Higher education in England is delivered by a market-based system.
That in itself is pretty well understood – student choice is paramount, and while providers offering things that applicants want will flourish those that are not popular will either adapt or cease to exist.
On that basis, all of the changes we have seen in the sector in recent years – a concentration of recruitment in “prestigious” providers to the detriment of others; the closure of departments, courses, and institutions; the near-constant search for cost savings; the cold spots and subject concentrations – are a sign that the market is working as a market should.
Our lived experience might suggest that the market is not working in our interests as a nation.
The idea of a market
In a pure market-driven system, individual choices are driven by the availability of information. Whether or not this information is appropriate or even accurate is beside the point: information drives decisions made by hundreds of thousands of young people (and drives the advice offered to them by careers professionals, teachers, parents, and newspaper league tables).
Economists talk about an “invisible hand of the market” which orders supply based on demand to develop an efficient system for allocating scarce resources, we could perhaps better characterise the market as an AI that takes an enormous range of information inputs and generates actions as outputs. The market is an information processor – and much like AI the means by which it generates solutions are complex and opaque.
In this reading, a market absolves the state from making these decisions itself. It surrenders the idea of picking winners, allowing the aggregated information available to customers to fuel all the individual decisions that build up to institutional growth or collapse. Nobody decides that a provider needs to expand or contract, and yet this happens in response to informed demand to maximise the efficiency of the system in meeting this demand.
I’m cheating a bit here by talking about an idealised market – something that has arguably never existed and never will. There is always a thumb on the scales somewhere. Governments and regulators intervene in markets to preserve quality and utility, to address specific policy goals, or even to ensure that the market is working properly. But because the idealised market as a resource allocator remains attractive to policymakers, such interventions are very carefully policed.
What interventions?
The list of interventions the government makes in the higher education market in England is longer than you might think. The fact that the government will loan somebody money to take a course at some (registered) providers but not others is an intervention: it makes it far more likely that higher education will happen in a regulated environment. Regulation itself is a market intervention, as it sets standards and requirements that offer a baseline standard for market participation – you see it work in similar ways everywhere from utilities to rail companies. In common with many other regulators, OfS intervenes to provide information to customers – in this case perhaps only the smaller sub-group of customers that have heard of Discover Uni or TEF. And of course the price of higher education is very tightly regulated, with (effectively) a set of standard fees for courses and providers of various types.
Subsidies (financial interventions) make it cheaper, and thus more attractive, to offer provision that the market would not otherwise select. In the main, market subsidies for higher education flow through the Office for Students: we have the obvious example of the subsidies for high cost subjects that would not otherwise be sustainable, and the subsidy offered to providers who teach non-traditional students which was originally designed to address the costs of providing additional academic support but now largely fuels hardship funds. And there have been any number of smaller, time limited, selective subsidies that support the launch of specific products (accelerated degrees, short courses, AI related stuff).
All of these interventions are well established – OfS’ predecessor HEFCE used to support specific priority subjects, non-traditional students, and strategic priorities in very similar ways. And there’s been government loans to pay (or at least contribute to) fees for registered provision since the late 1990s. A register of permitted providers is newer, but HEFCE used to control market access and egress via the terms and condition of grant, a different way of doing fundamentally the same thing.
The argument against interventions – regulation, subsidy, even information provision – is that these are expensive (either directly to the government, or to those involved the market as administrative burden) and distort the market, which can lead to unintended consequences as participants modify their behavior in unexpected or unwanted ways in response to these measures.
How was the market designed?
I really glibly stated at the top that the changes we are currently seeing in higher education are a sign that the market is working. This only really holds if you are being really fundamentalist about the power of the market: in reality there is no such thing as a completely pure market, and the higher education market in England is designed to do certain things and prevent others.
In the 2015 Green Paper – Fulfilling our potential – we get a list of six priorities that set out this design:
- Ensure the system promotes the interests of students, employers and taxpayers to ensure value for their investment in education
- Create an open, market-based and affordable system, with more competition and innovation, and a level playing field for new providers
- Maintain the highest quality of higher education, safeguarding the strong international reputation of English providers
- Reduce the regulatory and administrative cost and burden, adopting a risk-based approach while improving accountability to students
- Protect the institutional autonomy and academic freedom that has underpinned the success of English higher education
- Require transparency from providers so that students, employers and taxpayers have the information to hold providers accountable
Principles 2 and 4 in this list set out the desire to fully marketise the system. Principles 1, 3, and 5 describe the interventions the government wished to make in the market to ensure that it delivered what was wanted. And principle 6 developed the information that the market would process.
The 2011 White Paper – Students at the heart of the system – set out some of the underpinnings of these principles. It highlighted the government’s decision to undo an earlier intervention in the market: student number controls, which constrained the ability of applicants to choose a course and provider that interested them. And it committed the government to reviewing regulatory burden more generally in the development of a new regulatory framework – which the Green Paper handed to the Office for Students (and noted fan of market-based public service solutions Michael Barber) to develop.
Is it working?
It isn’t so long ago that DfE and the team developing the Office for Students were relaxed about provider failure. The idea was that, occasionally, individual providers that had proved unpopular with customers would leave the sector. The regulatory framework was designed with this in mind, including the development of “student protection plans” to ensure that the interest of customers were protected if the provider they were attending left the market.
The OfS regulatory framework, and the range of regulatory or market interventions available to it, were not set up with widespread financial stress in mind. A separate policy decision to freeze the maximum allowable fee chargeable for several years (rather than allow it to rise with inflation as was planned) did lasting damage to the sector’s financial resilience. Meanwhile, the market itself saw some providers recruit well at the expense of others recruiting poorly meaning further financial stress. And a range of exogenous economic factors – for example the pandemic, interest rate rises and changes to pension contributions – also had an impact.
At inception, there was no duty to ensure that individual providers in the sector were financially secure – this was a duty that Jacqui Smith and Bridget Phillipson placed on OfS pretty much at the moment they came into post.
It was couched in terms of preserving student choice – in other words as a market-preserving measure rather than a means of negating the impact of the market. In reality it does both: when providers close applicants lose choices, but in a “pure” market successful providers would crowd out unsuccessful ones.
A classic case, therefore, of a market failing to provide the benefits that were intended. While some may desire a system where students have the option study a small number of popular courses delivered by vast providers at a huge scale, it turns out we like the idea of choice and diversity more than the idea of maximum efficiency. The idea that you can do similar courses in different parts of the country, or choose from a dizzying array of subjects – from the very vocational to the purely theoretical – seems to have won out.
What other interventions are available?
Other regulatory approaches, and other uses of subsidies, are possible. For example, the government could take a much more active stance regarding what is taught and where, using regulations to enforce these decisions. Or it could use subsidies to make provision that does not meet the market test viable.
For example, we’ve seen OfS and DfE work together to constrain the growth of franchised provision – where a student is registered at one provider but taught at another, or registered and taught at a provider towards a degree awarded by someone else. Because there were no restraints on the growth of this kind of provision, and because it is both a useful way to add diversity and coverage to the sector and a good way for providers to make money offering a low quality student experience, regulations now attempt to make the bad stuff unattractive.
What’s happened is that providers delivering franchised courses to more than 300 students will be required to register with the OfS (and therefore be subject to all the rules and regulations OfS puts on registered providers), while those setting up franchise arrangements covering more than 100 students will be required to say how they will manage risk, and publish information about their franchising activity – for review by OfS.
This intervention controls the growth of higher education provision in undesirable places – and perhaps providers growing their own provision at speed might need a couple of regulatory speed bumps too.
It’s been clear for a while that OfS and DfE are rethinking the way that the Strategic Priorities Grant (SPG) is used – and it is a fair guess that we will see a move away from supporting “high cost” subjects (a list that has gradually been chipped away over time) to supporting provision that the government wants to encourage. In particular, the signs are there in data collection that some serious thought is being given to subjects that align with the government’s industrial strategy, and it is not too much of a stretch to read across from this into local skills needs as identified by local strategic authorities. Another fair guess might be to imagine support for short course provision via the Lifelong Learning Entitlement.
It isn’t directly under review at this point, but I would venture that the various parts of the student premiums are ripe for overhaul too. Since the pandemic it has primarily been used to power student hardship funds (money that providers allocate on demand to students struggling with the cost of living – which these days is the majority of students). This does not fulfil the actual aims of the fund (to offer extra academic support), and allocating it based on the number of students without impressive level three qualifications makes very little sense.
What are the constraints?
HERA
I’m afraid we are going to start off with the 2017 Higher Education and Research Act. Section 39(1) allows OfS to make payments to providers for “the provision of education” or the provision of facilities or the carrying on of other activities for the purposes of education. That’s pretty broad.
On conditions of registration – 5(7) requires that OfS applies initial and ongoing registration conditions to a provider that are proportionate to what it has assessed as the regulatory risk, and it must keep these under review. This bakes in the “risk-based” approach to regulation, so it follows that OfS is allowed to regulate different providers (or, I guess parts of providers) in different ways based on a calculation of risk.
Section 2(1) contains a list of things OfS needs to “have regard to” when it is doing anything – including allocating funding or making regulations. Highlights include a need to protect institutional autonomy (it can’t just demand that things are done in whatever way OfS wants them done); promote quality, greater choice, and opportunities of students; encourage competition where this is in the interest of students and employers; promote value for money; and use resources in an effective way. Capping all this is a need to be transparent, accountable, proportionate, consistent, and risk-based.
The trouble with that list is that the duty is to “have regard to” – a rather mealy-mouthed construction that ensures that OfS considers all of these matters but does not require that it does or does not do anything as a result. Rather surprisingly, OfS also gets to “have regard to” what the Secretary of State (effectively the government) wants – regulation fans may note with some delight that OfS is explicitly permitted to decide not to do something that has turned up in the annual guidance letter.
The Secretary herself also has to “have regard” to institutional autonomy and academic freedom, but is explicitly not allowed to give guidance relating to:
- Particular parts of courses of study
- The content of such courses
- The manner in which they are taught, supervised, or assessed
- The criteria for appointing or dismissing academic staff
- Admissions criteria
There’s also – in 2(6) – a prohibition on guiding OfS to perform a function in a way which “prohibits or requires the provision of a particular course of study”. She can’t, in other words, command the OfS to ban the teaching of media studies outright, or make it compulsory for anyone to teach media studies.
A note on subsidies
There are a number of rules – both within English law and internationally in things like the World Trade Organisation rulebook – about what the government can and cannot do with subsidies. In English law (post Brexit) we have the 2022 Subsidy Control Act which sets tight controls over how public money can be used to support economic activity in a market-based system.
Despite teaching in higher education being a market-based system it doesn’t count, for the purposes of these kind of rules, as an economic activity – even though funds are, these days, quite likely to flow to a for-profit commercial enterprise. The rationale here is that the purpose of the activity (for higher education teaching, also core research and dissemination) is not economic so the activity itself is not economic.
Higher education is likely (this isn’t in the text of the act) a service of public economic interest (section 29) – as such a public authority like OfS giving a subsidy has to be satisfied that the amount it is offering covers the costs of delivering this service and a reasonable profit. It is easy to see how OfS could be satisfied that SPG or student premium funds meet these requirements, but other measures – including the support of particular subject areas of interest – would be more difficult to justify.
The reader here may wish to ponder why, if the primary activities of universities are classified as non-economic (and indeed, universities can act as public authorities themselves for the purposes of subsidy control where money is spent by universities) the Office for National Statistics describes higher education providers as being in the private sector. Or indeed, why, when universities carry out the teaching of fee paying international students as an economic activity, the teaching of home students on these same courses is classified as a non-economic activity. Such are the vagaries of public finance.
So what could change?
As I started thinking about this stuff I was bullish on the idea of SPG being retooled to support the industrial strategy. Thinking again on the restrictions on the Secretary of State instructing the OfS about what is taught and not taught, and thinking about the need to be sure that subsidies covering (an understanding of) the cost of carrying out a service of public economic interest, I now think that this could be quite difficult to pull off.
University autonomy is baked into the Higher Education and Research Act – universities are solely responsible for what they do and do not teach and how (and where) they do it. This autonomy is jealously guarded – any attempt to constrain it, even in terms of trying to teach the higher-level skills that a local area desperately needs, would be hugely controversial.
We are left with regulatory and information provision activities. The former is less constrained for OfS, though there are limits on what ministers can tell OfS to do via guidance. The disincentives on franchise activities demonstrate one way to encourage higher education providers away from undesirable behaviour without triggering the autonomy klaxon.
Information provision presupposes – as a theory of change – the existence of a rational, informed customer making decisions in their best interests based on data. We’ve been trying to bring this about for nearly a quarter of a century in English higher education with vanishingly little success. Applicants tend to apply to courses and providers that they like and feel like they might enjoy, and personal advice trumps any number of league tables or government-backed websites full of charts.
The eyes of the OfS and DfE needles are very narrow. And, to mix metaphors for a moment, this does not make it the best tool for carrying out the kind of delicate surgery the sector needs.
