Should we bail out universities? Are they too big to fail?

You will recall when OfS was being set up that debate about whether universities would be allowed to collapse, and whether in fact there would end up being a “bailout” of some sort. And we’ve been debating the question (not least on the site) ever since.

There has been a tendency for that choice to be seen as binary – and the question in my mind has always been whether we might end up seeing something a bit more subtle – and in line with practice in the other half of the English tertiary sector.

Blink and you’ll miss it

Let me explain. Buried at the bottom of the DfE press release that announces the higher education “bailout” is a deeply ominous paragraph. Those hoping that the modest announcement so far is the thin end of what will end up as a bigger bailout wedge will certainly be disappointed:

The Government expects access to the business support schemes, reprofiling of public funding and student number controls should be sufficient to help stabilise most providers’ finances, and that should certainly be the first port of calls for providers.

Of course, that implies that a calculation has been carried out using OfS financial sustainability data and projections on student numbers that may or may not turn out to be accurate. As usual, we can’t see those calculations – OfS’ annual report on the financial sustainability of the sector is MIA and where DfE uses words like “expects” and “most” you’d want that to be based on projections you could see – so that if the situation is worse (mass deferrals of current students, even worse international numbers, etc), you could approach with freshly minted begging bowl.

But what if even the models being used inside DfE suggest some will be in big trouble? Wouldn’t you, in that event, want there to be a more “orderly” way of doing exit?

I’ve got a plan

Maybe you could use the Student Protection Plan regime. After all, DfE promised us back in 2017 that:

If there were wider economic changes that dramatically affected the sustainability of many providers, the OfS would review its regulation of individual providers, with particular regard to student protection plans. It may find that in order to retain the same level of protection for students, changes are required. The OfS would then work with providers to improve their student protection plans so that they remained strong, deliverable, and in service of the student interest.

I can assure everyone right now that there have been some wider economic changes that dramatically affect the sustainability of many providers. So much so, in fact, that it’s pretty odd that OfS hasn’t already swung into action and started to work with providers to improve their student protection plans so that they remain (if they ever were) strong, deliverable, and in service of the student interest.

But what if you’ve already been told by OfS that student protection plans won’t cut it, and that there needs to be better ways of doing “orderly exits”. And what if there was a way to do that that better fits with your wider, post-Augar tertiary plans?

Thickening plot

The paragraph in the press release continues:

Should that [the schemes referred to above] not be sufficient, such that a higher education provider finds themselves at risk of closure, the Government will only intervene further where we find there is a case to do so, and only where it believes intervention is possible and appropriate, and as a last resort.

Intervention you say? “Last resort” you say? These are not terms that we are hugely familiar with here in our part of the tertiary sector – but they are (or at least equivalents are) to large chunks of DfE in relation to “failing” Further Education providers. The paragraph continues:

In such instances, the DfE will be working with HMT and other Government departments to develop a restructuring regime, through which we will review providers’ circumstances and assess the need for restructuring. Where action is required, this will come with attached conditions.

What could that possibly mean? To answer that question, let’s take a look at the Technical and Further Education Act 2017.

The Cinderella sector

In higher education we tend to think of 1992 as the year when polytechnics became universities. But it was also the year that further education colleges also gained status and autonomy – although the way the sector is funded and the nature of “competition” is markedly different.

Even so, if you spend a decade forcing austerity on a part of the education sector, in the end there are impacts – your “autonomous” “providers” start to look financially shaky, and so you need a way to intervene and act to shore up the student/public interest.

Officially TFEA took forward policies relating to Technical and Further Education which supported “the government’s social mobility agenda” and sought “to boost the country’s productivity by addressing skill shortages” and ensuring “high quality technical education”.

A significant component of that was the introduction of measures to create an FE insolvency regime, which sought to support the “financial resilience” of FE and sixth form colleges, and build on the “ongoing area-based reviews” of the sector.

To cut a long story short, it was decided earlier in the decade that there were probably too many individual FE providers – and that mergers (or at least federations) of providers were one way in which to become more efficient and ensure that larger geographical areas’ skills needs were being served effectively. A process called “area-based reviews” ensued – a kind of “very strong hint” to sets of providers that they ought to co-operate with some funding levers (not, usually, positive ones) to make that all happen.

That wasn’t enough, though, to shore up the finances of the sector and cause the behaviour that many wanted to see. So the 2017 act created a new thing called “education administration” – like standard company administration, only with a “special objective” to avoid or minimise disruption to the studies of the existing students of the college. Squeeze them til they collapse, then give yourself powers to merge them in the student interest.

It’s a fascinating bit of legislation. The education administrator has powers/duties to:

  • rescue the further education body as a going concern,
  • transfer some or all of its undertakings to another body
  • keep it going until existing students have completed their studies (with DfE cash), or
  • make arrangements for existing students to complete their studies at another institution.

The Act gives the Secretary of State, or for Wales the Welsh Ministers, the power to make grants or loans to the further education body for the purposes of achieving the “special Objective”, and that grant or loan can be made on any terms that are considered appropriate, including making the grant or loan repayable, with or without interest.

And it places restrictions on other dissolution procedures, by preventing FE bodies from taking action to dissolve the college where either normal insolvency or education administration procedures are already in train, preventing them from disrupting those procedures.

The bastards

To give you a sense of how this has panned out in practice, take a look at Hadlow College. It was put into educational administration last May after receiving £2.827 million of emergency funding from DfE last February alone, after it said it was out of cash when the leadership had quit. There’s a fun snapshot of midway through the process over on FE Week:

The b***ards” was the reaction of one of many small businesses owed thousands of pounds by the first college to go into education administration. Albion Fencing and Construction is one of 300 creditors awaiting a total of £40 million by Hadlow College, according to administrators BDO’s statement of proposals. Albion in particular is owed £12,000 for decking and outdoor furniture at Betteshanger Visitor Centre near Deal in Kent, part of the Betteshanger Sustainable Parks project that Hadlow is selling after going into administration in May.

The future

We would need amendments to the Higher Education and Research Act (or perhaps a broadening of the Technical and Further Education act) to achieve a similar regime for universities.

But think about it for a minute. Plenty of people predicted that there needed to be more “super tertiary” style institutions off the back of the Augar review. There’s experience in the department of “causing” mergers through carrots, sticks and rescues. There are wider agendas about skills, and levelling up, and “value for money”, and getting “something” for “something” and “value” from investment in skills.

And if you’re keen to not waste this crisis, what better way to achieve your objectives than waiting (perhaps not very long) for institutional collapse – so your saviour act can carry the strings you need to deliver the tertiary super sector that you wanted all along?

8 responses to “Even in the Covid crisis, universities are not too big to “fail”

  1. The education administration process created by the 2017 Technical and Further Education Act has only been used once so far (for Hadlow and West Kent Colleges, linked by a federation) and, although it’s now close to a conclusion (there have been transfers to EKC Group – EK is East Kent – and Capel Manor), it’s not finished yet.

    A more relevant set of experiences from the English FE sector comes from the Restructuring Fund which operated between 2017 and 2019 and which provided a mix of loans and grants to 36 colleges.

    The fund was used in the second half of the FE area review programme which started as a big merger push but which ended up with several cases of stabilising financially weak colleges on a standalone basis.

    This DFE report (https://www.gov.uk/government/publications/area-review-end-of-programme-report) explains (at pages 14-18) some of the things involves in the process including

    * applications to a committee formed for this purpose
    * individual negotiation of deals with banks, including some refinancing of commercial borrowing, replacing them with interest-bearing government loans
    * legal charges “to ensure that any cash realised from asset sales, as part of the college’s estates strategy, would provide a payback on any public funds”
    * grant conditions including “repayment where financial performance is over and above a certain level of performance, for example, as a result of estate disposals or improved recruitment of learners”
    * ongoing monitoring and scrutiny against delivery milestones for key elements of the turnaround plan and key performance indicators for the new or restructured entity – for up to 5 years. Colleges who received restructuring support currently have to supply detailed financial reports to ESFA every 3 months.

    Itf there is a restructuring fund for universities, then the model used for colleges might be a starting point. The English FE 2017-19 restructuring model was exceptionally slow and more expensive than it needed to be (lots of work for consultants and accountants). I do think it would be worth anticipating this and thinking about ways to keep the process as friction-free as possible

  2. Thanx for this analysis. I agree that the government may wish to restructure institutions as part of any financial restructure.

    While many policy makers had long believed that further education colleges needed to merge I am not sure that there is such wide and longstanding support for ‘super tertiary’ style institutions.

    Surely the wide and longstanding view even before 1992 was that the binary divide should not be dissolved between polys and unis, and surely the long aim (of many reactionaries) has been to reverse the unification of the higher education sector.

    One way to do that may be to make any financial support conditional upon the university relinquishing a formal role in research, and perhaps even relinquishing the right to award PhDs (in all fields), perhaps symbolised by a change in title or a change in sector to teaching university.

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