When the Trustees convene behind locked doors on Friday, the Brodhead administration will seek approval for radical changes in Duke's venture into Kunshan.
Changes that make this expansion vastly more costly.
Far more risky, with giant losses on the horizon.
And far more grandiose.
✔ We start with the burgeoning cost, or more pointedly the burgeoning losses, a worry occasioned not only by the financial meltdown and tight budgets competing for every dollar in Durham but also by the sheer magnitude of where we are heading.
In recent weeks administrators have dropped snippets of information about rising losses in Kunshan -- but have given a very incomplete (and in our view misleading) picture. In fact we believe the Brodhead Administration -- by failing to be candid with all stakeholders -- has brought upon itself a huge credibility gap.
✔✔ Item one: the annual operating deficit of Kunshan
On April 16, 2009. The Chronicle reported for the first time our aspiration to move into China, an ebullient Dean Blair Sheppard of Fuqua describing how the city of "Kunshan will cover all construction and operating costs for the facilities."
Weeks later, we learned of an important limitation: operating costs for only five years. But administrators stressed how comprehensive Kunshan's commitment would be in this period, even specifying that electricity was included.
President Brodhead echoed this 100 percent commitment in his initial comments, but in a rare e-mail to all alumni on April 21, 2010, he seemed to hedge, for he mentioned only construction costs.
By the time the December 3, 2010 meeting of the Academic Council rolled around, the recently appointed VP for international expansion, former Divinity School Dean Greg Jones, was singing a new tune. He said that he would ask the Trustees in late February 2011 to vote $1 million a year to subsidize operating costs. Yes, money that would be taken from the budget in Durham.
And by the time President Brodhead delivered his annual address to the faculty on February 17, the Chronicle quoted him as slipping in a new figure: $1.5 to $2 million a year.
Fellow Dukies, we believe we understand how Brodhead arrived at this total -- and we must challenge his methodology for it conceals -- but does not resolve -- the true dimensions of our liability.
After much study, we have concluded that the financial model Brodhead used shows Duke responsible for covering losses approaching $8 million a year, every year. This sum could be dramatically higher if the expected sources of revenue do not pan out -- and we truly have no idea how many people will pay tuition or how much we can charge. And it could be dramatically higher too, if the city of Kunshan starts to charge rent for buildings it is putting up, a distinct possibility after the 6th year.
Brodhead does not focus on the loss. Rather he tells how -- stop stop stop writing. Rather he guesses how it might be covered.
Brodhead assumes $2 to $3 million of the loss will be covered by new donations every year, and thus not payable out of our general funds. Every year. This is an unproven estimate based upon no experience, based upon no fund-raising for a new university that has no alumni, no stakeholders.
Please understand that donations given directly to the Kunshan campus -- to be run as a separately incorporated university -- won't count as Duke's share. That's separate. We're talking money given to Duke to be transferred to Kunshan at the expense of Durham, $2 to $3 million a year.
Brodhead also assumes Duke will tap Fuqua -- we believe the Fuqua Corporate Education program to be precise, organized as a profit making corporation -- for $1.5 to $2 million a year. But wait a second. Corporate Education is totally owned by Duke University. Anything that comes out of their coffers might just as well have come from Duke University itself.
And then Brodhead assumes that its partners in Kunshan will let Duke send in bills for leadership and administrative costs incurred by Duke University brass, even though these are phantom expenditures for people already on the payroll of Duke University. This little ditty is in the $1.5 million range.
Voila. Our President talks not of an $8 million loss, but of the prayer that only -- only -- $1.5 to $2 million a year will have to come from Duke's general funds.
Fellow Dukies, did you ever hear of Enron and the way it did its accounting? That's what this is.
We repeat: without speculative and false infusions, after the Kunshan campus gets up to speed, Duke would be losing on the order of $8 million a year. Yes $8 million a year to be borne by Duke University alone.
The government of Kunshan would lose additional money.
The city managed to get Duke to renegotiate the original deal that provided it would pay 100 percent of operating costs, and thus all losses. The deal was whittled down, the tables turned to the point where Duke must pay 100 percent of some of the losses (associated with certain Fuqua programs).
Then Duke must pay half of the rest -- giving Duke University responsibility for approximately 55 percent of the overall annual loss. In today's Durham Herald Sun, Brodhead describes this as a "clarification." FC calls it a screwing.
Duke did get another year of free rent tacked onto the deal in the exchange. Six years and not five. But it's anyone's guess what happens after the sixth year; the only guarantee is a rather vague expression of intent to continue the venture, meaning we could be liable for all the losses in the range of $14 million a year.
If Kunshan starts charging rent for its buildings, the losses go out of sight.
These statistics are in small type deep inside the Trustee briefing papers. They add up this way: coupled with surprise costs for overseeing construction and furniture, Duke University could easily lose $100 million in the first decade in Kunshan, and $150 million seems a more realistic figure. These totals will go higher if we have to pay rent under a renegotiated lease for the buildings after six years. Or if the city stops covering a share of operating losses.
Decisions at Duke Kunshan University -- as this new entity is called -- will be made by a seven member board of trustees. Duke will appoint only three. The bylaws call for five affirmative votes on any decision -- meaning that the board can act with only one Duke vote. Ah yes, there is an exit strategy, not specified, in case of implosion.
✔✔ The financial projections which we have discussed bounce around because nothing is certain. There is no experience -- by any university -- for such a venture. As noted before, we do not know how many students will matriculate. We do not know how much we can charge them. And beyond the economics, we have no idea of the quality of people who may be interested in applying.
✔✔ A second economic model shows a total loss in the range of $15 million in the first five years and escalating after that. The fine print also says there's a 3 in 4 chance the loss will be more than that. Putting all the possibilities and ground rules together, this model shows Duke's share could reach $11 million per year.
✔✔ And yet another projection shows that Duke could lose more than $10 million per year. Per year.
We repeat: FC believes -- given these models and their horrendous possibilities -- that Duke University is digging a $100 to $150 million hole for itself in the first ten years of operations in Kunshan, and that Mr. Brodhead owed us a better explanation than to say Kunshan might need a subsidy of $1.5 to $2 million a year.
And we believe that our Trustees -- like us -- should be scared of the entire project.
✔✔ Item two: the construction costs in Kunshan
Our starting point once again is Dean Sheppard on April 16, 2009: "Kunshan will cover all construction and operating costs for the facilities." Time and time again, administrators affirmed this. Until the December 3rd Trustee meeting.
Duke's new vice president for global expansion -- former Divinity Dean Greg Jones -- asked for $5.5 million to cover planning, construction and oversight, to insure the 201 acre, six building complex meets "Duke standards." Duke announced this in a press release. While Jones was new to the administration, surely someone knew about this all along, while we were repeatedly hearing all construction costs were taken care of.
What was not announced -- and surely Jones knew about this one -- is a second request that is even larger.
In preparation for Friday's meeting, Trustees have received briefing papers that reveal for the first time that while Kunshan is putting up the buildings (including dorm beds for around 700 and 70 faculty apartments) they are an empty shell. Duke is going to have to dig deep for furnishings -- the numbers we have seen are in the $20 million range -- half of it from Duke. The Brodhead administration will describe this as a “loan” and is asking the Trustees for approval now, although it will not reveal how the loan will be repaid -- if ever -- until the May meeting of the Trustees.
A loan? An annual payment on a loan is an operating expense, and Fact Checker and Deputies have debated whether the amortization is included in the loss projections that we outlined above. A deputy says maybe it is. Fact Checker says no it is not, because the Trustees, asked to approve the borrowing now, are told they will learn at their May meeting the details.
✔✔ ITEM THREE: What's in this for our new partner, Wuhan University?
The briefing materials for the Trustees give just a few words about our new partner, short shrift in fact, leaving wide open the tantilizing question of why this school would want to get involved with Duke. What's in it for them?
Duke has described Wuhan as our silent partner. What does that mean?
It means no financial contribution. It means we have no faculty or student exchanges in place, no joint programs.
Saturday evening we picked up on a discussion indicating we will pay Wuhan what amounts to a franchise fee. Maybe in cash. Maybe in disguised ways.
We emphasize that other information in this Special Report did not come from this conversation and that while the Dukies in this conversation are in a position to know, we have no confirmation of their conclusion that Duke is going to fork over $1.5 million a year to Wuhan.
If this is true, it would be beyond any losses projected in the economic models above. Those models do detail where money will be spent -- and nothing for Wuhan is included.
✔✔ Item four: The shifting sands of what Kunshan is constructing.
In an initial press release putting a price tag on Kunshan, Duke's press office described Duke's $650 million campus in Kunshan.
Later we got clarification that this is not money that the city is putting into the new campus at all, but a translation of what it would cost to put up similar buildings in Durham.
By the time Sheppard gave the Wall Street Journal an interview that appeared on 2-11-2011, the translation had slipped to $360 million. And Duke had also flip flopped between five and six buildings.
And Friday, the briefing papers for the Trustees will include yet another estimate, this one $100 million or more lower than the last. And we're back to six buildings although the map being provided Trustees shows eleven.
FC has repeatedly asked VP for public relations and obfuscation Michael Schoenfeld to explain these calculations. We have provided him with comparable construction costs -- for example details on the new North Carolina Central dormitory which will open soon -- and comparable property values -- the recent sale of Hoch Plaza for example -- but have not had any answer.
We believe Duke's estimates are wildly inflated.
Here is why these numbers are crucial. Kunshan has committed these buildings rent-free for six years (actually the material we have is in conflict on the length of the lease, five or six years, though clear on the period in which Duke and Kunshan will split operating losses, six years).
The value of the buildings may well guide the future rent we have to pay. There is only a guarantee that Kunshan will hold talks to extend the lease in principle, no discussion of price.
We dare say there is not a business in America that would begin a major operation with such a shaky foundation.
✔✔✔ One of the negative effects of our rapid expansion globally -- not only in Kunshan but in London, Dubai, New Delhi, St. Petersburg and soon Brazil all at once -- is the way our management's attention is diluted and diverted.
Take Larry Moneta, vice president for student life. This is not to single him out, for we think he is one of the better administrators, but look, please, at his portfolio in Durham. He's leading campus culture in a new direction, trying to change course and introduce something more stimulating than a night stumbling on alcohol. He's leading fundamental changes in campus housing as we completely rework the concept of what it means to live in a dorm. And he's in charge of dining at a time when we're trying to return mealtime to an integral part of the educational experience and not just a line at the feeding trough.
The last thing Moneta needs is responsibility for dorms and dining, and faculty apartments, thousands of miles away. Yet he's getting it.
The Trustees will receive a long list of assignments. Executive Vice President Trask has more than a full time job in Durham, with the financial crunch continuing. Yet he will also have oversight in China. Our librarian, our head of computer resources, the list goes on and on.
Duke went down this route with the medical school in Singapore. Dean Sandy Williams tried to juggle two hats, spending half his time in Asia and half at Duke Medical School, and it did not work. And while we do not see Moneta or Trask or any of the others spending half time on new assignments, the diversion, the dilution is considerable.
Most seriously, Duke's vice president for development Bob Shepard (do not confuse him with Fuqua's Blair Sheppard) will also have Kunshan responsibilities. If someone gives a gift to the Kunshan campus, the city and Duke will share the benefits by having the gift applied to DKU income.
While we get those details, there is no discussion of the 500 pound gorilla: if donors are solicited for Kunshan, will this be at the expense of donations to Duke in Durham? Remember please, we will use Duke's donor list, as there are no stakeholders, no alumni, no constituents to tap in Kunshan
✔✔✔✔✔ Up until this moment, with the exception of the medical school in Singapore, the globalization of Duke has meant engaging on the Durham campus, welcoming faculty and students and researchers from all over as never before, bringing in ideas and honing our perspectives and sensitivities.
Kunshan is different: it is envisioned as a separate school called Duke Kunshan University. DKU. Get used to it. A totally new university, not a satellite, not an outpost, not the headquarters for Duke's programs in the city, but a totally new university. Its own charter, bylaws, Trustees. As we said at the start of this Special Report, grandiose.
With the possible exception of the excursion of New York University into Abu Dhabi and soon Shanghai too, no university in the world has ever tried this. Tried to found another university in a far off land.
While the trustee documents state that Duke is exceptionally well positioned to pull it off, there are no details of precisely how we view ourselves in such an advantaged spot. In fact financially we are always crying the blues, explaining how as a younger university -- compared to others in our class -- we have a far smaller endowment.
Certainly a university that lost 30 percent of its assets during the world financial crisis -- 30 percent of all that was accumulated over generations by Trinity College and Duke University flew away in one quick year -- is not well positioned financially. We are a school where just 17 months ago the chair of the Trustees proclaimed we were in "dire financial strait."
In part, our confidence is inspired by outside consultants, including Boston Consulting Group. Quite frankly, FC does not think highly of such organizations.
We can find no BCG expertise in the education field, no substantial involvement with universities. Its senior leaders come from the travel industry, from brand label food products, the leader of its Shanghai office known for his work with airlines and oil companies. BCG is part of a business school oriented culture that exudes confidence in its own ability to reshape anything anywhere with insight and expertise. For the right fat fee that is. While in favor in some circles, in our experience -- and it is extensive -- organizations such as BCG are veneer tacked on to very little supporting wood.
✔ The intent is to have Duke faculty travel to Kunshan, hire some adjunct faculty locally maybe. The feeling is this is the only way to guarantee the quality of instruction.
The students will be mostly from China, but other nations too some day. And Trustees will learn on Friday we have no forecast whatsoever on the quality of students who will apply.
These students -- most at the graduate level, most in business school -- will never see East or West Campus.
As for undergraduates, the Chinese government requires some, and we are going to try to slide by with only a token number of undergrads in one classroom for a certificate program, a far cry from our earlier understanding from the King Dean of Undergraduates Nowicki. The government has yet to sign off on all this.
We do know this: Duke plans to soak the students. As FC noted last Friday, the briefing papers for Trustees state flatly that the Chinese think to pay more is to get better quality. But won't this limit who can attend, only the rich and those selected by the communist government? You bet, but Duke makes vague mention of a sliding scale of fees and passing reference to scholarship money. We are talking discounts from normal tuition to uphold our commitment to need-blind admissions, a core value.
There are also concerns of course about academic freedom. In the extensive briefing reports, there are precisely three sentences about this crucial value that seem to us vapid. Empty lip service. And there is one curious observation: a fear that people associated with the new university will become involved in public controversies. You know, controversies like free elections and freedom of thought, access to the internet and the exploitation of labor in Kunshan.
Trustees will be told that administrators largely dismiss concerns about the stability of the Chinese government and what would happen if students and faculty on campus start getting bright ideas like their counterparts in Egypt and other lands. While Duke's crystal ball shows no significant likelihood of this (Mubarek used the same crystal ball all through January), there is mention but no detail of an exit strategy.
Question: will the availability of a Duke degree in China mean fewer students will travel to Durham for their education? Will the mother campus thus be robbed of international flavor?
Question: in outlining initial Fuqua activities at DKU, only a masters degree in management studies, an executive MBA and corporate education programs are mentioned. Curious, but the Cross Continent MBA which is the genesis of all this is not mentioned. We have no idea why. We speculate that Fuqua may want to run this out of the financial hub of Shanghai itself, not the backwater of Kunshan. Yes backwater, no matter how our promotional materials try to puff the city.
✔ Faculty going to Kunshan can expect a semester of isolation. Bleak isolation. There is no university there, and thus little opportunity for intellectual intercourse with colleagues other than those you could meet in Durham. There will be no Chinese neighbors either, as the Duke campus is carved out of a new industrial park, a fact that we learn for the first time from the Trustee briefing papers. DKU likely will have a high fence around it, like the Kunshan factories where workers who came in from rural China searching for more meaning in their lives are stacked in dormitories behind huge gates to protect them from city crime.
We have no idea how faculty children will be educated, but Duke has stated specifically it will foot the bill for elementary and secondary education; it already gives a giant grant to any faculty or staff member with college-aged kids.
Culture? Forget it. Zippo.
In the city of Kunshan, there is only one local hotel with stars, and having just been sold, its future is uncertain. The other hotels are charging in the $7 range. And quite frankly, the food does not sound appetizing either, the local specialty being hairy crab. Yes hairy crab, born in sea water, migrating to fresh water and well known for clogging local drainage systems before being ripped lose and brought to your table.
✔✔ The opening paragraphs of the briefing materials for Trustees tie our expansion into Kunshan to the execution of the current strategic plan called "Making a Difference."
First of all, this plan is not current at all, but a statement developed with the kind of collabrative input from every segment of the university that we have not seen during Brodhead's tenure. All this was prepared before the financial meltdown with its indefinite postponement of the lynchpin of the plan, the new Central Campus. (During his initial days at Duke in 2004, Brodhead told the freshman class that they'd be using Central Campus as seniors)
We find that the quote about global expansion presented to the Trustees from the strategic plan has been ripped out of context. There is no philosphical nor stragetic underpining for the creation of a new university 7,681 miles away.
Read, please, the five goals in the plan, written before the words international and global became the Shibboleth of administrators.
A) Attracting and retaining outstanding faculty.
B) Deepening engagement in education by undergraduate and graduate students. (This was before we lumped these thoughts under the campus culture banner.)
C) Transform East and West Campuses with new and improved facilities.
D) Strengthen the arts
E) Recommit to diversity and access.
Not a word global.
✔✔ Duke does have a history of growth, even audacious ambition to borrow from the great Terry Sanford. But Mr. Brodhead and his administrators misread. When Trinity College was converted into Duke University, James B. Duke specified a medical school. But President William Preston Few and others held off for six years, until adequate money could be secured both from Mr. Duke's will and the Rockefeller Foundation.
When President Terry Sanford took Duke from being a strong Southern school to a hot national power, he did it by focusing on the Durham campus, increasing the depth of the experience at home, increasing the endowment per student which is a key measure of institutional strength. He did not start outposts all over the nation -- New York, LA, Houston -- in order to achieve his goal. This should be a lesson as we desire to join the ranks of truly international universities -- that the need to have campuses in half a dozen nations may be a canard.
When the Forestry School saw the need to be far more comprehensive, it waited until President Nan Keohane raised funds and thus it emerged as the Nicholas School for the Environment. (Pete and Ginny Nicholas delivered on the transforming gift; they reneged on a later pledge of $72 million for a new building.)
And when the Sanford Institute sought to expand into a full School, Brodhead and the Trustees told the Dean to raise the money first. And that's what he did.
When Duke Health was solicited to join forces with Singapore, the government ponied up $350 million in real cash upfront, and a wealthy industrialist Tan Sri Khoo Puat bequethed another $52 million.
Never, never have we set sail for new frontiers with only hot air propelling us.
And never, never have we set sail with such risk.
Trustees of Duke, you have decided that in order to give frankest consideration to issues, you must meet behind closed doors. While we do not agree, we hope that the dimensions of Kunshan, which you will learn about for the first time on Friday, provoke particularly pointed questions and ultimately a decision to step back and let all of us -- from the oldest Trustee to the longest serving faculty member to the newest freshman -- digest the frightening implications and impact.
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