In 1988 the Teaching and Higher Education Act introduced tuition fees in all the countries of the UK. However, as result of the establishment of devolved national administrations for Scotland, Wales and Northern Ireland, different fee arrangements now exist in each country. For example, in England and Wales, tuition fees for UK and EU students are capped at £9,250 p.a., while in Northern Ireland the fees are limited to £4,030 p.a. In Scotland, universities are not allowed to charge fees to Scottish based or EU students, but instead received funding from the Scottish government, which varies by subject, but averages around £5,000 p.a. per student. This funding model has introduced significant differences in the financial strength of the universities both between and within countries and has been subject to considerable criticism from all stakeholders, with alternative funding options being promoted by opposition political parties.

This differential funding model exists at a time when universities are facing a very competitive market to attract both UK and international students in a post Brexit environment. This has resulted in significant capital investment by a number of universities on major building works, to maintain and grow student numbers. While some of the funding has been supported by the rise in tuition fee income, universities have also used a range of funding options from private bond issuance to commercial bank lending, both short term and long term, and loans from the European Investment Bank to finance the expenditure.
Adopting a corporate finance theory perspective, this paper considers the appropriate mix of debt and equity which is appropriate for major capital projects in the HE sector. Utilising both HESA data returns and published annual accounts, in-depth analysis using a nested logit structure was carried out on data from the top 63 UK universities over the period 2013 to 2016, to establish the range of funding sources adopted for major capital projects, all set within the context of the UK macro environment and a period of low interest rates. The research also carried out a survey of funders to understand the decision criteria used by lenders active in the HE sector and to understand how the borrowers are monitored ex ante and ex post the lending event. 

The research reveals significant differences in covenant strength across the HE sector with a wide division emerging and differential access to the public markets.