Soon, we'll be banking it

How to thrive in recession - create a market in university course futures. Richard Middleton has a modest proposal

May 28, 2009

In the closing session of the annual conference of the Association of Heads of University Administration, held last month at Leeds Metropolitan University's Headingley Campus, Jonathan Nicholls, the deputy chair of the association and registrary of the University of Cambridge, gave us assembled secretary-registrars and chief operating officers a compelling summary of how bad the recession caused by the banking collapse could be for us. Very bad. And he reminded us how much more Barack Obama is investing in US universities than our Government is investing in the UK sector. A lot more. Some of us may suffer as incomes fall, some jobs are already being lost, and research scientists could start to migrate.

Earlier in the day, we learnt that the number of applications for undergraduate places made by overseas and European Union candidates had risen significantly in 2009 (by 9 per cent and 14 per cent respectively). This will be a sliver of a silver lining if those applications transmute into students paying overseas fees. One explanation for the increase was the devaluation of the pound by 25 per cent against the dollar and nearly one third against the euro. UK higher education, if not exactly cheap, is suddenly a lot less expensive for overseas students.

Upon overhearing that an overseas student had offered one university three years' fees upfront, I began to wonder if this could help save us from recession.

The solution is university futures. Prospective students, their families or even their governments could buy one, two or three years' worth of course fees and accommodation rents upfront, at the currently discounted rates, in the form of a voucher. The university would guarantee to provide a course place and accommodation to a person bearing that voucher who met the entry criteria, visa conditions and other course requirements. The user of the voucher would not have to be the original purchaser.

Because the original purchaser might fall short of entry standards, there would need to be a market in university course futures, so that those with a place could purchase a prepaid fees voucher from someone no longer eligible.

You see where this is going.

The scheme could be scaled up so that an overseas school, philanthropist or government could purchase blocks of vouchers for future places and then allocate or sell them to prospective students. No one buying those vouchers need lose. If places were limited, they could possibly make a profit.

The universities selling vouchers gain as well - they get immediate cash for investment at a time when borrowing is restricted and relatively expensive and when government investment capital is shrinking. A university comfortable with risk could sell more course futures than it had available places because those vouchers would inevitably be redeemed farther into the future. Indeed, the farther into the future they are used, the more valuable the vouchers are to the trader - you can imagine traders avoiding redemption in order to maximise their profits. This makes the university's position very different from that of an airline overselling seats.

Confidence in future overseas students' places requires careful planning. Using applications data, it would not be difficult to predict how many vouchers were likely to be redeemed and to tailor provision - after all, the money is already in the bank. For universities with large proportions of overseas students, such as Aston, Bradford and the London School of Economics, this is an attractive option.

Once trading in university overseas student futures takes off, we could anticipate markets in derivatives - bundled university futures - with risks offset by hedging transactions. The total market is worth £1.25 billion a year. Tertiary markets need more development, but very soon our finance departments could be behaving like merchant banks, trading in these instruments. And that, of course, is the real purpose of this proposal.

When the recession ends, currency movements reverse and the market in university futures collapses, looking more like a bank will ensure that we are more eligible for a massive bailout - certainly more eligible than we are now for merely delivering world-class education and research.

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