A camera sweeps over a landscape of lush green forests and sparkling rivers. “I could have studied anywhere in the world,” a voice says in Russian-accented English. “But I chose Cardiff.” Drums begin to roll as the camera shifts from a medieval castle to a modern glass-fronted building. This is Cardiff University’s YouTube video, featuring a succession of international students singing its praises, from China to Botswana, Canada and Turkmenistan.

'The Diamond', undergraduate engineering facility, University of Sheffield. Cost: £81m
'The Diamond', undergraduate engineering facility, University of Sheffield. Cost: £81m © Murray Ballard

Cardiff is not alone in its glossy promotional film-making; Ucas, the UK’s university admissions service, links to dozens of such videos on its website. In an increasingly cut-throat global market, universities are developing new strategies to attract more money, students and top-flight academics through their doors. They are also turning to new avenues to raise funds. In February, Cardiff raised £300m by issuing a 50-year public bond (essentially, an IOU with a fixed rate of interest, which can be traded by investors), with an interest rate of just 3.1 per cent. The university said it planned to use some of the money to develop its “innovation campus”, which will include facilities in neuroscience and cancer research. It is one of a growing number of higher-education institutions turning to financial markets to fund expansion plans. Last year, $1.39bn of UK higher-education bonds were sold into global capital markets, the highest level on record, according to the data provider Dealogic.

The borrowing is taking place against the backdrop of a historic shift in the financial landscape of higher education. After half a century in which universities were financed directly by government, and students were supported by maintenance grants from the state, the introduction of tuition fees in 1998 signalled a new era, and a move — if hesitant at first, now accelerating — towards a free market in higher education. Successive governments have retreated further from direct funding, allowed the cap on fees to be raised, lifted restrictions on student numbers and put no limit on the amount that foreign students can be charged. What money the state does commit is heavily weighted towards the highest-achieving universities, particularly those with state of the art science and research facilities — which is where much of the borrowing is being invested.

From Swansea to Sheffield and Southampton to Strathclyde, universities are now engaged in a spending spree: renovating campuses and building lecture theatres, laboratories, libraries and halls of residence. “What we know is that students and their parents, when they go on open days, they are impressed by shiny buildings,” says Nick Hillman, an adviser to the universities minister David Willetts from 2010 to 2013 who now runs the Higher Education Policy Institute, a think-tank.

But as cranes dominate campus skylines, debts are mounting on vice-chancellors’ ledgers. In November last year, the Higher Education Funding Council for England (HEFCE), the government quango that distributes research grants to universities and monitors their financial health, pointed to a growing polarisation between the finances of the highest and lowest performing universities and warned that “reducing surpluses and cash levels [in the sector] and a rise in borrowing all signal a trajectory that is not sustainable in the long term”.

The increasing financialisation of higher education — the process by which financial institutions and markets gain influence — also raises fundamental questions about the place of universities in society. In order to service their debt, the sector is relying on the promise of future student numbers. But students — who now leave university with an average of £44,000 of debt — are being encouraged to think more like consumers, demanding returns on their investment. University leaders are being forced to rethink their priorities and the purpose of the education they provide.

Tuition fees were introduced in response to the rising proportion of young people choosing to go to university in the late 20th century — from less than 10 per cent in 1970 to almost a third of the population by 1997. While the increased participation rate was broadly welcomed by policymakers, the burden on the Treasury — and the taxpayer — inevitably increased and was soon seen as unsustainable. The government-commissioned Dearing report in 1997 recommended that undergraduate tuition costs shift from being entirely funded by the state, to a mixed system in which fees would be partly paid by students themselves, through government loans. Tony Blair’s Labour government introduced fees of £1,000 a year in 1998. Five years later, top-up fees were introduced in England, meaning better-off students had to pay up to £3,000 a year, to be repaid once their salary exceeded £15,000. (Devolution meant that Scotland and Wales pursued different policies.) Then, in 2010, the Conservative-Liberal Democrat coalition government trebled fees to a maximum of £9,000 a year. It was expected that highly rated universities would charge the full £9,000, while less popular universities would compete by offering a cheaper deal; in fact, almost everyone charged the maximum.

'Translation and innovation hub', White City campus, Imperial College London. Cost: £200m
'Translation and innovation hub', White City campus, Imperial College London. Cost: £200m © Murray Ballard

As tuition fees have risen, the total government grant via HEFCE has fallen, from £7.1bn in the academic year 2007-08 to just under £4bn for this academic year. For university finance directors, the pressure to attract students, and their all-important fees, has intensified, while international applicants — who are often charged twice as much as UK and EU nationals — have become ever more attractive targets. In a further step to bring market forces into the sector, the government last year ended controls on student numbers, allowing universities in England to accept as many students as they like.

Luke Reeve is a partner at EY, the professional services firm. He previously worked in investment banking and now advises universities on fundraising. He likens the process of financialisation under way in many British universities to that experienced by Premier League football clubs — another group of institutions that have opened themselves up to the forces of global finance. “[Universities] are going through a similar evolution — the ‘professionalisation of financial management,’” he says. “When you walked in [to a football club] in the 1990s you saw someone wearing the club blazer. Today, you walk into Manchester United and see . . . a former JPMorgan investment banker.”

One peculiarity of universities borrowing money from capital markets is that some of the debt issued thus far has been viewed as carrying an implicit government guarantee. Publicly traded bonds are typically “rated” by agencies, with the safest government debt attracting a “triple A” rating. The rating on the Cardiff University bond was boosted by the presumption of “extraordinary support” from the state, according to Moody’s, the rating agency — essentially, the idea that if for some reason a university proved unable to meet its liabilities, the government would step in to help out, as it did with banks during the financial crisis (although the market for university debt is much smaller).

This, coupled with record-low interest rates, meant universities could borrow at levels that would previously have been unimaginable. “We would not have issued [a bond] had it not been for the combination of exceptionally low interest rates and very favourable terms,” says Frank Marshall, estates bursar at University College, Oxford, which raised £40m through a 50-year bond in April last year, at a rate of just over 3 per cent. A year before, Marshall had attended an alumni event in New York, where a group of former students working in finance told him they “regarded the use of the capital markets as something you would naturally do if you were using all the tools available to you,” he recalls. “This is quite a change from a historic sense that you shouldn’t go into debt.”

The market in university debt has created opportunities for many in the City of London, from specialist consultants to investment bankers and rating agencies. Investment bankers, Reeve suggests, have had their eyes on universities for some time. He recalls a former colleague in the 1990s who described universities as “real estate portfolios with diversified and historically quasi-government revenue streams”. Not all of the borrowing is by the universities themselves. The University Partnerships Programme, a university accommodation developer that is jointly owned by the Dutch pension fund PGGM and the People’s Bank of China, has raised £1.8bn to spend on university accommodation. UPP, which has worked with 14 institutions including Plymouth, Nottingham Trent, Leeds Beckett and Oxford Brookes, takes the money it raises from the bond market or directly from investors such as Allianz or Aviva and parks it in a separate private company, often in partnership with the university, known as a “special purpose vehicle”.

chart: University income from tuition fees

Universities like this model because it allows them to “account for the new project on an off-balance sheet basis”, says Jon Wakeford, group director of strategy at UPP. The money is then used to build and run student accommodation, which only returns to the full ownership of the university once the debt has been repaid.

In a corner of east London, a large expanse of grass in the Queen Elizabeth Olympic Park in Stratford is earmarked for construction. University College London plans to open the first part of its new campus here by 2020; it will eventually stretch over 11 acres of land. The project, along with improvements to UCL’s existing site in central London, will cost £1.25bn overall — the biggest single construction project in the university’s 200-year history — and is being paid for partly through a £280m loan from the European Investment Bank, a non-profit institution owned by EU member states.

Angus O’Brien, UCL student and member of the Cut the Rent campaign
Angus O’Brien, UCL student and member of the Cut the Rent campaign © Murray Ballard

The controversy surrounding its development encapsulates the broader tug of war taking place over where a university’s priorities should lie. UCL’s provost Michael Arthur told academic staff this month that the university was in a “barely financially sustainable position”, with a lower annual surplus than rivals such as Imperial College or King’s College London. “We have 42 days of expenditure in the bank. So if all the money stops, we cannot pay your salaries in 42 days’ time,” he said. “That is not a sufficient surplus for a financially sustainable institution.” (The average university has the equivalent of 93 days’ worth of spending in the bank, according to HEFCE.) The associated squeeze on budgets has angered staff, while higher accommodation charges for students have triggered a rent strike and demonstrations.

Angus O’Brien is studying for a degree in European Social and Political Studies at UCL. A soft-spoken 20-year-old, he helps lead “UCL cut the rent”, an ongoing protest against the high levels of rent that the university charges its students, mirroring a broader housing crisis across the city. For O’Brien, the rent issue is not merely a function of London’s crazed housing market, but part of a broader shift in the ethos of the university. “It’s become monetised. When students go to a lecture, they think, ‘I haven’t got my £40 to £50 of lecture there’, rather than, ‘Is this interesting?’”

He says UCL’s expansion — its research capacity has doubled and the number of students it accepts has risen from 19,000 to 38,000 in the past decade — has coincided with a sharp rise in rents, to an average of about £170 a week. “It’s like an infinite loop of growth, rather than actually making [education] accessible and affordable now,” he says. UCL admits rents have increased by 40 per cent in the past six years but says this is below market levels. It adds that it is a not-for-profit organisation and reinvests all surpluses from student rent, which it says were just under £8m in the financial year 2013-14, into running costs and refurbishment. The Stratford campus will also include new accommodation.

Those involved in university building projects say they are vital if the UK is to compete on a global level. Terence Fox, a director in the finance department at Edinburgh University, believes new buildings can prove decisive. “If a student [comes] from the US, Australia or China, they need to come here because we’ve got not just the best students, but the best facilities. If the choice is Manchester or Edinburgh, and Manchester has new buildings, they’ll probably go to Manchester.”

chart: Government grants to English universities through HEFCE

On the other side of the capital from UCL’s Stratford campus, London’s Imperial College has begun construction on a 25-acre site in White City. The centrepiece is a £200m building that Imperial calls a “translation and innovation hub”, which the university says will be used to build bridges between its academic community and industry, helping researchers translate their innovations into commercial ventures. The hub is being funded in conjunction with the property investor Voreda Capital and a £35m government grant.

Neil Alford, professor of materials science at Imperial, is working on the development as part of his role as associate provost and describes it as an “opportunity to think really ambitiously about what we might do”. The UK can only continue to “punch above its weight” in terms of research, he says, if it invests. “I think there’s an underlying nervousness of strategy with respect to consistency of [government] funding. We then have to decide, do we want to remain among the best in the world? And if we do, then we need to make that investment, and we make it now in collaboration with the government and with industry.

“If the government were to say, ‘We’ll give you all the money you’ll need’, well great,” he adds. “But that’s not going to happen, is it?”

In November last year, HEFCE noted in a four-year overview of the sector that university debt across England was rising, from £6.7bn at the end of July 2014, to an expected £9.2bn by the end of July 2018. A March annual report from the same institution on the sector’s financial results said universities were in a “sound financial position overall” in 2014-15. But it warned of an “increasingly significant variation in the financial performance of individual institutions across the sector”, with a “concentration of large discretionary reserves in a small number of universities”. While elite universities such as UCL are grappling with ambitious expansion programmes, lower-ranked institutions may face an even bigger struggle if they fail to attract the students needed to keep growth plans on track. HEFCE added that a key challenge for the sector would be whether it can achieve planned growth in overseas student numbers — a factor that could be affected by tighter UK immigration rules and trends in the global economy.

Nan Yue, a 23-year-old studying for a PhD in aeronautics at Imperial College, hadn’t originally intended to study outside China but was inspired by her classmates at university in Shanghai. “In my class half of them wanted to go abroad,” she says. Yue’s two countries of choice were the UK and the US, “because they speak English”. Her first choice group included Imperial, UCL, Southampton, Bristol and Cranfield. “I basically followed the rankings for aeronautics. They were the top few,” she says. Yue pays Imperial £20,000 a year for her PhD, and estimates that her annual living costs come to about £24,000. She is entirely self-funded. Of the 26 students in her classes, just five are from the UK. One big appeal is the quality of tuition. “Here [it] is definitely more advanced. This subject in China is not as developed as here.”

Nan Yue, Studying for a PhD in aeronautics at Imperial College
Nan Yue, Studying for a PhD in aeronautics at Imperial College © Murray Ballard

For Frida Loedeng, it was a different story. She took a course in Chinese with China studies in her native Norway, before travelling to China for a year at Peking University. Afterwards, she applied for a graduate course, titled “China and globalisation”, at King’s College London. Like Nan Yue’s, most of her classmates are not British, with many from China. Her experience has been “great” but the course does not come cheaply. “I have my own savings and great support from my parents,” she says.

But there is another source of support. While the income that universities are raising from tuition fees has helped replace funding from the taxpayer, some international students can draw on governments elsewhere. Foreign study, Loedeng notes, is “highly promoted by our government. We have a financial institution supporting us with tuition fees.” Norway’s government-run Lanekassen, or Load Fund, provides grants and loans to help students study in Norway and abroad. After several years of higher education, Loedeng has amassed about £10,000 of debt — less than many of her English counterparts.

According to the higher-education statistics agency, the number of students from outside the EU studying in the UK has risen by more than 50 per cent in the past decade, to 312,010 in 2014-15. At UCL, the proportion of non-EU foreign students is 28 per cent. Nan Yue’s fees are rising but she enjoys her course. When she arrived in England she could barely speak the language — not even a “proper sentence, to order a meal”. The lecture notes were hard to follow, and not many of her classmates were native English speakers. She felt “stressed” and “alienated” in this strange country, where students “dared to interrupt the professor”. But 18 months later, her grasp of the language has moved on, becoming subtly laced with British abbreviations and American idioms. She notes that the Chinese language itself is now accommodating the cultural shift in British education. Young people have begun to use a term to refer to overseas study, especially one-year British masters degrees: du jin (镀金) — literally, “gold plate” — but it also translates as doing something just “for show”.

“You paste a layer of gold on yourself,” she says. “On your CV, [people] can see, ‘Oh you went to this UK uni,’” she says. “[But] it’s only a year . . . it probably doesn’t change you.”

Alison Wolf, Professor of public sector management, King’s College London
Alison Wolf, Professor of public sector management, King’s College London © Alamy

A more leveraged and market-driven culture is already changing English universities, for better or worse. Alison Wolf, professor of public sector management at King’s College London and a cross-bench peer in the House of Lords, says the construction boom is part of a financialisation process that is “aided and abetted” by the government, which sees “universities and degrees as an export industry and an investment good for the student”.

“If the driving ethos, the thing which directs your behaviour day on day is maximising your income, maximising your position in the league tables in order to maximise your reputation and your fees, that means that you behave in a way that is very different from a traditional university where that wasn’t the driving force,” Wolf says. “You do get the sense that if that is 90 per cent of what is being thought about by central management, you are fundamentally changing the institution. For the people running it, it feels like a business.”

For Louise Richardson, who was recently appointed vice-chancellor to Oxford university, the commercial pressure has been healthy, and “keeps us on our toes”. But she worries that it is altering how fee-paying students behave. “I dislike the marketisation of education in other ways; this sense that ‘I’m paying so much in fees, therefore I’m a customer,’” Richardson told the FT in December. Even though she said she had not experienced this at Oxford, she dislikes “the notion some students feel that they’re coming to university to get a better-paid job and that their success can be computed in the size of their salary. I like to think we’re doing much more than that.”

Louise Richardson, vice-chancellor, Oxford university
Louise Richardson, vice-chancellor, Oxford university © Rex

Stewart Ward, head of education lending at RBS, a leading bank lender in the sector, agrees that “universities are becoming more corporate in their nature” but, in his view, this is “a major positive”.

Universities have undergone radical change since fees were introduced in 1998 but they are about to enter a new phase of disruption. A government white paper published in May by Jo Johnson, the minister responsible for universities, announced plans to force English universities to become even more competitive. “We cannot stand still, nor take for granted our universities’ enviable global reputation and position at the top of league tables,” Johnson wrote in his foreword. The white paper proposes to tear down barriers to entry, making it easier for new universities to be established, while pledging to introduce an “Office for Students” that will act as a market regulator. It also throws into doubt the implicit government guarantee that has helped some universities borrow at such low costs. “There may be some providers who do not rise to the challenge, and who therefore need or choose to close some or all of their courses, or to exit the market completely,” the white paper reads. “The possibility of exit is a natural part of a healthy, competitive, well-functioning market and the government will not, as a matter of policy, seek to prevent this from happening.”

Jo Johnson
‘We cannot stand still, nor take for granted our universities’ enviable global reputation and position at the top of league tables: Jo Johnson, minister responsible for universities, from his foreword to last month’s white paper © Getty

Emran Mian, director of the Social Market Foundation think-tank and a former civil servant who worked on the review of fees in 2009-10, says this could narrow funding options for underperforming institutions. “I think those guys are likely to start finding a harder financing environment because the government is dropping stronger hints that they want an explicit failure regime and they are OK with the idea that some universities might fail. That is the corollary of being more competitive.”

The prospect of government-sanctioned “exits” marks a further evolution in the relationship between universities and the state. As government policy works towards creating an ever more competitive market for higher education, the highest-achieving institutions can hope to reap substantial rewards, in both revenues and status. But university leaders also face a far tougher climate; no longer protected by the state, their global position will depend on future investment and finding creative means of raising money. Without this, they risk not just falling behind, but failing altogether.

Thomas Hale is the FT’s capital markets correspondent. Gonzalo Viña is an FT public policy reporter

Photographs: Murray Ballard; Alamy; Rex; Getty

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