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Income cross-flows and financial sustainability

11 Mar 2019 | David Williams Typically, institutions pool the income they receive to pursue their agreed strategic priorities. This leads to income cross-flows. A new report suggests the sector has failed to inform policy-makers that these.

Typically, institutions pool the income they receive to pursue their agreed strategic priorities. This leads to income cross-flows. A new report suggests the sector has failed to inform policy-makers that these arrangements bring public benefits and should be retained.

In recent months there has been considerable comment on whether students, especially in England, are receiving value for money for the tuition fees they pay. Much of the discussion has looked at whether there is transparency as to whether the fees paid by students lead to resources being allotted to student-facing activities; for example, the report on Value for money in higher education issued by the House of Commons Education Committee in October 2018. The discussion typically implies there should be a clear and direct relationship between what a student pays and what they receive. This has led to calls for institutions to publish evidence as to how the tuition fee income they receive is spent.

A new report, Understanding the impact of cross-flows on the financial sustainability of the higher education sector, published by Financial Sustainability Strategy Group (FSSG) questions whether recent discussions about value for money is well informed. The report suggests that there is a justification and public benefit to cross-flows of income between different activities delivered by institutions.

Cross-flows occur when income from one activity is partly used to fund another activity. This allows a provider to pool resources to achieve its strategic aims. Cross-flows exist at three levels: sector, institutional and subject or discipline.

Over the longer-term institutions need to achieve financial sustainability, which is defined as follows:

"A sustainable financial position requires institutions to generate the necessary level of cash to finance their operations and strategic needs over the medium-to-long term, including its investment in human and physical resources."
(FSSG, 2019, p.16)

To establish whether the sector, institution or activity is financially sustainable, the full economic cost needs to be established. Full economic costing (FEC) requires a margin for sustainability and investment to be added to the institution’s costing surplus or deficit. Specifically, ‘FEC reflects the costs of replacing income-generating assets, investment in human capital, IT and innovation over the longer term’ (FSSG, 2019. p.23).

For the higher education sector, the FSSG reiterates the known position that it does not recover the full economic cost of its activities, indicating the sector as a whole is not sustainable. However, the level of cost recovery by institutions varies significantly.

Examining different activities, public-funded teaching broadly recovers its FEC, non-public funding teaching (e.g. international students) more than covers its FEC, and research fails to achieve 100% of its FEC. The report concludes ‘research is not sustainable and requires either more direct funding or the ability to utilise income from other sources to support its delivery’ (p.32). Without income cross-flows, research activity and other activities, such as civic community and place-making, for which institutions do not normally receive income, would need to be reduced.

The FSSG report also questions the separation of teaching and research, noting ‘research active staff use the knowledge gathered from their research work to provide materials and input for the delivery of teaching, but the cost of acquiring this knowledge is excluded from the teaching costs (p.33).’

Based on its analysis, the FSSG suggests there is a strong case for allowing cross-flows of income between activities. Should these flows be restricted it would impair the ability of institutions to sustain their current range of activities. FSSG suggests ‘much of the recent attention on ‘value for money’ for students has shown a lack of understanding of how and why universities fund the wide range of activities they undertake’ (FSSG, 2019, p.1). The FSSG believes ‘that the HE sector had not clearly communicated the benefits of income cross-flows between teaching and research, and this needed to be better understood’ (FSSG, 2019, p.1).

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