Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, October 3, 2019

Official Report 628KB pdf

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Section 23 Report

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“Finances of Scottish universities”

Item 3 is our section 23 report on the finances of Scottish universities. I welcome our witnesses from Audit Scotland: Caroline Gardner, Auditor General for Scotland; Antony Clark, audit director; Mark MacPherson, senior manager; and Adam Bullough, audit manager. I invite the Auditor General to make an opening statement.

Thank you, convener. Scotland’s university sector is highly respected and makes a vital contribution to the economy and wider society, primarily through the important education and research that it delivers. The sector in Scotland is diverse. Our analysis of university finances finds that the sector, overall, is in good financial health, but that masks some significant variation.

Scottish Government funding to the sector reduced by 7 per cent in real terms between 2014-15 and 2017-18. Despite that, overall sector income increased by 3 per cent over the same period. Tuition fees represented the single largest source of income for the sector in 2017-18, overtaking Scottish Further and Higher Education Funding Council grants for the first time.

The sector faces a number of financial pressures and uncertainties, including increases in pension contribution rates, significant estate maintenance requirements and, of course, EU withdrawal, which is likely to have significant implications for students, staff and funding.

Although the ancient universities are generally better placed to respond to these financial pressures because of their ability to generate surpluses and the levels of reserves that they hold, they face strong competition from other universities in the UK and the rest of the world. Universities are adopting a range of responses to financial pressures and most are forecasting increases in fee income, mainly from international, non-EU students.

The Scottish funding council, as the body providing the bulk of the university sector's public funding, has a good understanding of the risks facing the sector. Outcome agreements are a key accountability mechanism between the Scottish funding council and universities, setting out what universities plan to deliver in return for SFC funding. However, in 2017-18, many universities did not have agreed targets for some measures relating to teaching and research and, in some cases, as few as two universities met their targets. That makes it difficult to determine whether universities are contributing as intended to the Scottish Government's national outcomes. There is also room for improvement in the SFC’s public reporting of university finances and of university performance against outcome agreement measures.

The Scottish funding council’s recently published strategic framework provides a good foundation for future engagement and delivery. The funding council now needs to develop specific proposals to ensure the sector can maintain and enhance its position and the contribution it makes to Scotland.

As ever, my colleagues and I will be happy to answer the committee's questions.

Thank you very much, Auditor General. I ask Anas Sarwar to open questioning for the committee.

In almost every report that we have had from you and every evidence session that we have had with you, you have discussed workforce and skills challenges. Obviously, Scotland’s universities are a key part of addressing workforce and skills challenges. Do you think that the current funding model is meeting those challenges?

I would expect the funding model to be one part of meeting the challenges, as would the outcome agreements approach that I touched on in my introduction and which we cover in the report. It is fair to say that the outcome agreements that we looked at were not fully effective in agreeing between the university sector—which is made up of autonomous institutions that receive significant public funding—and the Scottish funding council, which provides the funding, for what the universities should be delivering and how their contribution would be measured. In particular, we found that not all universities had targets in place for teaching and research and that not all those measures were being achieved in practice. There is more that can be done, for sure.

One of the things that we have discussed before in relation to the national health service has been the challenge of the balance between Scottish students and international students and how likely each are to stay and contribute long term to Scotland’s economy and public services. Looking at the statistics, I see that you are rightly saying that the income from tuition fees have now overtaken the income from SFC grants. If you look purely at the teaching elements, only 18 per cent of the total funding that goes to universities comes from SFC grants, whereas 32 per cent comes from tuition fees. That is twice as much for teaching coming from tuition fees as comes from SFC grants, and 16 per cent is coming from non-EU students, so the international students element is almost identical to the Scottish students element if you look purely at the SFC funding. Surely that is inconsistent with the model of trying to have more Scottish places in universities.

We probably need to clarify the figures first. I direct the committee’s attention to exhibit 2, which shows the income profile for the university sector as a whole in 2017-18. Of that, you are right that 32 per cent comes from tuition fees, 30 per cent comes from Scottish funding council grants, and 21 per cent comes from research grants. We have not covered the funding of Scotland-domiciled students in detail in this report, although we did in our report in 2015-16. I will ask Antony Clark to talk you through what we knew then and what we know now.

You are right about the SFC grant of 30 per cent, but of that SFC grant, over a half—18.3 per cent of the total budget—is for teaching. Within the SFC grant there is also money for research, capital, strategic, and further education courses. I am referring to the teaching element of the SFC grant rather than the whole SFC grant and how that teaching grant compares to the teaching money that comes in from tuition fees.

Anas Sarwar is right that 18.3 per cent of income comes from teaching grants and 7 per cent comes from Scottish students’ tuition fees. As the committee knows, Scottish students are not funded through tuition fees that they pay themselves, as is the case for students from the rest of the UK and the rest of the world outside Europe; instead, the funding for them comes in directly through the Student Awards Agency for Scotland. As a consequence, the amount that is available is capped because of the very direct call on Scottish Government funding. We have looked at that in the past and found that, although the amount of money that is available and the number of places have increased, they have not increased as rapidly as the number of applications from Scottish students. That is where the tie comes in. Antony Clark can give you a bit more information about that.

I will do my best. The committee will remember that the Scottish funding council funds a set number of places at Scottish universities for Scottish and EU students each year and that is determined largely by the level of funding that the SFC gets from the Scottish Government. For the period covered by this report, the total number of places for Scottish and EU students increased from just under 125,000 places in 2014-15 to 127,445 places in 2017-18. Over that period, the total number of Scottish enrolments increased by 10 per cent and the total number of EU enrolments reduced by 2 per cent. There has not been a reduction in the number of Scottish student enrolments over that period.

Is it fair to say that a university is more likely to get greater income from a non-EU and non-Scottish student—an international student or a student from England—and that there is at least the risk that universities are more likely to enrol a foreign student or an English student than a Scottish student, given the funding pressures?

There is no limit placed on the number of students that universities can enrol from the rest of the UK or from outside the EU, so they are free to enrol and seek to recruit as many students as they can from those places. It is quite a competitive market and, obviously, the fees that universities can charge those students differ from the fees for EU and Scottish students.

10:30  

Just for my benefit, I will try to put this in language that I understand. We expect our universities to provide our future workforce, and the committee has looked at workforce planning in the NHS and the education sector. If funding is more heavily exposed to international students—English students and non-EU students, who we know from previous sessions are more likely to return to their home countries following completion of their courses—in the long term we will not solve our workforce issues on the current funding model. Is that a fair summary?

I will start off and ask Antony Clark to come in. It is important to recognise, first, that there is variation between universities, and some universities in Scotland have many more students from outside Scotland, relatively speaking, than others do. Also, I would not want us to think of the universities as the only part of the system that is developing the workforce and skills that Scotland needs for the future. The further education sector, which the committee has also looked at, plays an important part and so do schools. There is room for more connection between the different parts of the system to make sure that students who do not go to university straight after school can either return later or progress to university through further education colleges. A joined-up approach is important. Antony Clark can give you some more information on the specifics of your question.

One aspect of the way in which the system operates is that the funding council funds a certain number of what it calls controlled places, which are for specific skill sets, such as nursing, education and medicine. Those places are funded based on planning that is done at national level with other bits of Government. That planning operates through the Scottish Government and the funding council working together to identify how many nurses, midwives, teachers, doctors and so on will be needed and putting in place a number of places upstream, through universities, in accordance with those future needs. As I understand it, there should be no competition from non-EU students or students from the rest of the UK for the places that the Scottish Government needs. This may be an issue that you will want to follow up in more detail with the funding council, but there are national arrangements in place to link strategic planning for key skill areas and key professions with university place planning.

Supplementary to that point, you said earlier, Mr Clark, that there is no cap on places for international students or, if we look at it the other way round, there are no reserved places for Scottish students. Do you think there should be a certain number of reserved places?

I do not think that I said that, Mr Sarwar. I was trying to explain that there is a certain number of places for Scottish and EU students, which is agreed each year with individual institutions. I was making the point that there is no limit on the number of places for students from outside the EU, which is a very competitive market.

On that point, let us take the example of medical students. There is a figure agreed between the sector, the Government and the funding council for the number of medical students going into medical college. However, is it not the case that, every year, there are far more applicants for places at medical school from candidates who have the necessary qualifications but cannot get into medical school in Scotland because we do not have enough places for them? I am talking about students who are resident in Scotland.

I do not think that we can answer that question absolutely directly based on the report that we have here today. We looked at that issue previously when we were looking at the NHS workforce planning report and I think that we provided some information to the committee at that time. I will check with the team in a moment whether any of us has that information at our fingertips, but I do not want to mislead the committee. It is certainly true though that, as Antony Clark has said, the amount of funding that is available to fund the tuition fees for Scottish students and students from the rest of the EU provides an effective cap on the number of those students who can be recruited. That number is agreed annually between the funding council and individual institutions. Although the number has been increasing in recent years, it has not been increasing as quickly as the number of applications.

What is the latest total cost of giving free tuition to EU students?

I think that it is about £97 million.

Thank you.

That has been a good discussion, but we have strayed from the content of the report. Colin Beattie, you have been very patient.

One item that springs out from the report is, not unusually, backlog maintenance. I would like clarification of the figure for backlog maintenance at Glasgow School of Art that is shown in exhibit 5, which is 39.2 per cent of income. Does that include repairs to the fire damage, which would obviously distort the figure?

I believe that it does.

Do we know what the figure would be without that?

I do not know whether I have the level of detail.

Clearly, there is a different funding exercise going on to rectify that, so that figure would distort this figure considerably. I will move on for now.

Paragraph 41 clearly says that £139 million is needed to address urgent backlog maintenance. What is happening between universities, the Scottish Government and the SFC to address the urgent backlog? The total backlog is £937 million but the urgent backlog is what we want to focus on at the moment.

Similar to what you have heard about colleges, the current amount of Scottish Government funding to support capital investment is not sufficient to cover that backlog. Universities are independent, autonomous commercial entities and it is very much their responsibility to be careful about how they manage their estate maintenance costs.

Although that is true, you would expect the Scottish Government and the funding council to take an interest in that, because the health of the universities is a key issue.

There is certainly regular engagement between those three entities.

There is on-going discussion on that point

Yes, as there is on all the financial issues and pressures affecting the university sector.

It is highlighted in your report that universities are operating in a highly competitive environment. Therefore, the quality of the accommodation and facilities is critical to the ability to sell the university when we are competing to attract international students. In that respect, we are not just competing within Scotland or the UK; we are competing internationally and we would hope that our universities are providing state-of-the-art facilities to attract those students. Are they?

You are absolutely right about the importance of quality. It is critical that universities are able not just to maintain their current estate but to keep upgrading to reflect the developments in scientific research, for example, new ways of teaching with the use of information technology for recording lectures and making them available to people off campus. The ability to make those investments varies across the 18 universities in Scotland in the ways we have described here. That is one of the reasons why I think that it is so important for the funding council to have a view of the longer-term financial sustainability of universities and to be thinking about how it uses its own funding and the other levers it has, such as outcome agreements, to mitigate those risks across the sector.

As part of the audit exercise here, where are the discussions held with individual universities on how they will handle their backlog?

It is important to remind the committee that I do not appoint the auditors to individual universities in the way I do to all the other bodies in my remit. The focus here is on the sector as a whole and on what the Scottish Government and the funding council are doing to understand the sector and to manage the contribution that universities make to the Scottish Government’s priorities in return for the significant public funding they receive. We have not talked in detail to the individual universities. Instead, we have used their published financial accounts and plans to produce the analysis here.

I will come at this from a slightly different angle. I was astonished to see how many buildings the universities own. Obviously, they include a vast array of types of facility. I think that the witnesses have highlighted that. Are any of the universities considering selling parts of their estates to fund their operations?

Estate rationalisation is certainly something that universities consider, but it should be done as part of a broader estate management strategy. We heard of an example from the University of Aberdeen, where an old building that has been listed is no longer in operational use due to its not being fit for the purpose, and the university is having difficulty selling it for that reason. The university is working with the local authority and others in the area to find an appropriate use for the building. We do not know how widespread such non-operational use is within the sector.

It is cause for concern about the financial health of the universities if they are being forced to sell off parts of their estates to fund their day-to-day operations.

We say in the report that decisions about estate rationalisation—having no further use for parts, or selling parts—should be part of a broader strategy.

I acknowledge what you say, but would you pick up, as part of the audit, that universities were disposing of assets in that way?

We do not have a direct way of doing that, other than for very significant disposals that would be reflected in the accounts as exceptional items. We have not looked at the 18 universities individually—we have looked at the financial analysis and at what the funding council does to understand and mitigate the risks that the universities are facing.

The report says that the ancient universities tend to be better placed to meet the upcoming challenges than the others are. However, in exhibit 5, I see that the University of Aberdeen receives a higher proportion of SFC funding than the other ancient universities, that it has higher staff costs as a percentage of expenditure, and that it has a very much higher urgent backlog maintenance figure as a percentage of income. You have mentioned that the university is looking to dispose of one building. Does that one building comprise a good chunk of that urgent backlog maintenance?

That building does form a large chunk of the university’s overall backlog maintenance figure, although I am not sure that we have the detail on how much.

It would be interesting to see how that relates to buildings that are in current use, because 20.8 per cent of income being allocated to urgent backlog maintenance is a considerable drain.

There is no question that Aberdeen university is less well placed than the other three ancient universities to respond to the challenges. I do not think that we have figures to break the amount down in that way because of our sector-wide focus. However, you are absolutely right that Aberdeen university is facing significant challenges, and that its estate is a part of that.

I draw your attention to exhibit 6, which is on the potential impact on fees of EU withdrawal. The exhibit shows that more than 8,000 staff and more than 21,000 students at our universities are from the EU. I do not think that that includes the Erasmus+ students and visitors, so perhaps you could clarify that.

Exhibit 6 also shows that our universities receive about £114 million in research funding. Have the universities been able to assess the possible impact of losing proportions of students, staff and research funding? What does that look like, at the moment?

Your colleagues on the Education and Skills Committee recently held a special meeting to discuss the potential impact of EU withdrawal on Scottish universities. It is fair to say that the participants—Universities Scotland, the National Union of Students Scotland and the University and College Union—were all very concerned and provided more detailed analysis than the figures that we have. One of the challenges is that nobody is yet clear about what the Government response at Scottish Government or UK Government level will be to the changes that might happen. It is therefore very difficult for universities to plan for how they might replace funding that is at risk, and to know how much they might lose and what the impact on staff and students might be.

Recently—over the past year—we have seen a dip in the number of applications from EU students. The information on staff is less readily available, so it is hard to know what the impact will be on people who might want to move here or on existing EU staff who might decide to move on to somewhere else because of the uncertainty. There is no doubt, however, that the impact is potentially very significant.

How big has the dip in applications from students been?

We have with us the figure from submissions that were made to the Education and Skills Committee. I do not have it at my fingertips, but we can come back to that during the meeting, if that would be helpful.

There is a footnote on research funding, just below exhibit 6, that says that

“at least half of the £114 million EU funding would be protected”—

I think that that is a statement from the UK Government—but that implies that half of it will not be protected. What does “protected” mean? Does that apply to certain sectors or certain types of research?

10:45  

We do not know the detail: we just know that the UK Government has given an assurance that there will be a degree of protection for some existing programmes that are currently funded through EU research funding.

Roughly half of the funding will be protected.

That is an estimate. The Scottish Government estimates that about half the amount will be available.

By the sound of it, the Education and Skills Committee will be looking at the matter in more detail, but I would appreciate any more figures that you have on that, and any information that you could provide on whether the student tally includes the Erasmus+ students. I would be interested to know that.

Note 2 to exhibit 6 says that

“EU student numbers exclude visiting/exchange students.”

That means Erasmus+ students, does it not?

Yes.

Do we have the numbers for them?

I do not have them to hand.

We could maybe catch up on that. Thank you.

Obviously, loss of EU funding is of great concern. Around half of £114 million being taken out of our university sector will be significant.

Exhibit 2 shows that 21 per cent of the £3.8 billion coming into Scottish universities comes from research grants. Of that £3.8 billion, 2.6 per cent comes from the EU—the £114 million; 3.5 per cent comes from the UK Government; 4.3 per cent comes from UK charities; and 7.4 per cent comes from the UK research councils. That is a total of 15.2 per cent of the 21 per cent, which means that two thirds of the research money comes from UK authorities. I think that it is safe to say that any challenge to that section of our research grant would have a devastating impact on research budgets in Scottish universities.

You will understand that we need to focus on analysing the information that is here as we present it. You are correct about the analysis of sources of research funding that is shown in the top half of exhibit 2.

It is also true—as we show in the bottom half of exhibit 2—that individual universities rely to very different extents on research funding and on other funding. As with all such things, the impacts on individual universities will be quite different, but they are all working in the context of cost pressures and a great deal of uncertainty, which makes it difficult for them to plan for the future. That is why I think that the funding council needs to be working with the universities to understand the pressures that they face and how they can be mitigated.

Can you confirm note that just over one third of the research grant money that comes in is from the EU Government and two thirds are from UK funding sources?

From adding that up in my head, it look as though about two thirds of the research grants come from UK sources, but not all are from the UK Government.

Alex Neil is next.

I do not have a question. I will just comment that we have just got some of our own money back.

I had you on my list. Liam Kerr is next.

I do not have a question, either.

Okay. Bill Bowman.

I will fill the gap. I have a couple of questions on the numbers in the report. In paragraph 13 on page 8, you say:

“All financial data is reported in real terms, adjusted using gross domestic product deflators at market prices”.

Which of the numbers in here are what I would call real numbers and which are funny numbers that you get by taking the real numbers and applying a coefficient to them?

The team will keep me straight, but I think that the figures that we reported for 2017-18 are nominal terms, and we have used deflators to get changes over time, so the change in Government funding from 2014-15 has been deflated in that way.

They are numbers that you would not get from just taking the accounts of each of the individual years; you have applied an adjustment. That is something that we need to be aware of.

Yes—for the years prior to 2017-18.

In your very first paragraph, you say:

“While the aggregated underlying financial position in 2017-18 shows the sector overall to be in good financial health, it masks significant variation.”

We need to be quite careful about that. In exhibit 1 on page 11, you show lines going one way and lines going the other way, but there is no way that you can take, say, Scotland’s Rural College’s surplus and apply that to Glasgow Caledonian University’s deficit. What value does aggregating give you? If people are doing well, that is fine; if they are not, you need to look at the individual numbers. You cannot just add it all together and say that, overall, everything is fine.

We have tried to provide both a Scotland-wide picture and the disaggregation wherever that is possible. You will see that in exhibit 2 we have given the overall make-up of income for the sector in the top graph and broken it down by institution beneath that. That reflects the fact that my interest in the sector is at the sector level, not at the level of the individual institution. However, if we look just at the sector as a whole, we lose a lot of the detail, which is very important for understanding what the pressures and risks are for the future.

Exhibit 2 is what you might call a busy slide. In exhibit 1, the bodies are all independent organisations, and there is no way that you can tell one of them to take the funds from here and move them somewhere else. It would have to be done by Government deciding to mitigate a loss by reducing the funding over here and increasing it there.

As Auditor General, I cannot tell any public body what to do with its funding; I report to this committee on what the position is. It is important for us to be clear that universities are autonomous institutions, and some of them are very old with long histories. They receive significant amounts of public money: more than £1 billion directly in SFC funding, plus tuition fees for Scottish and EU students.

The overall recommendation that we are making is that the SFC needs to be clear about the risks and the opportunities that individual institutions are facing, and that it needs to apply its funding and the other levers that it has, such as the outcome agreements, in a way that both helps to mitigate risks and makes sure that the sector is contributing to the delivery of the Scottish Government’s priorities in return for that funding.

I do not wish to be awkward about the numbers. It is just that when you do what I would call inflation accounting, you are not necessarily comparing apples with apples. When we talk about changes from year to year, we have to realise that the figures are derived figures. They give a trend, but they are not exact figures that you can pick out of the accounts.

That is true, but equally, if we did not adjust the figures for inflation, it would look as though the funding position was more favourable than it is in practice, given the pressures that come through inflation.

I have a general question on the sector focus that you talked about. You also talked about the Scottish Government’s priorities. As I understand it, the Scottish Government issues various directives or outcomes that it expects the sector to achieve—we talked about the workforce of the future, for example.

One thing that I get from the report is that real-terms funding from the Scottish Government is reducing while the Government seems to be expecting more to be generated from private sources, perhaps from research funding or non-EU students. That is in the context of the Government asking for more and more to be achieved by the sector. How can that be squared off in the medium to longer term?

It is important to say that we recognise that the Scottish Government budget is under pressure and has been for some time, and that, in the context of the Government’s commitment to protect the health service budget in real terms, other funding streams and parts of the budget will come under pressure. That is a simple reality. The funding council’s funding to universities is significant, but it is not the largest part of what the universities raise overall, because of the trends that we have seen over recent years. As we have said, universities are autonomous institutions that would in any case be raising income from a range of sources, which we have tried to set out in the report.

Having said all that, it is important that there is a clearer line of sight between what the Government and the funding council want universities to contribute to the Government’s priorities for Scotland and the public funding that universities receive, which is well over £1 billion a year. We make some recommendations in the report on the way in which the outcome agreements are put together and the action that the funding council takes when targets are not met, in order to make that line of sight—that accountability for public funding—clearer than it currently is.

Do members have any further questions for the panel?

I know that this has not been asked in the report, but some of the issues that it throws up pose a question. Do we have too many universities in Scotland?

That is not a question for me. As the committee knows, I am precluded from commenting on matters of policy. What we have shown in the report is that all the universities are facing a number of cost pressures and that they are operating in a very competitive environment, not just in Scotland but UK-wide and globally. That is a question that the committee may want to pose to the Scottish Funding Council as it thinks about the risks faced by the sector and the individual universities that make it up.

A number of years ago, when I convened the Enterprise and Lifelong Learning Committee, it looked at the cost overhead of each of the institutions. There was a lot of consensus then about close relationships between universities and colleges. Some people from the university sector argued that instead of having so many individual institutions—and we have more now than we had then—it would be much better for everybody if we had fewer institutions, so that much of the money could go into the front line rather than into administrative overhead. Do you think that that needs to be looked at?

I completely understand why you would ask the question. If you look at what we say in this report about the pressures on individual universities and what we said in our annual colleges report about the pressures on colleges, you can see that it is an appropriate question to ask. However, I am saying that I am precluded by legislation from answering it because it is a matter of policy.

That is a pity.

Thank you very much indeed for your evidence this morning, Auditor General. We now close the public session and move into private.

10:57 Meeting continued in private until 11:21.