The gap between the “lowest and highest-performing” institutions financially widened last year, while overseas student entrant numbers fell, according to England’s funding council.

The Higher Education Funding Council for England has today published its annual report on the , based on results and cost breakdowns from institutions for 2014-15.

The sector’s financial results for the year “show a sound financial position overall”, says Hefce. But it adds that there is “an increasingly significant variation in the financial performance of individual institutions across the sector”.

In 2014-15, the English sector reported an operating surplus of £1.6 billion, or 5.8 per cent of income. That was up from a surplus equating to 3.9 per cent of income the previous year.

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This improvement is “largely attributable” to a “one-off” benefit from the government’s Research and Development Expenditure Credits – a tax relief scheme that the government has since closed to universities – says Hefce.

The latest Transparent Approach to Costing data show that excluding the benefits from those credits, the shortfall on the sector’s research activity came to £2.8 billion.

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Hefce also warns: “Without increased surpluses and continued government support, there is a risk that the sector will be unable to deliver the scale of investment required to meet rising student expectations, build capacity for growth and ensure that the sector can remain internationally competitive.

“Government support also fosters confidence among others to continue to invest in the sector, including banks’ willingness to lend money, although the sector’s capacity to lever in funding from other sources, including additional borrowing, is limited and may not be sufficient to meet the sector’s long-term investment needs.”

And the funding council also says: “One of the key challenges for the sector will be whether it can achieve plans for growth in the overseas student market, which is a significant source of income for many institutions.

“While income from this source grew in 2014-15, overseas student numbers were lower than forecast by the sector in July 2015, and data from the Higher Education Students Early Statistics Survey shows a 1.7 per cent drop in international new entrants in 2015-16. If this pattern were to continue, HEIs would find it difficult to achieve their income and surplus projections.”

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Madeleine Atkins, Hefce chief executive, said: "We are paying close attention to the increased variability of financial performance across the sector. It is clear that many institutions need to invest in new facilities, to support a high-quality experience for students and to respond to growing competition from overseas. This will require higher surpluses, and a drive to maintain increased efficiencies, to ensure long-term financial sustainability.

"While the sector has benefited from increased fee income generated from overseas students, it needs to be alert to the risk of underachieving against its ambitions for overseas recruitment. The latest data may be evidence of this risk materialising."

john.morgan@tesglobal.com