Economics, which was commissioned by the University and College Union to assess the extent of the fallout, UK universities could collectively lose £2.47 billion next year if, as its forecast suggests, first-year enrollments of international students fall by 47%. Universities UK (UUK), the sector’s lobby group, has warned that some institutions will go bust if the government does not grant a bailout (it has not,

Anip Sharma, L.E.K. Consulting

so far). The University of Manchester, at which one in eight students is Chinese, has said it expects to lose £270 million and will cut jobs and staff salaries to cushion the blow. Across the sector, between a quarter and a third of revenues are derived from international students. This publication, from conversations with market sources, is aware of at least five institutions that are exploring mergers to avoid outright collapse.

James Pitman, Study Group

A real catastrophe Because universities’ overheads – lecturers’ salaries, rent, insurance, maintenance costs, energy bills, software licences, and so on – remain fixed, “if international students do not show up, it could mean a real catastrophe for the sector,” said Anip Sharma, partner at L.E.K. Consulting’s global education practice, during a recent webinar hosted by this publication. “The impact is very real.”

Just how “real”, though? The top 15 UK universities by measure of international students collectively enrol more than 100,000 learners, according to QS, a provider of education analytics. Some forecasts indicate a mild dip in international enrolments, followed by a relatively quick recovery, once ‘normality’ – namely flights and in-person instruction – resumes; others suggest a plunge from which it could take five years to recover. A survey of more than 180 webinar viewers carried out by this publication found that most (58%) thought it would take between two and five years to reach pre-Covid-19 levels of international student mobility. Sharma reckons it is reasonable to expect a 10% drop in international student enrollments globally.

Others are more optimistic. James Pitman is managing director, UK and Europe, at global pathway provider Study Group, which surveyed more than 8,000 students with offers in place to begin university studies overseas in September. During an online panel discussion hosted by this publication in late April, he suggested that a fall in September’s international student intake would be a one-off, and noted that “demand in the pipeline for January intake is growing very, very fast”, driven by large numbers of deferrals. “There’s no doubt that there will be a dip in September… but that net figure, over a longer period of time, will recover,” he said. “Plus, you have to remember that students with offers are already quite a long way along their journeys and will still want to come.”

Glynne Stanfield, Eversheds Sutherland

But an April survey by the British Council of nearly 11,000 Chinese students who had applied to, or were already enrolled at, universities overseas – in other words, in the “pipeline” – found that 39% were undecided about cancelling their plans, while over a fifth (22%) were “likely or very likely” to do so. China is the UK’s largest source market for international students. Last year, more than 115,000 study visas were issued to Chinese students – accounting for nearly half (45%) of all international study visas.

Pressed on whether the British Council’s findings were accurate or not, Pitman’s outlook remained rosy: “We have 500 staff in 40 offices around the world. They’re still engaging with agents, students, parents and stakeholders and it’s not quite as bad as one might suppose from some of the data that’s out there.”

To be sure, British universities are not in hot water just because international students are in short supply. Before the pandemic struck, universities in the UK were facing potentially perilous challenges. The governmentordered Augar review dissected the workings of the sector, identified flaws – such as too many low-quality courses, excessively high fees, under-funded further education providers and over-paid vice-chancellors – and suggested remedies: cull courses deemed as poor value, reduce domestic annual tuition fees to £7,500 from £9,250, and divert more cash to colleges delivering vocational training. These recommendations, however, were said to have later been quietly shelved as Brexit planning consumed Whitehall throughout last year.

Existing pain The pandemic has exacerbated existing pains felt by thinly capitalised and loss-making institutions across the UK. The sector-wide debt-to-income ratio stood at 37% last year, equivalent to £12 billion. In November, ratings agency Moody’s cut the credit ratings of eight of the country’s universities, including Oxford and ▶

▶Cambridge, from ‘stable’ to ‘negative’. Universities with mounting debt and dwindling enrollments might have struggled to meet the cost – estimated to be around £10 million, on average – of switching to online instruction in March when the government locked down the nation to curb the spread of Covid-19. With all tuition currently carried out online, universities which took out hundreds of millions of pounds in loans to finance flashy campus expansions are now questioning when they will make a return on investment – if at all.

For some, pre-coronavirus financial pressures proved insurmountable. GSM London, one of a handful of private universities in the UK, which was owned by buyout house Sovereign Capital, folded last summer following a consistent decline in student numbers, forcing banks to write down nearly £30 million in sour loans.

Richmond, The American University – another private institution – flirted with bankruptcy after its philanthropist benefactor died, but was spared from extinction in

April when it was acquired by a Chinese investor. Cases like these demonstrate how tough the higher education operating environment was before it was infected by Covid-19.

And, with suggestions that distance learning may have to continue into next year, it could remain challenging for some time, prompting further consolidation as the market recalibrates, pressing less-well-insulated institutions closer to the wall. During an online panel discussion alongside

Pitman, Glynne Stanfield, partner at law firm Eversheds

Sutherland, said: “I’ve no doubt there will be mergers in the sector and I think some of these mergers will be like the bank mergers of 2008 – they will be forced onto institutions within a very short timescale.”

Still, questions remain over whether Boris Johnson’s government would let a university – or universities – fail. In 2018, Sir Michael Barber, the then-head of the Office for Students (OfS), which regulates higher education in the UK, said it “would not bail out providers in financial difficulty”. Since then, this publication has on several occasions put the question to the OfS, Department for Education and universities minister – to no avail.

But Eversheds Sutherland’s Stanfield thinks otherwise. “In the short term, I don’t think that the government’s actually going to allow an institution to fail,” he said. Indeed, in May, the DfE gave the higher education sector an advance on tuition fees worth up to £2.6 billion to help tide universities over with a dose of liquidity and released an additional £100 million in research funding. It stopped short, however, of granting an outright bailout.

Local heroes Universities are important to local economies. They help fuel demand for housing, employ sometimes hundreds – if not thousands – of local people, and provide businesses in regional supply chains with income. It would be politically difficult for any government to consider letting a university – or universities – collapse, especially in less affluent towns and cities, where institutions most at risk tend to be situated.

Anthony Seldon, University of Buckingham

Nevertheless, “this government is not particularly supportive” of the UK higher education sector, said Anthony Seldon, the outgoing vice-chancellor of the University of Buckingham. “They [government] prefer FE [further education]” – which under the Augar review’s recommendations would receive a £1 billion injection – “and think that too many universities… are inward-looking and self-regarding. I don’t agree with that.”

Seldon said that his soon-to-be former employer, which is a private university, was considering asset sales to help it weather the financial impact of the pandemic, even though its digital degree offering was relatively advanced compared to other universities, most of which do not offer full onlineonly degrees.

He expected “we will see a bleed between HE [higher education] and FE like we’ve never seen before” in the years to come, as funding pressures mount on both sectors, driving consolidation and collaboration. His advice for universities facing steep falls in enrollments? Offer a wider variety of course lengths and be more flexible in terms of start dates.

“My belief is that students in the new world, post-Covid, will want to get their degree over and done with more quickly,” said Seldon. “Two-year degrees work very well. Students like them; it saves them a lot of money.

“And, talking about entry points, there is nothing sacrosanct now about September. This idea [of a September intake] goes back to the 1800s and relates to the harvest cycle. Why not January? Why not April? Universities should offer a generous port of entry.” In the long run, “we’re going to see a superbly strong British higher education sector,” he added, “but it will be much more agile”.

As citizens eagerly await a vaccine for Covid-19, which has been touted as the most efficient and effective route out of lockdown, universities – like all businesses – want and need one thing: customers. But, with warnings circulating in the sector that face-to-face instruction in lecture halls and labs may not return until next year, the immediate future of degree provision is undoubtedly online.

Julie Mercer, Cairneagle Associates

Julie Mercer, partner at education-focused strategic consultancy Cairneagle Associates, said that universities should see long-term opportunities in blended delivery models. Courses involving a mixture of online learning and in-person instruction, in many cases, are more profitable due to reduced delivery costs and are highly scalable, irrespective of geographical boundaries. This could open up access to deeper pools of international students of varying affluence in a greater number of markets, said Mercer, while avoiding the financial and reputational risks linked to branch campuses.

“Transnational education should not be underestimated,” she said during an EducationInvestor Global webinar. “Technology could afford greater opportunities to young people who can’t necessarily afford to come and spend three years in the UK.” The hardest part, arguably, about delivering online degrees is getting students to stick around: according to LINC Education, the past decade has seen a 300% jump in the number of online university students, yet digital degree completion rates remain below 20%.

In the coming months, we should get a clearer idea of what September’s intake will look like. But, whatever the outcome, it would be foolhardy of vice-chancellors to assume that their institutions will be bailed out, no matter what. That, as the OfS has warned, would risk indirectly incentivising reckless decision-making and profligate spending.

The concept of ‘too big to fail’ went out the window with the last crisis. With a spate of potential mergers looming, perhaps this time universities need to think small – and agile. n

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