New varsity financing model targets private capital

Kenya’s capital markets will be the biggest beneficiary of the proposed shift in financing of university education, experts said, underscoring the increased role that crafters of the new plan have carved out for private capital.

The plan, prepared by a World Bank-backed team of consultants, proposes a wide mix of instruments that universities can use to tap private capital for their expansion and growth.

It proposes that universities be allowed to use assets such as land, and government guarantees to access long-term capital from banks and the bonds market -- opening up new channels for private equity, insurance firms, fund managers and high net worth individuals to invest in tertiary education.

Investors are also expected to get an additional window at the Higher Education Loans Board (Helb), which under the new financing plan, will issue education bonds linked to its performing loans.

Helb is initially expected to issue a Sh7 billion education bond, based on the Sh7.4 billion performing loans portfolio that will be tradable at the Nairobi Stock Exchange, according to people familiar with its plans.

Analysts, however, warned that the viability of bonds as a sustainable source of funding for universities will depend on the interest rates regime.

Bonds performance has traditionally had a converse relationship with interest rates, rising when interest rates are low and falling with the rise in interest rates.

It has also been proposed that Helb securitises the loans for use as an asset to borrow directly from banks.

The proposed shift in the financing of tertiary education could also see investors build and operate facilities such as hostels and book stores to meet the demand for ultimate transfer to the institutions.

Client base

It is also proposed that the universities lease or sell the huge chunks of idle land valued at billions of shillings they own and use the proceeds of such transactions to expand learning infrastructure.

“The sector has a growing client base that should be of interest to both government and private players,” said Carol Musyoka, a finance expert with Bungani Consulting.

“Listing bonds by individual universities could, however, be tricky because of the costs involved,” she said, adding that the regulatory requirements could also pose a challenge to many of the colleges.

The proposals released on Monday aim to wean the public universities of heavy reliance on short-term borrowing that has left them with yawning budget gaps and ramped up the cost of higher education.

While some finance experts reckoned that the plan offers public universities the best avenue ever to raise the estimated Sh100 billion they need to finance their programmes, critics said it was inappropriate in a socially unequal economy like Kenya’s as it raises the prospect of locking students from poor families out of tertiary education.

The plan also came under heavy criticism for its potential to make Kenya’s university education the most expensive in the region posing the danger of mass flight of capital as parents seek affordable options in places such as South Africa.

A full year’s post-graduate education in South Africa’s top five universities costs about Sh200,000 (USD 2,667) lower than what Kenyan universities charge before the proposed increments.

“Investing in the education has massive long-term benefits in productivity and wealth creation,” said Edwin Nyanducha, a financial analyst with Inkubate Consultancy. “It cannot, however, be a lucrative high returns platform for hard-nosed investors chasing profits,” he said.

If adopted, the plan will take public universities closer to their private counterparts who are increasingly embracing new financing models such as private equity funds to meet their investment needs.

An American private equity fund ––Africa Integras Fund (AIF) is expected to seal the first such financing deals that will see it invest millions of shillings in academic and residential facilities at a local private university.

University of Nairobi vice chancellor, Prof George Magoha, however reckoned that the plans could only work with intensive reforms in both the universities and the capital markets.

“Universities are facing unfavourable investment environment where the economic risks to investors are poorly quantified,” Prof Magoha said. “The cost of money is quite exorbitant and must be addressed.”

Public universities could, however, get help in overcoming the challenges from institutions such as Barclays, one of Kenya’s top banks that are developing university-specific debt instruments for the bonds market to be backed by the billions of shillings worth of assets held by the colleges.

Experts also warned that the shift in financing will require a heavy-dose of legislation to give investors the comfort they need to put their money in the sector as well as back Helb’s loan recovery mechanisms.

While the BOT model could sort out the financing dilemma for private universities, their public counterparts are barred by the University Act from entering into such arrangements.

Educationists warned that the new plan could come at a heavy cost to students as it will also see fees and the interest charged on student loans increase significantly to raise more funds.

Already, local universities bear the dubious distinction of being the most expensive in East Africa, a development that is being blamed on the financing model.

Public universities have traditionally been financed through government allocations.

More recently, however, as Treasury became overburdened by the increasing public expenditure needs, the universities have come to rely more on income-generating activities such the popular parallel degree programmes.

Heavy reliance on fees as a revenue stream has in turn tipped the scales in favour of upward adjustments that have blocked thousands of prospective students from university education.

It costs at least Sh1.5 million to complete a Bachelors degree programme under the parallel model.

In UK, the maximum tuition fee amount that can be charged to domestic students is around Sh350,000 per annum for a three-year undergraduate course.

Educationists say failure to push through new financing solutions could throw the sub-sector into an admissions crisis that will deny thousands of qualified candidates a chance to pursue higher education.

“We have had to think of a mix of financing options but when it comes to borrowing, the interest rates are still too high,” said Prof Freida Brown, the vice chancellor at the United States International University (USIU) in a previous interview.

According to the new proposals fees increment will be offset by loans taken from Helb –– disbursed on per semester basis ranging from Sh35,000 -Sh60,000.

But the loans –– currently issued at four per cent for regular students–-could come at triple the cost, with the experts proposing they be based on the government borrowing rate currently between seven and 12 per cent or the prevailing market rate which averages 14 per cent.

Kenyan public universities received Sh11.2 billion worth of State subsidies in the last financial year, down from Sh14.2 billion a year before–- a 16.2 per cent drop.

Education officials said the universities were spending double the amount sourced from commercial avenues to supplement incomes.