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No 6526

Wednesday 14 November 2018

Vol cxlix No 8

pp. 114–120

Report of Discussion: Tuesday, 6 November 2018

Tuesday, 6 November 2018

A Discussion was held in the Senate-House. Deputy Vice‑Chancellor Professor Simon Franklin was presiding, with the Registrary’s deputy, the Senior Proctor, the Junior Pro‑Proctor, and three other persons present.

The following Report was discussed:

Report of the Council, dated 31 October 2018, on the use of external finance in accordance with the authority granted by Grace 2 of 10 May 2018

(Reporter, 6522, 2018–19, p. 63).

Dr S. Watson (Faculty of Education and Wolfson College), read by the Senior Proctor:

Deputy Vice-Chancellor, the Council has already approved of raising external finance by issuing bonds of up to £600 million. And I understand that this Discussion is about the use of the funds raised. But I thought it important to explain that there are potential societal affects as a result of this kind of debt financing, since no Regent or any other person has done so previously, and that a stated aim of the University is to benefit society and not to act in a way that is detrimental to it.

I will try and explain as briefly as I can.

My starting point is a simple incontrovertible truth about a national economy, that is, the sum of individual deficits must equal the sum of individual surpluses. To illustrate this, if there was just me and the Deputy Vice-Chancellor on a desert island where we agreed on an issued currency, if I was in deficit, that is earning less than I spent, necessarily the Deputy Vice-Chancellor would be in surplus, earning more than he or she spent.

Within the closed monetary system of a national economy no one other than the state can create or destroy currency. Therefore, the sum of deficits must equal the sum of surpluses.

Let us now aggregate. If we consider three aggregations, as is the practice in national accounting, public, private, and overseas: ‘public’ represents government spending and revenues, ‘private’ represents household and business spending and income, and ‘overseas’ represents imports and exports. Using the same reasoning about individual deficits and surpluses, the sum of public, private, and overseas deficits and surpluses must be zero.

The UK economy generally has an overseas deficit, we import more than we export. Therefore, the rest of the world is in surplus with the UK economy. In managing an economy, a government should ensure that the private sector is running a surplus so that people, households, and businesses can accumulate savings to cope with changes in the economy. The normal operating condition of public finances is in deficit. This ‘sectoral balance’, as it is called, reveals that a national economy is nothing like the economy of a household or business.

But UK governments over the last forty years have become preoccupied with treating the national economy as a household and a key economic mission has been in balancing the books or reducing the deficit or recently in its more extreme form, ‘austerity’.

What is the effect of this? Overseas deficits have remained broadly constant, so reductions in public sector deficits have resulted in the reduction in private sector surpluses. This reduction in private sector surpluses does not affect the sector evenly. The poorest households become increasingly indebted and the credit is provided by the wealthiest in the private sector. Austerity exacerbates a private debt-based or rentier economy, where existing wealth is expanded through debt interest and rent. As the state withdraws from using fiscal policy, in other words, as it stops investing, private debt and credit become the dominant economic form.

So, as government attempts to reduce public deficits, by cutting spending on things like higher education, the poorest in society are under increasing financial pressure. Meanwhile universities are forced to raise finance in other ways and this simply adds to the problem.

There is a further consequence of public deficit reduction that was recognized by both Marx and Keynes. When conditions lead to a private debt-based economy or rentier economy, the investor is less likely to invest in the productive economy. That is in enterprises that deliver the things that we need as a society. In a debt economy demand is fickle, it is reliant on household debt and inflated assets. The risk of making profits from lending is much less than investing in the productive economy. Investing in manufacturing, for example, becomes much less attractive, it is much more attractive to live off interest and rents. This has an impact on jobs and on the creation of long-term meaningful work. This contributes to undermining liberal democracy (see for example the EU referendum result, or the US presidential elections in 2016).

So, there is a great deal of demand for debt, it is bought and sold and traded like a commodity. Financialization is the business of using low-risk low-return debts such as that generated by the University’s bond scheme and using it to construct portfolios that feature a balance of high-risk speculative investments and safer investments such as government bonds. Financialization involves securing marginal profits from speculating on debt, interest, and risk using sophisticated financial products. This kind of financialization led to global political crises in the 1920s and a major financial crisis in 2008 (among others). By entering the debt economy, the University contributes to the problem.

It may seem expedient to the Council to proceed with this proposal since the University must sustain its work. I accept that the decision has been made. However, I just wanted to explain that this is not a politically or economically neutral endeavour. From our privileged position we have a duty to offer moral and intellectual leadership and must at least be aware of what we are complicit to in issuing over £0.5 billion of bonds. I welcome the Vice-Chancellor’s commitment to more robustly challenging government’s higher education policy, but we must match this with our actions.

Professor G. R. Evans (Emeritus Professor of Medieval Theology and Intellectual History), read by the Senior Proctor:

Deputy Vice-Chancellor, Grace 2 of 10 May 20181 gave Regent House permission to the Council ‘to arrange further external finance from £300m up to a total of £600m’.2 So it was the Council which approved Cambridge’s decision to proceed with a Bond issue of up to £600m at its meeting of 21 May 2018, as the present Report notes.

The Report whose recommendations the Grace approved was published in April 2018, as the Report of the Council on external finance for income-generating projects including housing solutions in the non-operational estate.3 As well as seeking ‘authority in advance to arrange, on the advice of the Finance Committee, external finance for income-generating projects up to a total additional amount of £600m’ the Report, which carried a Dissenting Note from two members of the Council, discussed possibilities for spending on ‘non-operational estate’.

‘Non-operational estate’ turned out to mean building which was not for any purpose connected with the University’s teaching and research, for example development of the old Press Mill Lane Site for commercial gain and ‘the commercial research development strategy at West and North West Cambridge’.4 In the Discussion of this Report on 2 May, Professor Maskell, speaking as the Senior Pro-Vice-Chancellor, argued for spending on ‘non-operational’ projects in the expectation that they would make money and could ‘deliver financial returns capable of meeting interest and principal repayments on a bond issue’, for the University he said:

needs capital to fund other major projects and developments. These include the provision of further housing for staff, nurseries, the potential commercial elements of development schemes such as Old Press Mill Lane, the development of commercial research facilities at West Cambridge.5

The new Report is treading carefully and protecting the Council’s back in seeking to create a Special Ordinance, with the necessary Regent House approval. That may become important, for the Regent House is now being asked to Grace a requirement that the Council should spend the proceeds of the Bond solely on ‘income-generating projects’, and expressly not on anything directly related to teaching or research. The Council would:

be bound by a Special Ordinance that would restrict the application of the bond proceeds to income-generating projects, such that the approval by Grace of the recommendations of a Report to the Regent House would be required to enable the proceeds to be used for another purpose.

The Recommendation to be approved is as set out in the Appendix to the Report and begins with the stipulations that ‘projects’ must ‘form part of the non-operational estate; be ‘income-generating’ and ‘meet appropriate thresholds of commerciality’. This goes significantly beyond the basis on which the enlargement of the Bond to £600m was approved. It would seem to allow the Regent House an opportunity to vary this requirement only through change to the Special Ordinance initiated by the Council (though with of course the possibility of a 50-member Grace).

I am sure the University has taken ample legal advice on the implications of all this for its charitable status and I am well aware of the immense complexity of the rules. But what is projected is surely clearly ‘trading’? It seems plain from the wording (‘non-operational’) put before the Regent House that this is not likely to count as ‘primary purpose’ trading, though perhaps it could count as ‘ancillary’. Raising money to pay the interest may prove hard to separate from making money by way of profit but the term used is ‘income-generating’. In the case of ‘commercially-oriented trades where a significant risk to their assets would be involved’ charities must use trading subsidiaries.6 I cannot find any information in the present Report about the vehicles the Council intends to use to operate these ventures. It is merely to ‘arrange’ the external finance.

The Office for Students has taken over the task previously carried out by HEFCE as Regulator for exempt higher education charities. Its ‘guidance’ is on its website.7 Has the Council consulted with it about the acceptability of the proposed way forward?

Professor R. J. Anderson (University Council, Department of Computer Science and Technology, and Churchill College), read by the Junior Pro-Proctor:

Deputy Vice-Chancellor, I am a member of Council and signed the Report under discussion here.

I make the following remarks in a personal capacity.

I did not support the bond because, after the debacle in North West Cambridge, I did not have confidence that the University would use the money wisely. Recall that this House was promised that North West Cambridge would be profitable; now that the estate is largely built and in the process of being occupied, we can see that, once it is fully occupied, the annual income will be about £9m and the annual expenditures, including bond interest, about £13m. Our investment of over £400m is not yielding a return of five percent a year, as one might have gathered from a series of reports, but a return of about minus one percent a year. This is now justified with the argument that postdoc salaries, and thus rents, will rise over time, moving the project into profit. Never mind that postdoc salaries have fallen in real terms over the past decade.

So there is a real risk that the bond money will be wasted. There is talk, for example, of a shopping centre in Mill Lane – just as the demand for even prime retail space is collapsing thanks to the move online. All sorts of other glitzy projects will no doubt be pitched to the senior management team.

Under the circumstances, we need a mechanism to impose some basic discipline. The proposed Special Ordinance is not perfect, but it is the best that could be done given the current constitution of the Council, and I supported it for that reason.

Internally, there are senior people who would love to spend the money on academic buildings, where we have enough declared projects to absorb our capital budget and likely donations for over twenty years. The Regent House will have to remain vigilant, or our grandchildren will come to regret it.