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No 6209

Wednesday 12 January 2011

Vol cxli No 13

pp. 365–408


Report of the Council on external financing for the development of its land holdings in North West Cambridge and other building projects

The Council begs leave to report to the University as follows:

1. The Council on the recommendation of the Finance Committee proposes that the Council be given authority to secure external borrowings to finance the current and future building projects of the University as set out in outline below.

North West Cambridge development

2. The University’s formal policy for the development of its land holdings in North West Cambridge (the area between Madingley Road, Huntingdon Road, and the M11 motorway) has been set out in four Reports (First Report, Reporter, 1999–2000, p. 724; Second Report, 2003–04, p. 149; Third Report, 2004–05, p. 513; Fourth Report, 2007–08, p. 613). The range of uses to be provided for in the planning of the site comprise housing to address the recruitment and retention problems of staff, student accommodation, and academic and University-linked private research space.

3. As set out in the Third Report the guiding principle is that the release of part of the site for market housing will mean that no investment from other University sources will be required although it is not expected that the overall development will release capital for other purposes. The Fourth Report proposed laying down new principles including:

– development should not proceed unless the projected net present value for the project is positive and of a size commensurate with the University’s expenditure and exposure to risk, and gives a sufficient margin to allow for variations in future development costs and capital receipts;

– negative cash flow in the early years of the development would be acceptable.

4. The West and North West Cambridge Project Board is developing a financial appraisal of the North West Cambridge development. The project is evolving and the financial projections and appraisal are not yet final. However the current view is that approximately £200m of funding will be required to cover the negative cash flows in the early stages of the project, which taken with the interest cost of borrowing gives a peak borrowing requirement of approximately £250m before the cash inflows from the project turn positive (Green Paper, paras. 117–129, Reporter, 2009–10, p. 1025). On the current projections borrowings would be repaid from project cash inflows after approximately 35 years.

Capital Plan

5. The Estate Management Division has carried out further investigation of the redevelopment of the New Museums Site and consequent development opportunities, which will be the subject of future Reports of the Council. The preliminary proposals involve relocation of the Department of Chemical Engineering and Biotechnology to West Cambridge, redevelopment of the New Museums Site, and certain works on the Sidgwick Avenue Site, Madingley Rise, and the Old Schools.

6. Investigation has also been carried out on the planned, proposed, and possible projects at other University sites, projecting forward fifteen years, which the Finance Committee and the Planning and Resources Committee have reviewed carefully. Individual projects would be the subject of future Reports of the Council.

7. The future of capital funding by HEFCE is unclear and the opportunity for other capital grants for the Capital Plan may be limited. If the Capital Plan does proceed, then significant funds beyond those realistically possible from external capital grants and from the operating budget would be required. A preliminary estimate is around £100m. However the Council anticipates that there is a strong case for the programme to proceed in order to ensure the future teaching and research capability of the University and expects to make proposals to the Regent House in due course.

8. The Council has agreed that in order to finance the capital investment programme, a capital fund should be established with the aim of supporting an average spend of no less than 3.5% (£25m) of total income on buildings and no less than 1.5% (£11m) on equipment. It is expected that donations in support of the University’s capital programme will continue and the minimum target should be to match spend from the capital fund. The University should be prepared to borrow to allow the Capital Plan to proceed. However, total borrowing should be limited such that the costs of servicing and repaying the loans can be met from within the capital fund.

External financing

9. The University has cash and other liquid financial assets to cover operational requirements and held for application in the short term by departments, trust funds, and affiliated entities. Certain amounts are not restricted or ring-fenced and are available to be advanced to fund approved projects. However the amounts are clearly insufficient to finance the negative cash flows in the early years of the North West Cambridge development or, should it proceed, the Capital Plan. To proceed with these projects the University must look to external finance, as many other Higher Education Institutions and certain Colleges have done.

10. The University has powers to borrow, such powers being made clear in the amendments made to Statute F, III in 2008–09 (Report of the Council on amendments to Statute F, III (Property, buildings, and loans) and Statute J (University Press) (Reporter, 2008–09, p. 145)).

11. The ‘opportunity’ case for long-term external finance was set out by the Board of Scrutiny in its Fourteenth Report (Reporter, 2008–09, p. 976). The Board recommended ‘As last year, the Board strongly recommends that the University’s Finance Committee proceed as soon as possible with a long-dated issuance in the fixed-interest markets while conditions remain historically favourable.’ The Council responded (Reporter, 2009–10, p. 342): ‘The funding requirements for the University’s capital programme and North West Cambridge project are being developed and the Finance Committee will consider the financing options, which will include long-term borrowing, during 2009–10’.

12. The Council believes that there is a clear need and case for external finance. There are various sources of external finance that the University could seek, for example, bank finance, private placement, public bond issuance. There are factors of cost, flexibility, tenor, risk (current and future), affordability, and so on which the Finance Committee is considering. Any proposals would be in the context of the current financial constraints, risks, and challenging outlook. However it is possible that the current conditions for external finance, which are attractive on a historic basis, may not continue. The process of negotiation with potential lenders would be lengthy and confidential. The Council, with the advice of the Finance Committee, wishes to have the flexibility to move swiftly to secure external finance when market conditions are attractive or in circumstances when conditions could move adversely.

13. The total external finance required for the North West Cambridge development and other building projects set out in the Capital Plan is estimated at around £350m. Any funds raised would be in anticipation of expected needs. The funds would not be applied until Regent House approval had been received for the associated projects, and even then the funding would be phased over a number of years in amounts yet to be determined. In the interim, any excess cash would be invested to mitigate, and perhaps exceed, the interest costs of borrowing. It should be noted that the University’s long-term investments are managed in the Cambridge University Endowment Fund with an investment objective of a total return of RPI plus 5.25% a year over the long term and, by way of example, this return exceeds the interest rate currently payable on long-dated bonds.

14. Any external borrowing would comply with any consents required by the HEFCE Financial Memorandum.


15. The Council recommends that it be given authority in advance to arrange, on the advice of the Finance Committee, external finance up to a total amount of £350m, earmarked for the Capital Plan and the North West Cambridge development.

16. The authority will apply for a period of two years from the date of this Report. In the event that external finance is not arranged within this period, or is not up to a total amount of £350m, then the Council will request continuation of the authority on a rolling two-year basis annually by Grace.

20 December 2010

L. K. Borysiewicz, Vice-Chancellor

A. M. Donald

R. Mansigani

N. Bampos

David Good

Mavis McDonald

R. J. Barnes

Christopher Hum

Rachael Padman

Nigel Brown

F. P. Kelly

David Simon

William Brown

Vanessa Lawrence

S. Wakeford

S. J. Cowley

Debbie Lowther

Joan M. Whitehead

M. J. Daunton

Note of dissent

I do not support the planned development in North-West Cambridge.

This site should be our land bank for building new colleges and departments over the next fifty years, not squandered in speculative housebuilding. Now that the housing bubble has burst and the returns we anticipate from this development are less than we expect from our investment portfolio, the whole project should be reconsidered.

Ross Anderson