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No 6528

Wednesday 28 November 2018

Vol cxlix No 10

pp. 128–153



29 November, Thursday. End of third quarter of Michaelmas Term.

30 November, Friday. Full Term ends.

12 December, Wednesday. Last ordinary issue of the Reporter in Michaelmas Term.

19 December, Wednesday. Michaelmas Term ends.

25 December, Tuesday. Christmas Day. Scarlet Day.

Twenty-third Report of the Board of Scrutiny: Notice in response

19 November 2018

This Notice is the Council’s reply to the Board of Scrutiny’s Twenty-third Report (Reporter, 6521, 2018–19, p. 42) and the Discussion of it held on 23 October 2018 (Reporter, 6524, 2018–19, p. 99).

The Council welcomes the prominence given by the Board to several matters which it agrees require further consideration. It has provided its response to the Board’s comments on the University’s finances in Part A, and to the Board’s specific recommendations and points made at the Discussion in Part B.

A. The University’s finances

The University of Cambridge operates in a globally competitive sector and needs to continue to make appropriate investments both in its people and its academic estate in order to ensure it continues to attract the best students, faculty, and research funding, and hence maintain its reputation.

The University seeks impact, not profit. The Academic University’s core operational activities of teaching and research are inherently loss-making and it is dependent on cross-subsidisation from other income sources, notably the Cambridge University Endowment Fund (CUEF) distribution, in order to balance the books. Capital expenditure for core academic estate is financed from donations, grants, a distribution from the surplus generated by Cambridge University Press and Cambridge Assessment, and, as a last resort, from retained unrestricted reserves.

The University’s financials are complex, and accounting requirements in the external consolidated Group Financial Statements make it difficult to see readily the underlying dynamics and financial balancing act the University has to maintain. To be sustainable, the University needs to match costs and revenues in the Academic University over time, and generate a sufficient surplus overall to invest in academic capital expenditure.

In an extended period of CUEF growth through market performance, the Academic University has allowed largely unconstrained growth in non-fully-funded research, accepted declining operating margins, and experienced cost growth (including staff costs) ahead of revenues. Significantly, the Academic University is now budgeting a net operating cash flow deficit (post-CUEF-drawdown). At the same time, the University has been committing to increasing levels of capital expenditure on projects (after accounting for grants and donations). Given cost pressures within the University, government funding risks, and the likely impacts of Brexit, the University must continue to look to achieve efficiencies and generate incremental revenue to deliver on its objectives.

The University’s highly diversified revenue base and strong balance sheet allow it to manage risk and deal with short-term uncertainty significantly better than the sector as a whole. However, in the long run, it remains essential that the University, if it is to maintain its leading global position, generates sufficient surplus to invest properly in people and facilities.

The single largest issue for staff is the cost of housing in Cambridge, and by raising external finance, the University is in a positon to help address this issue through investment in housing stock which also generates an appropriate financial return to the University. Housing is not the only use for external financing, but the strict policy for bond proceeds is only to invest in revenue generating projects, so that they add economic value and do not compete for resources available for core academic activities and infrastructure.

Turning to the specifics in the Board’s Report:

Financial Statements

The table in paragraph 22 is extracted from the published University Accounts. These provide an overview of the finances and operations of the University Group, covering the teaching and research activities of the University, and its subsidiary companies (that undertake activities, which, for legal or commercial reasons, are more appropriately carried out by limited companies), Cambridge Assessment (CA), Cambridge University Press (CUP), their subsidiary companies and joint ventures, the Gates Cambridge Trust, and certain other Trusts (the ‘Associated Trusts’).

Turnover is the ‘Group’ income (including income from Cambridge University Press and Cambridge Assessment, subsidiaries, and trusts) and represents both operational revenues and capital grants. While growth in, and diversity of, income allows the University to do more and achieve greater impact, it is worth noting that:

◦ a high proportion of total turnover must now be competitively won each year;

◦ increasing operational activity levels of loss-making teaching and research, brings higher income but demands a progressively larger cross-subsidy;

◦ the significant element of ‘Group’ income derived from Press and Assessment’s activities is already earmarked towards reinvestment in the Academic University’s capital funds.

Surplus is the Total Comprehensive Income from the consolidated ‘Group’ accounts. This represents the sum of all incomes, net of all operational expenditure, depreciation, interest and tax, and the unrealised gains on investments (revalued for accounting purposes at balance sheet date), actuarial adjustments to projected pension scheme liabilities, and currency adjustments. It is worth noting that the Surplus includes:

◦ surpluses from CA and CUP which, net of funds held for investment in the future growth of these businesses, is reinvested to part-fund the University’s academic capital needs;

◦ unrealised gains on CUEF investments and actuarial adjustments – movements that can be large, can be positive or negative, and are not realised (and hence not directly available to spend).

Over £430m of the Total Comprehensive Income of £492m for 2017 was from these unrealised categories.

Finally, it is also important to note that the Total Comprehensive Income includes depreciation but excludes capital expenditure (which has been rising well ahead of current annual depreciation charges).

The underlying Total Comprehensive Income, excluding these unrealised gains, is modest and needs to be sustained to ensure sufficient funds are available to invest in the maintenance, renewal and replacement of operating buildings and infrastructure, meeting the rising costs of replacing assets through inflation (and rising expectations of functional suitability), and ensuring the University can deliver on its ambitious programme of capital investment, necessary to ensure that educational spaces, libraries, laboratories, IT systems, and research equipment are of sufficient quality to support world-class academic activities.

Allocations Report

In budgetary terms, the ‘Chest’ is a mechanism to manage and allocate centrally received forms of income (e.g. fees and residual government block grants), and centrally incurred and managed expenses (e.g. maintenance of the estate and supporting administrative services). Over time, the ‘Chest’ has become a progressively smaller proportion of the overall finances of the University. The Budget allocations from ‘Chest’ Income and Expenditure therefore only reflect a partial view of the financial position of institutions, which can only be fully assessed through a consideration of the combined ‘Chest’ and ‘Non-Chest’ position over time. ‘Non-Chest’ includes direct sources of income and directly incurred costs which do not flow through the centre. NSIs and UAS have limited opportunities to generate external ‘non-Chest’ income and, as supporting activities have grown in response to the increasing demands, scale and complexity of the wider University, their share of the ‘Chest’ has had to rise. It should be noted that central departments are subjected to the same budgetary growth restrictions as the rest of the University for like-for-like activities. Finally, it should be noted that, unlike in many other institutions, the costs of Development and Alumni Relations are currently fully met from ‘Chest’ funding, while the financial benefit of the donations they support the collegiate University in securing, now approaching £100m p.a., are recognized elsewhere in the financials (e.g. as endowments or contributions to capital facilities).

B. Responses to the Board’s recommendations and the Discussion remarks

1.Active engagement by members of the Regent House in governance is essential, so in addition to the ongoing review of membership, consideration should be given to whether the processes governing Graces initiated within the Regent House are sufficient, clear, and not unduly complex, and if these processes – including the limitations of Graces – could be better advertised, e.g. on the governance web pages?

The Council notes that the process concerning Graces initiated by members of the Regent House is a relatively new feature of the University’s governance processes, having been introduced on the recommendation of the Wass Syndicate. The Council agrees with the Board that the current provisions governing that process should be revisited, now that there have been sufficient examples of their use to have a sense of where improvements might be made, and could be simplified. It also shares the Board’s view that consideration should be given to whether the governance team within the Registrary’s Office, which supports these processes, is adequately resourced. It therefore proposes that work on a revised draft is postponed until resources to support that work have been identified. In the meantime, the content of the governance web pages will be reviewed, to see whether any further explanatory information can be added to aid understanding of the process of initiating Graces.

2.That the University develop a medium-term (3–7 year) financial budgeting and planning framework which is both holistic and transparent in consideration of income and expenditure for the whole institution, i.e. ‘big U’. This could be done in a way that should protect the autonomy of the Schools, Cambridge Assessment, and Cambridge University Press, but allows the central administration of the University to take a longer-term view and would enable Schools and Non-School Institutions to present proper business plans for their initiatives.

The Council agrees that the current approach to budgeting and planning must be reformed and replaced with a more transparent and efficient planning process focused on the delivery of the University’s academic vision within a financially sustainable framework. This is a priority for Professor David Cardwell during his tenure as Pro-Vice-Chancellor (Strategy and Planning).

Initial steps to be implemented following discussion by the Planning and Resources Committee include the establishment of a group, chaired by Professor Cardwell, to review resource distribution within the University; and a revision to the current Planning Round process to distinguish more clearly between annual financial planning and forecasting and longer-term strategic planning in Schools and Non-School Institutions. A tight focus on the Chest is recognized as a limitation both of the current Planning Round and Allocations Report, and of the existing Resource Allocation Model (RAM). The Income Incentivization Model introduced in the 2018 Planning Round continues that focus on the Chest but is intended as a first step towards a new model for distributing resource within the University. The Resource Distribution Group will identify the income to the University and the costs across the University that are to be within scope of the new model, and will be expected to develop an approach that enables the delivery of the University’s academic plans and the professional services – including central support services for students – that underpin them.

3.(a)  That the existing reporting format contained within the Allocations Report is refined to present a more holistic and balanced view of our annual budgeting decisions which ties into the new medium-term framework;

Under the direction of the Chief Financial Officer a 10-year cash flow model for ‘big U’ has been developed and will be refined over this academic year. Development of the model and the changes to the Planning Round process summarised above are expected to influence the development of the Allocations Report in the direction recommended by the Board of Scrutiny.

3.(b)  That the University pays particular attention to the ongoing growth in research activity in order to obtain a better understanding of the longer-term financial implications of expansion in an activity only partly-funded by external sources.

The Research Policy Committee will be introducing regular monitoring of research funding trends, including the overall growth in research income and the relative contribution of the different sponsor categories that impact on cost recovery by the University from external research sponsors. The development of a dedicated pre-award research administration service within the Research Office will provide significant additional capacity to enable Schools to respond to research funding opportunities, including targeting funding sources that offer improved financial return. The Resource Management Committee will monitor the performance of the new service against agreed key performance indicators, for example, targets to improve ‘time to grant’ as recommended in the response to the Board of Scrutiny’s Twenty-second Report.

4.A methodology should be developed to facilitate investment by Schools and NSIs in projects anticipated to have known payback periods, including those delivering improved administrative efficiency, and in kick-start projects expected to be self-funding in time, such as a new taught postgraduate courses. This could be some form of income-incentivization, or loans which might have agreed repayment schedules. Authorization for such investment should be separate from desirable allocations core to the University’s purpose that might be without a definite payback period.

The Planning and Resources Committee has agreed that funds will be available on exactly this basis to support credible revenue-generating and cost-saving initiatives. Initiatives which are academic- or education-led, including new taught postgraduate courses, will be considered for funding from an academic priorities fund, which is also intended to meet academic priorities for which there may be no short-term financial payback. Other initiatives underpinned by a convincing business case will be eligible for funding from a separate investment fund. In each case detailed guidance is still being developed but the Council hopes that both funds will begin to operate during the course of this academic year.

5.That adequate resources should be allocated to a strategy to develop academic and commercial research space, preventing haphazard expansion and maximizing potential revenue streams, notably across West and North West Cambridge.

The West and North West Cambridge Estates Board established a West and North West Cambridge Commercial Research Group to develop a strategy for commercial research space at West and North West Cambridge. The Group is completing its work and will be requesting resource to take forward plans and proposals, including developing full business cases. In parallel the West and North West Cambridge Academic Board continues to discuss academic strategy for West and North West Cambridge. The Academic Board is regularly appraised of discussions at the Commercial Research Group and has commented on all plans as they have developed. Both the Boards and the Group are keen to ensure that future development at West and North West Cambridge is appropriately resourced and coordinated.

6.The General Board should closely monitor implementation of the recommendations of the review of the Research Office, publish a timetable for its completion, and commission a follow-up evaluation in three years’ time.

The Steering Group for the Review of Research Administration will continue its work during Michaelmas and Lent Terms with the aim of publishing a report in the Lent Term 2019 on progress in implementing the recommendations of the Review.1 The Council and the General Board, with the full support of the Research Office, have agreed that there should be a light-touch follow-up evaluation to the review in 2022.

7.That the Council better inform the University of the development of a Brexit strategy, initially by publishing the minutes and papers of the Brexit Committee on the governance website.

A dedicated Brexit website was relaunched in October 2018 to coincide with the Vice-Chancellor’s statement on Brexit and the University’s priorities ( Updates from the work of the two groups focussing on strategy and operational planning will be published on this site on a termly basis. Open meetings on Brexit chaired by the Vice-Chancellor are planned during the year, with the first on Wednesday, 12 December 2018.

8.As part of the further development of the People Strategy the Council should clarify the policy – and criteria – for the creation and filling of unestablished posts.

Whether a post is unestablished or established is a matter for individual institutions to determine based on local circumstances. The Resource Management Committee provides guidance on the process for creating, filling and changing posts, which includes information on preparing a business case. There is currently no plan to develop a new policy or criteria to dictate to institutions whether a post should be created and filled on an unestablished or established basis. However, the Council notes the concerns of the Board of Scrutiny and will ask the Human Resources Committee to keep the matter under review.

Response to Discussion remarks

The Council notes Dr Sliwa’s remarks on pay. As a member of the New Joint Negotiating Committee for Higher Education Staff (N-JNCHES), the University is bound by the national pay awards agreed under the N-JNCHES process. However, the University also recognizes the need to improve the total reward package offered to staff, as well as to tackle pay inequalities. Many of the initiatives currently under development provide additional focus on closing the gender pay gap. These include professional career pathways and pay progression schemes, and career coaching, and an augmented line management development programme.