CFO’s report

Sustainability

The achievement of our strategic goal of financial sustainability relies on the recurrent operations of the University of Cape Town (UCT) and the availability of free-cash reserves. Although our operating margins are relatively low, the associated risk is partially mitigated by the knowledge that a significant portion of our income, comprising subsidies and fees, is received early in the operating cycle. If these inflows deviate significantly from our projections, we can promptly react and make necessary adjustments to our operations. Notably, our free-cash reserves have consistently remained within the guidelines outlined in our financial policy for eight consecutive years.

As part of the university’s preliminary financial sustainability plan, UCT has identified specific projects that aim to enhance its revenue generation while focusing on the core areas of teaching, learning, and research. Consequently, a comprehensive review of our current investments in the third income stream is under way to ensure strategic alignment with the university’s goals and long-term financial viability.

Despite our efforts, there are certain concerns that warrant our attention. The constrained fee increases, coupled with the lingering impacts of the COVID-19 pandemic on fee payers, as well as the mounting pressure on the state to fulfil its funding commitments, remain influential factors that require vigilance. These events and uncertainties serve as a constant reminder against complacency and emphasise the importance of maintaining our free-cash reserve target, along with staying informed about economic outlooks and challenges faced by the state.

UCT recognises the significance of effective cash flow planning in maintaining financial stability and pursuing sustainable growth. By implementing prudent financial strategies, monitoring economic conditions, and adapting to evolving circumstances, we aim to navigate potential challenges and secure the long-term success of our institution.

2022 financial highlights

Statement of financial position

In the current fiscal year, the total assets of the organisation experienced a decrease of 1.3%. This decline can be attributed to several significant factors within our financial landscape. Notably, there was an increase of 4.9% in Property, Plant, and Equipment (PPE) compared to the previous year’s growth rate of 8.8%. This rise in PPE can primarily be attributed to the construction projects undertaken by the institution, namely the School of Education and the Hasso Plattner d-school Afrika.

Conversely, our investments witnessed a decrease of 1.1% compared to a substantial increase of 13.7% in the previous year. This decline is mainly due to the stabilisation of the markets post-COVID-19, which resulted in a more conservative investment approach.

Another notable change is the decrease of 10% in current assets, contrasting with a marginal increase of 0.6% in the previous year. The most significant contributor to this decline is the decrease in cash and cash equivalents by 22.3%. This decrease in cash is primarily attributed to the payment of bonuses in December 2022, as opposed to the following year.

It is essential to highlight that a substantial portion of our non-current assets are designated, and the Council has no discretionary control over them. These assets, which amount to R4.3 billion, constitute 28% of our total assets for the current fiscal year, slightly higher than the R4.1 billion reported in 2021. Moreover, it is crucial to note that the approval of the Minister of Higher Education and Training is required for the alienation of all immovable properties.

Regarding our investments, approximately 60% of the portfolio is held by the UCT Foundation and is allocated to specific activities. The remaining balance is held within the university operations, with 80% of these funds designated for specifically funded restricted activities.

A concerning aspect of our financials is the increase in student fee receivables, particularly since 13% of this debt is over 12 months overdue. The management team acknowledges the importance of addressing this issue and emphasise that student fee debt collection remains a key focus. We recognise that the negative economic outlook may impact the timing and effectiveness of our collection efforts. We anticipate that the resumption of in-person graduations will contribute to an improvement in fee settlements, as it has historically played a crucial role in encouraging timely payments.

In terms of our financial position, the university maintains a healthy gearing ratio, with liabilities totalling R3.05 billion against total assets of R15.44 billion, resulting in a debt ratio of 0.20. It is noteworthy that the university did not increase its long-term borrowings in 2022 but rather continued to settle the total drawdown of R110 million from the Development Bank of Southern Africa (DBSA) loan facility. This loan, utilised for the funding of the conference centre at the UCT Graduate School of Business, is scheduled for repayment over a 10-year period, with the university currently in its fifth year of repayment.

In conclusion, the decrease in total assets, along with the changes in specific categories, highlights the financial dynamics of the organisation. We remain committed to managing our financial resources prudently, addressing the challenges in student fee collections, and ensuring the sustainability and growth of the institution.

Financial performance

In 2022, the total revenue of the organisation increased by 10% compared to the previous year, reaching R7.76 billion. This growth was primarily driven by subsidies and grants. In 2021, the total revenue stood at R7.05 billion, reflecting a growth rate of 7.5%.

Net fee income, which excludes bursaries, scholarships, and financial aid adjustments, increased by 1.3% in 2022. The net fee income for 2022 amounted to R2.01 billion, compared to R1.98 billion in 2021, representing a growth rate of 37.29% in the previous year.

Income from state appropriations experienced a decline of 2% in 2022. UCT received R2.24 billion from state appropriations in 2022, while the corresponding figure for 2021 was R2.29 billion, reflecting a marginal increase of 0.2%.

The income from contracts made a significant contribution to the overall revenue increase, with a growth rate of 24.7% in 2022. The income from contracts amounted to R1.55 billion in 2022, up from R1.24 billion in 2021, which represented a growth rate of 19.4% in the previous year.

On the expenditure side, which includes personnel costs and other operating expenditure, there was a 9.2% increase in 2022. The total expenditure for the year amounted to R7.37 billion, compared to R6.75 billion in 2021, reflecting a growth rate of 10.1% in the previous year.

The operating surplus experienced a significant decrease of 94.1% in 2022. In 2021, there was a substantial increase of 112.6%, whereas the operating surplus for 2022 amounted to R80.82 million, down from R1.37 billion in 2021.

Excluding investment income and fair value movements on financial instruments, a deficit of R196.4 million was incurred in 2022, compared to a deficit of R138.8 million in 2021.

Cash generated from operations decreased by 189% in 2022. While in 2021, there was a growth rate of 64.76%, the university utilised R223.5 million in cash in 2022, compared to the R251.4 million generated in 2021.

Total assets decreased by 1.3% in 2022. In 2021, there was a growth rate of 9.3%, whereas the total assets amounted to R15.44 billion in 2022, down from R15.63 billion in 2021.

Out of the operating surplus of R80.82 million, R225.4 million is attributable to restricted funds that are not under the discretion of the Council. It is worth noting that these funds, due to the nature of research contracts and donations, will not generate a surplus over time. The net deficit balance of R80.82 million includes R121.68 million from Council-controlled activities and R22.9 million from Student Housing operations.

Specifically funded activities – restricted operations

Funded activities restricted encompass research and other specifically funded initiatives that typically lie outside the purview of university management. Although decision-making authority may be retained in terms of governance, monitoring, and occasionally approval, these activities introduce additional risks to the university. These risks primarily stem from limited decision rights concerning cash flows, accounts receivable management, and infrastructural support. Moreover, the growing complexity of compliance and reporting requirements associated with research contracts amplifies these risks, necessitating additional resources to mitigate them.

In the fiscal year, the university witnessed a significant increase in revenues, with a notable surge of 19.81% amounting to R3.29 billion. Government-related grants experienced a decline of 11.3%, decreasing from R411.5 million to R365.06 million, while income from contracts exhibited a robust growth of 25%, rising from R1.24 billion to R1.55 billion. This surge in research activity, which has persisted over an extended period, has placed substantial demands on core administrative departments. Unfortunately, these departments have received limited resource allocations to effectively manage this growth, leading to an increased risk of reputational damage.

As a research-intensive university, securing funding for research activities remains a strategic imperative. Therefore, it is crucial to establish robust systems and employ capable personnel to facilitate research and attract sustainable research funding. The university’s research-related activities have witnessed consistent growth over the years, surpassing the R1 billion milestone in 2014. The current research-related revenue, comprising grants and contract income, stands at R1.91 billion (2021: R1.65 billion), representing 58% of the total specifically funded activities valued at R3.29 billion. Additionally, research-related revenue accounts for at least 25% of the university’s total income.

Analysing the broad categories of funding, contract income amounts to R1.55 billion (2021: R1.24 billion), constituting 47% of the research revenue. Government grants contribute R365.1 million (2021: R411.5 million), accounting for 11% of the research revenue. Research-related donations total R476.88 million, indicating a slight increase of R82.4 million compared to 2021.

The top 10 major research funders at the university include the National Research Foundation (NRF), the Bill and Melinda Gates Foundation (BMGF), the National Institutes of Health (NIH), the Medical Research Council (MRC), and the Wellcome Trust. Among these, the NRF serves as the primary source of research funding, contributing a minimum of 22% of the total research revenue and supporting the largest number of researchers and their students.

In 2022, the university incorporated a new spin-off company, Acinotech (Pty) Ltd, bringing the total number of spin-off companies to 31 since 2004. Furthermore, two more companies are scheduled for incorporation in the first half of 2023. The university actively supports a robust portfolio of active companies through its investment and partnership with the early-stage venture capital investor, the University Technology Fund (UTF). The university invested a total of R4 million in spin-off companies, which was further leveraged through the UTF’s investment of R10 million. The pipeline of innovation projects is expanding, and seven new technologies received seed funding from the UCT Innovation Builder Fund.

During the year, UCT signed 45 licences for its intellectual property, resulting in licensing revenue amounting to R1.4 million. Maiden royalties were received from three intellectual property rights. Over the past 10 years, UCT has accumulated R23.5 million in revenue, but it is expected that greater financial returns will be realised in due course through the divestment of equity in spin-off companies.

Statement of cash flows

In terms of the Statement of Cash Flows, the operations resulted in a net outflow of R223.5 million (compared to a net inflow of R251.4 million in 2021) for the year, representing a decrease of 189% when compared to the previous year. Several factors contributed to this variance, including a substantial increase in personnel costs amounting to R317.67 million, attributed to annual increments and filling vacant positions. Additionally, there was an increase in student fees receivable by R57.24 million and accounts receivable by R56.53 million, primarily due to challenges in collecting outstanding fees. Furthermore, other operating expenses increased by R400.28 million, mainly driven by spikes in repairs and maintenance costs.

Key risks and contexts

a) State subsidies

The state has faced significant pressure in fulfilling its subsidy obligations and commitments to the sector. In April 2021, the sector received notice of an unforeseen reduction in the previously communicated block grant allocation, because of diverting funds towards other priorities. While the block grant has been safeguarded for 2022, the allocation for 2023 has been reduced by 2.5% compared to the previous year. The primary cause for this reduction stems from the fact that the planned increase in block grant availability for 2023/24 was set at 0.9%, while simultaneously expecting a 1.7% growth in enrolments within the higher education sector. It is evident that this incremental increase falls short of covering the anticipated growth in volume, let alone accounting for inflation. Consequently, our financial outlook has been significantly impacted, hampering the anticipated trajectory of state funding growth.

b) Student fees

Regarding student fees, the Department of Higher Education and Training (DHET) Fee Regulation Task Team has been operational for four years. However, its progress was severely hampered by the disruptions caused by the COVID-19 pandemic. Both the DHET and higher education institutions were compelled to focus on managing essential functions under the constraints of lockdowns and pandemic-related restrictions. The task team reconvened in September 2021, as the DHET aimed to implement the framework for 2022. After deliberation, it became apparent that achieving this target would not be feasible, leading the DHET to adjust the implementation date to 2024. It should be noted that the revised framework will initially apply solely to tuition fees, with the inclusion of residence fees to follow in due course. Commenting on the specific timelines for implementation is challenging; however, it is evident that the framework will further restrict our ability to raise fees.

c) National Student Financial Aid Scheme

The implementation of fee-free higher education through the National Student Financial Aid Scheme (NSFAS) has resulted in the state assuming responsibility for covering the fees of an increased number of students at UCT. However, this has led to a greater dependence on the state for our primary sources of income, namely state subsidies and tuition and residence fees. In 2023, we anticipate receiving a subsidy of R1.77 billion, with approximately 50% of fees expected to be settled through NSFAS. As a result, a significant portion of our recurrent revenue is closely tied to the Medium-Term Expenditure Framework (MTEF) outcomes of the state. We have considered the anticipated funding changes proposed by NSFAS, assuming their implementation in 2023, which will likely result in a substantial increase in our provision of financial aid.

d) Student enrolment and retention

UCT must continue to enhance its capacity for recruiting and enrolling new students, as well as improving student progression rates within the academic system. Efforts have been made to streamline online registration processes, while online open days and information sessions have also been conducted. Various initiatives aimed at enhancing student retention and progression rates are already in progress, and additional measures are currently being explored and evaluated. A specific area of focus is the expansion of recruitment and enrollment efforts targeting international students. These sustainability interventions are integral to the realisation of Vision 2030.

e) Credit load / academic workload

Continued efforts are under way to review and revise the allocation of academic credits for courses, with the goal of gaining a deeper understanding of the associated costs of instructional delivery. The deputy vice-chancellor (DVC) for Teaching & Learning and her team started this work in 2020 as part of our curriculum reform endeavours. It has become apparent that we are offering more credits than what frameworks and norms necessitate, resulting in a need for additional lecturers. This situation places burdens on both students and staff. The ongoing work in this area is an integral component of our initiatives for ensuring financial sustainability.

f) Staffing

The DHET along with various other national higher education regulatory bodies, establish staffing percentage benchmarks that are considered appropriate within the sector. These benchmarks are typically expressed as a percentage of the total costs. Regarding our teaching and related budget for 2023, our total staffing and related costs account for 65.5% of our overall expenditure. However, this percentage is projected to decrease by approximately 3% over the medium-term outlook, mainly due to the rising value of other expenses, particularly financial aid.

Regarding student housing, the staffing and related costs represent 29.7% of the total spend. When combining these two aspects of Council-controlled operations, our combined rate stands at 60.6%. It is worth noting that the benchmarks for staffing percentages range from 55% to as high as 70%, with local institutions predominantly falling within the 55% to 60% range.

Despite operating at a relatively high percentage for several years, it is imperative for us to evaluate our revenue outlook and delivery capabilities. Failing to do so may necessitate a review of our overall operating costs, with particular focus on staffing expenses. Given the substantial amount and relative percentage allocated to our staffing bill, sustaining our organisation without revisiting human resource planning, staffing models, or salary increments will prove exceedingly challenging. Consequently, addressing this matter has become a crucial component of our financial sustainability plan.

g) Council-controlled teaching and related operations bottom line

The medium-term outlook period indicates significant deficits for the period 2023–2025. However, we anticipate a turnaround in subsequent years, assuming our financial sustainability interventions gain traction and meet expectations. This turnaround is expected to result in a surplus exceeding the target range of 3% by 2028.

Nevertheless, it is important to note that even minor changes in the rates of increase for state subsidies, tuition fees, and staffing can have a substantial impact on the overall financial picture in a relatively short span of time.

Despite these challenges, we maintain an optimistic outlook. Our track record of effective financial management and accurate forecasting, coupled with our strategic interventions outlined in our medium-term financial sustainability plan, instils confidence that UCT will successfully navigate the current economic landscape. Our plans are further supported by a well-tested university integrated financial plan.

Through these measures, we aim to uphold our commitment to excellence in teaching and research, ensuring that UCT remains at the forefront of academic achievement.

Future challenges – 2023 and beyond

Looking ahead to 2023 and beyond, several challenges loom on the horizon. The economic outlook remains bleak, aligning with previous assessments. Notably, the anticipated changes in the state subsidy and tuition fee model may significantly impact UCT’s financial position.

However, the specific details and implications of these changes are yet to be published by the DHET.

Three key variables continue to have a substantial impact on UCT’s financial sustainability. These variables are the state subsidy and tuition fees as income sources, as well as human resources planning and staffing models as expenditure factors. Furthermore, the decline in allocations from the state to NSFAS, coupled with an increasing number of qualifying students, has necessitated changes to NSFAS funding criteria, resulting in a significant decline in per capita funding. This poses an additional challenge for UCT, given its large cohort of financial aid students.

To address these challenges, UCT initiated the development of a Financial Sustainability Plan in late 2019, encompassing a 10-year period with three to five-year medium-term forecasts and annual rolling plans. The plan’s first phase was completed and submitted to the university Council in June 2022, followed by a Leadership Lekgotla workshop in October to initiate the development of an implementation plan. The anticipated impact of these initiatives is incorporated into the medium-term financial outlook.