A university operating an internal bank can seem like a strange concept, but it’s what UBC and several other B.C. universities often turn to for the type of large scale infrastructure projects that seem to be ever present on university campuses.
According to Peter Smailes, UBC’s treasurer, an internal loan is when money that has been raised either from the public markets or the province is lent out by the institution itself for specific projects.
“[For] Marine Drive student housing, we ended up borrowing money to do that ... and then those loans are repaid back to the university over 30 years,” said Smailes. “Over the course of that … students get to use those facilities.”
Marine Drive isn’t the only well known venture that internal loans have helped fund. Ponderosa Housing, the UBC Bookstore renovations and the steam to hot water conversion were all backed by internal loans.
When loans are made in this way, the university still collects interest on it. According to Smailes, all of UBC’s long terms loans have an interest rate of 5.75 per cent and “part of that interest is to cover our external borrowing cost.”
When asked whether the ability to pay back the loans with interest comes mainly out of student fees, Smailes said “it comes out of all sources … it depends on what the project is. In some cases, like the bookstore, it’s paid for by anyone who uses the bookstore like a regular business.”
That being said, in the case of residences such as Ponderosa and Marine, residence fees do play a part in facilitating the constant recycling of revenue.
“If you had to wait till you had the money … students would have to pay for the student residence before they actually got to use it,” said Smailes when asked how students are impacted by this practice. “So you’d have to save up the money to pay for it and it would take you 20 years to save that money.”
It’s not only UBC that recycles revenue in this way. No one from UViC was available to comment, but their website confirms that they “act as the internal bank of the university in order to provide cost effective financing of UVic's growth.”
According to Alison Blair, Associate VP Finance at SFU, they've been doing internal loans in part because universities are not allowed to borrow from the province at this time. This has been the case since 2007.
The province has been rationing debt in recent years because provincial borrowing is based on the debt to GDP ratio. To maintain a solid credit rating, the province has been attempting to control debt as GDP is less easy to control.
“Since we are a part of the government reporting entity now … that means any debt that’s on our books basically becomes debt of the province,” said Blair. “There’s always a huge concern over that, so that is why we’re not allowed to borrow because we would increase their debt ratio.”
In the mean time, UBC will continue funding projects through their internal bank. A more recent venture made possible through the university’s internal bank is the aquatic centre.
After a donor was not found, UBC had to pick up 29 per cent, or $11.4 million, of the cost of the new aquatic centre. The original board document noted that the UBC Development Office is “confident in the ability to raise $2.5-4 million,” despite that by last summer John Metras, director of UBC Infrastructure and Development, confirmed that the university didn’t have any major commitments.
There was an understanding that if fundraising wasn’t successful in raising the money for the project, then UBC Athletics could absorb the cost.
When asked whether internal loans tend be the alternative option as in the case of the new aquatic centre, Smailes said, “At times, [but] it depends on the project. It depends on the amount of money. It’s very project specific, but certainly there are times where fundraising has not been in place and they want to start construction.”
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