From liquidity to solvency – what might a real bailout look like?

Jim Dickinson goes hunting for clues for solutions to the emerging sector solvency crisis - and finds a report for Policy Exchange from David Goodhart.

Prediction right now is fraught with difficulty – and there’s plenty of despair around the sector – but here’s a slice of hope. I still think it’s highly unlikely that the government would let a university go under.

Of course we do have to be clear about we mean by a “university”, and “go under”. At the thinner end of the long tail of providers on the OfS register (and don’t forget those not on the register), there are providers that may well have already gone without us noticing; “challengers” that the government was giving money to in the HEFCE days whose outcomes it would probably rather forget; and providers whose size and geography probably mean that even a proper collapse wouldn’t trouble the university partner up the road.

And as we’ve said before, there can be “exit” and “orderly exit” – the sort of process where a higher education corporation might technically cease to exist, but things are done to ensure students are protected and staff retained by breaking it up, merging it etc. And as well as exit, there are types and forms of rescue – strings that might be attached to additional funding that fit both with pre-existing and post-Covid political agendas.

So let’s flesh out a scenario for a few hundred words and see where it goes.

Liquid news

As others have pointed out, the headlines in the DfE package were all about treating the issues facing the higher education sector as a liquidity crisis rather than a solvency crisis.

Optimists figure this is because it’s only Part One of any plan, and Numbers 10/11 of Downing Street prefer to sort things in terms of impacts of immediate problems than assessing the size and scope of modelled/potential problems which they assume a) might not be as bad as they look, and b) discourage efficiencies and sacrifices if “cushioned” too early, or for too long.

There’s a clear nudge in these directions the DfE release – that in part things will recover (boosting the international education strategy, etc) and that in part some efficiencies need to be found.

Part Two though still remains a possibility, and is likely being prepped up carefully. We have some clues as to what the solution to this “solvency” part of the problem might look like if pandemic implications + efficiencies isn’t enough to keep everyone going.

Intensive research

One wink to the nudge came from Research England’s Head of Data and Evidence Hamish McAlpine in the aftermath of the support package announcement, who said:

May I also gently suggest that the importance of the joint BEIS/DfE taskforce looking at short and long-term research sustainability should not be overlooked.

He was referring of course to the announcement of a joint DfE/BEIS Ministerial Taskforce on university research sustainability to be jointly led by Science Minister, Amanda Solloway (BEIS) and Universities Minister, Michelle Donelan (DfE).

It will “involve the devolved administrations” (Barnett consequentials hint), advise on the risks associated with the impacts of Covid-19 on university research, and how universities and the government can work together to “ensure the health of university-led research” in both the short and long term across the UK.

He continued:

Sorry, I’m forgetting that this is Twitter, where gently suggesting anything is a waste of time. I should have gone with “READ THE FULL ANNOUNCEMENT AND THINK ABOUT WHAT IT MIGHT MEAN BEFORE PRONOUNCING WE’RE ALL DOOMED FOR ETERNITY”.

So let’s assume that some in the sector have been heard on how we currently fund research; that some “solvency” money is coming via this route; and that it’ll be concentrated in particular ways (medical research looks a good bet right now). Think “global reputation” and “elite” and “in a better position to bounce back” and “they’ll do well out of the forecast +5 per cent cap thing” and you’re probably on the right tracks.

How the other half will live

Then, in primary colours, think of the “other” half of the sector – hugely important to public services and regional economies but full of “low value courses”. What if, post-Augar, you wanted more FE/HE collaboration; fewer (at least proportionately) students to “leave home” to go to university; courses more closely related the needs of the economy, etc etc.

When news emerged of the higher education sector’s “not a bailout” bailout, my mind turned first to the “education administration” scheme put in place by the Government over in the Further Education sector – mainly because depending on how many providers have already used (or are about to use) the new OfS reportable event (“reasonably likely that liquidity will drop below 30 days at any point during a rolling three month period from today), we need a better solution than student protection plans.

Haste and speed and all that. The hugely respected funding supremo at the Association of Colleges, Julian Gravatt, pointed out in a comment below that blog that a more relevant set of experiences from the English FE sector arguably comes from the DfE’s FE “restructuring fund” which operated between 2017 and 2019.

Developed and deployed in the latter part of the FE area review programme (which started as a merger push for mergers but ended stabilising financially weak colleges on a standalone basis), it facilitated some 57 provider mergers, created three federations of colleges and created three joint FE and HE mergers.

The official purpose of areas reviews and then this fund – all of which sounds kind of right for the politics of now – was:

  • Institutions that are financially viable, sustainable, resilient and efficient, and deliver maximum value for public investment;
  • An offer that meets each area’s educational and economic needs;
  • Providers with strong reputations and greater specialisation;
  • Sufficient access to high quality and relevant education and training for all; and
  • Colleges well equipped to respond to the reform and expansion of the apprenticeship programme.

This DfE report lays it out well. At the start of the area review process, there were 93 SFCs and 241 general FE colleges (GFECs), of which 37 had a financial health rating of inadequate. As of April 2019, the number of SFCs had reduced to 54 and the number of GFECs to 193, meaning the number of individual college corporations in the FE sector had been reduced by 26 per cent, while provision was protected. In financial year 2017-2018, 21 colleges had a financial health rating of inadequate.

As Gravatt points out, this all involved:

  • 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.

The enemy of good

It wasn’t perfect. Gravatt argues that the model was “exceptionally slow” and more expensive than it needed to be (“lots of work for consultants and accountants”). The National Audit Office had words too. It suggested that government consider whether the college by-college approach to intervention was going to address the more “fundamental structural problems” faced by the sector. We could have similar problems if inconsistent solutions (to suit local politics or institutional prejudices) were deployed.

It also said the process was slow (“reconsider the extent to which the current approach… helps to resolve problems quickly”) didn’t sufficiently focus on management capacity (“development of the management skills needed in this more challenging environment”) and not enough focus on governance.

And maybe even area reviews, the restructuring fund and education administration aren’t enough. Gavin Williamson’s appearance at Education committee suggested something big was coming, and then last week FE Week splashed on the news that the government is working on a plan to bring colleges in England “back into public ownership”. Tonight we’re gonna party like it’s 1992!

It’s not quite as dramatic as those that only read the headline assumed – it’s a rekindling of government powers to intervene where a college is being mismanaged or is performing poorly, so that the government can exercise more control over which courses are run, whether they must merge and with whom, and more “generally how they spend public funds”. But why implement only for colleges when you have Augar to respond to?

A good hart these days is easy to find

And then, as if by magic, David “somewheres or anywheres” Goodhart appears – with a Policy Exchange report that’s officially on “skills”, but is really on reorganising tertiary.

First, some clickbait keywords – current bail out conditions provide government, he says, with short term leverage to “weed out” weaker courses and push back against “grade inflation”, “unconditional offers” and other “pathologies of modern”, market-driven HE. Then the meat – the short term also offers a “danger and an opportunity”. The danger:

…is of top down cannibalisation. Elite universities must not be allowed to lower standards and pinch students heading to lower status post1992 universities (many of which add more educational value than the Russell group) and the latter must not be allowed to pinch FE students. The reimposition of number caps for individual universities, as the Government is proposing, will not in itself prevent this.

And so the solution?

Via selective and conditional bail-outs the Government has the chance to create a more overt sub-set of “applied universities,” essentially undoing the policy error of abolishing the polytechnics in 1992.

Even Goodhart can’t resist falling into the “applied irony” trap, mind:

With the exception of the “higher” vocational courses in medicine, engineering, and perhaps law, why not cluster almost all vocational degrees in the applied universities?

Most importantly:

Government should insist that they shift their missions to offer a wider range of applied learning courses aimed at a wider range of students: 18 month/two year courses, part-time courses at times that people working can attend, sandwich courses and so on, and to focus almost entirely on teaching rather than research and on local non-residential students (though with some national and international boarders) rather like the US’s community colleges. It is true that longer and residential courses are popular with students – who wouldn’t be attracted to three years of fun away from parents at age 18/19? – but the enormous cost (both for the individual and the taxpayer) and disappointing returns for too many students is starting to shift attitudes.

He goes on :

Charging students for accommodation has been another source of HE income so moving to a different kind of model, with fewer internationals and fewer residential students, would clearly need more state support at least for a transitional period. It might also require university mergers.

Structural changes

In the TES, AoC boss David Hughes says that while “no minister will allow a university to fail”, the “strings attached” is the more interesting question:

This has to be the time to make more profound structural changes if not nationally, then certainly locally with more joined-up thinking and a restructuring of the post-18 landscape.

Of course, this kind of thing is always harder than it looks. It would, yes, on some level involve the recreation of a kind of binary divide. And for every broad brush policy intention, there are thousands of devils in details. Just think about the way standards work, or fees, or quality, or funding, or sector level coordination. And there’s plenty of providers that would argue they don’t “fit” any of the primary colour narratives being drafted. Maybe we’ll get lots of FE/HE groups. Maybe we we’ll just get this “return of polytechnics”.

Whatever the detail, there are too many agendas right now that are begging for policy solutions that could be sold in the very brightest colours. A package that offers up the hope of not having to build 30 new universities to meet demand this decade; invests in colleges, communities and skills by squirting lots of tuition fees and their subsidies in them locally; dampens “unnecessary” costs and in-country mobility for some students; maintains the idea that the universities some people went to are an “elite”; offers what are basically unconditional offers for everyone else; sounds and feels a bit like the US, or Scotland, or… you get the gist, as does, it seems, Phillip Augar. And don’t forget who’s still installed as skills advisor in Number 10.

Research funding for the “best”; mergers, shorter strings and localism for the “rest”. Maybe it’s not such a great time to invest in student accommodation after all.

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