We still don’t know what happens when a large university runs out of money

There's been a lot of talk about market exit - but, as Jess Lister and Jonathan Simons explain, still no clarity on exactly what safeguards would be in place for the interests of students, the locality, and the nation

Jonathan is a partner and head of education at Public First

Jess Lister is Associate Director in the Education Practice at Public First

What happens if a school goes bust?

As with many public sector institutions, there are clear and rigorous procedures in place that spell out what will happen.

The DfE (rightly) puts in place lots of warning measures for schools in difficulty, and if a school or group of schools start to find themselves in real trouble, a lot of things kick into place.

They can mandate that schools have cost cutters come in; they can prescribe significant changes to operating models; and they can both demand that the school or school group takes an advance from the state, whilst placing (pretty onerous) conditions that are attached to repaying that advance.

And given that financial trouble often goes hand in hand with performance trouble, the government has pretty carte blanche to change leadership and management when a poor performance judgement is made.

And if none of that works, then ultimately the state absorbs the costs of failure – often to its considerable expense.

Big schools?

The same procedures aren’t really true of universities. We don’t really know what would happen if a major university risks bankruptcy. It’s true that some smaller institutions already have fallen into administration, but they’re of a scale where the existing arrangements around student protection plans mean that institutions can merge, or students transfer to another provider while the original one disappears relatively quietly (with nobody paying much notice apart from astute Wonkhe readers)

Universities are, of course, not big schools. And it is their fiercely guarded autonomy – as safeguarded in HERA – which means we don’t have a clear set of state interventions.

When the Westminster government made its various moves to extend a more market based HE system in England in the early 2010s, it was explicitly envisaged that some providers could exit the market – and that government wouldn’t step in. This was not a bug, but instead a positive virtue of the system. The threat of market exit for an institution should have been sufficient to ensure that all participants were paying close attention to the bottom line; and the absence of such risk was a moral hazard. As set out in 2016:

The possibility of exit is a natural part of a healthy, competitive, well-functioning market and the Government will not, as a matter of policy, seek to prevent this from happening. The Government should not be in the business of rescuing failing institutions – decisions about restructuring, sustainability, and possible closure are for those institutions’ leaders and governing bodies

Big business?

But this vision of market exit of the 2010s was clearly only really envisaged for smaller, challenger providers. Nobody ever really thought it would happen to a larger institution. We had, of course, the short lived HERR plan during Covid. But that was explicitly designed as an emergency measure to cope with unexpected cash flow shortages during the pandemic, and no longer exists. We are back to a world of limited student protection, and zero institutional protection.

We’re seeing increasing signs that larger providers are starting to struggle. A number of universities have put out calls for voluntary redundancy amid mounting deficits and signs of a fall in overseas enrolments. Some of these institutions are huge.

And whatever economic theory says, attempts by the OfS and the government to play market hardball on this may not survive contact with reality. As DK has pointed out, few MPs in university constituencies would be willing to sit idly by while the government lets a massive local employer and educator of its constituents get into real trouble. Government ambivalence about institutional closure also goes against wider policy objectives, such as an NHS Long Term Workforce Plan which requires (and funds) a lot more degree educated medical staff.

And if we have a Labour government later this year, with less of a fervent belief in the invisible hand of the market, they may be even less keen on such a “devil take the hindmost” approach.

So: what would a future DfE, OfS, or any other body do in a situation where it became clear that Major University X, having made staff redundancies, closed courses, and made all other types of financial efficiencies, came to a point where it was in practice or even legally unable to function financially?

We think there are some big questions that need to be answered. It may be that various civil servants and sector bods already know the answer to these and have a plan. But if the sector is facing – as it seems to be – significant financial challenges in the next few months and years, government (of whatever colour) will need to have answers close to hand, and would benefit, without driving panic, from starting to present this thinking more publicly.

At present, it’s not even clear what regulators should be looking for, let alone how they’d intervene early when alarm bells start ringing.

Big questions

We’ve posed some of the most important questions here, but there’s almost certainly more.

  • What does “going bust” look like? It’s hard to envisage – but not impossible to imagine – that a university has to shut its doors overnight because it would no longer be able to meet its financial duties and obligations. Obviously this would be the most dramatic type of failure and necessitate, if one is desired, the most immediate intervention. But a period of significant curtailing of university activity and rounds of redundancy would also have a serious impact, and might need a more targeted policy approach if government wanted to avoid essentially managed decline across a number of institutions.
  • What happens to students? This is the easiest to answer hypothetically, given that all institutions are required to have student protection plans, but as Wonkhe has previously pointed out, few of these seem up to scratch. The OfS will need clear guidance on what powers it has – particularly if there is not an obvious answer as to where students will go to complete their studies. And governments may need to be firmer on institutions recruiting students onto courses they know might not be viable in 2-3 years time. Recent graduates from institutions that have gone under could suffer too: they may find that the value of their degree in the labour market drops precipitously.
  • What happens to staff? This is obviously pertinent not just to academics, but to the many vital professional services staff. In some areas, universities are more often than not one of the largest local employers. A quick scan of HESA shows that universities on average employ around 2,500 staff, with the largest employing 5x this number. Given that a number of these jobs are highly specialised, there will need to be serious thought given to redeployment or retraining if there isn’t sufficient demand in the local labour market. And pensions are another large question, as they are for private sector employers who go into administration. What is the balance of liability between institutions, and the sector schemes as a whole?
  • What happens to the local economy? The staff question is the thin end of a large wedge. Universities are deeply woven into local economies, not only in the additional economic activity that students create, but also in the efficiencies that proximity to university-based innovation and skills brings to economic activity. In some places, the loss of the university could send shockwaves through and demand from the university for suppliers and from students for certain businesses dries up. It may be worth the government bailing out some universities on an economic basis in some cases – but how will this be decided, and by whom?
  • What happens to the physical estate? Most university estates are big, and complicated. Sometimes facilities like labs are part government funded and part private funded (we haven’t even touched here on what happens to the unfinished work of these labs and the research groups they house). Some were likely paid for entirely by the taxpayer. Sometimes land or buildings are co-owned by the institution along with a private sector partner or the local council. There’s no easy answer to the question of what happens to all the physical “stuff” – accommodation, labs, etc – that make up a university – and much of it likely can’t be practically or legally resold or reused.
  • Is anyone ready to be the lifeboat? In a scenario in which a major institution suddenly was in existential trouble, then the most practical way that student protection plans and some continuity of provision might continue is through some form of merger, or looser collaboration. And in the case of actual exit, it may well be preferable for students and all existing assets to remain in place, with a new institution taking it over, at least in the interim. That is, in part, what administrators seek to do in the private sector, and what would happen in schools: the pupils don’t move to new schools; instead, the staff and students stay put but just under new management. But there is a lot of capacity to do this in the school sector, because individual failure of a school of 500-1,000 students is manageable for institutions that in total oversee tens of thousands. Who is ready to be a lifeboat for an organisation that might be almost as big as their existing institution? Do we have a shortlist of Vice Chancellors, Boards, and universities ready to step up, if asked?

What can the government do?

There is no power in today’s legislation for the government to give “extraordinary support” to a particular institution. In a major failure scenario, they could theoretically want to support (or even force) a merger or acquisition. They could also want to support specific institutions financially to keep them open at least for an interim period. But both would likely require new legislation, potentially at speed, and all of this tells against a story of autonomy

And the truth is that discussions of failure are only half, at best, a technical issue. This issue all relies on some very big P political questions. Which institutions might be allowed to fail – and which won’t? What does increased government intervention mean for institutional autonomy, an idea already much eroded in political and policy circles? What does it mean for the status of universities, and could they be reclassified as FE colleges as public sector bodies if the state gains more control over funding or governance? And how much is the sector as a whole willing to trade to save a small, but potentially significant number of institutions?

We don’t know all the answers yet – but somebody needs to, and likely soon.

7 responses to “We still don’t know what happens when a large university runs out of money

  1. In regards to mergers of “distressed” failing organisations – two turkeys don’t make an Eagle is the evidence from other sectors.

    1. This is true. Mergers need to happen in advance of failure, and need to be accompanied by external capital that can fund transition costs.

  2. The regime under the Insolvency Act 86 will not protect the funds needed to finance an effective SPP (which are anyway hard to calculate since there is no clarity on what compensation might be due to students under the vague U-S contract). The only way forward is to give priority to the SPP via similar legislation used for the FE sector – but that means Ss getting priority over redundant staff! Pity the insolvency practitioner trying to calculate the true cost of an SPP (what compensation, how long a teach-out, etc) and what the proceeds will be from a fire-sale of a second-hand U’s buildings/site – anybody want an asbestos riddled Chemistry lab or a swath of flat-roofed lecture halls?!

    1. Excellent point – also SPPs are condition of registration with the OFS but if you don’t plan to be registered with the OFS then…

    2. The FE insolvency legislation protects students but this might provide continuity or staff because the special administrator in the cases where it has been used so
      far has sought to transfer students, courses, assets and staff to other colleges. The downside has been the expense. DfE underwrote the Hadlow administration with loans. The total cost of professional fees for the 2 linked insolvencies were about £10 million.

      The FE insovency law was considered by Parliament at the same time as HERA. A bit of a failure in policy making that HERA didn’t include an administration / insolvency regime.

  3. Given the massive amount of data that Universities have to report on the government should know well before any University is in that situation. Short of Labour giving a huge increase in funding (unlikely) it may well be time for a large series of mergers and federation of Universities in the sector. This approach has already occurred in Finland and Belgium.

  4. There is no doubt that a large failure would have many of the deep and lasting impacts described in the big questions. This has also been true of large organisation failures across the decades. Coal mines, steel works, car factories, etc, so any consideration of this problem shouldn’t start with the premise that Government has a duty to “save” failed Universities as time and time again, public money has not been used to avoid these sorts of devastating impacts. Where there is exception, is where the activity is sustainable, a roadmap to operating without external aid. The key test therefore of University financial resilience is sustainability, and Boards/Executives should be clear what triggers there are to put this at risk (for example financial “golden rules”), and what intervention has to happen and when, when the trajectory starts the wrong way. Wishing/hoping/lobbying for a change in government policy to increase fees isn’t an action plan that any reasonable financial stakeholder would see as a credible way out, and therefore the onus is on those with the fiduciary duties to take steps to ensure sustainability, or if it just isn’t viable, to accept such and manage an exit in an orderly fashion, protecting all those stakeholders in an optimal fashion, rather than continued erosion of resources and then a cliff edge exit that is devastating for all.

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