At first glance, the headlines on this loan sale do not look great.
Student loans with a value of £3.5 billion sold for less than half that amount. The Treasury is not being clear about how it decided that was the right sale price. Most puzzlingly, there’s a refusal to publish who the loans were sold to. As a result, £1.2bn loans – for 410,000 students who were at university at the same time as I was – are moved off the books. But to where?
The decision to sell an old tranche of student loans for significantly below their apparent value is an important one to discuss and not just in higher education circles. So, earlier in the autumn, the public accounts select committee that I am a member of took a deeper look and today publishes a number of recommendations about how future sales could be improved.
Agreement in principle
As a starting position, and as a Conservative MP, I think the government has got the principle of wanting to sell these loans right. We can disagree over the size and scope of government but, even for those who have different political leanings, there aren’t many that think the government has an enduring role as a large-scale lender of finance. So, as the student loan book grows over the coming decades, the government made a sensible decision to develop a market for student loans and to find institutions that want to hold the value and long-term risk of these portfolios.
The question for the committee, then, was whether this initial sale worked well and whether we can recommend any improvements for the next time around. On both counts, as a cross-party committee, we thought there was further work to be done.
First, we were concerned with the headline sale price. Achieving £1.7 billion for loans with a book value of £3.5 billion looks low to both the trained and untrained eye. Just by keeping the loans on the books, the government would have received £1.7 billion within eight years as borrowers continued to repay.
Beyond that, money would have continued come in for the next couple of decades too. The government’s objective here – which I have sympathy with – is that one-off sales can help to reduce the Public Sector Net Debt which, as most people know, remains historically high and worrying.
So, the debate here is one of a trade-off – is the short-term gain of a single one-off sum for the government worth forgoing more money after the next few decades by not selling them? The difference between £1.7 billion now and £3.5 billion over decades is a difficult one to balance – and we may need to think about where the balance lies in terms of short-term gain versus long-term loss. That trade-off would be easier to swallow if the actual sale price wasn’t so far away from the estimated value.
Further, we have real concerns about how we validate that the sale price was the right one. The government has not been clear about its internal thresholds which enabled the sale and, from our investigations, its modelling seems to be based on a narrow set of estimates on the value of the loan book.
As it stands, it achieved 48p in the pound in the sale – but would it have accepted 40p, 20p or even 2p? We don’t know, and as of now, it isn’t telling us. There may be a case for black-boxing off financial transactions in some circumstances but that should be by exception – and we see no exceptional circumstances here. Indeed, as this was an initial sale to help stimulate the market, it might be in the Treasury’s interests to outline how it valued the book, and what it could do better next time, in order to bring greater transparency and clarity to future sales. This initial deal has been done now, yet we remain unsure whether it was done for the right principles. That remains a real problem.
Finally, our jaws did drop somewhat in the committee hearings when the Treasury refused to tell us who it had sold the loans to. In question after question, we simply did not receive a compelling or coherent answer as to why the state is entering into a £1.7 billion transaction without telling the public who the purchaser is. Indeed, the best the Treasury was able to provide under questioning was that some (not all) of the purchasers requested that their identity not be disclosed.
If the new yardstick for public transparency is that one party isn’t that keen on being named, then that would create a somewhat interesting precedent for the future. For us, it looks like the Treasury has talked itself into a very odd corner here. Hopefully, it will find a graceful way out of it before the next sale.
Transparency and trade-offs
Just last month, the government announced the next tranche is to be taken forward. No process in government is perfect and fault can always be found if you look hard enough. Our job on the Public Accounts Committee is not to be the pub-bore eternal critic, always knowing better how to do things that those who did them, but instead to try to provide a constructive assessment of whether the process worked. In places, it seems to have done so here.
Yet, the challenge on all of these public policy issues is to look behind the headlines. The default tabloid response would be to scream about the top line values. Indeed, that is important – and the government needs to think more clearly about the trade-offs involved in the future. Yet, just as importantly, there are questions about transparency – both in validating the sale price and knowing who is purchasing.
I believe the government is doing the right thing in selling these loans. The challenge is how to do it better next time; we hope the Treasury is listening and learning. And, if not, we will be watching.