David Kernohan is Deputy Editor of Wonkhe

I can’t help thinking about a brief exchange at Education Questions at the start of the week.

Clive Lewis (Labour MP for Norwich South) was called on during topical questions. He asked:

Is the Secretary of State and her Department aware of the severe financial crisis engulfing the University of East Anglia, one so severe that the vice-chancellor has today resigned? This will have a dramatic impact on the regional economy. We could be looking at up to £45 million-worth of projected debt and 30 per cent job losses. As such, will the Secretary of State or the Minister agree to meet me and a delegation from the University of East Anglia to discuss this most critical issue as soon as possible?

To which Skills, Apprenticeships and Higher Education Minister Robert Halfon responded:

Yes, I would be very happy to meet the hon. Gentleman sooner rather than later.

What’s striking is how ordinary this seems. There are stories about a major constituency employer struggling financially, and the MP asks the minister responsible for a meeting.

But universities – as you will be aware – are special. The government has an interest in providers it has funded for multiple years that goes far beyond the local politics around jobs and income.

How special are universities?

Back in 2018, Michael Barber (then chair of the Office for Students) pitched up at Wonkfest to repeat something that has become an accepted truth:

Should a university or other higher education provider find themselves at risk of closure, our role will be to protect students’ interests, and we will not hesitate to intervene to do so. We will not step in to prop up a failing provider

This always seemed like an attempt to sound tough rather than a statement of policy. Certainly, ratings agencies like Moody’s never believed a word of it. In rating the handful of providers that access international bond markets, the assumption baked in has been:

A high likelihood of extraordinary support from the UK government.

Indeed, ratings fans will be thrilled to learn that every provider rated (that’s Cambridge, Oxford, UCL, Cardiff, Leeds, Liverpool, Manchester, De Montfort, Keele) is currently seen as being as good a risk or a better risk for lenders than the actual UK government.

Extraordinary support

The position is that despite the regulator trying to sound like the toughest kid on the playground, people with serious money who invest in UK universities (and those who advise them) assume government would intervene to protect public investment in (at least) larger universities where the effect of not doing so would have significant local or national implications.

Moody’s, for instance, shared a document with me that notes:

One of government’s primary aims as part of HERA was to increase competition in the sector to improve the choice and quality of education for students. The government has been consistent in its stance that as part of this shift toward a more market-based approach for UK universities, some institutions may fail. Our view when the legislation was passed was that despite statements contemplating provider failure, the strong links would still provide incentives for the government to intervene to prevent a default for the nine universities we rate. As such, our view on government support for rated universities was unchanged as a result of HERA.

So, despite all the sound and fury from OfS – nothing has changed. The government would still – in the eyes of serious finance people – step in if a provider was in trouble.

It helps as we see the government as having a direct financial interest in the success of universities. After all, it has invested a vast amount of money – both recurrent and capital – in the sector over the years. Were a provider to fail significant assets purchased for the public good could be lost. Or would they?

Exchequer interest

It’s still there in the OfS terms and conditions of funding if you know where to look. If a provider has received HEFCE or OfS capital funding since 2008 it is liable to repay the full amount of the Exchequer interest balance should it become insolvent (or any “analogous event” or leave the Approved (Fee Cap) category on the OfS register – the regulator will do the calculation at the time but broadly speaking that’s the inflation adjusted initial value of the capital grant, minus the depreciation of any assets generated as a result.

The funds returned are passed straight to the Treasury.

The OfS board can waive this requirement – but in 2018 it chose not to do so when Heythrop College left the sector. This was not an insolvency case – Heythrop chose to leave the sector – but some of the rationale is telling. The board was told:

If we do not invite Heythrop College to repay its Exchequer interest balance at the point of closure, we might be challenged on how we are ensuring the best use of public funds, as per Treasury guidance.

That guidance is in annex 5.2 of Managing Public Money. It’s fascinating, as we shall see.

Number 11 writes

When you think of assets generated from public capital funding, your mind goes to buildings – or possibly equipment. But this is to ignore the intangible assets – intellectual property rights, patents, databases – that universities are awfully good at creating. This is a part of the reason why the government (and thus the regulator) is so hot on accountability for public funds, and why there are always terms and conditions attached to funding.

“Public sector organisations providing funds to others to acquire or develop assets should take steps to make sure that public sector funds are used for the intended purposes for which the grant is made. It is usual to consider setting conditions on such grants, taking into account the value of the grant, the use of the asset to be funded and its future value. A standard grant condition is clawback. This is achieved by setting a condition on the grant that gives the funding body a charge over the asset so that, if the recipient proposes to sell or change the use of the asset acquired with the grant, it must consult the funder and return the grant to the funder, or yield the proceeds of sale (or a specified proportion) to the funder.

In insolvency, the basic understanding is that a provider may not have enough money to meet its obligations, and in this situation OfS would become an unsecured creditor – in the queue like everyone else. When talking tough means the Treasury standing to lose assets it has an interest in, and risk doing so without compensation, the idea of OfS standing back and blaming market forces feels unlikely.

Clive’s civic case

Whatever is happening at his local university, Clive Lewis is very much pushing on an open door when it comes to getting DfE interested in sector finance. Though the expansion of private lending in the sector (fuelled in part by the removal of the old HEFCE “annual income times 6” borrowing limit) means that the Exchequer interest is just one of many in a modern university you can bet that the products of decades of investment is still very important to government.

This, indeed, is a very real reason for OfS to monitor sector finances. Indeed, HEFCE used to calculate Exchequer Interest every year for each provider and send them it – just for information. Providers could then (indeed, Heythrop did) ring-fence a portion of their reserves for this purpose. With this input removed, what OfS learns from the finance data becomes a lot more important.

As a constituency MP, Clive Lewis will also argue about potential local impacts from provider struggles – as he would for any major employer or (direct or indirect) source of local revenue. A smaller or less vibrant university would have a huge detrimental impact on yet another East of England town, and for a government still nominally interested in “levelling up” that has to be a consideration.

But the Treasury (and thus Halfon) will have a very careful eye on Exchequer interest too. And it is reasonable to expect that that the Industry and Regulators Committee – concerned, as it is, about oversight of sector financial stability – might be thinking about this too.

2 responses to “Government has an interest in keeping universities solvent

  1. The last time – only time in living memory? – we had a potential insolvency crisis at a UK U was the financial collapse of University College Cardiff in the mid-80s. Some of us from the U of Warwick, led by Mike Shattock its Registrar, went in to ‘help’ – along with a gang of management consultants possessing impressive laptops and clever spreadsheets. The Warwick team knew where the financial skeletons were likely to be buried; the consultants entered the data and the answer emerged at about 2am one morning – the Answer was 42 (as in The Hitchhiker’s Guide); a £42m deficit. UCC was rescued because there were two marginal Commons seats in the City, but rescue was in effect oblivion as it was taken over by the adjacent well-managed UWIST – the new entity now is Cardiff U. UCC had never made the economies it should have after it took a similar 15% or so hit as many other Us in ‘the 1981cuts’ – its own financial incompetence led to its demise given that all those other Us duly muddied their way through the 1980s, largely by enthusiastically embracing the milch-cow of overseas fees.

  2. The danger here is that the sector believes there is a safety net. In practice it may only be that the largest institutions may be “too big to fail” and therefore new policy gets created in a such a situation to support them. The funding crisis in FE that followed austerity also led to an insolvency regime, and although HM Treasury did step in where providers were failing, it did so as a lender of last resort. Business (university) failure would rarely happen instantly – instead it is a journey. Treasury as guardian of public funds would expect the institution to have taken all possible steps for survival before even considering stepping in – and this would include the swingeing reduction in staff, asset sell offs etc etc. Maybe the policy through covid and now in this energy crisis of providing interruption loans or emergency relief creates a more favourable wind for government support in a crisis, but it would be complacent in the extreme for any organisation to think of this as some kind of safety net.

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