Financial crisis in public sector universities

Government/ HEC role in creating a pension fund management company for the education sector is highly desirable

January 22, 2023

Addressing the admission ceremony of the Oxford University’s 273rd vice chancellor on January 10, the chancellor, Lord Patten of Barnes, commented on the tough financial situation faced by the country as well as the institutions of higher learning. He observed that “our national economy is in a poor, indeed a lamentable state. Future growth prospects are buffeted by the aftermath of a global pandemic, a European war, a faltering Chinese economy and the self-willed departure from our largest export market in pursuit of an elusive and mendaciously spun notion of national sovereignty. ”

Pakistan’s higher education sector is facing a similar crisis of much larger magnitude. Federal universities are struggling to pay salaries and drastic budgetary cuts are being imposed on the universities. Austerity is the buzz word in the power corridors but there is hardly any coordinated effort to address this problem to devise a sustainable and long-term solution. Universities are expected to generate more resources from their own sources without creating an enabling environment for them in terms of developing capabilities and conducive policy frameworks.

With an old policy framework and archaic governance structures, universities can thrive in a highly competitive environment. Public sector institutions of higher education have never been systematically trained in resource mobilisation. There is no concept of engaging professional financial managers in most public sector universities.

Traditional accounting and audit jobs are done by respective officials and routine budget making and follow-up with the officials of relevant government departments are key responsibilities of concerned university officials.

Though most of the concerns about cuts in the higher education budget are valid, there is a need to revisit the governance structure of higher education institutions which is so archaic and outdated that even the injection of a hefty amount would eventually prove insufficient due to systematic inefficiencies and waste.

It is desired that the universities should become self-sufficient and generate the financial resources they need rather than relying on government funding. However, existing governance structures do not adequately equip the top administration of universities to realise this goal.

We are continuing with old patterns of membership of syndicate and senate bodies where members hardly contribute to actual governance of the universities. Pakistan has adopted a new and bold structure of governance for its power distribution companies and even public sector hospitals by opening up membership of boards for business and community representatives. This has opened countless possibilities for developing public-private partnerships.

Universities have yet to adopt this model of open governance that can link them with industry and communities. Of course, the universities cannot do so on their own as the laws and regulations governing them are beyond their control. Here comes the role of the federal government and the HEC in providing a clear regulatory roadmap by providing sufficient autonomy to universities and their governing boards.

The HEC should strictly confine itself to its constitutional mandate of setting standards, rather than becoming a full-fledged regulatory institution. Within the framework of the minimum standards set by the HEC, universities should be encouraged to experiment with self-regulation through respective governing boards.

Almost no public sector university has a functional resource mobilisation office. Consequently, the finance offices of public sector universities merely administer government grants for recurring expenditures and development projects.

The lack of professionalism is a major cause of the financial crisis in the universities. Old and large-sized public sector universities are increasingly facing the problem of payment of retirement benefits to their employees. One of the key factors in this problem is poor administration of savings and financial resources. Universities typically invest savings in the risk-free and low-return option of fixed deposits in scheduled banks. The HEC has never provided them with prudential guidelines to diversify their investment portfolios.

There are plenty of low risk and safe investment options but such ventures require professional acumen that is missing. Consequently, universities are in trouble and every year a substantial amount of the recurring budget is directed towards payment of retirement-related expenditures. If this situation is not fixed, additional funding from the government of Pakistan will hardly be sufficient.

The idea of allocating more funds to the higher education sector should be linked with governance and institutional reforms. Without revamping the current model of governance and institutional practices, universities will end up wasting more money.

Amidst the deepening financial crisis in almost all public sector universities in Pakistan for a variety of reasons, immediate steps need to be taken for damage control. Increasing pension liabilities of universities is one of the burning issues that many universities are currently facing. The newly established universities will also face similar problems sometime in the future.

A larger number of university employees (academic as well as non-academic) are in the BPS system. They joined this stream with the expectation of getting retirement benefits. However, it is becoming increasingly difficult for universities to allocate funds for the payment of post-retirement benefits. In almost all universities there are long queues of recently retired employees for payment of retirement benefits.

There are complex reasons behind this problem. These include poor management of pension funds and even, in certain cases, delayed establishment of pension funds. Consequently, universities are paying for these liabilities from recurring budgets, which in turn creates a shortage of funds for essential academic activities. Hence, pension fund reforms are badly needed to avoid a complete breakdown of this system.

The Planning Commission, the Ministry of Finance and the Higher Education Commission can play a vital role in this regard. The lack of professional management of pension funds is the main problem. Universities deduct employees’ contributions and fix them in commercial banks at low rates after adding employers’ contributions. This is undoubtedly a low-risk-low-return option. However, it is in no way capable of yielding the income required for pension fund needs.

Experience shows that universities will not take the lead in this direction for many reasons. Most of the vice chancellors are not financial managers. They hardly ever go for out-of-the-box solutions, especially after the NAB arrested some vice chancellors. Investment committees in universities typically comprise people who avoid liability by placing funds in commercial banks.

The role of the government and the HEC has become crucial in identifying policy guidelines for a low risk-high-return investment roadmap for public sector universities. Engagement of professional pension fund managers is necessary.

For this purpose, the government/ HEC can seek technical support from the insurance/ takaful sector which has an established record of managing investment portfolios with promising short-term and sustainable long-term returns. Insurance/ takaful funds have rarely struggled with the payment of liabilities to their contributors because these companies select a range of investment options. Instead of simply fixing their investments in commercial banks, public sector universities should be encouraged to diversify investment portfolios.

Naturally, this will not be a viable option for every university. Hence, the involvement of government/ HEC in creating a pension fund management company for the education sector in Pakistan is highly desirable. The task can be outsourced to reputable companies like the State Life.

A smart policy intervention in this regard will be very helpful. Without such changes, pension liabilities of public sector universities will take over a substantial portion of the budgets and create more frustration.

The writer is a professor of law at Quaid-i-Azam University, Islamabad