Plan for the unimaginable

Universities used to be thought unsinkable, but the unthinkable – an institution going to the wall – is now a genuine, if yet remote, prospect

August 17, 2017
Bailing out a boat
Source: Alamy

Universities are not too big or too important to fail. Jo Johnson made this one of his founding principles when he took over as the UK’s universities minister back in 2015.

That, after all, is the whole point of a marketised system. Consumers are given the conditions to make choices, and suppliers understand that if they fail to attract a sufficient share of the market, they go to the wall. It all sounds so simple, doesn’t it? Except it isn’t in higher education. And until it actually happens, it’s hard to imagine how it will.

How, exactly, would a British university fail? It might be subject to a shotgun marriage in the form of a hastily arranged merger. We’ve been there before, although the soundings are that if this were to happen again, universities should not expect the hefty dowry that has been made available in the past.

If a more brutal market failure were allowed, what would that mean for the students left high and dry? For the alumni who, quite apart from any sentimental attachment, might consider what action they could take to protect the value of the tarnished degree sitting at the top of their CV?

The Westminster government has begun to take steps to answer some of these questions. In an explanatory note to the Higher Education and Research Bill (now Act), it was made clear that the new regulator, the Office for Students, “will monitor the financial health of registered institutions, and will require student protection plans to be implemented if a provider is at risk”.

The note states that while “instances of a provider suddenly and without warning exiting the market completely are likely to remain extremely rare”, the OfS will be ready to “work with students who want to transfer to alternative institutions”, and will maintain a permanent database of institutions holding degree-awarding powers (past as well as present), so that graduates have “an easily accessible record to prove the value of their degrees if their provider ceases to exist”.

Whether this would really wash is another question (a degree in financial management from a defunct university might not have the cachet a graduate was hoping and paying for), but it demonstrates that the government is not messing around when it talks about the possibility of market exit.

Take a close look at the vulnerabilities in university finances, and again the impression is that this is not just a free-marketeer’s daydream.

This is not to suggest that any mainstream university is about to go bust. But from reading our cover story, which pores over university accounts to assess their financial health, it’s clear that the risk registers held by governing boards will be lit up with warning lights.

The uncapping of student number controls, coupled with the fact that student tuition fees now account for more than two-thirds of income in almost half of UK universities, is among the most significant factors.

Universities are now competing directly with each other for their primary source of revenue, and are doing so in an increasingly unforgiving environment.

Challenges include a demographic decline that will see the pool of potential students declining, the Brexit effect and potential tightening of immigration controls threatening the international student market, and the unknown impact of new quality measures such as the teaching excellence framework compounding recruitment uncertainties.

Throw in the multibillion-pound shortfall in funding the full economic cost of research and the political threat to the tuition fee regime (coupled with the near-universal belief that fee revenue would not be fully replaced by the government should the system be abolished), and the threats seem as significant and numerous as they have ever been.

Some of these issues are specific to the UK, or even to England, but many are not. In a recent report, the credit ratings agency Standard & Poor’s highlighted that declining funding from the government, increasing reliance on student fee income, and growth in debt to fund infrastructure projects are making the financial environment “more challenging” for public universities in many countries.

It’s important not to overstate all this. S&P’s credit ratings for the universities it assesses are still very high, and its view is that there remains a “moderately high” likelihood that the government would step in with support of one form or another (if not the direct underwriting of finances) should a university get into life-threatening difficulties.

But what our analysis this week makes clear is that, in the UK at least, the safety nets that once existed have largely been cut away. For universities facing a curdled cocktail of, for example, a poor rating in the TEF, declining student demand from the local area and from overseas, and a high reliance on tuition fee income, there are challenging times ahead.

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