Failing universities should be allowed to go bankrupt, an influential think-tank recommends in a report to be published this week.
Policy Exchange, which advocates free-market and local solutions to public-policy questions and has close links to the Conservative Party, also says that private education providers should be allowed to take over failing institutions.
The report, Sink or Swim? Facing up to Failing Universities by Anna Fazackerley, the think-tank's head of education, points out that no university has ever gone bankrupt in Britain.
"The current deeply embedded culture of shoring up struggling institutions as fast and as quietly as possible means that universities are unable to learn lessons from failure in other institutions," it says.
"Given that the Higher Education Funding Council for England will distribute just under £8 billion of public money to 131 institutions in 2009-10, we feel strongly that we should question whether a no-fail culture is acceptable."
The report admits that university closures outside London could be disastrous for local economies and student access, but it suggests that the situation in the capital is very different. "All the senior university figures we spoke to agreed that the loss of an institution there is far from unthinkable."
London has 42 higher education institutions, and many of them compete for the same students.
"There should be a realisation that a university could close, if that is shown to be the best use of public money and assuming that students can be satisfactorily located elsewhere," the think-tank says.
Change the default
When an institution is in crisis, the default option is to consider a merger with another university, the report says. In the future, institutions should be broken up if necessary and private providers asked to take over some of their constituent parts, it suggests.
"One private company told us that it would look to move into vocational subjects such as business, law and technology," says the report, which quotes another company as claiming that it could make a 10 per cent profit by "getting rid of inefficiencies" in a university.
Although private providers cannot receive money from Hefce, the Government could offer a contract for a provider to take over all or part of an institution.
The report concludes: "A bigger barrier to entry for these companies may be opposition from academics themselves."
The next few years are likely to see several universities suffer severe financial difficulties. Most institutions expect state funding to fall by at least 5 per cent in the next two years.
Earlier this year, Adrian Smith, the Government's Director-General for Science and Research, said that universities were "going bankrupt" because the promised review of university funding had not taken place.
The Government's insistence that universities must not increase recruitment of home and European Union undergraduates beyond last year's numbers in 2009-10 means that institutions will not be able to expand student numbers to dig themselves out of financial trouble.
The suggestion that universities should be allowed to fail provoked a mixed response from the sector.
Robin Baker, vice-chancellor of the University of Chichester, said: "If we are serious about wanting a sector in which all institutions are excellent as well as diverse, it is hard to understand why the managed demise of failing providers is anathema." He continued: "The conventional responses - rebranding and merger - are not panaceas. The former resembles a cheerful lick of paint on a crumbling wall, and merging failing institutions produces the risk of failure on a bigger scale while haemorrhaging resources."
Terence Kealey, vice-chancellor of the private University of Buckingham, said: "Of course universities should be allowed to go bankrupt, and of course administrators should be allowed to then sell on their viable parts.
"Universities in America go bankrupt, which is why the US has the best universities in the world. But the Government has a social duty to ensure that a community is not ravaged by its local university going bankrupt, and should intervene temporarily if necessary."
Paul Marshall, chief executive of the 1994 Group of small research-intensive universities, was more circumspect. "It should be the role of the funding councils and Government to set the framework in which competition takes place; beyond this, autonomous institutions must have the freedom to find their own positions, and succeed or fail, within this marketplace," he said.
But he stopped short of agreeing that universities should be allowed to go bankrupt.
The University and College Union was less enthusiastic. Sally Hunt, its general secretary, said that allowing universities to fail would be "an act of gross vandalism".
"If this current financial crisis has taught us anything, it is that we cannot rely on the market to provide a fair and just system," she said. "Private-sector involvement would lead to worse conditions of service for staff and to a poorer service for students."
UNIVERSITIES ON THE BRINK OF A MELTDOWN
A recent routine audit of a university by the Higher Education Funding Council for England found that it was three months away from bankruptcy, according to a "senior government source" quoted in the Policy Exchange report.
"Shockingly, senior management appeared to be unaware of the dire financial position, with the internal audit committee having recently signed off a good bill of health to the board," the report states.
In another case, Hefce found that a university's top management did not know that a large total deficit was accumulating because it had devolved finances to individual departments.
The Policy Exchange paper comments: "The board had no indication that the organisation was running itself into serious financial difficulties."
In both cases, Hefce had to step in.
The discovery last year that London Metropolitan University had been overpaid £50 million in public money also suggests that the regime for financial oversight is not working, says the report, which brands Hefce's five-yearly audits as insufficient.
It recommends that the funding council audits more frequently or that university mission groups conduct annual audits in addition to Hefce's.
This proposal was not well received by the mission groups.
John Craven, chair of the University Alliance, described it as "entirely inappropriate", while a 1994 Group spokesman said: "We have neither the necessary expertise nor the will to do this."
Les Ebdon, chairman of the Million+ group of post-1992 universities and vice-chancellor of the University of Bedfordshire, said: "My university is subject to at least seven layers of audit. Adding another layer would not strengthen the system, but weaken it."
Hefce said: "Our approach to accountability and financial management is based on proportionality and risk", involving an annual set of data returns, a five-year cycle of reviews and a data assurance programme.
Hefce said it examines institutions more often if it thinks they are at risk or if financial concerns have been reported.
HOW IT MIGHT END
- Pre-1992 institutions set up by Royal Charter or Act of Parliament require another Act of Parliament to be dissolved.
- Universities established as companies limited by guarantee, such as London Metropolitan University, could be liquidated under the provisions of company law.
- Post-1992 statutory institutions could be disestablished in the same way that they were set up - by statutory instrument under the 1992 Further and Higher Education Act.
IN THE DARK OVER MERGERS
Since 1997, there have been mergers in higher education, most of which received little or no publicity, the Policy Exchange paper notes.
"We found it difficult, and in many cases impossible, to find information about the mergers that have already taken place," the report says.
"The consensus among our interviewees was that the majority of mergers have been poorly managed, costly, often driven by political rather than economic factors and, as a result, have rarely delivered the efficiencies expected."
It concludes: "Lack of openness about these merger deals is fuelling poor performance."
London Metropolitan University is the product of a merger in 2002 between London Guildhall University and the University of North London. Its current crisis stems from its "problematic beginnings", the report suggests.
The Higher Education Funding Council for England cut London Met's grant by £15 million in 2008-09 after it discovered inaccuracies in student data returns. It is now trying to claw back a further £36.5 million.
The think-tank says the merger was complicated by financial difficulties in both institutions, an overly optimistic estimate of the size of Hefce's grant to support the merger, and "a lack of buy-in from staff at both institutions".
"One education consultant explained that 'Hefce's view was that it would supposedly be cheaper to fund a merger than a bailout of both institutions'," the report says.
"However, given the fact that the merged institution is now in such serious financial difficulty, this seems unlikely to be proved accurate."
Last year, Times Higher Education broke the news that consultants commissioned by the Higher Education Funding Council for Wales had identified problems with the management of the University of Wales, Lampeter, and suggested that a merger might be necessary. Policy Exchange's report says: "Very little information exists in the public domain about exactly how this came to be."