How an incoming government could act immediately to stabilise universities at risk of financial collapse

The new government needs to walk the line between allowing universities to collapse and pledging to protect them indefinitely. Sarah Seed, Matthew Howling and Debbie McVitty think they have found a way of doing that

Matthew Howling is a principal associate at Mills & Reeve

Debbie is Editor of Wonkhe

Right now if a university were to find itself at immediate risk of an insolvency process, there’s no policy, regulatory or legal framework for it to reach to for support and there would be no financial support automatically available from the government.

The regulator for England’s universities, the Office for Students (OfS), has interpreted its duties under the Higher Education and Research Act 2017 as being solely to monitor the prospective impact on students if an institution were to go bust and certainly not to intervene, except in the student interest.

This position, however reasonable in the abstract, is, in the current circumstances, unrealistic. When a university reaches the point where it is facing an insolvency process there is surely no student protection plan or compensation scheme that can offer an adequate substitute for students being able to stay at their chosen institution and complete their course of study. What too, would be the impact on the local community, on research activity and indeed on the sector as a whole? To consider the implications of an insolvency process on a multi-faculty provider, on which thousands of students, staff and a local community depend, truly boggles the mind.

Yet, the alternative in which the government pledges to protect any and all higher education institutions from unplanned market exit is neither realistic nor especially palatable. It could require endless bailouts of public money, which is simply not on the table, and would prop up those institutions which are, in their current form, not financially sound (even before the cap on home student fees fell so far behind inflation) for an undefined amount of time. No government could afford to be so irresponsible.

Order from chaos

What is needed is a mechanism that puts sufficient support in place for an institution at risk to give it a breathing space to enable it to either produce a transformation plan sufficiently credible to give its lenders sufficient reassurance to extend a line of credit past the crisis point OR provision for an orderly exit, probably over a period of several years, possibly including a merger or acquisition by another institution.

In other words, the incoming government (of whatever political make-up) needs to abandon the idea that it can be relaxed about the disorderly exit of a higher education provider. It needs to acknowledge that the best interests of students, in most cases, and indeed the sector as a whole, will be best served if a provider can navigate through its issues, so it can continue to offer its courses.

The incoming government needs to signal to the sector that it would temporarily support a failing institution to either get it back on its feet or so it can exit the market in an orderly way. Such support would likely take the form of emergency provision for managing and supporting institutions at high risk of an insolvency process, but with the clear end goal of getting a struggling institution back on a path to financial viability in partnership with its lenders, not propping it up with public funds indefinitely. At the same time, the government needs to retain the possibility of an orderly market exit as an ultimate conclusion, if it is considered that such an institution is no longer in a position to achieve its mission or create value for students or its stakeholders.

The long-term goal of an incoming government might be to codify these principles in some form of special administration regime for higher education, akin to the regime in place for further education colleges, which would help on the governance front. However, in terms of immediate actions, we think much comes down to developing the role of OfS, or an alternative body, to support institutions in a financial predicament and a great deal could be achieved through the time-honoured tradition of an issuing of a guidance letter from the desk of the Secretary of State setting out the role of the regulator and any additional body (combined for ease in the below as “the regulator”), in these cases.

What the guidance could include

Instructing the regulator to prioritise its due regard to its duties on (for example) promoting choice and opportunity for students, value for money, equality of opportunity for access and participation and stating plainly that none of these are best served by allowing a disorderly market exit.

Highlighting that there is no pre-eminent factor among the list of matters to which the OfS is to have regard as set out in section 2 of the Higher Education and Research Act 2017. This would protect the interests of students without ignoring research activities, the interests of the local community, and the sector as a whole.

Setting out that the regulator is to be guided in its work with the institution by what it can most usefully do to help develop a credible transformation plan or plan for an orderly market exit.

Instructing the regulator to be guided in its actions by what is most likely to contribute to the long term sustainability of an institution and to listen to the needs of the institution, rather than stick to its own internal timetables and narrow preoccupations.

Setting out the options an institution might feasibly consider to ensure an orderly market exit such as a strategic sale of assets, acquisition or merger, closure of departments, divesting of partnerships etc, and require the regulator to engage in preparatory work to explore what additional support would be needed to enable these measures to be taken – for example, fast-tracking degree awarding powers for new providers formed out of mergers and the creation of a sector-wide body to facilitate the transfer of students to a different provider.

Signalling that the Department for Education may ultimately need to play a role in deciding whether, for example, to provide a bridging loan or to direct the reprofiling of student loan funding to enable an institution to move towards financial sustainability, and the broad considerations that would need to be taken into account when deciding whether to make such a thing available (these would be likely to include strategic importance of the institution in regional economies and public sector skills pipelines, and areas of research specialism, for example).

What would change

The very existence of such guidance would do a number of things. It would give a clear role to the regulator, which would put it in a more secure position to make sensible choices in what is, for the whole sector, fairly uncharted territory. It would also give institutions a steer on what they should expect from the regulator and government in these situations as lenders gain clarity over what they are being asked to do to support the sector.

The guidance will provide the beginnings of a much needed framework to help the sector rebuild itself. Because it retains the possibility of an orderly market exit as an ultimate solution, it avoids moral hazard, the danger that providers take more risk if they are protected against it.

It doesn’t answer the question of the longer-term structure to sustain the sector or how to foster closer institutional collaboration, or whether the OfS, as currently constituted, has the right powers to steward the higher education sector into the coming decade. But it does help to create the conditions for those questions to be answered in the fullness of time.

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