The Office for Students (OfS) is going to start work in the new year. Bringing together the teaching-related functions of HEFCE and the widening access work of OFFA, OfS will be a new kind of regulator with a new kind of funding model. It’s proposed that the new body will be funded primarily by institutional subscriptions, payable as a condition of registration. This is a significant change from the way HEFCE is currently funded, directly by DfE.
There is a live consultation on OfS registration fees which states “the fee amounts provided are highly indicative and included for illustrative purposes. They do not represent the final fee amounts, which we would expect to provide once the final fee model is confirmed”.
But will those final fee amounts go up or down?
We ran some numbers and the answer would appear to be “up” – and fairly sharply at that. Based on what we know about the sector as it stands 2019-20 subscription income based on the Model 1 indicative banding will be £8m lower than the government’s own impact assessment and business case suggests. Even using the government’s own very optimistic estimates about the size and shape of the sector we struggle to get close to the target figure.
It is possible that the government will step in to provide the surplus – after all, with no fees to be levied in 2018-19 the detailed impact assessment (Table 4) would appear to suggest that DfE will fund the entirety of the £30.9m required to run OfS in year one. But both the overall costs and the expected fee income continue to rise year on year, and we feel it is unlikely that significant subsidy beyond what is already planned would continue.
It seems most likely that in the future, registration fees will need to rise substantially above the currently indicated levels to meet government projections – by up to 48.8% according to our modelling.
Why registration fees?
The idea that institutions would pay an annual subscription to OfS to cover their ongoing registration has been a part of the new machinery of regulation changes since the green paper. Since then, we’ve seen two consultations on the issue, the second of which provides the indicative institutional banding by student numbers that we use in our income calculation.
The proposal is that institutions registering at Approved or Approved (Fee Cap) levels – those eligible for OfS funding, research funding, Tier 4 visa designation and university title – would pay an annual fee based on the size of their student population. Institutions at the Basic level – which only indicates that they are delivering higher education courses – would pay a flat fee of £1,000. For new providers entering approved categories, fees will be discounted for the first three years – though no detail of the level of this discount is given.
Showing our working
We’ve used student numbers for all English institutions likely to seek an Approved registration status – drawing on HEFCE HESES/HEIFES survey data alongside all alternative provider student numbers held by HESA. To model FTE we used a common approximation, assuming that each part-time student is 0.5FTE. We don’t include Basic subscriptions in this calculation, as there’s no reliable way to estimate this and the sums involved are small – likewise, we don’t model the (undocumented) new provider subsidy which would mean that new registrants would pay a lower fee.
Lower FTE Upper FTE % increase Indicative fee amount # institutions Subscription income
0 50 £18,200 49 £891,800
51 100 10% £20,000 50 £1,000,000
101 300 10% £22,000 106 £2,332,000
301 500 10% £24,200 48 £1,161,600
501 1000 20% £29,100 53 £1,542,300
1001 1500 20% £34,900 11 £383,900
1501 2500 20% £41,900 17 £712,300
2501 5000 30% £54,500 15 £817,500
5001 10,000 30% £70,800 35 £2,478,000
10001 20,000 30% £92,000 46 £4,232,000
20,001 30% £119,700 7 £837,900
TOTAL 437 £16,389,300
Fee income, from Model 1 fee proposal.
OfS year 2, and beyond
Looking at the government’s Higher Education and Research Bill impact assessment and OfS business case (both published in 2016 and the latest sources of such estimates – the 2017 impact assessment does not deal with finance!) OfS is predicted to cost a surprisingly high £32.4m to run in year two (2019-20). Of this, £8m was slated to come directly from the government (for new provider costs and wider benefits works), with a whopping £24.4m raised from subscriptions.
Finance experts will have noted that an approximate £16.4m income is a lot less than the £24.4m income in the impact assessment. So even if we do see a gently sloped introduction to the first year of fees (with the government picking up the slack), we have to consider the potential for a sharp rise in the near future to cover this £8m deficit.
Impact assessment projections
Table A3 of the summary impact assessment suggests that there will be 495 Approved registration category institutions by 2019/20. This is 58 fewer than in our model, but even if all 58 of these brand new institutions are bigger than 20,00 FTE students – that’s around the current size of the University of Nottingham – we don’t quite get to the £24.4m projected using the Model 1 banding. If you are still wondering about basic fees – the summary impact assessment figures suggest 106 institutions with this level of registration, and adding in the £106,000 raised would still not get us to £24.4m.
Beyond year 2, according to the business case, the OfS can rely on an inflationary income rise. Both the planned government funding and the planned subscription funding are expected to rise year on year to meet this – based on a 3.1% forecast – so institutions will end up paying more of their income in real terms if the fee cap freeze continues.
But it’s looking increasingly likely that institutional subscriptions to OfS are going to be higher than is currently anticipated.
In writing this story over the last week, we repeatedly asked DfE for a comment about the findings of our modelling, their own assumptions about the size of the sector and what they anticipated OfS to cost. To date, they have not provided an explanation. Given the live consultation and the proximity to the start of OfS’s work, we think that it’s important for the government, providers and their new regulators to understand exactly how the new system will be funded.
Update
We received a comment from DfE on the afternoon of 13th December:
A DfE spokesperson said: “As is standard practice, we will shortly be publishing an updated impact assessment in relation to the registration fees. This will further update details around the assumptions used in calculating our estimates of the OfS budget and income from the registration fees.”
On 14th December DfE released an updated impact assessment for introducing OfS registration fees. These new figures reduce the expected running costs of OfS in 2019/20 by removing the costs of direct funding for QAA and HESA.
In order to raise the required funding from subscription fees, this new impact assessment assumes a further 93 alternative providers will enter the approved part of the sector, at an average size of 501FTE.
We must also surely ask how the relative banding will change, if at all? Using a very rough approximation (taking the median number of students in a band), the smallest institutions would pay as much as £700/student, while the largest institutions (those most likely to have larger resource bases) could pay as little as £6/student.
A banding with a more evenly spread per-student cost (in effect ith a higher rate for larger institutions) could be one way to go about achieving an increased subscription OfS income.
Why is the fee linked to size as opposed to risk posed by the provider? How can OFS justify any inflationary increase when UK/EU UG fees have been frozen by government?
Regarding the reduction in the expected running costs of the OfS if direct funding of QAA and HESA is removed, there will still be a cost to providers in subscriptions to the Designated Quality Body (DQB) and Designated Data Body (DDB), as the HERA allows these bodies to levy charges.