Unable to cover their costs, universities are dipping into fast-dwindling reserves. Latest figures from the government-backed Higher Education Funding Council show the proportion of reserves held as cash falling from 22 per cent to as little as 16 per cent by the end of the century. Cash reserves are needed for universities to respond to events - and pay their bills. The funding council recommends that institutions have reserves to cover 30 days' expenditure, and is concerned that many don't. In fact, the proportion of reserves held as cash is forecast to fall from 27 to 15 days' expenditure by 2000.
Vice-chancellors have cause to be worried - much more worried than they have ever been before, say the experts. "I think the financial situation is very serious," says Professor Ivor Crewe, who runs Essex University. "The funding council is not crying 'wolf', but giving a realistic assessment of what the financial situation is likely to be over the next few years."
Businessmen agree - and think that the new figures reveal the tip of an iceberg. Lord Limerick, former Department of Trade minister, chairman of De La Rue and Pirelli and of the board of London Guildhall University, says: "Life is very hard for universities. Things are worse than the figures show. If quality is not to decline quite quickly, something has got to be done to preserve current and capital funding." The universities' combined cash reserves of pounds 500m may sound a lot of money. "But it's sailing very close to the wind," he says.
All of which has serious implications for the health of British industry, according to Dr Michael Elves, director of scientific affairs at Glaxo- Welcome. Many companies depend on recruiting first-class science graduates. "The sort of graduates we're getting from the universities are not what we used to get," he says. They lack practical skills. Companies depend on access to cutting-edge research in the universities. But that research is also suffering. More and more firms are looking abroad for collaboration.
Experts in university finance normally mince words. No longer. "I think it's absolutely clear we're at a watershed in funding policy," says Michael Shattock, registrar of Warwick University and the man who rescued University College, Cardiff, from bankruptcy in the Eighties.
There is, however, another side to this picture of gloom and despair. Every year vice-chancellors howl about cuts. Yet each year almost all get by, packing in more and more students at lower unit cost. Some might see this as a great achievement, a British success story. Professor Gareth Williams, of London's Institute of Education, sees an element of politicking in the current rumpus, a ritual attempt to drag more money out of a flinty- hearted Treasury in advance of the budget. But, he adds: "There are known to be some universities out there which are in hock to their banks to a considerable extent and getting near to the stage where they won't have the wherewithal to meet the pay cheques."
At the same time there are some universities which are rich, particularly in terms of assets. As one vice-chancellor, who wishes to be nameless, puts it: "12 universities are extremely wealthy, 70 are extremely poor, the rest are doing OK. Of the 70 poverty-stricken institutions, half could go to the wall at any time. It's pretty serious."
The statistics are sobering: the university system as a whole was in surplus last year to the tune of pounds 49m, or 0.6 per cent of income. From this year, it will be in deficit. "If that forecast of 0.6 per cent of income had been made for an industry in the private sector, shares in that sector would have fallen through the floor," says Professor Crewe. "We would have expected a lot of bankruptcies."
What are the long-term solutions for a system which relies so heavily on government funding but which is constantly having investment cut by its major shareholder? Most experts agree that the answer is boosting income through efficiency savings - that is, providing the maximum amount of education at the minimum cost - and with higher contributions from students and their families.
Universities have not always been brilliantly run in the past. As Professor Peter Scott, of Leeds University, puts it: "They are, in some areas, hanging on to the old ways of doing things. They like the idea of staff acting as personal tutors. If you have 20 students, that might work, but if you have 50 to 60, it doesn't. You have to look at other ways of maintaining a sense of community."
Change will have to come in teaching and marking exams, he says. Universities are going to have to teach in different ways, through distance learning, using new technology - interactive computer systems and CD-Roms - which enables large numbers to learn at relatively low cost. The problem is the start-up costs of Open University-style learning are very high - too high for some universities.
The universities soldier on. Names of the half-dozen or so thought to be close to bankruptcy are muttered in half-whispers. "Whether they will close down I doubt," says Sir Ivor. "I think what is likely is that they will be forcibly merged with other institutions and the system as a whole will have to pay for it."
That is what happened at Cardiff. The university was broke. It had exhausted its overdraft at the bank and was staring the receiver in the face. Initially Mrs Thatcher wanted market forces to take their course and for the university to close as a lesson to others n
Politically, that proved impossible. There were marginal constituencies in the neighbourhood, and there were the students, staff and local people to think of. So, University College, Cardiff, was forced into a shotgun marriage with the University of Wales Institute of Science and Technology. The principal, registrar and bursar were fired and a financial rescue plan drawn up. Vacancies were frozen, spending was pared and a serious attempt made to attract overseas students. The plan worked, just as it is expected to work with other vulnerable institutions.
"The solution has to be a different method of funding," according to Lord Limerick. A year ago the vice-chancellors flirted with the idea of an entry fee to be imposed on all students to recoup cuts. The resulting furore led to the setting up of the committee chaired by Sir Ron Dearing with the hope he would sort things out once and for all.
Many experts believe the only solution is to charge students fees - at present they pay only for board and lodging - through loans which are repaid over a lifetime via National Insurance. Australia and New Zealand operate such schemes. There are all sorts of objections, however, and Labour and the Conservatives are refusing to contemplate such an idea in advance of a General Election because of its unpopularity with the public. But if the politicians won't stump up the money, the choice is clear: either we embrace reform, or our system becomes increasingly threadbare and low-quality, unable to compete with Harvard, MIT and Berkeleyn
'No-one enjoys this process'
Set in countryside outside the town, Lancaster University has 10,000 students and an overdraft of pounds 5.8m with a major clearing bank. This month, it agreed a recovery plan, drawn up by the accountants Coopers and Lybrand, to clear its debt by the end of the century. That involves another voluntary redundancy scheme on top of the previous one which enabled it to shed 250 jobs, to put, a freeze on vacancies and professors' pay rises this year, and to get rid of departments or parts of departments.
Its problems were caused by a big building programme - a new library extension and a residential development - and generous investment in staff, according to the academic registrar Marion McClintock. But its income and expenditure are already in balance, and the university is confident it can put its reserves into the black.
"There isn't anyone in the university who enjoys this process, but at least we're keeping channels of communication open," she saysn
'We've had a very hard time'
It has been a tough couple of years for Guildhall University. A former Inner London Education Authority polytechnic, it inherited liabilities, tatty buildings and slender reserves from ILEA. But its financial problems worsened with the recession when demand for part-time courses in finance dropped off.
The accountants Coopers and Lybrand drew up a recovery plan that brought restructuring, job cuts (there have been four voluntary redundancy schemes, each less generous than the last), abandonment of a big library building programme and savings in refurbishment.
The university is still in debt and is in the red on its income and expenditure account, but expects to be in surplus by the end of the century. Earlier this month six compulsory redundancies were announced.
"We have had a very hard time, but we have come up with a plan that will take us back to positive reserves and a revenue surplus at the end of a three-year period," says Lord Limerick, chairman of the board