In recent years, the viability and sustainability of public institutions have come under severe pressure. The competition for public funds in light of increasing fiscal pressures has pitted departments and institutions against each other and forced all stakeholders to think creatively about how to manage resources. What remains undisputed is that such institutions remain central to the concept of the state at large and must remain viable in the long term.
In the higher education sector, financial sustainability is a critical concern for all South African public universities. As epicentres of teaching, learning and research, higher education institutions play a central role in the country’s development agenda which, given the persistence of poverty and inequality, is the country’s greatest challenge. As the world of work evolves, the ability of these institutions to lead the national research and skills revolution, is even more critical.
As universities fulfil a public mandate, part of their resources comes from the national purse. These state funds are in the form of, primarily, block grants to cover operational costs and maintain university assets. Reporting for this form of funding is done through an annual report which enables accountability to the public.
Secondly, state funding is provided through earmarked grants which are intended specifically for projects such as capital infrastructure, clinical training, and university capacity development, to name just a few, as approved by the Minister of Higher Education, Science and Innovation.
Funding the academic enterprise adequately has direct implications for the quality of education, research and the overall reputation of the institutions. Poorly funded institutions are unlikely to be able to fulfil their mandate and this, in turn, compromises the country’s human development mission. A solid financial foundation enables universities to attract and retain top-tier faculty, invest in state-of-the-art infrastructure and provide the necessary resources for academic excellence. It is imperative that this fundamental truth be recognised, and that national policy and funding acknowledge this reality.
As custodians of public institutions and primary role-players in the country’s academic and technical development, university leaders have the responsibility to safeguard the well-being of their universities and also lay the foundation for their future growth and prosperity.
Given the growing risk to financial sustainability at universities in recent years, it is important to examine some of these key risks. It is also equally important to propose a range of strategies to address these risks.
KEY CHALLENGES
Among the key challenges to universities’ financial sustainability are declining state subsidies; affordability of student fees and debt recovery; low enrolments and poor throughput rates; NSFAS and missing middle funding; and operational costs.
Government subsidies
On average subsidies constitute at least 40% of total revenue of the universities. The government has been under pressure to meet its subsidy obligations due to budget constraints. In recent years, there have been reductions in the original allocations for block grants. The state cut original allocations for 2020/21 by 1,07% (R18,4 million) and again in 2021/22 by 1,3% (R23,9 million) to fund other priorities, notably the increasing cost of the National Student Financial Aid Scheme (NSFAS) bill. Whilst the increase in NSFAS allocations is welcome, the distribution of NSFAS students across the system is a mixed bag and hence universities still feel the pinch of the lower direct subsidies.
According to the recent Department of Higher Education and Training (DHET) ministerial statement, the allocated block grant for universities is planned to increase by 0,9% (R40 billion) for 2023/24, from a 4,9% (R39 billion) increase in 2022/23. The 0,9% must be contrasted against the expected increase in enrolment numbers by 1,7% and the education inflation rate that is significantly higher than the rand (ZAR) increase of 0,9%. The consequence of these differences is that on a per-capita basis, universities will experience a funding decline. This outlook is a cause for concern, as it mirrors an unsustainable trend where the trajectory of enrolment growth in the higher education sector is not matched by the funding available.
Student fees and debt recovery
In addition to state subsidies, student fees make up a substantial portion of universities’ revenue. Over the most recent years, there has been a standardised approach or recommendation at DHET level on tuition fee increases. The increases as recommended by the Minister have been set with reference to the consumer price index. However, the economic downturn, combined with the impact of the COVID-19 pandemic on households, has resulted in concerns about student debt recoverability. This debt negatively impacts the liquidity of universities and poses a risk to universities delivering teaching and learning to the highest quality and meeting short-term obligations, including employee costs. At the beginning of 2023, the Minister reported that cumulative debt of all public higher education institutions stood at R16,5 billion. There is little evidence to suggest that this amount will be reduced in the foreseeable future.
Enrolments and throughput
Student enrolment and throughput rates are crucial to financial sustainability. Low enrolment numbers and poor throughput rates affect the subsidy and tuition fee income of universities and also create infrastructural and teaching bottlenecks when students do not transition out of the system. Hard infrastructure like university accommodation is not easily expandable and hence when students do not transition out, new pressures emerge that need to be addressed by university leaders. Efforts need to be made to recruit, retain and support students, particularly given the challenges posed by remote learning during the pandemic. Improving throughput rates demonstrates the universities’ effectiveness in delivering quality education and advancing knowledge through research.
NSFAS and the missing middle
NSFAS provides financial aid to students from disadvantaged households with a combined annual income below R350 000. Many students rely on NSFAS funding and the demand for NSFAS funding significantly exceeds the funds available for allocation to students rendering the entire model chronically fragile. The government has had to reprioritise funding allocations, reducing block grants and earmarked grants to cover the shortfall required by NSFAS. The ongoing review of NSFAS policies, including the capping of residence fees and reduction of funding for certain programmes, has had a significant impact on the resources and financial aid available to the higher education sector.
The challenges in the administration of NSFAS are well documented, and one of the issues which does not seem to have any immediate solutions in the short to medium term is the funding of the so-called ‘missing middle’ students. These are students who are above the NSFAS threshold but not in a position to afford higher education.
Operational costs
Operational costs, particularly staff costs, present sustainability challenges. Staffing costs remain high compared to income, and some universities rely on outsourcing services through consultants, further straining their finances. Ideally, staff costs should account for 20% to 30% of gross revenue to ensure financial sustainability.
In addition, the disruption in energy supply resulting from the countrywide loadshedding crisis has led to universities incurring significant costs to ensure that teaching, learning and research activities are not disrupted. In the absence of incremental funding to cover the costs of these additional expenses, the financial viability of institutions is further weakened.
Investments and maintenance
Investments in infrastructure and maintenance are vital for universities to provide an ideal environment for teaching, learning and research. However, reductions in grants for capital infrastructure and IT investment pose challenges for universities, hindering their ability to adapt to technological advancements and meet the needs of students and researchers. In addition, the demands for adequately resourced student accommodation are not matched by the residence fees, which means that any improvement in this area is an investment which cannot be easily recovered.
PROPOSED STRATEGIES
Financial sustainability poses a significant challenge for universities, requiring a proactive approach to mitigate risks and explore opportunities. Some of the possible strategies to address these risks are improved governance, expanding core business, increasing third-stream income and reviewing policies regularly to ensure relevance and responsiveness to the financial challenges.
Improved governance
One crucial aspect in ensuring financial sustainability is improved governance within South African public universities. It is essential for university leadership to prioritise operational sustainability and view finances as an enabler. By adopting best practices in governance, universities can make informed financial decisions and effectively manage resources.
Expanding core business
To diversify revenue sources, universities should fully explore opportunities to grow their core business. This includes developing online short learning programmes, offering part-time and online higher certificates and diplomas, considering micro-credential offerings and embracing online teaching methods that can attract a wider range of students, both locally and internationally. This expansion will not only increase student enrolment and widen access to higher education but also create additional revenue streams for the institutions.
Efficiency measures
To maximise available funding, universities should implement efficiency measures as encouraged by the Minister. These measures include reducing overhead costs relative to the core functions of universities. By streamlining administrative processes and eliminating redundancies, institutions can allocate resources more effectively.
Austerity vs cost management
An evaluation of expenditure should focus on achieving efficiency rather than resorting to austerity measures. Through a systematic approach, universities can identify areas where costs can be managed without compromising the quality of education. This could involve analysing the shape and size of the institution, considering the introduction of new courses that align with demand, and discontinuing courses that are no longer effective.
Collaboration and expenditure reduction
Collaboration among universities presents an opportunity to save on expenditure. By sharing resources, facilities and expertise, institutions can reduce costs without compromising the quality of education and research. This collaborative approach promotes financial sustainability by optimising resource allocation across the higher education sector.
Improved debt collection
Enhancing debt collection processes is another vital step towards financial sustainability. Universities can implement robust systems to ensure timely and efficient collection of outstanding debts. This effort will not only improve the institutions’ financial position but also enhance their cash flow, enabling them to meet their financial obligations promptly.
Increasing throughput
Boosting student throughput is crucial for financial sustainability. By improving graduation rates and reducing dropout rates, universities can maximise their tuition revenue. Strategies such as academic support programmes and mentorship initiatives, as well as initiatives addressing barriers to student success can significantly enhance throughput, leading to improved financial stability.
Investment in research
Investing in research can provide universities with various opportunities to bolster their financial sustainability. Encouraging the establishment of spin-off companies based on research findings can generate revenue and stimulate economic growth. Furthermore, universities should prioritise retaining intellectual property rights resulting from their research, which can lead to additional income streams through licensing and partnerships.
Increasing third-stream income
Universities can diversify their revenue streams by actively pursuing additional third-stream income funding. This may involve seeking partnerships with industry, attracting more donors, or engaging in innovative initiatives that generate revenue. By harnessing these opportunities, universities can reduce their reliance on government funding and enhance their financial sustainability.
Reviewing policies
Regular reviews of policies related to operations of the university, including financial management, are essential for maintaining financial sustainability. Universities should assess the effectiveness of existing policies and make necessary adjustments to ensure optimal utilisation of resources.
CONCLUSION
The financial sustainability of South African public universities requires a multi-faceted approach. Considering the complexity and magnitude of the financial challenges faced by public universities, it is essential to adopt a phased-in approach. This approach will allow universities to carefully manage and implement the proposed strategies over a short to medium term, thereby ensuring a smooth transition and minimising potential disruptions.
Author
Vincent Motholo (CA)SA, Chief Financial Officer at the University of Cape Town
