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Message to university leaders: you’re on your own now

mike boxall | he | 26 November 2015

The funding cuts contained in George Osborne’s spending review may have proved less onerous than feared, but that does not mean universities should breathe a collective sigh of relief. The autumn statement is just the latest, and not the last, in a slew of important policy changes to hit English universities.

Recent months have seen a series of reforms that together amount to the most fundamental shift in the policy and funding environment for a century. They include: the Higher Education Green Paper, promising radical reform of quality and market regulation: the Nurse Review, promising a restructuring of research support; the Consumer Rights Act, putting universities under scrutiny from the Competition and Markets Authority; the apprenticeship levy, incentivising employers to redirect their workforce development  priorities; the devolution of responsibilities and budgets for skills and innovation to new combined authorities and cross-regional powerhouses; ever-tightening Home Office constraints on the recruitment of international students, with little apparent concern for the collateral damage to university revenues.

Taken separately, each of these developments has echoes of the policy shifts that universities have seen come and go over many years, and which they have generally weathered without much disruption to their stately progress.  But taken together with other recent reforms like the ending of student number controls, they amount to a fundamental upheaval in the policy and funding environment for English universities.

For most of the past century, national policies for higher education have been focused on supporting a strong supply side of self-regulating institutions. From the UGC’s quinquennial institutional settlements to HEFCE’s rolling block grants for teaching and research, funding the HE system has meant paying the costs of provider institutions.  Even the move from grants to tuition fees, so long as student number quota controls stayed in place, only changed the name on the termly cheques, while allowing the Treasury to snipe at a sector “awash with cash”.
Those days have now gone, probably forever. The swing of the policy pendulum to a student-centred system, firmly focused on limiting and subsidising costs to students, marks an end to the era of supply-side economics in higher education.

The message is spelt out clearly in the Green Paper, which explicitly countenances  “some lower quality providers withdrawing from the market, leaving space for new entrants”. The related discussion is almost entirely concerned with encouraging new providers to enter the fray, rather than supporting struggling incumbents which is deemed “undesirable for various reasons”. This is the first time anyone can remember government Ministers being so openly sanguine about the possibility of widespread university closures – although we have yet to see their apparent insouciance tested in practice.

Universities have been firmly cast off on their own, into the most turbulent market seas they have ever known.  Few providers are more than two or three years from insolvency, with no guarantees of future income beyond their current student cohort and current research contracts.

All this comes at a bad time for the whole sector.    


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The latest report from HEFCE on the financial health of the university sector, based on institutions’ own projections, raises serious concerns about the short-term (up to 2016/17) viability of many providers and the vulnerability of the whole sector to even small perturbations in their planning assumptions.  Financial surpluses are falling rapidly from the windfall gains experienced after the tuition fee hike, and no longer cover the real costs of self-renewing operations, while balance sheet reserves are being eroded by the demands of property maintenance and replacements.

In what may come to be seen as the good old days, institutions running into financial difficulties could look to HEFCE to help them implement turnaround plans. This was often achieved through behind-the-scenes allocations of extra student numbers, injections of discretionary capital, facilitating site sales or brokering mergers. In future there will be neither the machinery nor the money for quiet bail-outs of these kinds.  The new Office for Students will, on current proposals, have a strictly limited remit for supply-side sustainability, while the diminished funding provided through BIS will be strictly formula based, explicitly denying ministers scope to “single out specific institutions.” 

Some institutions are looking to increased borrowings and investments from the private sector to replace lost public funding, and are planning to grow commercial borrowing by £2½ billion (to exceed £9.2 billion) over the next three years. However, pessimistic forecasts of operating margins, coupled with the ending of presumed government underwriting of institutional borrowing, will make this a difficult ask.

Others are courting new allies and sponsors among the newly-created Combined Authorities with devolved powers and budgets for local strategies regarding high-level skills, innovation and growth. Those Authorities will, however, be interested only in something-for-something deals that further their local ambitions, which are likely to be pitched at less elevated levels of skills and applications than universities usually address.

And this exemplifies the challenge that the ending of supply-side funding poses for all universities.  Are they well-enough aligned to the needs of students, employers and other paying client groups?

We are already seeing a scenario of winners and losers among universities, with no sustainable middle ground.  Every institution must take honest stock of their business and positions in the emerging environment, and ask themselves how plan to succeed in a world which no longer regards their relevance and value as self-evident. 

For those universities that are still doing relatively well, maintaining student numbers and income levels, they should ask whether their past strengths will be enough to assure their uncertain futures.  For those already hovering around the zombie zone, with falling enrolments and cumulative deficits, the questions are much more urgent and demand immediate answers.
This article first appeared in HE from Research Fortnight, and is reproduced with kind permission
Mike Boxall is a higher education specialist with PA Consulting Group

Mike Boxall is a higher education expert at PA Consulting Group

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