Strategy, Dollars and Sense

     
Some weeks ago, I was approached by the editors of The AlumNUS magazine, who asked if I would be open to the idea of contributing something for this issue, the main theme of which centres on the evolving campus and issues related to environmental sustainability. Given my job at NUS, this led me to think about questions related to “financial sustainability”, including how we pay for our buildings and campus infrastructure now and in the future. 

But let me first set some context. I have spent a lot of my past career (at the World Bank, in a private sector investment firm and lastly at UC Berkeley) focused on “macro” financial issues and how the financial dynamics of a country or an institution are likely to evolve, and how in turn these financial facts interact with the entities’ strategic objectives. One thing I have learnt is that the link between strategy and finance is not always very clear. Strategies are often aspirational in nature, designed to help a country or an institution meet the varied challenges they confront, whereas budgets are constrained and shaped by day-to-day reality. Thinking through how to make the two compatible is something I find to be an exciting challenge. 

Simply put, a strategy that is not financially sustainable is not a strategy — it is wishful thinking. Unfortunately, wishful thinking is very attractive. Many of us would like free services and goods — perhaps combined with universal access — but there has to be an economic model to fund the resources used. In addition, wishful thinking can do real harm as it may be possible to pursue an unsustainable path in the short-to-medium-term, by borrowing or using funds already pledged for other future uses. But the underlying financial issues will inevitably surface and the entity will be in a deeper hole than it need be. Being forced to address difficult issues at a time of crisis is no fun; ask any Minister of Finance that has had to implement an IMF/World Bank adjustment programme! It’s a lot better to get ahead of challenges, not least because one remains in control of the solutions and has time to adjust. 

A CASE FOR FORWARD LOGIC

Given these realities, a strategy and its stated objectives have to be compatible with the “financial dynamics” of the institution. This does not mean that finance determines strategy. In fact, in well-run institutions, companies or countries it is the reverse. The budget is shaped to serve the strategy, which — given limited resources — requires difficult strategic decisions to be made around resource allocation. For example, if a university’s strategic objective is to expand the number of graduates in discipline X, then the budget has to be redirected to achieve this goal. The sticking point is that this usually requires less resources going to something else. This is where wishful thinking comes in handy, as it appears to be a painless way out of the box. An alternative viable solution is to generate new additional resources instead of making cuts. But one has to be careful to ensure that the new activity fully covers its costs and, therefore, leads to an increase in “net”, not just “gross”, revenue. 

To take an example, shortly before I joined UC Berkeley, the Californian state government cut the amount of funding it provided to the university by around 30% in the wake of the 2007/8 financial crisis. In addition, the controlling Board froze tuition fees (in the mistaken belief that this helped low-income students, when in reality it harmed them due to the way the financial aid system worked) and eventually capped the number of higher-paying “out-of-state” students (due to the belief that California tax payers were funding the university and thus should be allocated a certain number of places, whereas in fact the State had reduced its share of total revenue to 12% and out-of-state students subsidised in-state students). The Board also set higher admission targets for in-state students, even though the average cost of providing an undergraduate education at Berkeley exceeded tuition. While one can understand the political/social motivation behind some of these decisions, the end result was a financial crisis with the campus recording a significant and unsustainable deficit. It has since dug itself out via a painful adjustment process that could have been avoided if corrective steps had been taken earlier.

Turning to NUS, it is clear that it has been very well-resourced and stands on a solid financial foundation. The government has provided significant support for both the operating budget via “capitation” (that significantly reduces the cost of tuition to students) and, very importantly, the capital budget by funding much of the infrastructure and buildings that currently comprise our wonderful campus. As the ex-Chancellor of Berkeley used to say, “One cannot do 21^st century research in 19^th century buildings”! In addition, the government has committed to provide resources to fund the maintenance and eventual replacement of many of the current buildings. And, where this is not the case, NUS management has done its best to create “sinking funds” to ensure that the campus infrastructure can be maintained. This type of forward financial planning is unusual, but it is essential to support the aspirational goals discussed elsewhere in this issue.

MEETING REALITIES HEAD-ON

Looking ahead, there are some important changes that NUS will need to confront if it is to remain financially strong and well-positioned to achieve its strategic objectives. First, the demographic trend in Singapore will lead to a decline in the number of junior college and polytechnic graduates. If the proportion of this cohort that proceeds on to university is held constant then, by definition, the number of undergraduates entering the university system as a whole will decline. In addition, the government is gradually reducing the tuition support it provides via “capitation” and there is a cap on the number of foreign students. These trends will produce financial challenges over the medium term unless alternative sources of revenue are identified. 

Second, in 2016 the government decided to reduce its funding of new buildings at NUS. For those buildings that are for an academic purpose and are approved by the MOE, it will now provide about 75% of the costs (via a mix of grants and debt). It will provide no funding for new student or faculty accommodation as it believes current capacity is sufficient, with the consequence that if increased campus accommodation is to be provided it may have to be funded using our own balance sheet. Nor will the MOE fund academic or research buildings that are not submitted for its approval or it does not approve. Thus, NUS must look to independent research funding agencies and donors, or fund them from our own resources.

Third, fundamental and translational research is essential for a world-class university such as NUS. It provides synergies with undergraduate teaching, enables us to attract top academic talent and, importantly, leads to a multitude of positive externalities for Singapore – for example, by ensuring that Singapore is a leader in many of the innovative new industries that characterise the new digital economy. NUS has been very successful in attracting research grants due to the calibre of its faculty and its facilities. However, funding the faculty, facilities and the necessary “back office” support is expensive, which requires that the providers of research funding acknowledge the associated “full” costs. If not, the university has to subsidise the activity by drawing resources away from something else. There is no free lunch.

Fourth, one of the shared objectives of the government and NUS is to ramp up the provision of “lifelong learning”. The strategic goal is clear and well-founded: Singapore is dependent on maintaining its competitive edge in terms of having a well-educated and motivated labour force. Given the rapid pace of technological change, people need to continually upgrade their skills. While many governments and universities have made this case, what sets Singapore apart is that the government did not just state an “aspirational goal” but it also provided the resources to make it happen. Thus, the government committed to meet about 70% of the costs of providing mid-career training. This is a clear example of marrying a strategic objective with a financial plan to make it sustainable and NUS has responded correspondingly.

Fifth, the government continues to incentivise donors to support NUS via a generous matching grant. The objective is to help NUS build an endowment that is large enough to generate a steady source of income into perpetuity. Once again, the government is backing its strategic goal with financial incentives. Most of the internationally-competitive top-tier universities have built sizable endowments to provide them with the financial capacity to pursue their strategic objectives. For example, I once calculated that the annual “pay-out” from Princeton’s endowment yields about US$100,000 per undergraduate per year, which was about 24 times the amount at UC Berkeley. While endowments take a long time to build, they are an essential part of the financial architecture of modern first-class universities. NUS is no exception, and thus donor financial assistance will be increasingly important.

In conclusion, NUS has a solid financial base that has allowed it to achieve its current place among the best universities in the world, which in turn has helped provide Singapore with the educated and innovative labour force it needs to compete globally. However, we are going through a transition to a new funding model and thus we must remain vigilant and forward-looking to ensure that we can meet or sustain the goals that others have laid out in this issue’s main feature. As NUS President Tan Eng Chye (Science ’85) has said many times, “If we all work together as ‘One NUS’ we can achieve our strategic goals”. This includes ensuring that we all work together to ensure our continued financial strength.