The bond that can work miracles

February 21, 1997

Last November, the THES noted that the Seventh Day Adventist Newbold College was awaiting the second coming of Christ and Sir Ron Dearing. Sir Ron may be cautious about the Messianic status he enjoys in education, but having walked on turbulent waters created by John Patten, he is now asked for a further miracle.

Could he, please, turn the meagre loaves and fishes which presently undernourish higher education into a funding feast for a growing multitude? Many have provided advice on how to raise existing sums of money from different sources - shifting state provision for students into private finance, for example.

Far too little has been said about where new money might come from and, just as important, how we can stop the Government from reducing its contribution by a similar amount. Neither objective is easy. The latter is especially difficult when higher education is no politician's priority, where tax increases have been forsworn for a Parliament and whilst higher education funding looks a soft target.

It is in that context that the Association of University Teachers has put proposals to Dearing for a higher education "Learning Bond". We seek a new source of finance structured so its values are locked into higher education for long periods of time, as close to hypothecation as one can get. Individual students, businesses and the state (all of us) benefit from higher education and if all beneficiaries are to contribute, business should do so in proportion to the advantages it receives. The Confederation of British Industry wants a pool of skilled staff generated by 40 per cent of 19- to 21-year-olds graduating, requiring a 48 per cent admissions pool at current drop-out rates. This acknowledges the requirement for and utility of graduate labour as a source of added value in business. How should business contribute?

We advocate the formation of a Learning Bank and the issue of a bond. The bank would issue the bond, and handle loans and loan repayments to students. The bond would mature at 20 years and have a low interest rate, about 2.5 per cent. It would be fully registered for security reasons - only those able to show legal ownership could redeem it. It should be bank-restricted so that banks could purchase it only in their capacity as businesses liable to corporation tax so as to minimise debt monetisation. And it would be illegal to use these bonds as collateral for loans.

All businesses would be subject to an additional penny in the pound on corporation tax. The sum raised, plus a penny in the pound from within the existing corporation tax rate (a total of two pence in the pound), would automatically be used to purchase the bonds in the name of the business being taxed. Owners of the bond would receive six-monthly interest payments and the redemption value on maturity. We calculate this would raise above Pounds 1.8 billion a year.

Such a scheme is capable of important variants. Owners of the bond could give up the maturity value and remaining interest until maturity by "spending" the bond at face value to purchase higher education courses for employees with higher education institutions. The institutions would then redeem the value. This might be attractive both for the education received by employee and firm, and because the face value at the time of exchange might be greater than the price of the bond in the market. In brief, rather than repeating the failures of "training levies" requirements on businesses, or demanding a straightforward tax increase from companies which would find its way to the Treasury but never into higher education, business would contribute value to higher education specifically, enhancing higher education, and receiving a guaranteed financial return or a return in kind in higher education services.

The money raised would form one element of the cash available at the Learning Bank to provide to students. There could be several other sources and certainly it would be a better way of dispensing learning credits than local or central government.

Over 20 years, the cash flowing in would add over Pounds 36 billion at 1997 prices. The bond would create overall stability of inward and outward movement of funds and the debts incurred in one generation would be repaid in that generation, creating no debt overhang for future generations.

There is one final requirement. Sale of the bond would be subject to requirements set out boldly on its face. The value yielded would go only for higher education purposes and no part of the contribution made by the state would be decreased to be covered by any part of the bond's value. Those would be the terms for trading. It is hard to keep governments honest but here is a long-term commitment which would be dreadfully painful to unravel. Bring on more bread and fishes.

David Triesman is general secretary of the Association of University Teachers.

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