Time to rebalance funding from universities to technical education

If a local authority run secondary school, at financial year end, has a surplus of greater than 5% of their annual budget (8% for primary schools), then it gets a stern letter from the council telling it that is has what is known as “an excessive balance”. Many councils actually have procedures to deduct revenue from the following year’s grant until such balances have fallen below the level deemed excessive.

The message is clear; taxpayers have contributed those funds to be spent on children, and simply putting them away in the bank beyond a level equal to 5% of annual revenue is not prudent, but wasteful.

In 2014, universities cumulatively salted away 48% of annual revenue.

So let’s get a few things clear. Yes, universities are independent, and as such (rightly) not under such close government oversight of revenue. Yes, the bulk of revenue is tuition fee income, which is ultimately paid by the graduate and isn’t really state funded in the same way. Yes, it is sensible to put money aside to protect against likely future shocks around income flows. Yes, universities need to invest in capital projects to recruit students in a competitive atmosphere. And yes, the balances are not evenly distributed.

But none of that justifies such a high level of collective reserves. At a time when public services across the country are facing ongoing austerity as a result of the spending review, government has a duty to look hard at every element of spending, to ensure maximum value for money across the board. And although a tremendous amount of activity is underway, the same HEFCE data quoted above shows that universities have cumulatively made efficiency savings of around £1.1bn between 2011/12 and 2013/14 – or 1.5%. Professor Sir Ian Diamond has noted that over the next few years, the efficiency drive in the sector will need to continue. I would suggest a better phrasing would be “significantly increase”.

At the same time, from a public policy perspective, we have an economy that is crying out for more higher level technical skills. The Royal Academy of Engineering forecasts that the UK economy requires 830,000 more engineers by 2025. A quarter of firms who need employees in science, technology, engineering or maths already report difficulty recruiting and a third anticipate problems in the next three years. 20% more construction staff are required in London and the South East from 2014–2017 compared to 2010–2013, with a particular focus on skilled construction workers and managers.

And the UK will require an additional 500,000 technicians between now and 2022. Taken in the round, and as a result of a shrinking of what are traditional lower middle or clerical style jobs which are being destroyed through automation, technology and globalisation, the Skills Commission estimate that by 2020 half of all jobs in the UK labour market will be in upper occupational levels, defined as managerial, professional or associate professional.

Universities can, should – and do – play a role in delivering these types of qualifications, often in partnership with colleges. Around 10% of full time and 28% of part time students at university are enrolled on higher level technical qualifications such as Foundation Degrees and HNDs, and many colleges now offer HE within their setting – indeed 8% of all HE students study principally within an FE college. Such collaboration is welcome and should continue.

However there are reasons to believe that the FE sector should play the lead in much of this type of higher level technical training, for the reasons outlined by Sir Frank McLoughlin in his report on features of best practice vocational teaching and learning.

The difficulty is that the two halves of our tertiary education system are simply not in balance. And nowhere is this more apparent than in their respective funding situations, and the related issue of financial access for students to attend different institutions. Whilst universities, as outlined above, have never been in ruder financial health, the Public Accounts Committee will today hold a hearing to see what can be done about a Further Education sector where the famously restrained National Audit Office have indicated that upwards of 1 in 4 FE colleges could be effectively bankrupt by 2020 without dramatic changes in circumstance.

That’s why our report recommends reallocating up to £532m of HEFCE grant away from universities in the Spending Review towards supporting FE. This £532m is made up principally of the Student Opportunity Funding, as well as smaller sums for students attending London institutions, some institution-specific high cost provision and some very high cost STEM funding.

This is not to say that these sums of money are not serving useful purposes – indeed, the Prime Minister has rightly focussed on increasing access to HE from low participation communities as being an important area of activity. But, in much the same way as the BBC has been required to take on the costs of meeting a laudable public policy goal (paying for the over-75s licence fee) from its own funds, we argue that universities are in a strong enough position to take on this responsibility themselves without being specifically funded to do it – and where individual institutions can’t at the moment, they have considerable scope for further efficiency gain to release such funds.

Importantly, depending on the level of reallocation which BIS might make, we further recommend that any remaining grant funding in this area is specifically tilted towards universities with the smallest reserves. This would support those in most need, as well as – deliberately – acting as an incentive to spend those reserves in coming years, and bring them down to a more reasonable level.

Alongside this reallocation of grant funding, we argue for an extension of the student loan system for tuition and maintenance to be offered to FE students for the first time, so that young people (and ideally, in time, older workers looking to retrain), can make decisions based on which route best suits them, rather than where the funding incentivises them to go. We also recommend an expansion of the current system of Industrial Partnerships to bring employers into qualification design, and for new Institutes of Technology to be able to award their own high level qualifications rather than having to be validated. Taken together, we believe that this could drive a resurgence in higher level technical education alongside a flourishing HE sector.

No one likes the concept of ‘robbing Peter to pay Paul’. But the facts on public spending cuts are stark, as is the difference in starting positions between FE and HE. As I have written before for Wonkhe, universities have continued to defy political and economic gravity. It is time for them to return to earth.

UPDATE: the third paragraph was amended after original publication to clarify the point about university revenue

3 responses to “Time to rebalance funding from universities to technical education

  1. Given that Andrew has flagged up the huge problem this report makes by conflating reserves and cash on his blog, http://andrewmcgettigan.org/2015/10/19/policy-exchangess-accounting-errors/, and the points made by UUK on their blogs responding yesterday, such as that the drops in capital grants from Government mean investment now needs funding by universities’ reserves, there isn’t a huge amount that needs adding. However, I do have a few points / questions:

    Is it really sensible to disincentivise saving by universities beyond a 5% surplus? Is punishing saving and making efficiencies really what Government should be doing? Does a flat surplus target irrespective of context really make any sense given the diversity of the sector? There might be very good reasons why certain institutions need larger surpluses given risks and capital needs.

    The report suggests you can cut funding and expect no shutting of STEM undergraduate courses or departments, that universities would just suck it up even if policy makes them uneconomical. The counter-argument is that this is not the historical experience of a decade ago: http://www.telegraph.co.uk/education/educationnews/3347042/Exeter-University-is-to-stop-teaching-chemistry.html
    Teaching STEM is expensive. If costs are not covered then departments close or, numbers stall / shrink.

    The report argues that all post-secondary post Level 2 training moves to a loan system. Would this not risk homogenising provision? Also, the report argues that it should “be offered on an equivalent basis to all learners regardless of routes, in a manner which encourages them to seek price competition.” Price competition has not emerged in HE. Would drawing FE into HE achieve that, or just drive up fees in FE to match funding?

    The report cites HEFCE’s report Financial health of the higher education sector: financial results and TRAC income 2013/14. However, I think it fails to mention or engage with some of the more worrying forecasts in that report. These include the forecast that, by 31 July 2017 liquid funds will be up to £5.5bn and borrowing up to £8.3bn, which is described as “not sustainable in the long term”. HEFCE argue that lower public capital grants has placed “greater pressure on HEIs to generate higher surpluses to remain sustainable”. HEFCE’s report also adds that “to sustain the required investment in its infrastructure, the sector will need to generate higher surpluses in the longer term”. http://www.hefce.ac.uk/media/hefce/content/pubs/2014/201426/HEFCE%202014_26.pdf

    On a side note, the report reads slightly oddly in places. For example, note 53 states: “As already noted, Liam Byrne as Shadow Universities and Science Minister wrote and planned policy extensively around options for a new cadre of technical degrees and technical universities, as set out in Robbins Rebooted, op cit. Since the election, all of the Labour leadership candidates have also talked of the ned to rebalance between academic and technical education.” Ignoring the typo, this reads as though it was finished before the end of the Labour leadership election and hasn’t been change since?

    Obviously, there are huge problems in FE which need addressing. However, I’m not sure destabilising HE will achieve that.

  2. I’ve put a note on Andrew’s site about the difficulties in the policy of removing Student Opportunity Funding and which institutions that policy hits hardest. I’ve contrasted the approach getting rid of, (say) Research funding for theology and classics.

    Certainly the huge problems in FE, including HE outside the Universities, need addressing but cutting the funding to HE as proposed by Policy Exchange is not the way to do it.

    One legislative change that is badly needed and is not properly explained in the report, is to redefine all level 4 and 5 qualifications as Higher Education for funding and loan purposes. It was the F&HE 1992 Act that led to this counterproductive divide by creating categories of ‘prescribed’ and ‘non-prescribed’ Higher Education (in Colleges). The net result of this has been to create an FE funding body (SFA) that is supposed to fund some HE, but is not interested, and an HE funding body that is only interested in certain awards, with the result that relevant and important qualifications in the middle have fallen by the wayside.

    The report also fails to realise that the Student Number Control (which it advocates a return to) following the post-2012 fee regime actually did much to reduce the attractiveness of level 4 and 5 qualifications by creating a perverse incentive for HEIs to recruit students directly into Level 6 qualifications rather than allowing them to transfer if they wished when they had completed the self-contained level 4 or level 5 qualification.

    Giving FE colleges the regulated power to award their own qualifications more easily, as with Community Colleges in the USA, is a further reform that is long overdue but which government policy has actually been working against, despite the rhetoric about widening degree awarding powers.

    The debate and reform is much needed – this report is not the way to set about it.

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