Private providers: maligned and misunderstood?

Alfred Morris argues that alternative providers, criticised by the National Audit Office, aren’t the villains they’re made out to be.

December 12, 2014

Margaret Hodge, chair of the Public Accounts Committee, which will hear evidence relating to the NAO report on alternative providers on 15 December.

Last week Times Higher Education carried an editorial responding to a National Audit Office report on private higher education provision, which contained more than a hint of disapproval for the idea that it could ever be proper for anyone to make a profit out of higher education.

The piece prompts me to offer a few comments from the perspective of someone with a ‘non-traditional higher education entrant” background and considerable experience of both the public and so-called “alternative” sectors.

Early in my career I spent three years at the then very new University of Sussex leading a Leverhulme-funded team looking at how universities were planned, financed and managed. 

I started my research with a predisposition to imagine that over time universities would increasingly come to resemble businesses. However, I ended my project convinced to the contrary: that businesses would have to become more accountable to internal and external stakeholders and would increasingly recognise that to succeed in a knowledge-based economy they needed to harness the creative and intellectual talent of the workforce by adopting participative management styles closer to those of higher education institutions.

I believe that events have confirmed that conclusion.

In parallel there has evolved a progressive view that it ought to be possible for academic integrity to be reconciled with control of a university or similar institution by private investors and that this could be powerful in attracting investment, generating competition, encouraging innovation and improving the quality of student experience.

In 2007, that view led a Labour secretary of state for education to recommend that the Privy Council grant degree-awarding powers to BPP, a company then listed on the FTSE 250 and subsequently acquired by the US-domiciled Apollo Education Group, which also owns both the University of Phoenix and Western International University and has more than a million students.

More recently, David Willetts as universities minister built on that precedent by facilitating Montagu Private Equity’s acquisition of what is now the University of Law. He followed that up by recommending degree-awarding powers for the UK distance-learning provider RDI. It is owned by Capella Education Group, a US company quoted on the NASDAQ exchange and which owns Capella University.

In all those cases, prior to the grant of degree-awarding powers there was thoughtful strengthening of governance structures in order to meet the concerns of the internal academic communities and of external bodies including the Quality Assurance Agency.

For example, the University of Law appointed a distinguished former vice-chancellor, Sir Tim Wilson, who once served as a member of the Higher Education Funding Council for England, to sit on its board as a non-executive director with no financial interest in the company and to chair an Academic Standards Committee.

The questions about academic integrity raised by the idea of an investor-owned university are similar to those about whether it is possible to reconcile clinical integrity with investor-financed provision of health services, or journalistic integrity with similar ownership of the press.

Let me tell you why I think the answers to those questions are very important.

All those years ago at Sussex, a much more important area of research than mine was being led by Christopher Freeman at the Science Policy Research Unit. It was concerned with “Limits to Growth”.

The Club of Rome had published an important report suggesting that the key question was about whether the world would run out of finite resources.

In response, SPRU argued that the more important constraint to growth was likely to be the success with which we could encourage innovation and the pace at which we could harness technology.

Today, I think many would agree that the key limit to economic growth and political and social advance is the availability and quality of education and training. That in turn determines the rate of innovative change.

In both developed and developing economies, there is little prospect of governments funding the scale of educational investment needed. It is politically if not economically impossible for them to do so.

My experience as chair of an NHS Acute Hospital Trust taught me that culturally such institutions have much in common with universities – not least in there being a view common to clinicians and academics that the chief executive should stop interfering and concentrate on solving the car parking problem. It also suggested that the scale of investment needed in health provision may be beyond the capacity of the public purse.

As regards journalism, THE is part of the TES GLobal, a group that also includes the TES title and is ultimately owned by the overseas private equity giant TPG. Notwithstanding its “for profit” ownership, THE enjoys and deserves a high reputation for journalistic integrity.

A fairly recent survey of the financial state of UK higher education showed that the average ratio of institutional net surplus to gross income in the publicly funded sector was around 5 per cent on a historical cost basis. That is higher than the average for the UK’s largest supermarket retailers. Indeed, the upper quartile margin for public sector universities is in excess of 10 per cent with the upper decile approaching 20 per cent.

In contrast to the publicly funded higher education sector, BPP University, the University of Law and RDI have all in the recent past reported losses reflecting considerable upfront investment by owners prepared to take a long-term view.

Those financial comparisons suggest that with modest improvements in higher education productivity, driven by innovation, there could be more than enough margin to sufficiently reward private investors whilst maintaining standards and generating the reinvestment cash flows needed to finance further growth.

Because public funding will remain inadequate, it is essential that we encourage private investment and public-private joint ventures in areas such as education and health provision if we are to push back the funding limits that impact with such cruelty on so many lives.

For that reason, it is imperative that we find ways of improving both public regulation and corporate governance so as to provide students and the public with reassurance and confidence that integrity and standards will be maintained regardless of ownership.

The actions taken over the past two years by the Department for Business, Innovation and Skills have included the tightening of regulation of private providers and encouragement of Hefce’s evolution into the lead body in a “Regulatory Partnership” that spans both public and private sectors and in which the Quality Assurance Agency, which has significantly strengthened relevant sections of its UK Quality Code, plays an important role.

Taken together with the innovative governance structures adopted by investor-controlled entities awarded degree-awarding powers, such as BPP and the University of Law, with the intention of safeguarding academic integrity, the steps already taken by BIS and its regulatory partners to improve regulation of the “alternative sector” are impressive.

That deserves to be acknowledged by Margaret Hodge and her Public Accounts Committee colleagues when they meet next week to consider the report recently published by the NAO, “Investigation into financial support for students at alternative higher education providers”.

In my view, the report falls well short of the standards we are entitled to expect from the NAO. In particular, it contains misleading comparisons of public versus alternative sector “‘dropout”’ rates based on Student Loans Company information of doubtful relevance.

The NAO had available to it, and was reminded of but chose to ignore, much more relevant information published by the Higher Education Statistics Agency.

That Hesa information leads me to a hypothesis that, contrary to the kneejerk reactions expressed in THE and other media, further research might show that alternative-provider “dropout” rates compare relatively favourably with the public sector if judged by benchmarks reflecting the socio-economic profile of the students and constructed on the same basis as is used by Hefce for monitoring the performance of the institutions it funds and regulates.

I hope the PAC’s chair, who appears to have already publicly recorded a guilty verdict against both BIS and alternative providers ahead of hearing the evidence, will concentrate next Monday on encouraging her colleagues to press the NAO hard as to why it rejected advice to seek the information necessary for meaningful comparisons. Instead, the NAO leads readers of its report to imagine that the average UK dropout rate in the public sector of higher education is 4 per cent, which is just not true.

The NAO report draws attention to the fact that BIS has not defined “an expectation of what might constitute an acceptable drop-out rate”.

That is true, and in response, I suggest that BIS should ask Hesa to calculate individual benchmarks for alternative providers, using the same statistical model as that used by Hefce, whose benchmark expectation for “UK all first-year non-degree students” exceeded 14 per cent for about 25 universities in the latest year for which information has been published.

At the same time, Ms Hodge and her PAC colleagues should note that the failures of the past in UK higher education have concerned the governance and management, sometimes of finances but more often of quality and standards, of the public sector.

In particular, public sector institutions have not always had a good record of regulating collaborative provision in which alternative providers deliver programmes leading to university awards.

The PAC should be encouraged to ponder whether it might help if we reinvented the Council for National Academic Awards, this time as a validating body for the “alternative sector”, and whether that might possibly provide a future for QAA if, as seems likely, it loses its Hefce quality assurance contract.

The challenge to demonstrate that academic integrity can be reconciled with the motives of private investors is very important, and all those of us who see education as the key limit to sustainable social and economic progress should be applauding and encouraging efforts that seek to do just that.

Meanwhile, I take encouragement, notwithstanding that editorial last week, from the way in which the “for profit” THE manages not only to maintain but to improve the quality of its content, particularly online, and with the benefit of the investment made possible by its private investors.

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