Higher Learning & Higher Earnings

Welcome to this week’s edition of ፍራንክ Digest!

Your weekly brief on all things Finance and Investing. Quick, enjoyable reads for busy professionals in 5 minutes or less.

Topics this week:

• 🏛️ Funding Freedom: Ethiopian Universities take charge of their finances

• 🌽 Assets In Store: The power of Warehouse Receipts

Thanks for reading!

Cashing In On Autonomy: Can Independent Universities Be Good For Business?

Investment

In 2021, H.E. Prime Minister Abiy Ahmed revealed the intention to grant independence for Universities to reduce the financial burden on the government. State expenditure on higher education has gone from ETB 66.06 bln in 2021/22 to ETB 55.77 bln in 2023/24, amid the high inflation, which means the real value is even lower! 

Following the ratification of public university transition policy in 2023, Addis Ababa University (AAU) gained legal autonomy in October 2023 and has been granted a two-year transition period to finalize the process. Nine other public universities will follow suit in the coming years.

Autonomy, however, does not imply the government will lift its hand from the higher education sector since it plays a key role in the country’s social and economic development.

Best case scenario is that it will introduce greater competition between institutions and promote a more corporate style of governance. Academics argue that government financial bureaucracy limits research, creativity and could be the reason for lack of linkage with the business community.

So what does financial autonomy mean for Universities?

In effect, it allows Universities the freedom to acquire and allocate funding. This means being able to charge tuition fees, keep profits, borrow or raise money from different sources, own assets and make procurements independently. However, this doesn’t mean academic autonomy which focuses on setting academic strategy, programs and quality assurance of degrees.

What are the current sources of funding?

Up until 2004, Ethiopia’s public higher education was fully funded by the government, involving no student contributions. In 2004, the government introduced a cost-sharing scheme whereby students contributed 15% towards their education with fees payable after graduation. In the 2022/23 budget year, the revenue to the government from cost-sharing amounted to ETB 400 mln. 

Globally, a significant source of revenue for Universities is tuition fees from students. Additionally, Universities receive government grants, research grants, donations and fees for expert consultancy. Effective financial management of these diverse funding streams, under an endowment fund, is crucial for universities to meet their financial obligations and support academic programs.

What are endowment funds?

Financial assets donated to universities, typically in the form of cash, properties, equity shares etc. with the intention of providing a reliable source of income.

• Collected and pooled under an endowment fund set up by the university.

• Carefully managed and invested by the university's financial team to generate a steady stream of ገቢ.

• The returns can then be used to fund various academic activities including student scholarships, research and faculty staff salaries.

Endowment funds play an important role in the global financial sector along with pension funds. It is usually invested through professional fund managers in safe treasury bonds, private finance markets which support Small and Medium Enterprises (SMEs) and public stock markets.

If the legal frameworks and incentives are put in place for endowment funds to exist, it will be good news for both:

• Businesses- large corporations can fulfill their Corporate Social Responsibilities (CSR) by donating to a university that produces the skill required for its industry (graduates, research & experts) and have the expense tax-deductible. While smaller businesses will be beneficiaries of endowment fund investments by tapping into an additional source of financing.

• Universities- can plan for long-term academic programs by managing the returns on their investments without being overly reliant on tuition fees or other fluctuating sources of funding. Research and graduate programs will also be more relevant to industry needs.

Collateral Kings: How Warehouse Receipts Transform Financing

Economy

Warehouse receipt is a document issued by a certified warehouse operator to provide evidence of the ownership of the stored goods.