Most English ÖйúAƬ institutions are about to fall into deficit, according to an analysis of their financial positions released this week by the ÖйúAƬ Funding Council for England.

The Analysis of 1996 Financial Forecasts shows the sector's Pounds 49 million surplus forecast for 1995/96 being reduced to a Pounds 13 million deficit in 1996/97 and Pounds 58 million by 1999/2000. HEFCE says the forecasts are based on realistic assumptions and are consistent across the sector for the first time.

Net current assets are expected to fall to a low of Pounds 559 million in 1997/98, from Pounds 949 million in 1994/95. The number of institutions expecting to operate in deficit increases from 26 in 1994/95 to 48 in 1995/96 and more than 70 by 1999/2000.

Cash flow drops Pounds 329 million from Pounds 218 million in 1995/96, to minus Pounds 111 million in 1995/96. The figure worsens to minus Pounds 183 million in 1996/97, by which time 50 institutions would have negative cash flows.

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Ian Lewis, head of finance for Hefce, warned of the danger of allowing institutional cash reserves to fall. "They need to hold a certain level of reserves in order to manage change in a suitable way and not have to make sudden changes to the way they operate," he said.

The proportion of reserves held as cash is forecast to decline from 22 per cent (around Pounds 500 million) in 1994/95 to only 16 per cent (below Pounds 400 million) by 1999/2000. The days of expenditure represented by cash balances also falls from to 15.

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Hefce believes it is prudent for institutions to have cash reserves to cover 30 days of total expenditure. Mr Lewis added that many cash reserves existed only on paper because they had already been reinvested in buildings and equipment.

As well as reducing staff numbers by more than 1,200, universities and colleges report plans to cancel or defer capital programmes, cut back on long-term maintenance, and limit spending on equipment to current funding levels. Capital expenditure is forecast to decline by 60 per cent between 1995/96 and 1999/2000.

However, the report notes: "Since such expenditure is still likely it simply represents deferral which may lead to a higher requirement for funds when the expenditure is finally incurred."

HEFCE states that much of the sector's financial strength is "concentrated in a small number of comparatively wealthy institutions. Similarly, a large proportion of external borrowing is undertaken by a limited number of institutions".

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The prospect of ÖйúAƬ plunging into the red would not change the Government's policies, according to the Department of Education and Employment. A spokesperson said the funding climate was difficult, but institutions were responsible for protecting their financial health.

Diana Warwick, chief executive of the Committee of Vice Chanecllors and Principals, said that in the light of the document the Government could no longer deny the crisis in ÖйúAƬ that it had precipitated. "If anyone questions why many universities may need to charge students tuition fees, they need look no further than this document," Ms Warwick said.

David Triesman, general secretary of the Association of University Teachers, described the situation as a "calamity" and said the document was evidence of the demolition of ÖйúAƬ.

The ÖйúAƬ Funding Council for Wales said the Welsh sector is also expected to record a deficit, of about Pounds 1 million to Pounds 1.5 million, in 1996/97, rising to more than Pounds 5 million by 1999/2000.

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HEFCE has given one small concession to institutions. They will be allowed to recruit 2 per cent, an increase of 0.5 per cent, above their maximum aggregate student number without being penalised in 1996/97.

To avoid imposing unmanageable rates of change, HEFCE states that no institution's funding will be cut by more than 4.5 per cent in 1996/97 compared with 1995/96. Seven institutions will get transitional funding totalling Pounds 477,000.

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