The old strategy: if you build it, they will come

A recent article, appeared on the NY Times (December, 13th), discusses the financial situation of several successful and reputable american universities and draws from the conclusions of a recent study published in July by Bain & Company and Sterling Partners a private equity firm. The study found that US universities’ long-term debt had growns by 12 percent a year from 2002 to 2008, while the corrisponding interest costs had increased by 9 percent.

Amid increasingly intense competition for better students and higher rankings, college administrators in US during the last decade have deployed a relatively simple strategy echoicing the strategy utilised in the Dubai real estate sector: if you build it, they will come.

A decade-long spending binge to build academic buildings, dormitories and recreational facilities — some of them inordinately lavish— has left colleges and universities saddled with large amounts of debt. Often, students are left picking up the bill; otherwise, it falls on taxpayers.

Outstanding debt at the 224 public universities which are rated by Moody’s grew to $122 billion in 2011, from $53 billion in inflation-adjusted dollars in 2000. On the private front, at the 281 private universities rated by Moody’s, debt increased to $83 billion, from $40 billion, over the equivalent period. Rather than deplete their endowments, the majority of colleges have opted to borrow to finance their capital projects.

Debt has ballooned at colleges across the board — public and private, elite and less-known. While Harvard is the wealthiest university in the country, it also has $6 billion in debt, the most of any private college, the data compiled by Moody’s shows. At New York University, which has embarked on an ambitious expansion, debt stood $2.8 billion as at the end of 2011, up from $1.2 billion in 2002, according to the Moody’s data.

At smaller colleges. more dependent on tuition fees for most of their revenue streams, students tend to swallow a bigger burden of the increasing debt amounts; at more well-known, larger universities, which rely on multiple revenue streams (yearly profits on their endowment funds being the main one), students may inderectly pay little for the additional debt.

“Much of the liquidity crisis facing higher education comes from having succumbed to the ‘Law of More,’ ” the Bain report said. “Many institutions have operated on the assumption that the more they build, spend, diversify and expand, the more they will persist and prosper. But instead, the opposite has happened: institutions have become overleveraged as revenues shrank and interest costs increased.”

With hindsight, the old expansion strategy is no longer  sustainable and this opens the debate as to how to reduce the colleges’ debt burdens without overcharging students. More importantly, how to continue finance research activities, the real essence of what universities should do.

It is clear that that universities need to focus on new revenew streams on top of fees and profits from their endowment funds.

Given universities’ key strengh lies in cutting-edge research, academies need to collaborate more with businesses in order to monetise their knowledge either via the provision of consulting services or through business partnership aimed at commercialising the research.

A stronger focus on collaborating with the world of business is sure not the medicine to delever the universities’ balance sheet, but it certainly is a key element. Additionally, more they main focus than a by-product, increased business to academia collaboration will certainly boost innovation in several industries, translating in long-term growth.

 

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