Indian Universities Shouldn't Fall for the Allure of the Yale Model of Financing

Most modern US Universities currently use the “Yale model” of investment, developed by David Swensen and Dean Takahashi. The model, which involved dividing the endowment amount into five or six roughly diverse asset classes and investing heavily, saw massive returns for Yale which were soon mimicked by other universities.

The current discourse on the establishment of a Higher Education Commission to replace the University Grants Commission has finally brought attention to a major crisis brewing in India: university financing. Campuses both private and public are suffering from pressure on multiple fronts. On the one hand, expectations regarding quality and access to higher education are at an all-time high; on the other hand, campus administrations are increasingly finding it difficult to find the resources to feed their ambitions. Any attempts to get additional public funding is being met with resistance, both in India and abroad, as governments seek to run more “fiscally sound” budgets. Any proposals regarding increasing student fees are met with resistance by students: in the last year alone protests have occurred at BITS-Pilani, Tata Institute of Social Sciences, Delhi University and Jawaharlal Nehru University.

The standard response to a shortfall in funding is to look to the private sector, and the university financing system is no different. While the concept of privatising higher education has seen both detractors and supporters, one area that has only recently been gaining attention is the idea of adopting an endowment model in India, similar to that run by some of the biggest universities in the US.

Understanding endowments

Endowments are large pools of money collected by universities from donors, with the intention of investing them in a variety of markets. These markets generate returns in the form of interest and capital gains, which can then be used as an income source for the university. Donors are typically alumni seeking to “give back” to their alma mater, rich philanthropists aiming to secure their legacy, or corporate interests looking for means through which their corporate social responsibility goals can be met.

The key point of an endowment is that the core amount is not meant to be spent; only the returns generated by the endowment are actually spent. This is meant to protect the size of the endowment for future generations, and protect the endowment from being spent too quickly.

Most modern US Universities currently use the “Yale model” of investment, developed by David Swensen and Dean Takahashi. The model, which involved dividing the endowment amount into five or six roughly diverse asset classes and investing heavily, saw massive returns for Yale which were soon mimicked by other universities.

The endowment system is big business: according to the 2017 NACUBO-Commonfund Study of Endowments, the top ten universities have amassed an endowment collectively valued at $230 billion. Both private and public universities are getting in on the action: after Harvard and Yale, the public University of Texas has the largest endowment at $23 billion; a fact even more impressive given that the fund is less than 20 years old.

Endowments and India

While starting much later, Indian universities have begun to amass small endowments of their own: several IITs, IIMs, BITS-Pilani and the Indian School of Business have all established endowments either directly or through their alumni network in the past 15 years. Most have yet to grow beyond $1 million, but have seen some steady contributions over the past five years.

The allure of endowments as a revenue source for Indian universities is fairly obvious. They allegedly provide a strong degree of financial stability, they provide colleges with a means of raising funds that do not upset other stakeholders like students, and they provide a means to help establish and maintain informal and formal networks with alumni who may prove to be highly influential in the future. At their theoretical limit, they could even potentially eliminate the need for public funds and allow needs-blind admissions for students through fee-waivers and scholarships.

Unfortunately, this rosy picture belies the fact that there are a number of immense challenges, not just to the wholesale adoption of the endowment system in India but to the concept of endowments themselves as has been experienced theoretically and practically in the US.

Where endowments break down

The first challenge to adopting endowments in India is one of numbers. The critical mass of funding that would be required is out of reach for most, if not all, universities; this is particularly true of universities that are less STEM-oriented.

This is illustratable by taking the case of Delhi University. Delhi University’s actual receipts for 2015-16 were approximately $14 million from students’ fees (both academic and examination) and $61 million from UGC grants. Standard procedures for the best-run endowment funds disallow any expenditure beyond the long-term rate of return, which for the US is currently about 4.6% for a ten-year period. This would necessitate a fund of approximately $1.6 billion to be able to allow a utopian endowment model that entire replaces other sources of funds – and put Delhi University amongst the highest endowments in the world. Exceptions like the University of Texas notwithstanding, amassing such high endowments in a relatively short period of time is unheard of. Admittedly this is an extreme case of an endowment model, but even a more moderated approach would require either significant donations or a long amount of time for enough funds to be amassed as to make any meaningful impact in finances.

The next big hurdle is the nature of Indian philanthropy itself, when it comes to education. The act of donating to a major endowment has several latent functions beyond the obvious sense of contribution to a formative institution. There are material benefits in the form of tax breaks, the ability to secure one’s legacy, the political and social capital that are developed in the process, etc. For most of India’s financially capable philanthropists, these additional benefits are easily accessible through other means. The relatively low cost and ease of setting up a university in India has meant that it’s far easier for a philanthropically-minded wealthy individual to simply set up her own university than to donate to an existing one. Indeed, this has been the case, as evidenced by the growth of large privately owned universities in India within the last few decades. Of those who do prefer to donate to an existing university, it is often to their US alma-maters which already have such endowments: Ratan Tata, Anand Mahindra and Narayan Murthy all being examples of large-scale Indian donors to Harvard.

Exceptions do exist, of course: Ashoka University was established using no-strings donations from a number of wealthy individuals and has a stated aim of continuing to adopt such a model. Such cases are incredibly rare, however.

Finally, there is the question of how these endowments actually even operate in the best of cases. The 2008 crisis saw endowment funds across the board drop dramatically, questioning their potential as a stable source of revenue for universities ever since. The past decade has seen wild swings in their annual returns, from high double digits to negative numbers.

In terms of implementation of stated aims, the case of the University of Texas system is itself a warning sign. A Texas Tribune report lays bare the significant mismanagement that has arisen in the decades since the UT endowment system was established: large-scale questionable land purchases, start-up developments and expensive new office complexes have meant that administrative expenditure has increased drastically (to $143m) while financial aid and actual student-oriented has lagged behind (financial aid being roughly $40m).

The fact that such immense challenges and questions exist when discussing endowments highlights the immense difficulties in finding a nuanced long-term solution to financing issues in India. Other approaches exist, but all have associated problems, from student loans (and the arms-race in debt they engender) to increasing investment in industry-university linkages (and their limited scope for non-STEM colleges) to simply increasing public funding (and the challenges of convincing an increasingly sceptical public and reluctant political structure of their necessity). A decision on how best to move forward needs to be made sooner rather than later, however, to prevent an even graver crisis down the road.

Karthik Manickam is an economics researcher and a graduate of JNU and BITS-Pilani.