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Ninth Report of the Board of Scrutiny

The BOARD OF SCRUTINY begs leave to report as follows. A glossary of terms used is in Annex A.

Key Issues

1. The most important issue currently facing the University is the need to maintain itself as a world-class institution while eliminating the budget deficit.

2. The Board believes that correction of the deficit should take place in the context of a coherent long-term strategy for the University as a whole. The Board recognizes that the Council, the Schools, and several committees are currently engaged in discussion of issues relating to the future direction of the University. So far, however, there has been no integrated University-wide discussion on such issues, as has been recently undertaken at Oxford and UCL. The Board welcomes the consultation taking place at School level on such issues as student numbers and the mix between undergraduates and postgraduates as well as between foreign and home students. But the Board believes that this should be only the beginning and that other options should be the subject of wide-ranging debate before the Regent House. These could include the University-College relationship as well as the disposal of parts of the estate and the range of activities of the University and its subsidiaries. It is not for the Board to say what should be done, but we are convinced that the wider University should be thinking, and thinking deeply, about such matters. In the Board's view it is much better to take the necessary hard decisions now rather than have them forced upon the University at a later stage.

3. The Council's strategy appears to be that individual reforms should be introduced separately; as a result, their broader implications are not always fully considered and are not fully appreciated by the Regent House. The Board considers that this strategy is, in the long term, likely to be harmful to the University's cohesion and to the morale of its staff.

4. The Council recognizes that the current proposals to deal with the deficit are inadequate to the task. The devolution of budgetary responsibility (via the RAM) places pressure on Schools and institutions to improve their financial position, but current policy is that the minimum required improvement is 'capped' at 1% of Chest expenditure per year. In the short term such economies will not produce sufficient savings to balance the books. Moreover, it will be important for morale that Schools respond positively to these pressures, not simply make 1% cuts across the board.

5. The RAM is one tool with which to tackle the deficit. But the Board continues to be sceptical about the RAM. It does not, in fact, attribute income on an 'as earned' basis and the Board fears it may create inappropriate incentives for some Schools to increase numbers of students. The Board remains concerned by the apparent absence, through the RAM or otherwise, of an adequate mechanism to ensure that the central administration is efficient and cost-effective.

6. The Board welcomes moves by the University towards planning and budgeting which integrate Chest and non-Chest income and expenditure. The Board sees the logical and appropriate conclusion for this to be for both the annual abstract of accounts and the annual budget (Allocations Report) to be on the same basis, including both Chest and non-Chest expenditure. We recommend, in any event, that in order to comply with accounting standards fully consolidated accounts should be prepared for 2003-04 including CUP as well as UCLES.

7. Critical decisions will be required over the coming few years about the development of West and North-West Cambridge and the use of existing central sites. The Board proposes that the University Estates plan should be made widely available so as to develop understanding of the strategic options and proposals.

8. Those few changes on the governance front that have taken place over the past year have been generally welcomed by the Board. The Board reiterates its view that a further major attempt at reform that failed would do the University great harm. For this reason the Board has proposed and remains firmly of the view that any substantial future legislative proposals should emanate from a body independent of the Council, preferably an Occasional Syndicate established under Statute A.

Introduction

9. The Board of Scrutiny forms part of the official mechanism for ensuring that the University is run in a way that is effective, transparent, and accountable to the Regent House, the University's governing body. The Board was created following a recommendation in the 1989 Wass Report,1 in which it was envisaged that 'members of the Board would see themselves as representatives of Regent House opinion'. The Board has a statutory obligation 'to scrutinize on behalf of the Regent House': the Annual Report of the Council; the abstract of the accounts of the University; and any Report of the Council proposing allocations from the Chest (of which the annual Allocations Report is by far the most important).2 In addition the Ordinances include the Annual Report of the General Board to the Council as within the remit of the Board. Importantly, in carrying out their scrutiny of these documents, the Board has the right 'to examine the policies of the University and the arrangements made for the implementation of those policies'.3

The work of the Board in the past year

10. In carrying out its functions during the academical year 2003-04 the Board of Scrutiny met fortnightly during each Full Term, with several extra meetings during May and June to finalize its Annual Report. A list of special meetings and visits is given in Annex C.

11. In performing its task on behalf of the Regent House, the Board has of necessity to ask difficult and sometimes awkward questions of members of the University. It is heartening to record that we have experienced nothing but courtesy and co-operation from all those involved and that documents we have requested have been made available to us without difficulty. The Board expresses its thanks to all concerned.

Financial matters

12. The University's financial affairs are complicated and can appear arcane to those not immersed in the minutiae. At present, it is particularly important that members of the Regent House should have an accessible account of the current financial issues. Hence financial matters will dominate this Ninth Report.

Overview

13. According to the current Allocations Report,4 the accumulated Chest deficit since 2000-01 and up to 2007-08 will be £71.2m. This compares with general reserves of £396m.5 The Board sees nothing inappropriate in spending reserves to this degree for a period, subject to the vital proviso that there is an expectation that, at the end of the period, the University will be in a position to maintain itself to the standard it has set. In other words, this spending must be used to create the opportunity for the University to reassess the range of its activities and if necessary to take hard decisions about them. The Board considers it vital to ensure that this level of spending from reserves does not simply defer the selection of priorities and appropriate activities.

14. The deficit first developed in 2000-01. Some of its principal causes were listed in the Seventh Report of the Board.6 Since 2001 the University has set up the Finance Working Party and received its Report, and has developed a RAM which is beginning to be used in earnest. These measures have not yet had a significant impact on the deficit. Notwithstanding increased income and increased funding from HMG, the deficit has increased. This is in part because of the reversal in the worldwide equities markets and the knock-on effects of the Assistant Staff Pension Scheme, discussed below. All this underlines the necessity for the University to face up to its financial constraints, to address the strategic issues and to make hard decisions. The University needs to ensure that it protects its core areas and those at which it excels, while cutting its peripheral activities and areas where its performance is less good.

15. The principal current proposal to reduce the deficit is effectively by imposing cuts of up to 1% across all Schools except the School of Clinical Medicine.7 While the Board believes that there is much to commend the RAM, as argued in the Eighth Report we do not believe that the RAM should determine the University's strategy.8 The Board fears that it may produce results in which all activity is nibbled away slowly. The Board does not consider that this is in the best interests of the University, since it precludes the possibility of savings being made selectively in a University-wide context. The Board awaits the draft strategic plan for the University being prepared by the PRC9 and the deficit reduction proposals promised by the Council for the end of the Michaelmas Term 2004.10

16. As stated in the Allocations Report, the critical over-riding issue is the recruitment and retention of excellent academic staff in the light of increasing global academic mobility and competition.11 The University needs to protect its RAE rankings to ensure that current levels of government and research funding are retained. That means that, among other things, the University needs to pay academic staff more. The financial projections, however, allow for average increases only at the rate of general pay inflation, which is likely to be uncompetitive compared with the rewards offered by other institutions seeking to recruit staff.

17. The Board notes that the Council sees the prospective income from top-up fees as a potentially important source for addressing the deficit, although it rightly notes that this is subject to conditions and to disbursement of bursaries and other offsets.12 The Board is also aware of the deteriorating financial position of many Colleges. It believes that the aggregate deficit of the Colleges (excluding Trinity) may be commensurate with that of the University. The division of any increased fees will be subject to future negotiation. Moreover, since a significant part of that income is pre-committed to bursaries, we consider that the University should not expect top-up fees to solve our financial difficulties.

18. The University is proposing to make distributions from the Amalgamated Fund, its main endowment fund, in excess of accumulated income.13 The Board is of the view that, as a matter of trust law, such excess distributions are capital and may not be treated as income. In the case of restricted funds with permanent capital it is at present unlawful for a capital distribution to be spent. As a matter of standard accounting treatment, the Board would expect the capital dividend not to be treated as income for accounting purposes and therefore that the projected University deficit on the Chest for 2004-05 will be higher than currently projected by some £0.6m. There will be a further diminution of £2.7m in the income of University trust funds which are outside the Chest.

19. For all these reasons, the Board considers that the financial projections contained in the 2004-05 Allocations Report will prove unrealistic and the deficit will be greater than projected.

Abstract of Accounts 2002-03

20. There has been steady real growth in research and fee income and a reduction in other operating costs compared to the previous year. In consequence, the Abstract of Accounts for 2002-03 showed a small improvement in the reported deficit14 from £3.8m to £2.2m at a time of rapidly increasing staff costs.

21. At the Discussion following the publication of the Abstract of Accounts for 2002-03, the Chairman of the Board welcomed the reduction in the deficit on the Chest but indicated that the problem of the deficit had not been solved.

22. When any organization undergoes external financial audit, the hope and expectation is that the auditors will formally give their opinion that the accounts 'give a true and fair view of the state of affairs' of its financial position. If the auditors will not do so, this may be seen externally as a serious matter. The Board thus remains concerned that for the second consecutive year the auditors have not been able to give a 'true and fair' opinion due to the failure to provide consolidated accounts for the University that include UCLES and CUP. The Board believes that an amendment to Statutes is not necessary for the consolidation required by Accounting Standards; this belief has not been challenged by the central bodies.15

23. The Board recommends that:

I. The University should from 2003-04 prepare fully consolidated accounts including CUP as well as UCLES.

The RAM

24. The RAM has evolved over eight years and the present version was presented to the Regent House in November 2003. As with any complex and politically sensitive system, key features have evolved over the years and understanding its effects has sometimes been difficult. The Board therefore wishes to summarize what it sees as key characteristics of the RAM. Readers are also particularly directed to Professor Minson's excellent introduction at the beginning of Annex A to the Report to the University.16

25. The RAM was originally intended 'as a tool to inform resource allocation and budgeting' and 'to assist decision-making'.17 However it has de facto evolved into the major means of forcing economies. It is a RAM formula that determines the savings target of each School.18

26. It was also intended that the RAM would make 'transparent the assumptions about notional attribution of income and expenditure' and that all income would be attributed to Schools and institutions 'as earned'. While the RAM reflects certain income 'as earned', notably the HEFCE 'QR' research income and overhead income attributable to Departments, this is not true of the HEFCE 'T' teaching income. As observed in the Board's Seventh and Eighth Reports, the top-slicing of the College fee and the particular way the HEFCE 'T' subject weightings are applied in the RAM results in an implicit cross-subsidy between Schools. Moreover, the HEFCE recently significantly revised its subject weightings but the RAM for 2004-05 uses the weightings for 2003-04.

27. The necessary calculations are formidably complicated. But it appears to the Board that income is attributed in ways that mean that some Schools 'earn' materially more from an extra student than the University would gain.19 Those Schools' additional gain would be at the expense of other Schools. It may thus become necessary to prevent Schools that plan to increase their income by an expansion of student numbers from doing so by some form of administrative over-ride. There may be other such unintended or perverse incentives created.

28. Expenditure in the Central Administration and Services is supposed to be cut at the same rate as that in the Schools, but in practice new-needs bids by the UAS seem to have offset much of the resulting impact.20 There is still no independent basis for controlling central costs.

29. The RAM does not include Colleges. Hence there is no consideration of the social, housing, and academic benefits and costs within Colleges. Further, while the Colleges collectively receive the QR income for CTOs who were entered into the RAE, this QR income is not directly passed onto a CTO's individual College. The Board notes that this reduces the incentive for Colleges to employ research active CTOs.

30. In reality the RAM is fundamentally a political exercise, whereby negotiation has generated a baseline of funding for Schools and other institutions that is acceptable to all of them. The sensitivity of the RAM to input parameters and the fact that no satisfactory mechanism has been found to determine the appropriate level of funding for academic services and other 'non-School' institutions, further emphasize the fact that it is incorrect to view the RAM as a simple income distribution and cost attribution model.

31. The RAM is essentially a parallel exercise to the annual budget for the University. The Board recognizes that this is a consequence of progressive development, but considers that if practicable the two should be part of a single coherent process. We understand that this is intended. The Board welcomes the commitment by the Council that the annual Allocations Report for 2005-06 will anyway include both Chest and non-Chest expenditure so as to give a full view of what resources are being committed21 and suggests that if practicable this should be prepared on the same basis as the consolidated accounts of the University. The Board notes that it proposed this in its Seventh Report22 and still considers it critical to effective management and cost-control. As stated there 'The case for 'joined-up budgeting' is as strong as ever.' A combined budget should identify how the net surplus/deficit arises between the Chest, trust funds, UCLES, and similar major headings. It should also give appropriate information at School level and preferably at Departmental level, accompanied by a clear statement of the associated basis for the attribution of income and expenditure.

32. The Board recommends that:

II. The University should, as promised, from 2005-06 move to budgeting that consolidates Chest and non-Chest incomes and expenditures and that if practicable is directly comparable to the financial statements of the University.

III. The University budgeting process and the RAM should be parts of a single coherent process. If practicable, this should occur as intended from 2005-06.

IV. Prior to finalizing the RAM to apply for 2005-06, the Council should consider whether the top-slice for College fees is distorting the use of the RAM.

V. The Council should, in consultation with Colleges, consider how strategic decisions can best be made so as to take account of expenditures by Colleges.

Allocations Report

33. The most significant variation highlighted in the estimates for 2003-04 in the Allocations Report is the £9.5m extraordinary payment into the Assistant Staff Pension Scheme during 2003-04 following the triennial actuarial review as at July 2003 which was published in April 2004.

34. The likely existence of a deficit in the Assistant Staff Pension Scheme was noted in the Board's Eighth Report. It appears that the Finance Working Party did not consider this significant area of staff expenditure at all in its deliberations. The Board notes that less than 7% of the increased future contributions are required by the deficit on the pension fund and that 93% arise simply to pay for normal accrual of pensions benefits in the absence of a large surplus.23

35. The failure to address the issue in a timely way has led to undue optimism in planning and - because of the late announcement of the increase in staff contributions - has adversely affected staff relations. The Board believes that the administration could have begun alerting staff to the likely shortfall in the fund twelve months earlier and could if necessary have undertaken an earlier actuarial review than required (albeit at a cost).24

36. The Allocations Reports for 2000-01 and 2004-05 show that full time equivalent staff numbers over the past four years have moved as follows:

 1999-20002003-04Increase
Academic, clerical,
research, and
technical staff
 6,173 7,071 15%
Academic-related
and other
administrative staff
 429 725 69%

The Board notes the disproportionate increase in academic-related and administrative staff and regrets that information does not seem to be available within the University on the detailed make-up of this increase. The Board wishes to be reassured that this increase can be justified on grounds of efficiency and cost-effectiveness, and therefore welcomes the decisions by the Council to review the workings of the Personnel Division and the Research Services Division.

37. The projected Chest deficit for 2004-05 is estimated to have increased from £3.5m to £11.8m, largely because of the increased cost of assistant staff pensions. The Board notes that the deficit would be considerably higher were it not for a £4m special dividend from UCLES, for severe cuts in equipment and maintenance budgets and for use of Departmental reserves which in some cases may shortly be exhausted.25 The Board would like some transparency on when these latter short-term measures are to be reversed, since they seem to the Board not to be tenable in the medium term.

38. The Board supports the Council's view that 'short-term reductions in expenditure are not possible without seriously damaging the University's excellence'.26 We look forward to seeing the report of the Council 'by the end of the Michaelmas Term 2004' with its plan to bring the accounts into balance within five years.27 The Board hopes that the Council will not draw back from tackling major strategic issues affecting the cost base and that a real debate, as advocated in the Board's Eighth Report and as adopted by Oxford and UCL, will take place in the University about the future areas of operation of the University and its subsidiaries.

39. The statements of the intention to reverse the deficit within five years28 and 'generate sufficient funds that would allow further investment including greater rewards for staff and increased flexibility in recruitment'29 sit oddly alongside the statement that 'there will be targets each year to reduce expenditure (or enhance income) which are projected to be restricted to one per cent of each School's direct expenditure'.30 The Board believes that such an arbitrary limit to cuts in expenditure should not be stated thus in the current financial environment and could encourage complacency.

40. The Board is concerned that the politically driven structure of the RAM and the projected restriction of savings may together mean that economies are achieved by many small cuts. This could lead to widespread low morale without generating the funding needed for priority areas.

41. Concern remains about the provision of funds for maintaining the estate. The assumptions about the availability of non-recurrent funding for certain large projects need to be reviewed. The Board welcomes the emphasis on energy efficiency in new buildings in the light of increasing utility costs.

42. The projections of growth in overseas student numbers at undergraduate and postgraduate level do not appear to incur any additional associated costs. It is hoped that these, particularly the real cost of provision of accommodation, are being investigated and that a thorough analysis of the costs and benefits is undertaken. The aggregate deficit of 30 of the 31 Colleges in the year 2003-04 may be commensurate with that of the University, so it should not be assumed that they can find the necessary finance.

43. The Board recommends that:

VI. The University should be clear how it proposes to find and invest resources to maintain and enhance Cambridge as a world-class university.

VII. Finances should be managed so that, should top-up fees become available, they can be applied for enhancement of the competitiveness of the University.

VIII. Financial proposals should expressly identify aggregate student numbers and these should be agreed with the Colleges.

Investment management

44. The University is an Exempt Charity and is not currently regulated in respect of its investment activities. Recent proposals from the Government,31 if enacted, will have the effect of requiring a regulator (possibly the HEFCE) to do all it reasonably can to increase compliance by the University with charity law. It is in any event relevant for the University to be aware of the views of the Charity Commission, since these reflect the Commission's understanding of charity and trust law, and this law applies to the University. An extract from the advice of the Charity Commission is given in Annex D.

45. The Abstract of Accounts shows the University as having some £294m of 'permanent capital' in restricted funds.32,33 Of these £285m are invested in the Amalgamated Fund.34 The term 'permanent' means in this context that as a term of a trust the capital may not be spent;35 and it is an established principal of trust law that in normal circumstances associated capital gains are to be treated as capital. The Amalgamated Fund has in recent years been distributing dividends in excess of the underlying income of the Amalgamated Fund by utilizing income accumulated in the past, and in 2002-03 this involved distributing 130p per unit compared to underlying income of 94p per unit. In consequence accumulated income had fallen by 31 July 2003 to an equivalent of around 14p per unit. Income into the Amalgamated Fund from its underlying investments for 2003-04 is estimated at 100p per unit and distributions at 116.34p per unit, so the accumulated surplus has been exhausted in the 2003-04 financial year. The same rate of distribution has been provisionally estimated for 2004-05.36 In the opinion of the Board the proposed distribution to the extent it is in excess of accumulated income is, both in terms of standard accounting and in terms of trust law, a distribution of capital.

46. Unless changes are made to University Statutes to allow a move to a total return basis of distribution, trusts with permanent capital holding units in the Amalgamated Fund are now required to limit their expenditure to the underlying income. Any excess distribution is capital and should be reinvested in units in the Amalgamated Fund. It would seem more sensible in practice for the Amalgamated Fund to limit distributions to the available income. Trusts which are allowed to spend capital can in any event do so by selling units in the Amalgamated Fund, and so do not need the extra capital distribution.

47. Historically the University has taken into income the distributions made by the Amalgamated Fund rather than the income received by the Fund from its underlying investments. It seems to the Board that this accounting treatment may be misleading. We suggest that the Council should, as a matter of policy, determine that the Amalgamated Fund will distribute the amount received as income in any year.

48. The Board recognizes that effective functioning of some Departments may depend on a higher level of distribution than the above analysis would permit. We suggest that if the University wishes to address this, it can either:

(a) seek a statutory amendment to allow the use of a 'total return'37 approach for permanent trust funds as has already been effected by one Cambridge College and is being considered by several others. Registered charities are able to seek approval for a move to a total return approach from the Charities Commission;38 or
(b) split the Amalgamated Fund into two parts, one with an objective to maximize total return and the other with an objective including maximization of income.

49. In any event we regard the proposed distribution policy of 116.34p per unit for 2004-0539 as high. It compares with projected income of 100p; and represents a rate of distribution of 4.67% on 31 July 2003 values,40 which is higher than most recent projections of long-term UK total real returns.41 Accordingly we question whether this level of distribution is even-handed between past and future beneficiaries as would be expected by the Charity Commission if it were to consent to a total return policy.42 We consider that, if authority is obtained for a total return policy, the proper level of distribution should be determined by the Investment Sub-Committee after taking professional advice, and that the determination should then be published.

50. We understand that the Investment Sub-Committee takes account of the advice of its sole investment manager on asset allocation.43 There is now extensive work available on the theory of asset allocation and several firms offer professional advisory services in this area, with a view to having as high an expected return as practicable for any given level of expected volatility. The Board suggests that, particularly given the views of the Charity Commission on trust and charity law,44 the Investment Sub-Committee should seek express and separate advice on asset allocation. The Board also notes that it is potentially self-defeating to seek advice from a portfolio manager on asset allocation and concurrently to set that manager performance benchmarks that are independent of the conclusion. It is known that a manager measured against any particular benchmark is likely to select an investment portfolio similar to the benchmark portfolio so as to reduce the risk of severe under-performance. If the adviser on asset allocation is also the portfolio manager, the advice on the former is therefore likely to be biased unless there is provision automatically to change the benchmark according to agreed policy changes. At present there is no such provision. We recommend that there should be a separate contract for asset allocation advice, that the advice should be explicit as should the consequent decisions of the Investment Sub-Committee, and that the benchmarks set for portfolio managers should then reflect the asset allocation policy to which they are required to work.

51. Whether or not the asset allocation is independently and expressly determined, the University will (we presume) continue to have separate portfolios of equities for different markets, of bonds and of property. It may also choose to hold other forms of investment such as private equity or hedge funds. The Board suggests that it may be appropriate to employ different investment managers for the larger of these different portfolios (as is already done for property), so as to get the benefit of greater expertise in each sector. The portfolio of US equities (some £45m) and the bond portfolio (£85m) seem to the Board to be examples where this is the case.

52. The Board recommends:

IX. The University should seek statutory authority to enable it to use, as appropriate, a total return policy for investment of its permanent capital.

X. The Amalgamated Fund should distribute no more than its income until statutory authority is obtained for the use of a total return policy.

XI. The Investment Sub-Committee should seek express advice on asset allocation separate from advice on investment selection.

XII. The Investment Sub-Committee should consider appointing specialist managers for the larger segments of the investment portfolio.

The University estate

The University's Estate Strategy

53. The University's Estate Plan was revised in 2003. One of the principal conclusions of the 2003 Plan is that 'The operational estate has grown beyond a sustainable size'.45 The Plan identifies an oversupply of space in the University as a whole, in particular teaching space. It is worth recognizing that the calculation of 'overprovision' depends on space norms which are, of necessity, somewhat arbitrary. However, the predictions of the Estate Plan, based on current projects in hand and planned growth in student and staff numbers, are that the University will have some 27,000 sq.m. (11%) 'overprovision' of space by 2007. The Board understands that the calculation takes no account of teaching and office space in Colleges, and concludes that the true level of 'overprovision' relative to the norms may therefore be much higher.

54. The HEFCE has advised HEIs that they can significantly improve their financial position by a more efficient use of space.46 If the notional overprovision of University space expected in 2007 were eliminated, the University might save around £2.5m a year in servicing costs. It is perhaps worth reflecting that this is a relatively modest saving and that, in general, few University institutions feel they have too much space. Nevertheless, the RAM will provide incentives for institutions to occupy less space. Furthermore, if the University were to be able to let surplus space for commercial use, the financial benefits might be greater: Brown's Restaurant in Trumpington Street is an example where surplus space is already generating income.

55. The Estate Plan is an important document in informing the University's strategy: in our view it provides useful and thought-provoking comments on the University's direction. The Board recommended in its Seventh Report47 that the Council publish a detailed report on its estates strategy; this has not happened. However, the Estate Plan now exists in a form in which it could, and in our view should, be placed on the University's website; the Regent House's attention should be drawn to this by means of a notice in the Reporter. The published plan should be kept up to date.

56. Key decisions about the utilization of central sites, in particular the Old Press Site, the New Museums Site, and the Downing Site, will need to be made within the next few years; and external consultants and internal working parties have recently reported on associated issues, although the Board has not seen those reports. These three sites contain a significant proportion of the University's poorest buildings.

57. If the present size of the estate is unsustainable, then it follows that a decision to develop a major new site constrains options elsewhere. It may well be that development of the North-West Cambridge Site for academic use will have to be balanced by disposal of central property. When the Regent House discussed the Reports on the development of the University's land in North-West Cambridge, the impact on investment elsewhere was not considered. Although these issues are undoubtedly being considered at senior committee level, there is no effective cascade of information even within the Schools directly involved.

58. These are critical issues for the future shape of the University that need to be widely considered before major decisions are made on the future of the central sites and further expansion on the periphery of Cambridge.

59. The Board recommends that:

XIII. The University's Estate Plan should be published on the University website.

XIV. The University should disseminate information more widely on the options for its future geographical shape. This needs to precede consideration of the future of key central sites.

Maintenance of the University's estate

60. The University compares favourably with other HEIs in the UK in all measures of estate condition, suitability, and investment in maintenance.

61. The Allocations Report for 2003-04 envisaged a significant contribution from the SRIF-2 stream of funding towards overall maintenance (approximately £3m of an anticipated £18m). Regrettably the HEFCE rejected all of the projects proposed by the University which would have contributed to 'maintenance'. While it is not the remit of the Board to comment on decisions by outside bodies, we note that the published criteria for SRIF-2 gave the University a reasonable expectation that remedying past underinvestment in building maintenance was within the scope of the scheme. The result is that spending on estate maintenance has not been restored to the level that was anticipated in last year's Allocations Report.48

62. The University has generally adopted a policy of spending around 1.5% of the estimated insured replacement cost (IRC) of the Estate on annual maintenance. Such a policy is in line with recommendations by the HEFCE and the RICS. The relevant figure proposed in the Allocations Report for 2004-05 is nearer 1.0% IRC.49 The Board has previously suggested that, in view of the nature of parts of the estate, 1.5% IRC is a conservative estimate of the spending needed for effective stewardship.50 Nevertheless, the Board has also consistently expressed concern at recent budget deficits and we accept that the University's overall financial position cannot be ignored when setting maintenance expenditure.

63. The Board recognizes that it is sensible to look beyond the headline maintenance figure to assess more clearly whether the University is providing the effective stewardship required. An area for consideration is the extent to which capital spending on estate improvement can be offset against recurrent expenditure. The HEFCE have noted the difficulty in distinguishing between revenue and capital expenditure in assessing estate maintenance.51 This issue assumes a greater importance in Cambridge than elsewhere as a higher proportion of our total spending is capital expenditure: we consistently spend more than twice the sector median on maintenance and building capital expenditure combined.

64. In the medium term the costs of maintaining the estate are expected to rise faster then the University's income, due to a combination of building expansion and above-inflationary increases in building costs. This issue represents a significant challenge for the University in future planning. However, it is of concern that the forward projections in the Allocations Report do not appear to allow for a significant restoration of the building maintenance baseline expenditure to the established 1.5% of IRC norm.52 Unless there is a redirection of capital spend from estate expansion to replacement, we consider that the current level will not sustain the estate condition in the longer term.

65. The Board recommends:

XV. The University should plan to restore its level of spending on maintenance in the medium term.

Governance matters

66. The academical year 2002-03 (unlike the current year) was dominated by attempts to make important changes in the University's constitution. In response to this, the Board called for the creation of a Syndicate to conduct a complete review of its governance arrangements. In reply, the Council said that it would consider establishing a body to review governance matters when the new Vice-Chancellor had had an opportunity to assess the position. The Board accepts the wisdom of this, but it continues to believe that, if further constitutional changes of any magnitude are eventually thought necessary, a Governance Reform Syndicate should be created to plan them. The Board stresses the importance of ensuring that any further proposals for governance reform are properly and carefully prepared and are sensitive to the views of the Regent House.

67. The Board welcomes the moves taken by the Council to create a Buildings Committee, and to rethink and clarify the relationship between the PRC and the Finance Committee.53 This welcome is tempered, however, by the recollection that these changes were among the recommendations of Professors Shattock and Finkelstein in their analysis of the causes of the CAPSA affair, which was published almost three years ago. The changes are important, clearly necessary, and relatively straightforward. The Board questions why it has taken so long for these proposals to be produced.

68. In welcoming the proposals the Board also states its firm view that the constitution of the PRC should be stated in Ordinances. This is a body that makes decisions of great importance, and the constitution of such bodies is a matter that should be determined by the Regent House and should be immediately available. To amend the Ordinances is not such a major task, and the need for flexibility does not justify the constitution of such committees being determined at a lower level.

69. In its Eighth Report54 the Board - echoing a recommendation in the Shattock report on CAPSA55 and the subsequent Special Audit by the HEFCE - called for a statement of accountability processes to be drawn up and published. In its response, the Council said it was then unwilling to do this because the structure of accountability would change if there were further reforms of governance. The Board does not accept the Council's view. In the interests of efficiency, accountability, and transparency, what is needed is a map that shows the lie of the land as it is now - and which can be amended if and when the administrative landscape is changed.

70. The Board believes there is another relatively small change that would increase efficiency, accountability, and transparency. This is to amend Statute K, 9 to allow the Council, and other University bodies, to delegate functions not only to committees (as the Statute in its current form provides), but also to individuals.

71. The Board believes that the rules by which the University's affairs are governed should be clearly set out. In its Eighth Report, the Board recommended that the University should embark on a complete revision of the Statutes and Ordinances.56 The Council responded that any comprehensive revision would be a major task and in any event must depend on the outcome of any future review of governance.57 We do not see these as mutually dependent, and particularly so given that no general review of governance is currently being planned. The Board believes that a major revision of the Statutes and Ordinances is required if current organizational structures, appointments procedures, and administrative practices are to be adequately defined and to have proper legislative authority. Further, the updating of Ordinances does not fully reflect the Graces that have been approved and so creates uncertainty and ignorance.

72. Central to the Board's views on governance is the notion that those involved in decisions share access to reliable advice on legal and constitutional matters. The Board is well aware that, under current arrangements, such advice is not always available when it should be. The Board also notes that there is often a potential conflict between the interest of getting on with management of the University and the interest of understanding and complying with legal obligations. Within the scope of this Ninth Report, examples include the statutory position on consolidation of accounts,58 the legal status and accounting treatment of distributions from the Amalgamated Fund,59 the legal status of the PRC,60 and possible reforms of the system of governance.61 The Board therefore considers that, with the Registrary now responsible for the UAS, it may no longer be appropriate that he should also be the principal channel for legal advice. We recommend that consideration should be given to the appointment of a General Counsel, who would be responsible for furnishing legal advice to the University and its component bodies and who would have lead responsibility for any general review of Statutes and Ordinances.

73. Having reviewed papers and minutes of the Council, the Board takes the view that Council agendas are too long. The Board made similar points in its Seventh and Eighth Reports and recognizes that the Council has made constructive efforts to streamline its business, but the problem remains. The Board considers that a major problem lies in the volume of largely undigested paperwork which the Council has to consider. There seems to be no practice of the University Civil Service producing short summary papers in which options and their consequences are succinctly set out. The Board considers that production of such papers as a matter of routine would greatly enhance the Council's effectiveness as 'the principal executive and policy-making body of the University'.

74. The Board recommends that:

XVI. Any proposals for substantial change in the governance of the University should be developed by a body independent of the Council, preferably an Occasional Syndicate under Statute A.

XVII. Statute K, 9 should be amended to permit the Council and other bodies to delegate functions to individuals.

XVIII. The University should embark on a thorough revision of the Statutes and Ordinances, ensuring that Ordinances fully reflect Graces that have been approved.

XIX. The University should consider creating, by Ordinance, an office of General Counsel.

XX. The organization and paperwork of Council meetings should be streamlined.

Possible changes to the way in which the Board reports to the Regent House

75. The Board has the right of reporting to the University on any matters falling within the scope62 of its scrutiny. Nine years ago, the Board decided to publish a single report each academical year exploring the themes that emerge from the reports listed in the Statutes63 and from the Abstract of Accounts, rather than to produce a series of separate reports on reports. This Ninth Report takes this form.

76. The Board has considered during the course of the past year whether a series of reports might not allow the Board to fulfill its role more effectively. The Annual Report of the Council, for instance, is usually published in mid-December and discussed during January, but under the present arrangements there is no comment from the Board until a report in July. This is plainly less than ideal. The Board would like to respond on the Council's Annual Report and on the Allocations Report before they are discussed. To achieve this, Discussion of these Reports would need to be postponed for a few weeks and the Board of Scrutiny would need to see them sufficiently early to have time to respond thoughtfully; if the Board's responses could be published before the relevant Discussions take place, they would provide a useful guide for the Regent House. The Board is in consultation with the relevant authorities to see whether this timetable can be made to work. If this comes to fruition there would be a Report from the Board in February dealing with the Annual Reports of the Council and the General Board and the Abstract of Accounts.

77. It is not clear yet whether the way the Board reports to the Regent House will be able to adapt to the ideal set out above in the coming year. But the Board considers that it is right to inform the Regent House that there may be changes in the coming year and to hear views from the Regent House when this Report is discussed.

Recommendations

78. The Board recommends that:

I. The University should from 2003-04 prepare fully consolidated accounts including CUP as well as UCLES.

II. The University should, as promised, from 2005-06 move to budgeting that consolidates Chest and non-Chest incomes and expenditures and that if practicable is directly comparable to the financial statements of the University.

III. The University budgeting process and the RAM should be parts of a single coherent process. If practicable, this should occur as intended from 2005-06.

IV. Prior to finalizing the RAM to apply for 2005-06, the Council should consider whether the top-slice for College fees is distorting the use of the RAM.

V. The Council should, in consultation with Colleges, consider how strategic decisions can best be made so as to take account of expenditures by Colleges.

VI. The University should be clear how it proposes to find and invest resources to maintain and enhance Cambridge as a world-class university.

VII. Finances should be managed so that, should top-up fees become available, they can be applied for enhancement of the competitiveness of the University.

VIII. Financial proposals should expressly identify aggregate student numbers and these should be agreed with the Colleges.

IX. The University should seek statutory authority to enable it to use, as appropriate, a total return policy for investment of its permanent capital.

X. The Amalgamated Fund should distribute no more than its income until statutory authority is obtained for the use of a total return policy.

XI. The Investment Sub-Committee should seek express advice on asset allocation separate from advice on investment selection.

XII. The Investment Sub-Committee should consider appointing specialist managers for the larger segments of the investment portfolio.

XIII. The University's Estate Plan should be published on the University website.

XIV. The University should disseminate information more widely on the options for its future geographical shape. This needs to precede consideration of the future of key central sites.

XV. The University should plan to restore its level of spending on maintenance in the medium term.

XVI. Any proposals for substantial change in the governance of the University should be developed by a body independent of the Council, preferably an Occasional Syndicate under Statute A.

XVII. Statute K, 9 should be amended to permit the Council and other bodies to delegate functions to individuals.

XVIII. The University should embark on a thorough revision of the Statutes and Ordinances, ensuring that Ordinances fully reflect Graces that have been approved.

XIX. The University should consider creating, by Ordinance, an office of General Counsel.

XX. The organization and paperwork of Council meetings should be streamlined.

17 June 2004CHRISTOPHER FORSYTH (Chairman)TIMOTHY MILNERJENNIFER RIGBY
  STEPHEN COWLEY SASKIA MURK-JANSEN ROGER SALMON
  NICK HOLMES DAVID PHILLIPSON JOHN SPENCER
  ELISABETH LEEDHAM-GREEN    

Helen Thompson was on leave when this Report was signed.

Annex A: Glossary of terms

Amalgamated FundThe main endowment fund of the University
Assistant Staff Pension SchemeCambridge University Assistants' Contributory Pension Scheme
CAPSANot an acronym but the Latin word for a book storage box, adopted as a name for the project to introduce the University's computerized commitment accounting system. This system developed into CUFS; Cambridge University's Financial Systems.
Chest incomeChest income consists of funding council grants, Home and Overseas fees, endowment income, a share of research grant overheads, transfers from CUP and UCLES, and certain other operating income. Non-Chest income consists of income from trust funds, special funds, the direct cost element of research grants and contracts, and departmental share of overheads, self-supporting accounts, services rendered, and residences and catering.
CTOCollege Teaching Officer [who does not hold a University position]
CUFSSee CAPSA
CUPthe Press Cambridge University Press
EMBSEstate Management and Building Service [of the University]
HEFCEHigher Education Funding Council for England
HEIsHigher Education Institutions
HMGHer Majesty's Government
IRCInsured replacement cost
PRCPlanning and Resources Committee [a joint committee of the Council and the General Board]
PVCPro-Vice-Chancellor
QRA component of the HEFCE grant reflecting assessed research quality in a subject, the value of which is the product of a per capita sum reflecting quality and the number of staff entered into the assessment.
RAEResearch Assessment Exercise
RAMResource Allocation Model [for the University]
RICSRoyal Institution of Chartered Surveyors
SRIFScience Research Investment Fund [managed by HEFCE]
'T' incomeA component of the HEFCE grant to the University which is in support of teaching
UASUnified Administrative Service [of the University]
UCLUniversity College London
UCLESUniversity of Cambridge Local Examination Syndicate

Annex B: Extract from the Wass Report64

5.2 The Board of Scrutiny

5.2.1. In order to make the central bodies genuinely accountable to the Regent House, we propose the establishment of an elected body which would be charged with responsibility for giving detailed attention each year to the three items of University business mentioned in section 5.1.8. above, viz. the Council's Annual Report, the Allocations Report, and the Accounts. This body, for which we propose the title 'Board of Scrutiny', would be constituted by Statute. It would have no executive or legislative power, nor would it be concerned with the routine business of the central bodies; its duty would be to take the lead in scrutinizing the three major items of University business listed above and to advise the Regent House of any issues arising from them that merited discussion or criticism. Members of the Board would be expected to devote more time and attention to these matters than the average member of the Regent House; the Board would have power to call for papers, to request background information from the central bodies and their officers, and if necessary to engage the central bodies in discussion at a joint meeting.

5.2.2. The Council's Annual Report and the Allocations Report would be put up for discussion in the normal way; the same would apply to the Annual Accounts. In considering these matters members of the Board would see themselves as representatives of Regent House opinion; at the Discussion they would speak in that spirit, rather than as spokesmen for any particular constituency. After the Discussion the Council would reply to any comments as expeditiously as possible; in the case of the two Reports, they would promote Graces for the approval of their recommendations. If the Board were not satisfied with the Council's reply in its final form, they would consider whether the matter was of sufficient importance to justify a non placet. If they decided that it was, members of the Board would take the lead in requesting a ballot on the issue.

5.2.3. We have specified the responsibilities of Scrutiny with some precision in order to give a clear account of the role that we see for it in the government of the University. We suggest that the establishment of the Board by Statute should include provision for its duties to be adjusted in the light of experience.

5.2.4. The Board of Scrutiny would consist of the two Proctors, the two Pro-Proctors (i.e. those due to be nominated as Proctors the following year), and eight members elected by the Regent House. The elected members would be persons chosen for their interest in University business and their willingness to devote time to it. We believe that, as with the present Nomination Board, provision should be made to ensure the inclusion of relatively junior members of the Regent House on the Board, and we propose that two of the eight elected members should be persons who are members of the Regent House of not more than ten years' standing.

Annex C: Meetings with the Board of Scrutiny 2003-04

During the course of 2003-04 the Board met with the following University officers:

The Vice Chancellor received a delegation from the Board in November 2003 and was a welcome guest at the meeting of the Board in April 2004.
The Pro-Vice-Chancellor for Planning and Resources met with a delegation from the Board on two occasions.
Two members of the Council and the Registrary met the Board in February 2004.
The Registrary attended meetings of the Board on two further occasions.
The Director of the Research Services Division received a delegation from the Board in November 2003.
The Director of the Estate Management and Building Service received a delegation from the Board in May 2004.
The Director of the Management Information Services Division received a delegation from the Board in May 2004.

In addition, the Board sought and obtained information and documents from the following officers of the University, sometimes on several occasions:

The Pro-Vice-Chancellor for Planning and Resources
The Registrary
The Director of the Personnel Division
The Director of the Finance Division
The Director of the Estate Management and Building Service

Annex D: Advice by the Charity Commission65

A. In using any power of investment, trustees must have regard to the suitability to the trust of investments of the same kind as any particular investment proposed to be made, and of that particular investment as an investment of that kind. They must also have regard to the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.
B. Trustees must from time to time review the investments of the trust and consider whether, having regard to the suitability and diversification points mentioned above, those investments should be retained or varied.
C. Before exercising any power of investment, trustees must (unless the 'exception' below applies) obtain and consider proper advice about the way in which the power should be exercised, having regard to the suitability and diversification points mentioned above.
D. When reviewing the investments of the trust, trustees must obtain and consider proper advice about whether, having regard to the suitability and diversification points mentioned above, the investments should be retained or varied.
E. The 'exception' is that a trustee need not obtain such advice if he or she reasonably concludes that, in all the circumstances, it is unnecessary or inappropriate to do so. For example, where a trustee is himself or herself sufficiently expert in matters of investment, it would be otiose for him or her to obtain advice from someone else.
F. The statutory duty to consider 'suitability' exists separately at the level of asset allocation and at the level of stock selection. The duty will, therefore, include:

**S267** consideration of the proportions of the fund which should be allocated to different classes of investment (asset allocation), and of the overall level of risk;
**S267** consideration of the merits of individual investments within each asset class (stock selection), in terms not only of their economic prospects, but also in terms of their individual contribution to the overall management of risk.

G. In the case of charities with permanent endowment, the duty to consider suitability also involves recognising the implications of the duty to be even-handed between the interests of present and future beneficiaries of the charity. Permanent endowment in the present context means funds which are held on trust for investment, the income alone being applicable for the purposes of the charity.
H. Some permanently endowed charities have been authorised by us to adopt a total return approach to investment. The effect is to give the trustees greater flexibility in the allocation of investment returns between the trust for investment and the trust for application for the purposes of the charity. The trustees are not subject to a rigid code for determining which investment returns are 'income' and which are 'capital', as would otherwise be the case. They are subject instead to a general duty to be even-handed between the interests of present and future beneficiaries in the allocation of investment returns.

1 Reporter, 19 May 1989, p. 617. The relevant extract is given in Annex B.

2 Statute A, VII, 1.

3 Statutes and Ordinances, 2003, p. 123.

4 The annual Allocations Report is the closest the University gets to an annual budget setting out the University's plans for income and expenditure in the year ahead. It is, however, not a budget in the usual sense chiefly but not exclusively because the information it provides is incomplete. It deals only with 'Chest Income' (very broadly grants, fees and some endowment income, and transfers from CUP and UCLES). Non-Chest income consists of trust funds and special funds as well as the direct cost element of research grants and other incidental matters.

5 Abstract of Accounts 2002-03, consolidated balance sheet. Of these reserves, at 31 July 2003 only some £280m was available as marketable investments, with the balance principally invested in property and other tangible assets. The Board notes that some £96m of this amount is in departmental reserves. The Abstract of Accounts contains the principal financial statements of the University which includes its Statement of Income and Expenditure, Balance Sheet, Cash flow, and Recognized Gains and Losses, together with the supporting Notes to the Accounts, the Treasurer's Report, and sundry other matters. As explained in §22, the financial statements that make up the Abstract of Accounts do not include CUP and UCLES.

6 Seventh Report of the Board of Scrutiny §18 (Reporter, 7 August 2002, p. 1306).

7 §6 of the Allocations Report for 2004-05 (Reporter, 26 May 2004, p. 716) makes it clear that 'a 1% annual improvement will be insufficient to rectify the financial position'. However §60 implies that the target of 1% will be a ceiling for 'each year' for which plans are being made.

8 Eighth Report of the Board of Scrutiny, §23 (Reporter, 6 August 2003, p. 1274) and similar sentiments elsewhere.

9 Annual Report of the Council for 2002-03 §4(e) (Reporter, 17 December 2003, p. 335).

10 Allocations Report 2004-05 §9.

11 Allocations Report 2004-05 §7.

12 Allocations Report 2004-05 §§9, 58.

13 See §45.

14 The figure quoted includes the income and expenditure of the University (both Chest and non-Chest) and those of some subsidiaries; it excludes UCLES and CUP. When considering the absolute size of the deficit, it should be noted that during both years the University distributed previously accrued income from the Amalgamated Fund and took this into income in the accounts of the University, as set out for 2002-03 in footnote 25. The deficit would otherwise have been larger.

15 On the Board's reading, Statute F, I, 1(d) requires that the University produce a set of accounts that do not consolidate CUP, but there is no bar to it also producing fully consolidated accounts. The Treasurer's Report (Reporter, 17 December 2003, p. 345) could lead an uninformed reader to assume that a change of Statute is required. In spite of enquiry by the Board, no member of the administration has asserted to us that our interpretation is 'or even may be' wrong.

16 Joint Report of the Council and the General Board on resource allocation: introduction of a Cambridge Resource Allocation Model (Reporter, 19 November 2003, p. 182. http://www.admin.cam.ac.uk/reporter/2003-04/weekly/5941/17.html).

17 Joint Report of the Council and the General Board on resource allocation: introduction of a Cambridge Resource Allocation Model, §§1 and 3(b).

18 Allocations Report 2004-05 §60.

19 The increase in numbers would have to be agreed with the HEFCE in advance otherwise there would be no increase in HEFCE 'T' income, only additional fee income.

20 Allocations Report 2004-05 §38.

21 Annual Report of the Council for 2002-03 §4(d).

22 §7.

23 The actuarial valuation shows contributions required to pay for continuing service as 20.5% of pensionable pay; total contributions for 2004-05 (employer and employee) are 22% of pensionable pay.

24 The Board notes that the Council in its response to the Eighth Report considered that it was 'alarmist' to draw attention to the need to increase pension contributions.

25 During 2002-03 trust funds in aggregate accumulated £3m income in excess of expenditure, but this was due to the distribution from the Amalgamated Fund of dividends £8.4m in excess of underlying income. In future excess distributions will count as capital. See also §45.

26 Allocations Report 2004-05 §13.

27 Allocations Report 2004-05 §9.

28 Allocations Report 2004-05 §9.

29 Allocations Report 2004-05 §7.

30 Allocations Report 2004-05 §60.

31 See http://www.homeoffice.gov.uk/comrace/active/charitylaw/index.html.

32 Note 16. The total investment assets of the University are some £690m.

33 In this Report the term 'trust fund' and 'restricted fund' are used interchangeably to refer to any fund where the donor or other external party has imposed restrictions which cannot be removed by the University by its own action. In contrast a 'designated fund' is one where the University can alter the restrictions by unilateral action. A change in the Statutes of the University can in certain circumstances have the effect of over-riding restrictions in a trust deed or on a restricted fund.

34 The Amalgamated Fund at 31 July 2003 was worth in aggregate £596m.

35 See also Annex D quote G.

36 Allocations Report 2004-05 §34.

37 This term is implicitly defined by the Charity Commission, see Annex D quote H. In essence a trust with permanent capital and the requisite authority is allowed to invest to maximize total return (i.e. income plus capital gains) and to treat a part of the capital gains as spendable income. The trust is required to balance the interests of present and future beneficiaries, which in the case of perpetual trusts within the University is likely to mean aiming at least to maintain the purchasing power of the trust capital in the long-term.

38 See Annex D quote H.

39 Allocations Report 2004-05 §34.

40 The Allocations Report for 2004-05 (§34) quotes a current return of 4.3%, presumably at a recent date. This does not alter our view.

41 'real return' means the return in excess of that required to maintain the purchasing power of the fund.

42 See Annex D quote H.

43 This term is implicitly defined by the Charity Commission, see Annex D quote F, first bullet. In essence it refers to the balance of asset types within the fund (e.g. UK equities, US bonds, UK property, hedge funds, etc.) as distinct from selection of specific investments within one asset type.

44 See Annex D, especially quote F.

45 University of Cambridge Estate Plan 2003.

46 The HEFCE 2003/56 Estate Management Statistics: Annual Report.

47 Seventh Report of the Board of Scrutiny, Recommendation III (Reporter, 7 August 2002, p. 1313).

48 Allocations Report for 2003-04, §36 (Reporter, 18 June 2003, p. 1074).

49 Allocations Report for 2004-05, §41 (Reporter, 26 May 2004, p. 716).

50 Seventh Report of the Board of Scrutiny, §28 (Reporter, 7 August 2002, p. 1306).

51 HEFCE 2002/53 Estate Management Statistics: Annual Report, §53.

52 Allocations Report for 2004-05, Table 1 (Reporter, 26 May 2004, p. 726, line 14); note that this figure includes much other expenditure as well as the £13.5m for long-term building maintenance (§41).

53 Reporter, 26 May 2004, p. 710. And see the Chairman of the Board's remarks at the Discussion on 27 April, 2004 (Reporter, 6 May 2004, p. 659).

54 §§81 and 83 and Recommendation XI; also the recommendation of the Special Audit Report from the HEFCE summarized in §63.

55 Recommendation 16.

56 Recommendation XII.

57 Reporter, 26 November 2003, p. 235.

58 §22.

59 §45, §18.

60 §68.

61 §§66-72.

62 Statutes and Ordinances, 2003, p. 123.

63 See §9 above.

64 Reporter, 19 May 1989, p. 617.

65 http://www.charity-commission.gov.uk/publications/cc14.asp. The text quoted comes from §§ 51, 52, 54, 55, and 75. The paragraph lettering A, B, C, etc. is an editorial addition by the Board for ease of cross reference.


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Cambridge University Reporter 11 August 2004
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