Universities need to plan better for future funds

PUBLISHED : Monday, 26 March, 2007, 12:00am
UPDATED : Monday, 26 March, 2007, 12:00am

City told to develop policies on endowment

Universities in the United States have hoarded billions of dollars to finance their operations for years to come and in Britain the government is offering incentives to encourage schools to do the same. But in Asia, endowment funds are few and poorly funded, a difference that could leave our institutions trailing those in the west.

Hong Kong has many wealthy, generous donors, allowing our institutions to raise millions of dollars in donations every year. However, many of these gifts are spent on erecting new buildings or paying scholarships, which leaves fund raisers passing the hat again year after year instead of building a fund to serve longer-term needs.

An endowment is a gift of money with laws strictly preventing the spending of the principal amount. Gifts to an endowment are often made at the end of one's life to leave a legacy. The money is invested, and the proceeds from those investments can be used to finance a specific programme or mandate.

'Institutions in Asia are behind the rest of the world on endowments,' said John Peralta, the managing director of consulting firm Global Philanthropic. 'This is money that you don't have to ask donors for every year or go to the government for. That is how you can hire the best professors, researchers and this is what helps make Harvard what it is.'

While institutions here may have large cash reserves, this is not protected capital and does not finance the long-term planning that income from an endowment enables.

Endowments are a key source of funding for many of the top schools in the US. Harvard has US$28.9 billion in its endowment fund, with Yale close behind with US$18 billion. Even many lesser-known universities, private and state, have endowments worth more than US$1 billion.

By comparison, the University of Hong Kong has an endowment of HK$4 billion to HK$5 billion, according to K.M. Cheng, a professor and special adviser to the university's vice-chancellor.

Mr Peralta said: 'Institutions in the west are driving incredibly hard on endowments right now. The disparity between schools in the east and west is going to become greater.'

Key to the success of US universities are their alumni networks, which are held together by a strong sporting culture and school identity. Long after leaving university, many Americans will continue to cheer for their school teams and that loyalty translates into handsome donations when they strike it rich.

'Endowments depend entirely on your ability to maintain contact with your network of alumni,' Insead dean Frank Brown said. 'People will support the institutions they know and trust.'

Funnelling donations into endowments is becoming more popular in Europe and Britain as well. The British government last month announced plans to build up the endowments of its top schools such as Oxford University and Cambridge University. For every GBP2 (HK$30) donated to a university, the government will contribute GBP1 from the public coffers, up to GBP2 million.

While British and European schools may not have the same rah-rah sporting culture as US schools, they have hundreds of years of history and subsequently an enormous alumni network to draw from.

Mr Peralta said it was important for Hong Kong institutions to plan their finances further into the future because the days of hometown tycoons such as Li Ka-shing and Henry Fok Ying-tung, who have regularly given large gifts of money, were coming to an end. Their sons and daughters are not expected to give such grand gifts, especially since most of the children of Hong Kong's wealthy go to school overseas, giving them less cultural ties to the SAR, and particularly to its schools.

The Hong Kong Academy for Performing Arts set up a HK$4 million endowment fund about a decade ago, but it has been dormant for much of that time. In any case, earnings from it would be a drop in the bucket, compared with the academy's annual operating costs of HK$260 million.

The academy recently created a development department, and its head, Winnie Sek, said taking a second look at endowment funds was on the to-do list.

'The development department will aim to have more fundraising, sponsorship and we would very much like to develop an endowment fund for the academy,' Ms Sek said.

Hong Kong charges no capital gains tax or estate tax, taking away some of the incentives to give that are built into other tax systems. However, rather than tinker with taxes, Mr Peralta said a more constructive approach would be for the government to be more focused in its incentive schemes on endowments.

The SAR government has offered a matching programme in three phases since 2003, which has attracted sizable donations to the city's universities. However, the programme does not require universities to put the money into endowment.

Professor Cheng said HKU had created about 20 endowed professors' chairs through the programme, each financed by a HK$20 million fund.

A key to running a good endowment is how you invest it. Professor Cheng said HKU's endowment had doubled in size in the past four years and various parts of it generated returns of 7 to 10 per cent last year.

'This year will be a real test to see if that's sustainable. This means we must have a fairly bold policy and strategy investment. Some universities in Hong Kong put the money into banks to play it safe,' he said.

HKU started its endowment fund in 1996 but did not start focused fund-raising efforts until 1999. Significant inflows only began in 2003 and 2004 as the government introduced its first round of a matching scheme.

Professor Cheng said Mr Li's gift of HK$1 billion to the university two years ago went into endowment.

'The money we get each year is very small, on the other hand, it is sustainable, perpetual, and that is a different way of looking at money,' he said. 'People need to move away from immediate returns and towards a vision of the future in terms of donations, and only then are endowments possible and useful.'