Institutions in financial holes suffer prolonged pain, and more will come, NAO says

Universities that get into financial difficulties are staying at higher risk for longer, and problems are likely to worsen under the revamped funding regime, a new report warns.

March 4, 2011

The study from the National Audit Office, published today, says the seven institutions deemed “at higher risk” by the Higher Education Funding Council for England last year had on average spent 4.3 years under the category, up from 2.7 years in 2006.

One, Thames Valley University, has been in the category for 12 years, it says.

In addition, although 95 per cent of institutions were not at higher risk, the number of cases with “areas of concern” had risen from 10 in 2007 to 43 last year.

In its report, Regulating Financial Sustainability in Higher Education, the NAO notes that Hefce’s approach to supporting such universities had required “significant” resources that could become “stretched” in the new funding environment.

“The funding council is unlikely to be able to support a more substantial caseload without either stronger powers to intervene effectively or more regulatory resources,” it warns.

It says Hefce may also have to be more open about the universities in financial trouble – currently it can withhold information from the public for three years – to help students make “more informed” choices about where to study.

Assessing the current level of risk, the report says that “while there are a number of financially strong institutions, there is wide variation in institutions’ financial performance”, with more than a quarter performing below financial benchmarks.

These institutions were more likely to be research-intensive universities without medical schools or specialist music and arts institutions, it adds.

The report also says that just under 10 per cent of institutions have had a deficit in at least two of the past three years.

On prospects for the future, it adds: “The funding council’s modelling indicates that while some institutions will benefit financially from the funding reforms, some will, by 2014-15, receive less public income and tuition fee income supportable by student loans.”

Overall, between August 1999 and December 2010, Hefce gave special grant funding of £44 million, and loans of £11 million, to all institutions in its “at higher risk” category.

However, this equated to less than 0.1 per cent of overall funding, according to the report, which praises Hefce’s “cost-efficient approach” to financial regulation.

Margaret Hodge, Labour MP and chair of the Public Accounts Committee, which the NAO reports to, said Hefce had “done well to oversee the stability of the higher education sector in a cost-effective manner up until now”.

But she added: “The funding council is not transparent enough about its risk assessments of individual institutions.

“Students deserve to know if the place they choose to study at has a high risk of failing, particularly in the brave new world where the student holds the purse strings.

“Moving to the new funding arrangements will potentially increase the risk of institutions at high risk of failing, as they compete for income. The funding council needs to respond accordingly, with clear leadership from the Department for Business, Innovation and Skills. A new type of regulatory framework will be required.”

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