Q: What was the impact of the loss of funds to leave the European Union and what would be the solutions accordingly?
Text: Lynne Neagle AM: Good morning, everyone. Welcome to the Children, Young People and Education Committee. We've received apologies for absence from Suzy Davies, and I'm very pleased to welcome Angela Burns, who is substituting for Suzy this morning. We've also received apologies from Dawn Bowden. Can I also welcome Siân Gwenllian to the meeting? Siân is joining us from her constituency office via video-conference. Can I ask Members if they've got any declarations of interest, please? Hefin.
Hefin David AM: Apologies. I'm currently registered as an associate lecturer at Cardiff Metropolitan University, although I haven't done any work for them for some time.
Lynne Neagle AM: Okay. Thank you very much. We'll move on, then, to item 2 this morning, which is our evidence session on the higher education new academic year allocations. I'm very pleased to welcome David Blaney, who is chief executive of the Higher Education Funding Council for Wales, and Bethan Owen, who is deputy chief executive of HEFCW. Thank you, both, for attending this morning. We're looking forward to hearing what you've got to say. If you're happy, we'll go straight into questions from Members, and the first questions are from Angela Burns.
Angela Burns AM: Good morning. Thank you very much, indeed. I just wanted to talk about, really, the financial sustainability of the higher education sector because, as we know, there's been all sorts of things going on in the press. So, can I just start with, actually, quite a technical question and ask you what the financial indicators look like for the universities here in Wales, and are there particular indicators that are really flashing warning signals to you?
Dr David Blaney: Well, shall I just start with a couple of contextualising comments and Bethan can come in then with some detail? It's undeniably the case there are financial challenges facing our universities. They result from three main causes: one is the impact of the demographic dip of 18-year-olds, which is deeper and longer in Wales than it is elsewhere in the UK. There are increased pension costs and, actually, increased costs generally. And, of course, we also have current uncertainty as a result of the Augar review in England, and whether that might play into Wales, and also Brexit. These challenges are not unique to Wales; the majority of the UK universities are actually taking out cost one way or another. So, this is not a Welsh issue. Before the Diamond review of fees and funding in Wales, there was a pre-existing funding gap in resource between England and Wales, and even now, that's still the case. So, Welsh higher education institutions are approximately £40 million worse off than they would be in the English system. That's a challenge, and that is a result from a political decision to invest in students, and that's fine. The money's gone into the system but it hasn't gone into universities, necessarily. So, these are serious challenges for institutions to manage, but I think it is a managed situation. We're not seeing a crisis; we are seeing some real challenges, and there is a distinction, I think, between—. We have to understand, though, that taking out cost to balance the books has a detrimental effect on the capacity. Obviously it impacts on the people who lose their jobs immediately, but there's a medium to longer term impact on the capacity of the system to deliver for Wales. They are taking out capacity; they're not cutting at fat now, they're cutting out core capacity. And so, the range of the curriculum, the range of research and innovation, the range of the contribution that universities can make will be diminished by that. And against that backdrop, the introduction of the Diamond reforms is hugely important—delivery of that is going to be really important—and we are really pleased to see the Minister able to meet her commitments in respect of that. The Diamond money is coming in. This forthcoming year will be the first year we see an increase in the resource, through us, to higher education. And the projections in future years are better still, and that will be extremely important. The performance of the sector is very good; we had the national student survey results out yesterday. Wales is still the best in the UK, which is excellent. We have the best impact from research in Wales across the UK. So, all of that is very positive, but that is also being done at some cost. There are some very tired staff in universities, and we've seen some stuff in the press recently about some of the impact of stress there as well.
Angela Burns AM: Can I bring you back to the financial element of that? Can I just ask a question: what are the university reserves looking like at present?
Dr David Blaney: Here, I refer to my learned friend.
Bethan Owen: The reserves are a measure. There's a difference between the distributable reserves—I don't have those numbers before me, but looking at reserves, what is more important are those reserves that are available as cash or liquid cash. So, universities have reserves, but a large amount of that is tied up in their estates, so they're not immediately realisable. So, one of the key measures that we're looking at, which is even more important than surpluses and deficit, is the operating cash that our universities are generating at the moment. When we look at operating cash in 2017-18, they were generating, as a percentage of income, about 7.6 per cent, which contrasts with nearly 10 per cent for the same year for English institutions. And that represents their capacity to generate surplus cash to meet their costs, which now, increasingly, include the costs of servicing their borrowings. So, again, because capital funding has not been as available to universities as it was, they've invested in their estates and that's largely been funded by borrowings. The costs of those borrowings have to be met on an annual basis, so that's becoming an increasing proportion of the operating cash that universities have.
Angela Burns AM: I just asked that question because I know that about four years ago, the universities were sitting on substantial reserves and were less than keen to deploy them back into actually using them for the students—it was more about building up the war chest, if you like, of the universities. And I just really wanted to have an understanding of how that picture might have changed over the last four years and are they actually skinnier cats now, rather than before.
Bethan Owen: We can get you that analysis, but even four years ago, I think the definition of exactly what's meant by reserves, it's really important to look at what are distributable reserves as opposed to the assets that universities have.
Angela Burns AM: Yes, I do understand the difference.
Bethan Owen: And, there are also differences in the way that universities have secured funding for investing in their estates. So, for example, Cardiff University have had a bond rather than borrowing, which you draw down as you're spending. So, in the short term, the reserves of Cardiff will appear as though they have significant cash balances, but all of those are restricted for investment in the estate and, over the next two or three years, will be utilised for that.
Angela Burns AM: So, overall, you're painting a picture of a sector that's under a significant degree of financial stress, and this is obviously using your key financial indicators. Do you monitor each and every university, or do you wait for them to come back and tell you what their situation is?
Bethan Owen: We monitor, we receive forecasts, five-year forecasts, and we meet frequently with all our universities now. It varies, depending on the risks of the universities, as to how frequently we meet, but we're actually meeting with every university because even the forecast that we received last July, the changes, even in the 12-month period, are significant enough for us to need a better understanding of what the latest position is. The forecasts, if I just run through—. We had a sector that, in 2017-18, had a deficit. Although it had a turnover and income of £1.5 billion, which had increased, nonetheless it had a small deficit of 0.4 per cent of income in 2017-18, which was an improvement on the deficit the year before of 1.7 per cent, but notably, again, the sector in England were looking at surpluses of 3 per cent to 4 per cent in the same period. The forecasts that we had this time last year were indicating that, for 2018-19, we should have a sector that's roughly in a break-even position, but that has to be caveated with waiting for new forecasts in July, where there will have to be a reflection of the pension costs, and there have been significant changes in pension costs, both for the teachers' pension scheme and the universities' superannuation scheme as well, and those will be significant costs that universities have to build into their forecasts at a time when their income, certainly their fee income, is not increasing, and that is the challenge.
Angela Burns AM: Are we going to lose any universities in the next couple of years?
Dr David Blaney: I don't think so. As I said earlier on, we're not seeing a crisis, we're seeing really challenging circumstances for institutions to manage. At the moment, our sense is they are managing them, so one of the things we try to do is to make sure that, insofar as we can see it, we are making sure that the institutions are alert to the challenges they're facing, and are actually engaging those challenges properly, and we are seeing that at the moment. So I think what we will see if the pressure continues unabated is more costs being taken out, so more jobs being lost, more capacity being lost, but that's not the same as falling over. I don't see people falling over. There is always the possibility of structural change within the sector, and that might be one of the solutions that institutions think about, but it's not a policy position, and it's not always a good short-term response to crisis anyway, actually. But I think, as I say, we're in a managed situation, but the challenges are quite acute. But I don't see an institution falling over in the foreseeable future.
Angela Burns AM: When you talk about structural change, are you referring to the fact that certain offshoots or divisions might close? I bring this up because I'm the Assembly Member for Carmarthen West and South Pembrokeshire, and I have had multiple representations from students, and their parents, who are about to go to Lampeter and who've been told that courses are being restructured, there's a massive staff loss, and they have concerns about whether the three-year commitment they're about to make to a course is going to be able to be sustained. So I am trying to drill down a little bit, because I think it's only fair for the students to know what they're up against, and also it's a bit like in the great depression—you can start a run on something, can't you? Because if enough people believe it, then suddenly enough people will stop going to what is an excellent little university, really top-quality in medieval literature, in archaeology. And I'm just talking about one, but I know there are problems in other universities around Wales, so I just wondered if you could comment on that and also what processes you as HEFCW might have in place to protect any student who does find themselves in a situation where their course appears to be disappearing before their eyes.
Dr David Blaney: So, there's quite a lot in that question, actually. Let me try not to forget any of the elements. First of all, your comment about causing a run is a serious consideration. So, if we look at the debate that happened in the Senedd last week, from my reading of the transcript, it was actually quite a balanced debate where pretty much every contributor made reference to the contribution that higher education is making. There was reference to the national student survey scores, and in many ways Wales is the best place in the UK to come and be a student, because you are looked after properly in Wales. But there was also a perfectly legitimate exploration of whether or not there's a crisis, and if you look at the way in which that was represented in the media, the crisis bit stuck and the rest of it didn't. At the point where the sector is trying very hard to recruit students, it's really quite unhelpful that you get that sort of representation. So we do need to make sure, I think, all of us, that we try to avoid a situation where there can be media amplification of a problem that's not actually as acute as the media are portraying it, and that is very harsh. I'm not being critical of the political process here, but it has ripples and we do need to be careful that we don't start a run on this. In terms of the specifics at Lampeter, we understand that there are no plans to close any of the departments, and there certainly will not be plans to pull the rug out from under continuing students. That is just not what institutions do. So there's an absolute obligation on them to meet their commitments, and that's a contractual obligation anyway, so it's a legal obligation. But we also have a quality machinery that we operate where we would expect institutions to be able to demonstrate that they've put in place appropriate arrangements to ensure that students can finish their programmes of study. So they're not going to be recruiting students to programmes that they're not planning to continue—they just are not going to do that. And if you think about it in a market context, it would be suicidal for a university to treat their students like that.
Angela Burns AM: But I have to ask these questions because the auditor was very clear that there was a material uncertainty in Trinity Saint David's financial plans.
Dr David Blaney: Yes, I understand that, so let’s come back to the material uncertainty. [Interruption.] No, I understand, and that's fine. What I'm hoping to try and express is that we have absolute confidence that the institutions will not do the dirty on their students. They will look after their students and if they're recruiting to programmes, they are recruiting to programmes that they are planning to run, and run through to completion. And the expectations that we place on them in terms of our quality assurance machinery is precisely that—when they are engaged in portfolio change, they have to look after the interest of the students that they currently have. In terms of our oversight and monitoring, our primary consideration, again, is the interest of the students. They are the people who have, in many ways, least influence over what happens in terms of the way an institution is managed. Although, they do have a voice and, actually, the arrangements for the student voice in Wales are, again, better than elsewhere in the UK. But, nonetheless, we do not wish to see students becoming innocent victims of difficulties of management and financing. And so that is our primary consideration when we're looking at these institutions. Our institutional risk review process is fundamentally designed to make sure that institutions are grappling with their problems before they become a crisis. So, we have machinery, which has 70/80 different factors and hundreds of questions that we ask twice a year, to interrogate the performance of the institutions and to make sure that we are seeing them managing the issues that they're facing. So, it's not the challenges you face, it's the way you face your challenges—it's a cliché—and, at the moment, they are managing them, but if we were in any way concerned that they weren't, the people who are most at risk in that context are the students and we will be intervening to make sure that they were cited, and we do intervene when we have to.
Angela Burns AM: Well, following on from what you said, I've just got two really specific technical questions, then, to ask, because you said that you look across the whole scope to make sure that they are meeting all of their correct liquidity ratios and so on. So, considering how much is invested in their estates, are you happy that each university's estates strategy and its financing is prudent and has appropriate governing-body oversight in place?
Dr David Blaney: Yes, so the estates strategies that institutions operate are overseen by either the full governing body or relevant sub-committees in respect of every institution, so there is proper governance oversight. And in all of those instances, there is staff and student engagement as well in the strategic approach on estates. So, the machinery is in place—
Angela Burns AM: Because it's the big thing that drives most of university borrowing, isn't it?
Dr David Blaney: Indeed, it is.
Angela Burns AM: So, if our universities are on a sticky wicket, we just need to know that the borrowing that they're undertaking is absolutely prudently assessed and is appropriate. So, as long as you're content, if I can hear you say that—[Laughter.]
Dr David Blaney: Okay. We're content on two fronts: one is that the governance machinery within the institutions is structured appropriately to look at that, but also that if the institutions are wanting to engage in anything other than relatively trivial borrowing, they have to get our consent as well. And what we don't do is second-guess everything, but what we do do is make sure that the governing body, or its relevant committees, have been asking the right questions. So, there are two bits to this.
Angela Burns AM: And then—sorry.
Bethan Owen: Can I just add to that, then?
Angela Burns AM: Yes, of course.
Bethan Owen: In asking for the forecasts, we have reinforced this year the importance of universities looking at different scenarios. So, to be looking at the demographic and maybe in the past, where there's potentially been growth in the system and universities have built that into their forecast, we have explicitly asked this year that we are provided—not just the governing body—with the scenario where there is no growth in the income. That's not the core forecast, but a scenario, so that it's quite clear how reliant the forecasts are on that growth, and if that growth doesn't come through, what the contingency plans are for ensuring that all the cost commitments can be met. And we should probably just differentiate between—we have a role before borrowings are entered into, but all the best forecasts in the world can never quite predict, certainly what's happened in the last two years, probably, in universities. So, there are significant borrowings that are now committed to and the key measures we are looking at are universities' capacity to meet their covenants and their repayments under those borrowings, because that's essential for maintaining their liquidity.
Angela Burns AM: Which actually, neatly, thank you, brings me to my last question, which is: have any universities broken those loan covenants or been close to breaking them, unable to pay their borrowings as and when they fall due?
Bethan Owen: There was a significant change in accounting standards in 2015, financial reporting standard 102, so most universities had to renegotiate their covenants, but it was because the accounts were looking very different. The accounting standards brought about changes in how income was recognised and how some service concession arrangements, largely student accommodation arrangements, and pension costs, significantly, were recognised in the accounts. So, most universities have had to renegotiate covenants, but we're not aware of any who've had to renegotiate due to covenant breaches, other than one which the University of Wales Trinity Saint David disclosed in their financial statements—that they did need to renegotiate their financing arrangements, which they have done earlier this year, and they have now negotiated new covenants. It's a core part of financial management in universities now that you manage your relationship with your lender as well as with us. Breaching covenants in themselves is different to doing that with your lender being unaware and the factors being within your control. So, again, from that perspective, we have the covenants built into our forecasts, we require the forecasts to show how the university are planning to be within their covenants. The nature of those covenants vary, but most of them require a measure of cash flow, a ratio between the cash generated and the cost of debt, so there is close monitoring that is required because of the borrowing in the system, as well as our ongoing monitoring as well.
Angela Burns AM: Thank you, Bethan.
Lynne Neagle AM: Thank you. Just before we move on to Hefin David, can I just ask you what your view, then, is on the statement included by auditors in the accounts of Trinity Saint David that there is material uncertainty?
Bethan Owen: Yes, I'll pick up on that. The material uncertainty largely relates—there is a note in the accounts that explains the factors that are being taken into account, but it largely relates to some significant cash receipts that have been subject to timing delays and the fact that the timing of these is essentially outside the control of the institution. The main delay relates to the receipt of funding for the Egin project, which was due to be received from the Swansea city deal. That funding has been delayed, but the sums due to the university are still due to the university—it's the issue of the timing of those receipts that is causing a cash pressure. Receipt of that funding would certainly reduce the cash flow pressure at the university at the moment. Just in terms of cash flows, all universities have to ensure that they are maintaining enough cash in their system to meet their payments as they fall due. Most of their costs are incurred on a monthly basis, staff costs in particular, but the income flows into universities are now less regular. In days gone by, that funding would largely flow from us and that would also come on a monthly basis. The funding from the Student Loans Company now, for example, comes in chunks. A quarter of that money comes in in October, a quarter in February, and the majority of it, half of it, doesn't come into the university in cash until May. So, that's quite a different cash management scenario for universities to manage; it requires holding cash balances to do it.
Lynne Neagle AM: Okay, thank you. Just before I bring Hefin in, we're going to need to have a bit of agility, as Dai Lloyd would call it, in our questioning and our answers if we're going to cover the ground that we need to cover. So, Hefin.
Hefin David AM: How can we be assured that governance arrangements across the eight institutions are sufficiently rigorous but also consistent?
Dr David Blaney: So, the first point to make, of course, is that universities are autonomous, as you know—
Hefin David AM: I've just written 'independent and autonomous'.
Dr David Blaney: Yes, all of that. And they are charities and so on, so they have expectations in respect of that in any case. The university governing body obviously is an important part of the machinery, particularly in terms of generating constructive challenge for the executive within universities. The governing bodies all are expected to behave in a way that is consistent with the guidance produced by the Committee of University Chairs, the CUC guide, which identifies good practice. So, it’s a higher education code of governance and all Welsh universities work to that code. That code is itself up for review at the moment. So, that is an opportunity for that to be strengthened. Just in terms of governing bodies, it's also important that governing bodies engage in a process of continual refreshing, because that gives you a greater variety of perspectives, which is important. But it’s also important they have people who understand the higher education business as well as from other contexts. Getting that mix right is important. As it happens at the moment, there are also issues about ethnicity and gender balance. Half the chairs of Welsh university governing bodies are female. Half the vice-chancellors are female. That’s a positive position for Wales to be in. But I think our view would be that when you get an increase in the contextual pressures that we’ve been discussing already this morning, the role of the governing body actually becomes even more significant. So, we have encouraged the sector, both the chairmen of the university councils, but also the vice-chancellors, to engage in a process of an independent review of governance in Wales. We’ll be alongside that. We’ll be supporting that. But, actually, it’s important that they own it. And it hasn’t been hard for us to encourage that—they have been keen to take this opportunity to take stock. The Welsh higher education system is part of a UK system—they don’t want to be a million miles away from the rest of the UK in terms of expectations, but there is scope in Wales, given the scale of the sector, to actually construct something that is more challenging, I think, in terms of expectations, than might be the common denominator across the UK, and maybe some more exemplification. Importantly, in this exercise, we are not just interested in governance process. It’s going to be quite hard to do this, but I’m very keen that we engage—and the sector are up for this—in governance culture, because, actually, you can do process checks and you’ll have the right structure of committees and have the right sort of papers going, but, in the end, it’s the dynamic within that room and who’s asking which questions and how well informed they are, and whether it's an open culture or is it a defensive culture—these are really what influences the quality of decision making.
Hefin David AM: And how different are those cultures across institutions?
Dr David Blaney: I think it’s very hard to say. We don’t sit in the governing bodies of those institutions. Very occasionally we get to observe one. Typically, that’s at a point where there are sufficient difficulties going on that we feel that we need to—
Hefin David AM: Do you have the option to observe at any point?
Dr David Blaney: We can't insist, I don't think.
Bethan Owen: We can ask to.
Dr David Blaney: We can ask. But in the main, actually, our presence would change the dynamic of that anyway, so I'm not sure that's necessarily helpful. But we are keen to see what we can achieve with the sector in addressing these issues of what constitutes constructive challenge.
Hefin David AM: I take from that that there might be different approaches in different institutions. Is your aim to see consistency in the same approaches, then?
Dr David Blaney: I think we’d like to see a consistent minimum set of expectations. I think there are differences, because there are people involved. In the end, it’s about personalities, it’s about people’s background and it’s about their knowledge. And we have a role to play in this as well, so we have a toolkit that we produce for governors, which, essentially, is a set of information that locates their university in the context of the UK, across a number of factors. So, if they had been told something that is not perhaps as true as it might be by the executive, they can see that in the data. Whether that toolkit needs a refresh—I’m sure it probably does, it’s been there for a while now—. So, part of that is what information we can provide to help governing bodies be properly informed as well.
Hefin David AM: Yes, and this is the independence and autonomy thing. This is quite distant from Government—unlike other institutions, where you can prescribe some of these approaches.
Dr David Blaney: Yes, and in the end I don't think there's any pushback from the sector in terms of wanting to operate in accordance with best practice.
Hefin David AM: Yes, and I totally defend independence and autonomy.
Dr David Blaney: Absolutely. The challenge is all of us being clear what constitutes best practice.
Hefin David AM: So, what about risk appetite? Do you feel that any governing bodies are exhibiting what might be considered to be an imprudent risk appetite?
Dr David Blaney: I don't think so, and this manifests itself in two ways. So, we would see this coming through in forecasts, and we would see it coming through in requests for borrowings, predominantly. Actually, we'd see it in other ways as well. Our links into institutions are many and various, and we have our formal stuff, but we all have links into institutions that are informal and we—. One of the beauties of the scale of the sector in Wales is we can see the institutions in a way that they can't hope to in England. It's just completely different. And so we would see it in other ways. But we have, in some instances, I think it's fair to say, helped institutions to think again about some of their aspirations. So, where we've seen things and we think, 'That just looks ridiculously optimistic,' we've just asked the questions. We don't say, 'No, you can't do that,' because they are autonomous, they make the decisions, but we try to make sure that they're asking the right questions.
Hefin David AM: So, would you see that governing bodies are falling short in doing that themselves, in that, where they become strategic decisions that require due diligence, are the governing bodies themselves presenting that challenge? Or the fact you've just said that, does that suggest to us that, actually, they are falling short?
Dr David Blaney: I think there's a mixture of things going on. We have a slightly different perspective and we have a perspective that is very intimately informed in terms of how the institution is performing. So, you have a governing body with a range of perspectives, and you will also have people who are very committed and very enthusiastic about the institution, and just occasionally it's helpful to get a slightly external perspective on these things. So, I don't think it's a shortfall as such, but I just think—
Hefin David AM: The kind of honest broker role, kind of.
Dr David Blaney: The machinery depends on having a body like HEFCW doing some of that role, and the people who lend money to institutions are absolutely clear about that. So, we have relationships with the banks; they come and see us every now and again—typically not to talk about individual clients but just to talk about what we do and how we do it. Interestingly, for example, when Michael Barber got up before Christmas and said there will be no bail-outs of universities, we had banks on the phone to us within a couple of days, wanting just to talk about how it is in Wales and is it still how it used to be. So, they are very keenly aware of what we do. So, it's not really a governance failure; it's just that the machinery includes us.
Hefin David AM: Okay, that's important. And one of the things, from a distance—I mean, I've been involved in different ways in an institution, and looking at the institutions from a distance. There are people, as you say, involved, and people always make the difference in different cultures. Do you find that the relationships between executive teams and governors is effective, and are they sufficiently robust and challenging as well? Those executive permanent staff and the governors—is there challenge there?
Dr David Blaney: I would say, in the main, yes. Occasionally, we help the governors to ask the right questions, so occasionally that external perspective we've just discussed is helpful in that regard. Actually, there are times when there are tensions between the executive and governing bodies, inevitably—that's not something that's remarkable—and we can feel that as well. We have conversations with both governing bodies and executives.
Hefin David AM: And that can become apparent from a public point of view as well—you know, media reports and—.
Dr David Blaney: Yes, sometimes these things can spill, and the governing bodies also include student representation, staff representation, who are typically union reps, and so, you know, there are all sorts of—. I'm not in any way saying that people are indiscreet, but there are all sorts of interests that are sitting around that table that have to be managed within a governance context. So, sometimes it can spill. And these tensions are not all-out war, but there are sometimes differences of view and they have to be worked through, and that's governance working properly, I think.
Hefin David AM: Okay, which is—some of the work you've suggested will help towards that.
Dr David Blaney: Yes.
Hefin David AM: And a last question: you've identified one university as high risk, five as medium, and two as low in the short to medium term. You're obviously not going to tell us which, but what I'm interested in is the direction of travel, and whether those that are 'medium'—are they at any point at risk of becoming 'high' in the near future?
Dr David Blaney: I think it's fair to say that the direction of travel is that we're seeing an increased risk profile in the sector in Wales, and it's about the financial pressures that we've already discussed this morning. And that is why the efforts that the Minister has gone to to secure the Diamond settlement, and, indeed, other bits of money now and again, are so important. So, she's doing what she can, and that's really good, but we always knew that, between the point of the Diamond recommendations being made and the full implementation, there was going to be a valley to cross. The new machinery costs more as you phase out the old as well. So, the amount of funding was always going to be under pressure; there's a demographic dip, and there are the other contextual factors we've discussed. We always knew there was going to be a valley. And the institutions have been working very hard to try not to take cost out now that they really don't have to take out, because they don't want to reduce capacity, which they'll struggle to recover again when the financial position improves. So, they are seeing deficits, which are managed deficits, where they're spending more than their income in order just to keep the capacity in. So, they're being as responsible as we could expect them to be in this.
Hefin David AM: And, if you're back in a year or two's time, the next few years, are we confident that there won't be more in the high-risk category? You said you don't see collapse, but are we confident there won't be more in the high-risk category?
Dr David Blaney: Well, I think what I would always say about this process is that it doesn't guarantee 100 per cent accuracy. We can only go on what we can see. So, I wouldn't—. HEFCW is innately cautious as an organisation, so I'm not going to say we're confident, but that doesn't mean to say we're worried either.
Hefin David AM: Right, okay. So, to answer my question: are we likely to see more in the high-risk category or not?
Dr David Blaney: We might.
Hefin David AM: Okay.
Bethan Owen: And, just to add, I think the key bit of that is maintaining the attractiveness of Welsh universities to students, because a large proportion are coming not from just Wales, but from England and internationally—so, that's a key part—and also that our research portfolio is invested in, and that also brings economic benefits. So, I think those are the two that we are [correction: need to be] able to maintain: the institutions as attractive options for students, and that our research capacity is invested in.
Lynne Neagle AM: Thank you. I've got a supplementary from Siân Gwenllian.
Sian Gwenllian AM: Just in the interest of transparency, are you able to tell us which universities are in which categories of risk?
Dr David Blaney: We don't publish that; we publish numbers. So, that's, I'm afraid, where we're going to stick.
Hefin David AM: They didn't even try to—[Inaudible.] [Laughter.]
Lynne Neagle AM: Okay. Thank you. The next questions then are from Janet Finch-Saunders.
Janet Finch-Saunders AM: Good morning. Can you explain your overall approach to the 2019-20 allocations and what your priority for allocations has been?
Bethan Owen: We publish our funding allocations, and we published the 2019-20 allocations on 4 June. For 2019-20, we're allocating £149 million, and, as David said, this is the first year that we've been able to start putting funding, additional funding, in from the Diamond recommendations for investment in the sector. So, that means we've been able to increase our recurrent teaching funding by £7 million—not a significant amount, but it's a start. And we have maintained QR, which is our funding for research, quality research, and postgraduate research, at least at the same levels of £76 million, as it's been that in previous years. We've increased part-time funding by £1 million to £26 million, and we've started to increase support for expensive subjects—that's medicine, dentistry and conservatoire provision—and higher cost subjects—those are the sciences and the STEM. So, we made a start on that and increased that support by about £6 million to £20 million in total. And, in addition to that, we have strategic funding that we're maintaining for Reaching Wider projects and the Sêr Cymru project. And then, in addition to our recurrent funding, we have had strategic funding in our remit letters for the last two years. So, we're developing programmes for civic mission, community engagement, collaborations between higher education and further education, and, more recently, we had funding at the end of March to start to implement the recommendations of Graeme Reid's report for research investment, and also for developing mental health and well-being. That strategic funding is very welcome, but to be able to build those activities into our core funding, which we hope Diamond will bring, would be more sustainable for institutions.
Janet Finch-Saunders AM: Thank you. Now, the Minister talks of one skills system. How do your allocations to the 2019-20 academic year support and incentivise collaboration between HE and FE?
Dr David Blaney: So, there are probably two dimensions to this. First of all, we have provided £3.5 million of separate funding specifically targeted to improve and increase collaboration between HE and FE. So, we put out a circular inviting proposals for that, and it was competitive, so we funded what was the best of the proposals, and we constrained it to be available only to pump-prime new activity or to add value to existing activity, but not just to keep things ticking over. We had seven bids submitted from across the three Welsh regions on a whole range of activities, which we probably haven't got time to go into now. I've got a long list here, but, for example, in south-east Wales, the University of South Wales is leading on a bid partnering with Cardiff University, Cardiff Met, with the Open University and all the FE players in the region. So, we were really pleased, actually. We tried to get it within regions, because that's how you get the biggest impact for learners in the area and also for smaller enterprises in terms of innovation work. So, that is a specific bit of funding designed to incentivise HE-FE collaboration. And then we direct fund a couple of FE institutions for delivery of higher education for historical reasons, and we also have our funding going through to support franchise activity between HE and FE. There are about 5,000 students who are studying HE programmes under franchise in FE colleges in Wales, and our funding method has, historically for some time now, protected that money. So, we try to prevent universities from taking the money out of franchise and onto campus, because we think it's important to try to encourage local provision within particular localities. And, certainly in areas where public transport infrastructure is perhaps not what it might be, for people to move to universities can be quite a disincentive, so—. But we encourage it that way as well.
Janet Finch-Saunders AM: Thank you. Then, finally from me, the council's remit letter for the 2019-20 academic year from the Minister does ask you to consider how you'd increase openness and transparency around the use of fee income. So, what are the issues here, and how will you take this forward?
Bethan Owen: The reporting of the income and expenditure is largely provided, probably more so in narrative form in the accounts and the financial statements and annual reports of institutions. A number of institutions also provide graphs and more easily accessible information to understand the income and expenditure of universities. But we would accept that this information isn't easy to access at the moment. There are examples of good practice across the sector in presenting as simply as possible what the income sources are for universities and how they spend their money. And we're going to be working with the Welsh universities and sector bodies to improve the accessibility of that information for Welsh institutions. More transparent reporting of income and expenditure, and not just fee income, is actually very important for understanding how income cross-flows work in universities. Some reasonably simplistic analyses can assume that all the student fee just covers the direct costs of academic provision, but there's much more to the student experience than that, so there are costs: there are the infrastructure costs, the student support costs, even the community engagement and all the research activities bring benefits to the teaching and fee provision. So, more transparency of all the universities' income sources and expenditure and a better understanding of the income cross-flows and why you can't look at universities in isolation of student provision and research, you have to look at the whole—so, we'll be working with them to improve that information.
Janet Finch-Saunders AM: Thank you.
Lynne Neagle AM: Thank you. We're going to go to Hefin David now for some questions on part-time student funding.
Hefin David AM: Part-time student numbers are bucking the trend in Wales, as I understand it, and we are seeing a bigger increase in Wales of part-time numbers than elsewhere in the UK. How is that going to be sustainable within current arrangements?
Bethan Owen: We've allocated £26.5 million in 2019-20 to support part-time provision, and we have been able in 2019-20 to fund some growth. So, there is growth in that funding to allow those institutions and incentivise those institutions who have recruited more students than last year to continue to do so. That came at an overall additional cost of £1.9 million, and, based on what we're hearing from student support, we're expecting to see that requirement increase. So, it's one of the areas where we'll need to look at how we prioritise Diamond funding. And at the moment, our intention—but subject to knowing the quantum of it—is to continue to support and fund growth in part-time provision.
Hefin David AM: So, is it possible—? With the Welsh Government's policy of developing lifelong learning, is it possible that will be ever spread more thinly?
Dr David Blaney: That is the challenge, and there's a piece of work that we have in our sights to look again at part-time and what it is and what the various drivers are. There's a temptation, I think, at times, to see it solely in terms of skills for an economy, and it is important for reskilling and upskilling, but actually, it's important for other things as well. If we see higher education solely in terms of skilling an economy, we've missed an important part of the contribution that higher education makes. But part-time is really quite difficult, because there's part-time that is about upskilling, part time that's about reskilling, there's part-time for social purposes, there's employer-supported part-time, there's student—. So, there's a complexity there.
Hefin David AM: But they are more reactive to rises in fees.
Dr David Blaney: Well, there is a sense that they are more price sensitive, yes, and so the support regime that the Government is putting in place is important, and that probably has made a difference to the numbers of part-timers entering the system this last year. But I think we need to stake stock of what is important about part-time, what the market will deliver, what the market won't deliver, what we should fund and so on. And there's a complexity around all that, as I've indicated, which we need to do a bit of work on with the sector, with the student body as well, just to take some stock of this over the next year or so.
Hefin David AM: Could we end up seeing significant fee increases for part-time students?
Dr David Blaney: My sense is we won't. The Government wishes us to monitor, so we monitor, and that in itself is not straightforward, actually. But your comment about price sensitivity, I think, is really the nub of it. There's a limit to how much a fee increase would be acceptable to the part-time market. So, I think it's kind of self-regulating in that respect. I don't think we'll see massive fee increases; we might see a bit, but we won't see masses, I don't think.
Hefin David AM: Okay.
Lynne Neagle AM: Thank you. We've got some questions now on funding for research and innovation, and also we'd like to talk a bit about a replacement for European Union funds. Siân Gwenllian.
Sian Gwenllian AM: Thank you very much. If I could turn specifically to research, we know, of course, that both the Diamond and Reid reviews called for QR funding to be maintained in real terms, but the allocation is exactly the same for 2019-20 as it has been for the past nine years. Have you carried out any kind of assessment of the impact of this level of research funding on universities and, indeed, on the Welsh economy?
Dr David Blaney: I'm sorry; I missed the beginning of that because I couldn't hear this headset.
Lynne Neagle AM: Siân, could you repeat the question? Sorry. We had a bit of a problem with translation at the beginning.
Sian Gwenllian AM: Yes, no problem. I was talking about the Diamond and Reid reviews at the beginning of my question and the fact that they had recommended that QR funding should be maintained in real terms. But, of course, the sum hasn't actually increased over a period of nine years.
Dr David Blaney: Okay. The reason the sum hasn't increased is because we haven't had enough money to be able to increase it and still meet the obligations we have to other bits of the HE system. We would dearly love to increase it. Both Ian Diamond and Graeme Reid were very clear about the importance of being able to invest in our QR research funding, for a number of reasons. The capacity of the sector to be able to respond to funding opportunities elsewhere in the UK and across the rest of the world is itself determined by the size and the strength of the research base, which is sustained by QR funding. If they go for UK-based competitive research funding, that is typically constructed on the absolute assumption that QR will be part of that mix. So, they tend to fund to 80 per cent of the actual cost of the research, with the expectation that QR will plug the gap. And we know that, although the Welsh research base is extraordinarily productive, and really is punching above its weight in many ways—and I mentioned earlier the impact of the research base in the last research excellence framework—we know that, actually, it could do so much more, if it just had more scale. So, we fully endorse the reports from both Ian Diamond and Graeme Reid that QR is important, and it's important also to be able to allow institutions to invest in research areas that emerge over time. It's almost impossible for a body like us, far less the Government, to know where these emerging strengths are going to come from, and QR provides the flexibility for institutions, which is absolutely fundamental to keeping the research base dynamic.
Sian Gwenllian AM: Therefore, you do have concerns that this isn't increasing—you have that concern of a lack of increase in the level of investment. But has any particular assessment been made of the impact of not increasing that funding?
Dr David Blaney: So, there is—. Graeme Reid's report produced an assessment of the correlation between QR funding and capacity to generate funding from other sources, and there's a very close correlation—
Sian Gwenllian AM: Has HEFCW done any assessment to look at the effect of underfunding research, to all intents and purposes?
Dr David Blaney: Not directly. We've relied on the expert assessment of people like Graeme Reid. It's sometimes more effective to have external experts making these points than us or the sector.
Sian Gwenllian AM: Your remit requires you to encourage universities to continue to develop one particular element of research, which is educational research. How does your allocation for 2019-20 contribute to that in terms of pedagogy and educational research specifically?
Dr David Blaney: Bethan, did you want to say something on this?
Bethan Owen: I was just going to add that, when we look at the funding that comes into our sector in Wales, compared with the rest of the UK, it's easy to see from the figures that our percentage of income that comes from research is smaller than in England, so the figures show that we receive less of the money that's available, which is a factor that results from us having less QR as a percentage, so we're in a situation where we get less of that UK funding that's available as well.
Sian Gwenllian AM: So, there's a knock-on to that; that's what you're trying to say. But from the point of view of my question on educational research—?
Dr David Blaney: So, we have provided funding in 2017-18 and 2018-19 to WISERD Education, which is a research collaboration between a number of the Welsh universities, specifically looking at educational issues, and we're providing additional funding to that to add value to the Welsh Government's existing evaluation of the progress of pioneer schools in developing the three-to-15 curriculum in Wales. I won't go into the full detail of it now, but it's a five-partner project feeding into this with researchers from Cardiff, Cardiff Met, Trinity Saint David, Aber, Bangor and the University of South Wales. So, it's a collaborative effort, and we have, in the past, also funded WISERD Education, so it's an important research facility and increasingly being used, I'm delighted to say, by Welsh Government in underpinning its own policy thinking.
Sian Gwenllian AM: And likewise, in 2019-20, there will be allocations specifically for this.
Dr David Blaney: It's a bit early to say yet. We haven't allocated anything specifically in the main allocations that we've put out. There might be others to come, but we're not yet in a position to say.
Sian Gwenllian AM: Okay. Well, could you provide the remit letter from—[Inaudible.]—do that? You have to do everything in the remit letters.
Dr David Blaney: We do what we can to pay due regard to the remit letters, as the wording goes. So, we have it in our sights, but we're not yet ready to make announcements.
Sian Gwenllian AM: And then turning to the impact of the loss of funds were we to leave the European Union. Of course, this is going to have a far-reaching impact on future research, and the Reid review has made recommendations to mitigate this impact. So, what assessment have you made of how allocations will be able to help universities to transition away from EU funding?
Dr David Blaney: So, again, the Reid review has done a lot of the heavy lifting in terms of an impact assessment for us. And we endorse, just as the Government has endorsed, the recommendations from Reid. The Government has committed in principle to delivering Reid. The challenge is finding the money, and we fully understand that. There has been an additional £6.6 million allocated for research very recently by the Government, which we have put out specifically in line with some of the recommendations from Reid. So, that's a start, but that's not sustainable funding, and it's not enough, really, but it is a good and welcome start. Reid was also not just talking about the money, but also talking about the way in which the Welsh research base both represents itself and also engages with UK-wide developments. And in response to that, we have recently issued our own vision for research and innovation, which was developed over a number of months, following the Reid report closely, working with stakeholders, including the Welsh Government, in order to try and set a vision for how we respond to the challenges facing research in the future, including the reduction, potentially, of access to EU funds. And a lot of that is—. These Reid recommendations all come together; they're coherent. A lot of that requires investment in the Welsh research base in order to be able to go for competitive funding at a UK level. Since it seems possible at least, and possibly even likely, that any money retrieved from not having to invest in the EU will sit in London rather than necessarily being devolved to the devolved administrations—we understand fully the Welsh Government's position on that, and we don't disagree with it. But either way, we need a research base that's able to compete, and that's why the investment recommendations of Reid are so important.
Sian Gwenllian AM: Yes. I think Reid was saying that there may be pots of money out there that aren't being accessed at the moment by Welsh universities. Are you able to help then within that process?
Bethan Owen: One aspect that we do intend to fund—and this is from Diamond, as well as Reid—is to place funding back into the system for innovation. We're consulting currently, with the intention, if the funding is available to us, clearly, in the year 2020-21, to provide £15 million back into the sector in innovation funding. That's funding that we had to take out when the new fee system came in. That is part of promoting the innovation, and part of the research portfolio as well.
Sian Gwenllian AM: Is that part of the UKRI funding? There is some £7 billion in the hands of that organisation, as I understand it, and there may be some possibilities there too.
Bethan Owen: That £15 million will be money that comes from us, but the intention is that the money will go in in order to improve universities' ability to access that funding from UKRI. So, Innovate UK would be the part of UKRI—and that we improve our ability to get funding from outside Wales. And, then, Graeme Reid says the same thing in terms of research—that we need more funding to do the same thing there.
Dr David Blaney: And, then, there's also the recommendation from Reid that Wales needs to be better embedded in the conversations that are going on on a UK-wide basis, so the Welsh Government has established a presence in London in respect of research, and we have a colleague in HEFCW who is fractionally embedded in the United Kingdom Research and Innovation specifically to respond to that recommendation. And that is actually paying dividends; we are strengthening our relationship with the UK machinery, which is essential if we're to understand where they're heading and what their funding bids are all about, and even to be able to influence those.
Lynne Neagle AM: Okay, Siân?
Sian Gwenllian AM: So, as far as research is concerned, it's not all doom and gloom.
Dr David Blaney: Yes, I mean, you know, things are looking up. There is money coming in and if the Government, as it is able to, can find money and can invest in this area, then that will help.
Sian Gwenllian AM: Thank you very much.
Lynne Neagle AM: Thank you. Just a couple of questions from me, then, before you close: what is your recent work on the 'basket of goods' show regarding student accommodation costs? And have any institutions used their 2019-20 fee and access plans to make commitments to more affordable accommodation for under-represented groups?
Dr David Blaney: First of all, on the basket of goods, the work we're doing now—we're currently in train in terms of analysing the data in respect of the basket of goods, so this is slightly premature, but our early look at the data indicates that there are no increases in costs, accommodation or other, that would cause us concern. So, it doesn't look like institutions are succumbing to the temptation to up their income streams from other costs. So, that's good. In terms of the fee and access plans, the sector has committed over £28 million of investment in student support-related activities from the fee and access plans, and that includes, in many instances, bursaries that are designed to help students cope with the costs of accommodation and the cost of living more generally. The support is provided for a range of purposes, but a couple of examples, just very quickly: Trinity Saint David, since we've talked about them a lot today, they offer £1,000 bursary to care leavers, which is in addition to local authority support for care leavers. Bangor also offer targeted support for care leavers, and these are often also extended, so they apply not just in term time, but throughout the holiday time as well, because people still need to live during the holidays. So, there is investment going in from the fee plans in that support.
Lynne Neagle AM: Okay, thank you. And just one final question from me then, going back to Trinity Saint David: are you concerned that the governing body of Trinity Saint David has taken decisions that have led to that material uncertainty, and is that unprecedented in Wales?
Dr David Blaney: My view is that the decisions that the governing body made were, in our view, perfectly rational decisions to have made, given the information they had at the time. So, what's happened is that a number of unforeseen events have arisen, which, actually, I don't think it's reasonable to expect them to have foreseen, and it's just a combination of these that has caused the cash pressure. So, I don't see this as a governance failure, and they are engaging with those challenges.
Lynne Neagle AM: Okay, thank you. We've come to the end of our time, so can I thank you both for attending and for answering all our questions this morning? You did say that you would give the committee a note on reserves for the last four years, so we'd be grateful if we could receive that. And, as usual, you'll be sent a transcript to check for accuracy following the meeting. Thank you, again, for your time this morning.
Dr David Blaney: Thank you.
Bethan Owen: Thank you very much.
Lynne Neagle AM: Item 3, then, is papers to note. Paper to note 1 is a letter from me to the Deputy Minister requesting further information for our scrutiny of the Children (Abolition of Defence of Reasonable Punishment) (Wales) Bill. Paper to note 2 is a letter from me to the Children's Commissioner for Wales also asking for further information to pursue our scrutiny of the Bill. And paper to note 3 is a letter to the Minister for Education asking for an update on the framework for young people educated other than at school. Are Members happy to note those? Thank you. Item 4, then, is a motion under Standing Order 17.42 to propose that we resolve to meet in private for the remainder of this meeting and for the whole meeting on 10 July. Are Members content? Thank you.
Dr David Blaney suggested that the main challenge was finding the money. Although there was an additional £6.6 million allocated for research very recently by the Government, that was not sustainable and certainly not enough. Also, the Welsh government had recently issued their own vision for research and innovation and more investment in the Welsh research base would make the Welsh universities be more competitive in accessing funding at a UK level.