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Markets and Suppliers: HE and Energy

October 3, 2021

David Watson once wrote that the answer to the question as to whether universities were in the private or the public sector was “yes”.

He suggested that universities most resembled BAE Systems: a private company with a host of public contracts. Back in 2011, the Coalition white paper on HE opened by trumpeting “Higher education is a successful public-private partnership: Government funding and institutional autonomy.”

It was always the aim of second round of public sector reform (“Privatisation 2.0”) to create an education market that could be regulated like public utilities in the UK. And so the recent spate of collapses amongst energy “suppliers” prompted me to think about Watson’s comments through the lens of bankruptcy.

The measures taken by the regulator, Ofgem, reminded me that the government has pledged to take a similar approach to university “failure”.

Last summer’s announcement from the Department for Education of an HE “Restructuring Regime” (HERR) was badged as a Covid-related, “last resort” and outlined general principles covering possible government support pre-bankruptcy.

Consistent with earlier statements regarding its approach to the orderly exit of “unviable institutions”, the opening sections of the HERR made things clear:

§4 The Regime does not represent a taxpayer-funded bail-out of the individual organisations which make up the higher education sector. It is not a guarantee that no organisation will fail – though current students would be supported to complete their studies, either at that institution or another.

Providers approaching DfE for support will be considered on a case-by-case basis, to ensure that there is a sound economic case for government intervention, with loans to support restructuring coming from public funds as a last resort.

A precedent here can be seen in the “Task Force” established in 2012 when the government rescinded London Metropolitan’s right to sponsor international students.

There, a “clearing house” was even established to distribute around 2000 affected students to alternative courses at different providers.

HERR made the priorities clear for its case by case consideration of whether to lend to an institution that had exhausted all other options and ‘would otherwise exit the market’:

  • the interests of students;
  • value for money;
  • maintenance of a strong science base;
  • alignment with regional economies;
  • support for “high quality courses aligned with economic and societal needs”.

Elaborating on the last of those, the 2020 document unsurprisingly picked out “STEM, nursing and teaching”. In sum, an institution in difficulties would be required to show that:

(i) it had a plan for future sustainability;

and (ii) that its collapse ‘would cause significant harm to the national or local economy or society’.

Alongside those points, it is worth recognising that it will be easier for the government to be sanguine about the disappearance of smaller institutions in areas that are otherwise well covered by universities (e.g. London).

Those that would be offered help will still find the “Regime” a deeply unpleasant experience: they mean it when the write about a “last resort”.

A bankrupt university will prove a bigger problem than an energy provider. But it is clear that the government will aim along those lines, such that a university bankruptcy will not be like a local authority issuing a “section 114”.

One should therefore reject any idea that financial deficits do not matter for universities.

Like private companies they face cash constraints. They can support an excess of expenditure over income so long as the cash outflow can be absorbed by cash reserves. When the latter are exhausted and debts cannot be settled as they fall due, then the institution will fall over without outside support.

Popular critiques of austerity and theories about governments and money might have misled people here.

Governments are not like households, but universities are, insofar as they need to generate more income than they spend.

As Watson noted, his answer about BAE Systems would make a lot of people uncomfortable. It’s even more discomforting to think that the government might view universities more like Igloo, Symbio, Enstroga et. al..

UPDATE – 7th October

By coincidence, DfE has just announced the closure of the “Regime” to “new applicants” with a deadline of 31 December 2021. They aim to move all applications “to a conclusion” by July 2022.
This decision reflects the fact that HERR was a pandemic measure, but, as I outlined above, the process and criteria set out there do give some indications as to how the department and regulatory bodies will approach bankruptcies in general.

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