Ideas & Debate

Endowment funds can help finance varsities

A recent graduation ceremony at the Technical University of Kenya. FILE PHOTO | NMG
A recent graduation ceremony at the Technical University of Kenya. FILE PHOTO | NMG 

In March, MPs handed about seven public universities a Sh662 million lifeline just to keep them afloat.

In the face of these events, an audit report picked a range of reasons — budget problems, low state funding and under-collection of internal revenue amongst others — as behind the cash crisis.

To add on the pile is the heavy reliance on tuition to cover expenses. What to do? These institutions desperately need a sustainable solution. So, here’s an old idea: endowment funds.

Going through Yale University’s 2016 endowment report, I was pleasantly surprised. About one-third of its operating budget (Sh100 billion), including professor salaries and student financial aid, came from endowment income. From its huge endowment (Sh2.5 trillion, the second largest behind Harvard) and outsized returns, the college receives generous amounts annually.

Its closest rival, Harvard, received Sh170 billion last year from its endowment, contributing to more than one-third of the University’s total operating revenue. Moreover, some schools such as Princeton derive about half of their operating budgets from endowment income.

Now, this is information is not news. The big takeaway is how these funds have utilised the power of the markets to sustain themselves.

Take for instance, through its strategic allocation in various asset classes – equities, private equity, bonds, real estate, natural resources et cetera—Harvard’s endowment has distributed more than Sh2.5 trillion to the university since its inception.

Putting its donations and retained earnings to work, the college has benefited from a 12.3 per cent annualised return in the past 40 years compared to a 10.9 per cent benchmark return.

Similarly, Yale’s ten year cumulative distributions to the college topped one trillion shillings thanks to a 8.1 per cent annualised return in the same period. Quite obviously, market success has greatly enabled these schools to independently support their missions.

Perhaps as a starting point, local varsities can begin working the basics; putting together an investment committee, setting investment objectives, developing an active investment strategy and finally crafting a spending policy. Emphasis should be placed on diversification and long-term equity-oriented investments.

Furthermore, outside money managers can be contracted only if there is no in-house talent. Alternative investments can also form part of the mix – here endowments can consider partnering with local private equity funds.

What’s more important, a culture of philanthropy, from alumni associations and well-wishers), should be encouraged.

Estate planning seminars are a great start followed by continuous programmes. Of course, not to the point where it becomes wearisome, but enough to make the stakeholders aware that the college has an endowment, how it’s being managed and encourage gifts to it. 

In summary, an endowment programme can help free these cash-starved institutions from concerns about having enough funds to finance their operations.

If universities are to comfortably finance their academic programmes, research and admit qualified students regardless of their ability to pay, then they need to consider setting up one. Universities do need to seize this opportunity and engage their stakeholders.