Should we bail out universities?

In all sorts of ways, HEPI’s recent polling produces some of what must be the least unexpected results ever released in the history of higher education policy.

Most students are confident that their own institution is in a strong financial position”.

Of course they are, given the sector’s continued resistance to communicating financial information in a meaningful and accessible way to students.

Three-quarters of students believe government should step in if their university were threatened with closure”.

Of course they do – students (like the public) regard universities as public institutions and anyway, what on earth is in the mind of the students who don’t think that this should happen?

The majority of students (89%) don’t know what Student Protection Plans are, and even more have not seen their own university’s Plan (93%)”.

Of course they don’t, given that, the last time I looked, just under a third of providers hasn’t even put theirs online.

Incompatible expectations

Two of the questions that HEPI asked are particularly interesting given the apparent contradiction they represent. Nearly all students (97%) want to know if their university is in financial difficulty – again, hardly a surprise. But most students (84%) say they would have been less likely to have applied to their university if they had known it was in financial difficulty.

The policy dilemma here is a familiar one. If it becomes widely known that a university is in financial trouble and applications fall as a result, theory goes that it becomes less likely that that university will be able to recover. Hence back in the halcyon HEFCE days – a simpler time where student number controls meant more gentle expansion (and contraction) – bridging loans and such forth could be made available to ease a university through trouble, and financial health ratings were kept decidedly confidential.

You cannot be serious

Today things are different. Last November Office for Students Chair Michael Barber couldn’t have been clearer when he announced to Wonkfest that the regulator would not bail out providers in financial difficulty. “Should a university or other higher education provider find themselves at risk of closure, our role will be to protect students’ interests”, he said, adding “we will not step in to prop up a failing provider.”

At the time, much speculation surrounded the question of whether he was serious – and whether, if it came to it, there really wouldn’t be a bailout. At government level, Sam Gyimah – speaking very much off the cuff at wonkfest – had a go at suggesting that financial troubles caused by poor decision making were one thing, but that those caused by Government policy (ie the reduction in PT students) might get assistance, although drawing the line will be tough. It’s not immediately clear that the government would escape blame if the rampant marketisation of the sector, the removal of all controls on competitive recruitment, or indeed changes that might come with Augar, were an obvious contributory cause.

It’s at the level of the regulator where things get interesting. First of all, it turns out that OfS doesn’t appear to be legally prevented from offering financial assistance in the event of a problem – this in fact looks like a policy decision, where OfS has decided that it would not be in students’ interests to do so. Saying that OfS would act “in the student interest” was fine as a bit of positional distancing from HEFCE, but if it turns out that that means that these days your university could be allowed to collapse, it looks like students would collectively disagree with that judgment. Maybe OfS should consult its student panel.

I saw the sign

Then there’s the question of mixed messaging. To make it onto the register without a formal condition of registration being imposed, OfS judges that there is “no reason to suppose the provider is at material risk of insolvency” within three years, and that it has the “necessary financial resources to provide and fully deliver the higher education courses as it has advertised” for five years. As I write, 317 providers are on the register, including every university in England. No conditions imposed. So when iNews says that three universities are on the brink of bankruptcy, or when HEPI says that current OfS practice is to “hide financial problems from students”, they must be wrong. Right?

But on the other hand, the signs are there. Michael Barber won’t have launched his shot across the bows for nothing. There are plenty of universities publically planning redundancy programmes, and a number that we know are doing so privately. And the rumour is that our risk-based regulator has imposed “enhanced monitoring” on a number of providers (stopping short of a full on registration condition), particularly where shaky looking projections on student number growth underpin their viability plans.

This is a theory of change that says an applicant’s “right to know” about risks is neutralised, because a Michael Barber op-ed and a stiff letter to the Chair of Governors will always prevent a risk leading to collapse by nudging Governors into action. But what if that doesn’t work? The press, the parents and the local MP – let alone the learners – are more likely to be demanding to know why they weren’t told than they are to be agreeing with the precise character of risk-based regulation.

A whole new world

This isn’t an issue that is unique or exclusive to the higher education sector. In the water industry OFWAT publishes a clutch of public financial performance indicators – but there’s less of a possibility of a “run on the bank” there, as customers are generally stuck with the provider they have. Over in energy, given some providers have hit the wall, OFGEM is reviewing its approach to supplier licensing to ensure that more appropriate protections are in place against financial instability. These will include “raising the standard of risk management”, enhancing their “visibility of, and ability to monitor, financial instability”, and promoting a “responsible approach to growth”. Still, in the event of a failure, it’s relatively straightforward for OFGEM to appoint a new supplier of last resort to keep the power on. It’s not so easy to do the equivalent in higher education.

Perhaps we should look closer to home. Over in Further Education right now there are a clutch of providers with a public “Financial health notice” issued by the Education and Skills Funding Agency. Yet, bafflingly, some of those with a notice then appear on the OfS register without a public condition of registration! Some would argue again that colleges are less sensitive to a “run on the bank” situation, but we might ask how it it possible that an FE funding council can go public, but an HE regulator can’t. Alternatively, in the the context of a tertiary funding review, we might ask how long we can last with an FE funding council and an HE regulator seemingly making different judgements about a single providers’ financial health.

Most observers rightly point to the system’s overall design as the culprit here. OfS has a tough job insofar as it’s being asked to operate as a market regulator in a sector where markets don’t work. Unsurprisingly, there don’t appear to be any other quasi-public sectors with sufficiently similar characteristics where practice can be reused.

But that doesn’t mean that there aren’t questions for OfS to answer and things for it to consider. Delivering on its promise to publish an assessment of the sector’s future financial health would help – heavily delayed since last November and no revised date forthcoming. The much maligned HEFCE was able to manage this on an annual basis. What’s going on?

We really do need to see its wash up of the registration process to get a sense of how many providers that it’s keeping a close eye on. And if it is to commend public or student confidence, a much deeper consideration of what really is in the “student interest” when it comes to information, warnings, bailouts and thresholds is probably before – not after – a provider goes under. In other words, OfS might usefully view HEPI’s survey as “enhanced monitoring, at risk of breach, must improve”.

5 responses to “Should we bail out universities?

  1. I am trying to make sense of the loans/bailouts question in drafting the relevant section of the 3rd ed of the Law of HE. I do not know what ‘loans’ means in the language of the Education Reform Act and its successors, up to ss. 39-41 of HERA. The term is not defined anywhere, as far as I know. I assume it was designed in 1988 to help HEIs fund important projects in the national interest, not as a bail out, which could not have been contemplated in the small university sector in 1988. The term ‘loan’ is so wide that a bail out loan would seem to be within OfS legal powers, as it was for UFC and HEFCE previously. I have no idea whether the UGC ever advised on loans. It is therefore correct to say that it is a policy issue, although that could be guided or made a condition under s 2 or 74 respectively by the Secretary of State. Maybe somebody can offer guidance on what ‘loans’ means?

  2. The key takeaway is that failure has to be left on the table (excuse lapse into brxittery) because that is the only motive factor in the market. Fear of exit will oblige providers to lower fees to either attract more consumers or lose them to cheaper alt-providers. Conversely it is this possibility that will encourage new alt-providers to come into the market. Legislative change in HERA 2017 designed to lower entry barriers were for precisely this purpose – the overall aim is to lower average fees across the system which govt has been trying to do since fees were trebled in 2010.

    Now obviously govt wants to preserve wriggle room: they won’t want a large existing provider in a marginal constituency to fail due to e.g. over borrowing to fund estate capacity to attract more students. But some institutions have to be allowed to exit the market for the market to function as designed.

    Of course a radical fee cut or abolition blows all this out of the water – no fee differential means no market incentive for undercutting by alts. Which means that HERA and the OfS are the HE equivalent of that Dallas episode where the characters were completely reset because the previous 2 series had ‘just been a dream’.

  3. The comment on financial notices to improve issued to colleges deserves a reply. ESFA has been issuing these notices to colleges for more than a decade following an assessment of the accounts and plans that their governing body returns to the agency. ESFA’s judgement that financial health is inadequate can happen because the college is making losses or has too much debt. The notice is then designed to prompt action.

    OFS regulation is supplementary to ESFA oversight. The ministers and officials who created OFS forgot that colleges had been offering HE courses since the 1920s and didn’t bother to work out the OFS/ESFA relationship. OFS’s framework requires an institution to show (under condition D) that it won’t fall into a commercial insolvency for 3 years. As it is turning out, colleges can meet this condition because, first of all, ESFA oversight acts as strong assurance for OFS and, second, if things really do go wrong, the education administration regime introduced by the 2017 Technical and Further Education Act, protects the interests of students ahead of those of creditors. As one FE-side official said to me in 2017, HE students in colleges may end up better protected in this area of life than anyone else.

  4. Choosing a University is a major decision and it is only right that students make this using all relevant information including the financial position of the establishments under consideration. There is a significant challenge in making such information both accessible, timely and understandable; most financial statements are impenetrable to most of the population.

    The argument as to the impact of transparency is fundamentally flawed as this ‘protection’ can create a poor governance culture within the organisation – leading to lack of action and further deterioration in financial and teaching performance. The risk of poor financial health being publicised should lead to action being taken earlier to avoid the potential repercussions.

    I have every sympathy that publishing adverse information can lead to a spiral of decline due to lower student enrolments, however this is in an issue in many other sectors including the FE and health care sectors. What you see in those sectors is clear action plans to address the issues that ultimately lead to improvements for the end users. Alternatively, it becomes ‘survival of the fittest’ that whilst painful initially leads to overall market improvement. It is hard to reconcile why the provision of Higher education should receive more protection from failure than FE, care homes or other similar sectors.

    Should we bail out Universities? As with all question I think the answer is ‘it depends’ – if there is a credible business plan to address the situation or it is accepted that there is local social need that warrants ongoing support then yes. However, the onus must be on the institutions to make sure that they structured in a financially responsible way.

  5. The impacting of not bailing out varies wildly depending where the institution is. If it is the only regional provider then the case for rescue is stronger than if it is one of many providers. Among other considerations, students can be transferred to these other institutions and/or one or more of them can manage down the failed university or even take it over.

    At the more general level though, the answer to this question is no: there should not be bail outs. Why? Because any bail out will almost certainly be funded by a windfall levy on the rest of the sector. Operating in this way will result in greater mismanagement and recklessness and poses a risk to the sector as a whole.

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