Financial nightmare for the dreaming spires?

The global demand for higher education has never been greater but, as Victor Smart discovers, UK universities are suffering a financial crisis, and a severe one at that

These are boom times for universities on a global scale. Many countries are unable to meet the growing demand for higher education. In some regions such as Asia, where demand is expected to grow by a total of 48m between 1995 and 2020, 'every week a new university of considerable size would need to be established', declares Professor Marijk van der Wende of the University of Twente in the Netherlands.

All this spells opportunity to the UK tertiary education sector, whose share in the global market for international students is already a handsome 16%.

But the outlook is not all rosy. The growing global market for higher education goes hand in hand with the emergence of new types of providers, including virtual universities, corporate and for-profit providers, which threaten the monopoly of the traditional university which Britain boasts in abundance.

And with the rise of English as the world language, flexible degree structures and more student-centred approaches should give British universities an edge. But the popularity of the UK and the US as first choice study destinations for a number of key overseas markets has fallen sharply in the last few years, according to a recent report by the British Council. The reasons are complex. After the events of 11 September political factors are likely to have played a part in the US' declining popularity for students from certain Muslim parts of the world, for example. The net result is that countries such as Australia, Canada and Japan are coming up on the inside track.

And while the economic downturn is putting pressure on universities' revenues around the world from the state, endowments, student fees, and research financed by companies, few countries face the severe funding crisis besetting the UK.

The funding pressures in the UK are likely to grow as a result of the Government's two main targets for universities: putting 50% of 18 to 30-year-olds into higher education by 2010 and 'broadening access' so more young people from lower socio-economic groups get a university education. According to the Higher Education Funding Council for England (HEFCE), these twin targets mean the enrolment of an extra 350,000 additional students by 2010. That is a 35% increase on current numbers.

Whereas leading US universities are kept afloat from gifts from well-heeled alumni, such a culture has never taken hold in the UK. Harvard has an endowment worth a cool $17.5bn, for example, but Oxford, one of the country's most prestigious institutions with many centuries of wealth, has a mere £2bn. In the UK revenues from the state and from students remain paramount.

According to Kirsten Gillingham, finance director at the University of Brighton, the universities have done a stalwart job in delivering more graduates. Indeed, in the last decade, the state-contribution towards the 'unit' of resource (as university directors unblushingly say) has fallen from £7,500 to £4,900. 'We have delivered a darn sight more for less. Academics have changed class sizes, timetables, assessment methods and more, to accommodate higher numbers whilst maintaining the quality of higher education. But there isn't much more to squeeze out of the system,' she insists.

The fact is that the UK spends only 1.1% of its GDP on tertiary education, compared to 2.3% in the US and 2.5% in Canada. £3.5bn more would have to be spent per year merely to bring the UK up to the EU average, which is itself well below that of North America.

British universities are said to need £5.1bn more to bring out-of-date equipment and crumbling buildings used for teaching up to scratch. The higher education infrastructure overall is old, designed in a different era, poorly maintained and often not fit for 21st century purposes. Many laboratories built in the 1950s and 1960s are now an embarrassment with complaints about dirt and noise. One former polytechnic boss complained that there is significant funding available for innovative learning 'but nowhere to do it for lack of space'. There is also said to be a funding gap of £2.7bn for research. In total, the vice chancellors' body, Universities UK, is demanding a grand total of £9.94bn - for teaching, research, and attracting more students.

In January, after tortured Cabinet discussions, the UK Government announced plans that, it claimed, would provide a 6% increase in financial support. The most prominent reform is that universities will be able to set their own fees, up to a £3,000 ceiling from 2006; students will get a grant of £1,000 a year if their parents earn less than £10,000. Opponents were unconvinced, dubbing this a 'messy political compromise', with most of the extra money tied to specific initiatives.

Overseas applications are buoyant and provide welcome fees for British institutions. Last year there were almost 10 times as many applications from China as there were in 1999, making China the largest single source of overseas applicants. There has also been an increase in applications from Hong Kong, India, Malaysia, Nigeria and Pakistan. International students now comprise 12% of the total at British universities and those from outside the European Union contribute over £600m of teaching income.

However, competition will get tougher. The 1999 Bologna Declaration seeks to make European universities more globally competitive. Universities on the continent are adopting internationally attractive degree structures that are similar to those in the UK, at a time when the British Government's reforms are set to move UK degrees in a very different direction.

While British universities have a good international reputation, they have nothing to be too worried about. But university leaders fear the under-funding of domestic students is undermining the quality and competitiveness of British universities. University staff unions claim that class sizes are growing, the quality of teaching is suffering and staff recruitment is reaching a crisis. Moreover, if student-teacher ratios are not to deteriorate further, universities will, it is said, have to recruit an additional 17,000 academic staff to teach the extra students.

Diana Warwick, chief executive of Universities UK, sums up: 'Without an adequate infrastructure it will be a challenge for UK universities and colleges to attract the additional student and staff numbers. And without new investment, the UK's leading position in a globally competitive market must be in doubt. It also puts at risk the Government's target for widening participation.'

Victor Smart is a business writer and former editor of the UK's Public Finance magazine.