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Jo Johnson’s evidence and arguments

Jo Johnson has set out his arguments for ‘breathing new life into our higher education sector by encouraging innovation and putting in place incentives to drive up the quality of teaching’. Given that the last round of innovation infected English HE with a virus previously confined to the US, he has some case to make.

High-quality institutions that meet rigorous standards for quality, financial sustainability, management and governance upheld by a new regulatory body, the Office for Students, will no longer need to be ‘validated’ by their rivals before they can award their own degrees.

The government hasn’t consulted yet on these ‘new rigorous standards’ – they aren’t part of the HER Bill but are separate regulations. The White Paper suggested that no track record in higher level teaching would be needed to meet these standards. Validation here is a red herring, what we are really talking about is allowing for-profit companies, perhaps registered overseas for tax purposes to access public funding. But if you don’t want universities – established, and previously trusted, higher education institutions – to act as gatekeepers then you need to set out in full detail what these standards are going to be.

As history tells us, every period of university expansion in this country has met with opposition. And the arguments against new entrants put forward today echo those aired more than a century ago when UCL – now a pillar of academic excellence – was dismissed as ‘a Cockney university’.

This tired and ahistorical analogy is repeatedly trotted out. How many universities were there in England when UCL was founded? Two (Oxford, Cambridge) and then depending how you count an institution as a university, you have to consider the rival claims of Durham, University of London, and King’s College London to be the next oldest.

The same arguments were also made in opposition to the 1992 reforms that allowed the Polytechnics to convert into a wave of new universities, enabling them to play their part in ensuring higher education was never again rationed for the benefit of the socially privileged.

Polytechnics had been delivering higher education for 25 years (a track record) before they were converted to universities. In 1991, there were over 40 universities, we now have over 100 in England. This is a very different context and one where the government is proposing to relax what many would take to be the defining characteristics of universities. (Today, Johnson was reduced to retweeting a Toby Young article, which again gives the reader no indication as to how many universities there are today in England).

Students are crying out for new ways of learning. That’s why Dyson has received twenty times more applications than places available at their newly announced Institute of Technology.

Dyson is offering 25 degree apprenticeship places taught by Warwick (it’s stretching things a little to call it an institute yet). So 400 people applied. There are over 1million undergraduates in English HE. As the example obviously indicates, there is nothing to stop such initiatives being established so it’s not clear why Johnson thinks it backs up the need for the HERB reforms.

While our higher education institutions are among the best in the world, research-based league tables tell only part of the story and we know that too many students have been dissatisfied with the quality of the teaching they have received.

Over 60 per cent of students feel that some or all elements of their course are worse than expected and, of these, a third feel that this is due to the teaching quality.

As far as I can tell, Johnson is basing his claim on a chart from the 2016 HEPI Student Experience Survey. (Though he ignores the first finding that 85% of students are ‘very’ or ‘quite’ satisfied with their course experience.)

hepi-student-experience

One could equally say “Over 75 per cent of students feel that some or all elements of their course are better than expected.” But you’d probably be better off comparing the 13% in red and the 27% in green and trying to find another way to drill into the blue.

But, when Johnson does so, things go awry.  HEPI says that the third referenced by Johnson are referring to ‘lack of support for independent study’, not teaching quality. I quote:

One of the specific reasons for expectations being met, which explains the differences between student groups, is the support provided to study independently. Overall, among students whose expectations were not met (in full or in part), 29% cited a lack of support for independent study …

The other factor explicitly discussed in this section is that many students feel their time as a student did not match their expectations, because they didn’t put enough work in. This is the ‘singlest most cited reason for expectations not being met’. And really means that Johnson is abusing the data.

Back to Johnson:

Our reforms deliver on the new Teaching Excellence Framework we promised in our last Manifesto, for the first time linking teaching funding to quality and not just quantity – a principle established by a Conservative government of the 1980s for research funding.

What’s proposed in the TEF is a suite of imperfect proxies for teaching quality – only one of which (completion rates) is a good indicator of something awry, but that may be more about recruitment and the financial strain of fulltime study rather than teaching quality per se.

For more on Johnson’s misuse of stats – this time in relation to the NSS – here see, BishopBlog on a lamentable performance.

First Lords amendment goes to vote, government loses

The House of Lords began its scrutiny of the Higher Education & Research Bill yesterday. Over two hours was spent debating the first of over 500 amendments. Proposed by Alison Wolf the amendment sought to specify what a university is understood to be.

“UK universities: functions
(1) UK universities are autonomous institutions and must uphold the principles of
academic freedom and freedom of speech.
(2) UK universities must ensure that they promote freedom of thought and
expression, and freedom from discrimination.
(3) UK universities must provide an extensive range of high quality academic
subjects delivered by excellent teaching, supported by scholarship and
research, through courses which enhance the ability of students to learn
throughout their lives.
(4) UK universities must make a contribution to society through the pursuit,
dissemination, and application of knowledge and expertise locally, nationally
and internationally; and through partnerships with business, charitable
foundations, and other organisations, including other colleges and universities.
(5) UK universities must be free to act as critics of government and the conscience
of society.”

This amendment was to be inserted at the very front of the draft Bill and seeks to limit the government’s plans to relax conditions on the university title, while also defending universities from direct government interference (particularly around standards – of which we will hear a lot in days to come). The stress on a ‘range of high quality academic subjects’ is designed to head off a raft of entreprenerial training providers specialising in single subjects from accessing the protected title.

The government spokesman in the Lords refused to bow to the pressure coming from the benches and so a vote on the amendment was proposed. Those ‘content’ with the amendment won by 248 to 221.

While this isn’t the defeat of the Bill that the Guardian’s coverage might have you believe, it is a significant opening salvo. The next amendment – on the establishment of universities – opens with two clauses that will hurt the government further with their bar on profit.

(1) UK universities must be bodies corporate, primarily located in the United
Kingdom, and established on a not-for-profit basis.
(2) UK universities are public bodies, contributing to society through the pursuit
of education, learning, and research at high levels of excellence.

Jo Johnson has already responded with his normal rhetoric about burgers.  He cites Dyson’s new degree apprenticeship scheme as an example of what his reforms have in mind, but neglects to mention that much of the demand in that new initiative derives from the involvement of Warwick, which will be teaching and awarding the degrees. Nothing legislative or regulatory has prevented more of these ‘high quality’ initiatives from being established.

Moreover, there is nothing to stop new training providers being established. Johnson continually fudges the main issue – access to public funding. What the new providers want is subsidies for their profit-making.

For-profits have access to government funding via tuition-fee loans, though it is also now already open to them to apply to become eligible for high-cost teaching, capital and research grant funding.(Attention needs to be paid to for-profit group structures, not the status of individual legal entities. It’s a straightforward matter to siphon money out of a not-for-profit into a for-profit parent, as detailed here in the case of New College of the Humanities. At present there is nothing to stop a for-profit corporation registered overseas for tax purposes accessing loan or grant funding).

Designation for student support as a policy and process grew out of the procedures whereby universities were trusted to validate provision at small and specialist institutions that offered something not present in universities (see the various controversies around the funding of alternative health and therapy courses). Pearson’s HNCs and HNDs were added to the mix and the coalition government raised the eligible fee-loan amount to £6,000. This set in train the uncontrolled expansion of alternative provision, which resuted in the National Audit Office investigation of 2014.

Given the mess inherited from the coalition, the need for regulation here is imperative but this current government can’t be trusted on that score until:

  1. it comes clean about what happened between 2010 and 2014 – how many qualifications were achieved for the billion plus squandered on its policy experiment?
  2. it publishes its proposed consultation on new regulations for the granting of degree awarding powers and the university title. As regulations these don’t need primary legislation so aren’t in the Bill, but interpreting the Bill depends on assessing the proposals for accelerating the procedure by which DAPs and title are gained. (A sixth-form college has to have 200 students, the government plans to set no minimum size for the university title). Until it does and makes the case for those proposals, we are left with the suspicion that the driving motive is to bring the timings of that procedure into alignment with investment cycles. Two high-profile title awards created University of Law and Arden University – the owners of both (hedge funds and venture capitalists) disposed of their new universities shortly afterwards.

It is not unreasonable to demand a track record from a provider before allowing them to access public funding. Whether that should be devolved to individual validating universities is another matter and the government should probably move to the establishment of a separate validating body for new providers that wish to award degrees. Like the old CNAA, this new validating body should have a core role for seconded senior academics or professors emeritus/emerita.

In truth, universities should be barred from validating degrees in subjects they themselves don’t teach and any university making more annually from partnership contracts than research should be subject to a higher level of quality assurance scrutiny.

As for HND’s and HNC’s these should be moved into FE funding, as Vince Cable realised. Even after the post-NAO clampdown the completion rate here is terrible. It is a mistake to see these figures as a sign of positive widening participation. The only significant innovation seen from alternative providers between 2010 and 2015 was in aggressive recruitment. Students who couldn’t benefit were enrolled onto HE courses, when they would have been better off on English language classes (and indeed some of them were mis-sold funded HE places as such courses). What we got was sub-prime HE English-style. The experimental HESA data on completions in 2014/15 tells us that government attempts to deal with HNC/HND hasn’t worked.

 

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Higher Education – for enlightenment or the market? (Tues 24 Jan, Kingston)

kingston-tues-24-jan

About this blog in 2017

I’m a freelance writer (who does a bit of teaching), not an academic. I run this blog on a voluntary basis with no commercial or outside support.

I aim to provide an alternative take on English HE with a focus on finances. 2017 will mainly focus on the Higher Education Research Bill and the continuing series on university borrowing and debt.

If you want a view on the accounts and finances at a particular university, I will consider requests.

Please do consider donating.

Please see About page for more details.

Against private provider revisionism

Despite what you might have read in the papers today, you don’t need to look to the USA or Australia to learn some lessons about loose regulation around alternative HE providers. England 2010-2015 provides more than enough evidence to suggest that funding outfits with little or no track record of undergraduate teaching is likely to lose money and create the conditions for malpractice.

Below is a set of links to various case studies in regulatory failings. I haven’t worked in any detail on this area since 2014 but my work back then initiated the Public Accounts Committee hearings and National Audit Office investigation (which I briefed). Their findings were damning and it’s still a surprise to me that heads didn’t roll in BIS.

Margaret Hodge, then PAC Chair, greeted the NAO report by saying:

“The Department went ahead with its reforms to expand the role of private colleges without ensuring there were controls in place to ensure that taxpayers’ money was used for its intended purpose of supporting higher education and not for private gain.”

We still haven’t been told how many qualifications were achieved between 2011 and 2014 for the £1billion plus that was loaned and granted to undergraduate students at alternative providers. This summer, HESA published some experimental statistics on 2014/15. These weren’t too informative but did shed some light on the continuing problems with HNCs and HNDs. (NAO found that in 2013/14 20% of HNC/HND students who were awarded public funding were never even registered with Pearson.)

In 2014/15, there were 22 605 students on HNC/HND (9 485 first years; 13 120 second years and over). 4 295 qualifications were achieved. HESA don’t differentiate here between the HNC award – 1 year full-time – or the HND – 2 years full-time. Even if we assumed that they were all the higher award that’s a pretty terrible completion rate for the second years. (It’s also worth noting that these HNC/HND numbers collapsed from over 40 000 in 2013/14 and we haven’t been told what outcomes were achieved prior to 2014/15).

So a lot of money has been spent for little return. No one seemed geared up to take responsibility for the outlay on loans and grants: Pearson did not record whether students were full-time funded students and the QAA had no remit to assess whether the providers it was visiting offered ‘value for public money’. For more detail on the regulatory and communication failings see my THE article ‘Uncontrolled Expansion’, which also details how QAA gave the benefit of the doubt to a failing provider with little HE experience.

For more detail on various kinds of malpractice, you can chase up  the Guardian’s Cashpoint College series which was the result of a four-month investigation conducted by myself, Shiv Malik and John Domokos.

Films:
Cashpoint Colleges (21 May)
“Lecturers claim private college puts profits first” (30 May)

Articles:
“Private sector and students profit at the college they call ‘the ATM'” (21 May)
“Empty classrooms expose flaws in private colleges boom” (21 May)
“Watchdog to investigate private colleges’ potential misuse of millions” (22 May)

If you are someone who’s convinced by the current line that, for all that, the ‘sky didn’t fall in’, then you should take some time to consider the following student stories and testimonies.

The government sent bailiffs to reclaim maintenance grants wrongly repaid to students whose only mistake was to enrol with ICE Academy on a “campus” for which it did not have designation.

Here’s the story of a student at St Patrick’s who ambitions for study were frustrated at every turn.

If you want a bit salacious detail, here’s the Telegraph’s account of a trial in Romania of a student who got onto an HNC course despite being illiterate. His trial centred on accusations that he had used this college to run a prostitution smuggling ring.

I could go on. But I’ll finish with the government briefing paper which summarised the situation facing the then-yet-to-be-published plans for English HE. 2010-2015 had been marked by ‘fraudulent claims’ (involving students and institutions) and “very high drop-out rates (one of the few proxies we have of bad provision)”.

The government’s insistence on accelerating the process by which new providers enter the funded system runs against all the evidence we have accrued. Even if new powers such as the ability to enter premises are needed to fight malpractice, it’s more telling that many of the colleges involved in the examples above are still in receipt of public funding through their students’s loan-backed fees.

For more on the White Paper’s proposals on alternative providers (not all of which need primary legislation via the Higher Education & Research Bill) see a pair of 2016 articles for wonkhe.

http://wonkhe.com/blogs/analysis-the-challengers-and-challenges-market/

http://wonkhe.com/blogs/make-room-make-room-hefces-new-model-of-quality-assessment/

 

Sale of student loans – confusing post-2012 and pre-2012 loans

Last week, the chancellor, Philip Hammond, told a Treasury Committee that the decision to freeze the repayment threshold on post-2012 student loans was a central aspect of the government’s plans for ‘fiscal consolidation’ and that the freeze would help a future sale of those loans.

Hammond responded to a request from Wes Streeting to reconsider the freeze:

“I would have to be frank with you and say I do not see scope for reversing that decision. It is an important part of our overall fiscal consolidation and, of course, it is also about preparing the student loan book, ultimately, for sale as an asset sale.

“I believe that student loans represent a very favourable arrangement, a very favourable structure for financing students through higher education.”

Now, the government does want to sell post-2012 loans, but this is an aspiration that has been thwarted since 2011 and which was taken off the table for the time being in 2013 by George Osborne – Hammond’s predecessor. In the latter’s statement above, the stress is on the ‘ultimately’.

The government is currently investigating a retrospective sale of pre-2012 loans starting with the borrower cohorts who graduated in the early 2000s. These loans have not had their repayment thresholds frozen – they are now indexed to RPI. In April 2017, the new threshold for pre-2012 loans will go up by 1.6% to £17 775.

The threshold on these loans did sit fixed at £15 000, but were tied to RPI a few years back in order to prepare the ground for an imminent sale. Potential buyers do not want the ‘political risk’ of thresholds moving unexpectedly in future as a result of government decisions, so the RPI-index was introduced. (It was not an option to leave it fixed at £15 000 as that would become too low in a few years’ time).

Apparently a loan sale in 2017 is looking more likely, having been delayed since 2013, but it will be these pre-2012 loans that are on offer.

So why is Hammond talking about post-2012 loans, where the threshold has been fixed at £21 000 for the next five years?

Firstly, he may not know what he is talking about and it’s pretty clear that the Committee didn’t ask the appropriate follow up questions.

More likely, Hammond knows that a freeze doesn’t help a near-future sale but that come the next parliament (2020-2025) having a threshold still at £21 000 – as compared to incrasing in line with average earnings from April 2017 –  will have removed a little bit of uncertainty from loan projections (and pricings), because the threshold will be lower relative to median earnings and more graduates will be likely to be in repayment (as well as making higher repayments).

Either way, if parliamentary committees are to perform their scrutiny functions, those who sit on them need to pay more attention to what’s going on and learn how to ask the appropriate follow-up questions. And more importantly, it needs to understand that a plan to sell is no justification.

A loan sale is a bad deal for government and the public, particularly after the decision to lower the official discount rate used to value student loans. A loan sale loses money and does so wittingly as the value for money test used by government does not require that the loans are sold for what the government thinks they are worth (their fair or carrying value).

 

Interest rate swaps come out of the woodwork

As of last year, universities have had to comply with Financial Reporting Standard 102 and the Statement of Recorded Practice for accounting in Further and Higher Education (SORP 2015).

One change is that universities are now required to declare contractual liabilities in their financial statements and record them at fair value. This brings to the fore the presence of certain financial derivatives like interest rate swaps.

Some institutions, such as London School of Economics & Political Science recorded details about their swap contracts in their statement notes. If you look at Note 16 to their 2014/15 Financial Statement you can see the following:

The School has arranged a £75.0m amortising loan repayable by December 2028 secured over three properties. £24.3m was outstanding with a residual facility of £30.0m remaining undrawn at the balance sheet date.

The School has entered into interest rate swap agreements with a nominal value totalling £65.0m. The effective fixed rate costs of the loans and swaps taken together is between 5.0 per cent and 5.5 per cent. The swap agreements had a negative mark to market value of £25.9m (31 July 2014 – £19.2m) at the balance sheet date.

What this means is that there is a loan with a variable rate and a contract that swaps the annual interest payments associated with the loan for a set of fixed rate payments. When the loan was taken out the university wanted to fix its interest payments to protect itself against adverse movement in interest rates. However since 2008 interest rates have collapsed (Bank base rates went down again in August to 0.25%) and so the fixed rates introduced by the swap have turned out to be unfavourable to the university. Should the university seek to dissolve this swap contract (or get someone else to purchase it) and revert to the original variable terms of the loan it would cost it £25.9m – this is the ‘negative mark to market value’ of the contract.

For 2015/16, LSE will have to revise its valuation of the swap contract to reflect a ‘fair’ value – the estimated value of additional repayments it would have to make until 2028 when the loan ends. It will also have to add a provision for this liability to the balance sheet (alongside other provisions like those for pensions).

Another university, University of East Anglia, has just published its accounts for 2015/16 and declared a similar interest rate swap on loans with Royal Bank of Scotland. There was no mention of a swap, derivative or hedging instrument etc. in its 2014/15 accounts.

The loans themselves come to £79.5m and run through to 2034. The swap contract has left UEA with fixed interest rates of 5.9% on £66m and 5.15% on £12.5m. On its balance sheet, UEA now declares – under ‘Other provisions’ – a liability of £38.14m which the Notes tell us represents the ‘termination value’ on the swap contract.

In the accompanying narrative of the report, UEA states –

The hedging financial instrument (SWAP) that backs the fixed Royal Bank of Scotland loan is … a non-cash transaction and would only crystallise on the occasion of the University seeking to repay the loan early (or in the case of default) neither of which are anticipated.

In response to my queries, UEA provided some additional detail:

The University has a long-term loan with Royal Bank of Scotland which has a fixed interest rate.  The fixed interest rate is backed by a matching SWAP arrangement.  As the loan payments are made both the amount of the SWAP reduces and the amount of the loan balance reduces until the loan is fully repaid.  At that time there will be no SWAP liability either.  The SWAP only crystallises in the event that the loan is repaid early or the University defaults.  The current balance reflects the difference between where interest rates were on the date of our year-end and the rate at which the loan interest rate was fixed.  As interest rates fluctuate the fair value of the financial instrument will change: reducing if interest rates rise and increasing if interest rates fall.

The university originally valued the swap contract on 1 August 2014 at £23m. According to the 2015/16, that value was revised up for July 2015 to £28.9m. This year the figure has moved up again to £38.14m – an increase of £9.2m.

The accounts don’t explain these specific increases in value. I have asked UEA whether this latest £9.2m movement was due to the Bank of England’s summer announcement (although this announcement was made 4 days after the 31 July ‘snapshot’ of UEA’s assets and liabilities given in the 2015/16 statement). As their statement notes, this upwards movement is what you would expect given that the difference between the original variable interest and the swap’s interest would increase. (See update below for new UEA statement).

The final point to make is the following. Now that the provision for the contract has to be stated on the balance sheet as a liability, such changes to provision show up in the income and expenditure statement.

The £9.2m is recorded there in 2015/16 after the operating surplus (deficit) and next to the change in pension provision as ‘change in fair value of hedging financial instruments’.

UEA made a small operating surplus of £4m last year (1.6% of annual turnover) but this turned into a loss of nearly £12m once changes in pension and swap provisions were factored in.

These are arguably paper losses since the fundamentals haven’t changed – UEA’s interest rates are fixed after all. More significantly though, UEA already has a relatively high amount of borrowing. In addition to the RBS loans, it has £40m from the European Investment Bank and a £33m ‘Private Placement’ loan. This means its long-term debt is over £150m, or over 60% of its £250m turnover. This puts it at the indebted end of English HEI’s.

A quick calculation suggests UEA’s EBITDA is roughly £30m. Hefce’s cap on borrowing under the MAA is 5 times EBITDA suggesting that UEA is at its current limit. It would have to win Hefce over to launch on any new investments or improve its “operational performance” significantly.  And that’s before we consider what covenants there may be on its existing lending – as we discussed before, these covenants can limit universities, particularly any plans for new borrowing. If UEA seeks to renegotiate or refinance any of its existing lending, then the termination value of the interest swap would come into play.

 

Update 20 December 2016

UEA responded to my query about whether the Bank of England’s base rate announcement on 4 August 2016 (lowering base rate from 0.5% to 0.25%) was factored into its ‘termination valuation’ for the swap contract. The answer – surpisingingly – is that it is not.

UEA does ‘not do the calculations: they come to us from the provider of the financial instrument’.

For statutory financial statements then the figure is struck as at the date of the balance sheet (31 July 2016 in this case).  We only receive the information once a year as at that date.  The movement in year is the difference between what the balance sheet would have said on 31 July 2015 and what is says the provision needed to be at 31 July 2016.

All other things being equal (and the wholesale markets work slightly differently from retail banking) as rates move down you would expect our provision to go up and vice versa but we don’t have any actual information on which to base that thought and we only seek the figure annually as at 31 July.

So, in effect, at financial year end, Royal Bank of Scotland tells UEA what the termination value on the contract is. UEA does not have an independent valuation of the contract liability.

UEA’s financial statement makes no mention that this 31 July snapshot will have to revised upwards again as a result of the BoE’s announcement four days later. This change in value will only appear in the 2016/17 annual report in a year’s time.