Provost's view: How UCL's finances must be shaped to ensure future success
11 February 2016
In UCL 2034, we articulate what UCL needs to do in order to ensure that we rank among the world's leading universities in 20 years' time - a task with many facets.
I believe that the very best universities in 2034 will all be characterised by a strong and stable financial position - indeed, that such a position will be necessary to maintain world-leading academic status.
Last June I shared some key messages with you about our finances and the need to achieve financial sustainability. Now we are more than halfway through the financial year (2015/16) following that first Provost's View, I thought it would be helpful to provide you with an update, and in particular to highlight that we are making good progress towards our key financial objectives.
What is financial sustainability and how does it relate to our strategy?
UCL 2034 is an ambitious and achievable strategy that will deliver academic success on a scale intended to ensure that we remain a global leader in higher education. But it is critically important to recognise that long-term academic success must be underpinned by financial sustainability.
Financial sustainability means operating at a level of performance that generates sufficient cash that, along with other available sources, enables us to meet our current obligations and to make investments that will achieve our strategic goals.
UCL is currently driving through a programme of change in order to improve our financial sustainability. These changes include investment in our physical estate, the creation of an operating surplus and the assumption of an appropriate level of debt.
Investing in our estate.
We are all aware of the need to invest, in particular, in our estate in order to provide capacity for our growth over the past six years and to improve the quality of the facilities we provide for staff and students. Continuing rises in London land and real estate prices and in building costs demonstrate why we cannot fall behind in the development of our estate and why an ongoing programme of acquisition and development is crucial to UCL's long-term financial sustainability. The cost of debt and the cost of delaying estate investment are factors that have to be carefully balanced in our planning processes.
We have identified a prioritised capital programme to invest £1.25 billion over 10 years in new and existing facilities, including teaching spaces, laboratories, student learning facilities, residences and including the first phase of development at UCL East on the Queen Elizabeth Olympic Park. The latter accounts for just 30% of this total expenditure, which includes £100 million of government investment in the post-Olympic legacy, which is only available to us for the development of UCL East.
In the current world of otherwise diminishing government grant funding, particularly for capital investment, we need to generate the cash to support this investment from other sources, most notably from philanthropy and from the surplus we generate from our operations. Unlike many of our US competitors, we do not have the benefit of substantial endowment wealth, though we do expect to increase our philanthropic income substantially over the next five years via our Campaign for UCL. My Provost's View last week had more to say about that in the context of philanthropy month.
To move forward with our current plans, we will be utilising some of our existing reserves, accumulated from previous years' surpluses, as well as the funds generated from future surpluses. In order to generate sufficient funds, we have estimated that we need to increase our surplus to between 5 and 6% of total income by 2017-18 and then maintain it broadly at that level. While this is some distance from where we are now, it is a level of performance that many of our Russell Group peers are already achieving, and almost all have an ambition to achieve a higher surplus than this.
Small changes to improve our operating position
Improving our financial performance will require action across a wide range of activities, including the generation of more income and more active management of our costs. The scale of UCL means that relatively small 'turns of the dial' on a number of elements of our income and expenditure account will deliver the scale of improvement required. It does not require the sort of steps that would damage our academic output or our reputation.
The good news is that we are on track to deliver this level of financial performance. In the last financial year, 2014-15, we set a budget to deliver a surplus of 2.5%; that is £30 million on total income of £1,180 million, and we achieved that. We have set a budget for this year to hit 3.5%, with projections to achieve 4.5% next year (2016-17) and 5.5% by 2017-18. This will be very challenging, but it is achievable. Our current financial projections suggest that, provided we continue to be careful in our management of the finances, we will hit the target for this year, which gives added confidence over the achievability of the targets for the next two years.
How UCL's balance sheet is helping to deliver estates transformation
UCL has a strong balance sheet, by which I mean that we have assets (land and buildings) of significant value, some cash in the bank and historically very little debt. This is useful for two reasons - we can spend some of our existing cash (accumulated surpluses from previous years) and we can raise funds by borrowing at an excellent rate. This allows us to get on with delivery of the programme of estates and other investments right now, while giving us some time to improve our year-on-year financial performance. Our estates transformation is underway and we are now into the second year of the 10-year programme.
Evidence of the change is all around us with the completion of the Sainsbury Wellcome Centre, the replacement for Wates House coming into view, redevelopment of the Wilkins Terrace and Physics Yard, full refurbishment of the Kathleen Lonsdale Building, the Centre for Children's Rare Disease Research with GOSH and the commencement of work on the New Student Centre, a fabulous new facility to support students in the heart of our Bloomsbury campus.
Shortly to be initiated will be the build of the Institute for Immunity and Transplantation at the Royal Free, the development of Thornhaugh Mews adjacent to the UCL Institute of Education, which will deliver new facilities for the IOE and much needed additional teaching space for all of UCL and redevelopment of UCL's Astor College hall of residence. Many other projects are in various stages of planning, including UCL East.
Negotiating debt facilities to finance our ambitions
We are close to completing negotiations for debt facilities to support our programme of estates development. These facilities involve short-term debt provided by a club of four banks and long-term debt provided by the European Investment Bank (EIB). We will shortly be announcing the securing of the largest borrowing that the EIB has granted to a UK university, and on highly favourable terms. This is not a scale of debt that is beyond our means to manage or that will be a burden to our successors. It will leave our indebtedness, measured as a proportion of our total annual income at about 25%, which is in line with the current UK sector average.
Migrating toward a position of financial sustainability will not be achieved without some difficulty and a few tricky moments along the way. I am immensely grateful for your understanding, support, and forbearance during this period. This change will, however, allow us to deliver on our strategic aims, to enhance our world-class status and to provide an environment for education and research of which we can all be proud.
Image: Distinctive Transforming UCL hoardings help to mark out the latest projects in the transformation of our Bloomsbury estate