In 2018, during the evolution of HEFCE to the Office for Students (OfS), the regulator made a small financial loan of £900,000 to an institution in financial difficulty under the transition rules from one regulator to another.
The universities minister at the time, Sam Gyimah, was quoted as saying that:
[Universities] should be responsible for their decisions, they should make sure that if they are borrowing and making their financial plans that they think about the downsides of that as well as all the upsides. That is a very clear message. No bailouts.
One of the most pressing questions in English higher education is this: what would Baroness Smith do today in such a scenario, if £900k was asked for? And what would she do if £9m was asked for? Or £90m?
No one here needs us to rehearse the drivers of the current financial pressures, nor the forecast that up to 80 per cent of institutions could be in deficit by 2027. But as we wrote back in January, there are a series of unanswered questions around what happens if, as a result of these pressures, a major university undergoes what OfS call “a disorderly exit” – that is closure that is unplanned, or chaotic, or short notice, or all of the above.
Since then, we’ve been working alongside the University of Warwick to answer these questions systematically. What would happen to students, staff and the institution itself? What could the immediate consequences be beyond a university’s gates? And more importantly, what can be done to help reduce or mitigate the consequences of this disorderly exit?
No lifeboats available
Our report, Institution Overboard, published today, paints a worrying picture as to the legal and regulatory position at present. Student Protection Plans (and their stricter cousins, Student Protection Directions, which can be imposed by OfS), have no force in insolvency law. In a situation where a university was in some form of legal wind up, student interests would only be recognised alongside other creditors. If a “lifeboat” couldn’t be found, or teach-out couldn’t be organised, then students would have no additional safeguards.
A disorderly exit would impact every aspect of university life. Campus facilities, accommodation contracts, the holding of records of who has previously graduated from the institution with a degree, use of research grants from UKRI, sale of capital assets funded by public money – in a chaotic exit all is uncertain.
And none of this accounts for the wider effects: the shrinking of public sector training places; the diminution of economic activity in an area; the loss of provision for students who don’t want or can’t study at a distance from their local provider. And perhaps most pertinently, the ripple effect of nervousness from lenders at other institutions, and international students considering the UK as a place to come and live and study.
None of this means that provision should just stay as it is. We don’t call for the current system to be preserved in aspic. Student demand and choices should be a driver of the system, and universities should respond. But just as the student loan system recognises that both students and wider society benefit from graduates, so too should regulation recognise that both students and wider society have a stake in patterns of university provision.
Orderly, orderly
Our paper calls for a three stage process to address the risk of chaotic failure: to more actively monitor the system; to help pre-empt exit; and ultimately, to manage it in a more orderly way should it come to that.
Firstly, we call for a change of the role of OfS, such that it prioritises “the benefits for students and employers resulting from collaboration between such providers” as its duty under the Higher Education and Research Act 2017, in the next few years. This will probably require a new legal direction from the Secretary of State. This would grant OfS the rights not just to monitor the system for financial resilience, but to consider its actions in helping to support it.
Secondly, we think that a new role of Higher Education Commissioner and team should be created within the Department for Education. This team would act as the primary liaison between the sector and the regulator, with a view to overseeing financial sustainability and efficient engagement in future. It would be the duty of the Commissioner and team to investigate instances of financial vulnerability in the sector, whether identified by the institution itself or by the regulator.
We also think the Commissioner ought to have their hands on a new Higher Education Enhancement and Transformation Scheme (HEEATS), worth between £2bn and £2.5bn over the Parliament, to offer loans to institutions that can make a compelling case for restructuring their university such as to deliver a more sustainable and high quality provision. Unlike the HIgher Education Restructuring Regime (HERR), this new scheme is designed to be taken up proactively before real financial difficulty occurs. We posit six “tests” which universities would have to meet to qualify for loans: what their plan is for economic growth in the region; how place and community will be protected; what the impact will be on public service training; the future flow of graduate labour in the region; protection of scientific assets and the research base; and protection of academic specialisms where needed.
And thirdly, and most intensively, we call for the creation of a new Special Administration Regime, modelled on that which exists in further education and other critical national sectors such as railways. This would allow for a more orderly form of exit should restructuring not be possible or effective, and would allow for protection for students and other national public assets under the law, in advance of a more orderly wind-down.
There is still much to be done. The human and financial cost of alleviating exit is high. When working on the ALRA closure, over 69 days, OfS and others held more than 60 meetings across multiple organisations and teams, for an institution that at time of closure had 284 students. We can only imagine the level of work for a market exit plan for an organisation with several thousand students, multiple numbers of physical and intangible assets, and the like.
But the need is also high. For the new government, this issue ought to be near the top of their priority list. Everyone benefits from a flourishing higher education sector; and everyone shares the risk from a disorderly exit.
You can download the Institution Overboard report on Public First’s website here.
