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Reading update

Although Reading has still not provided details of the £120million its owes to the National Institute for Research in Dairying Trust, for which it acts as sole trustee, a couple of letters and a blog post have provided a bit more insight.

Reading’s UCU branch has published a letter from the acting vice-chancellor, Robert van der Noort, which argues that the £120m is not a debt.  I was told by Reading press office that the money owed to the trust is a loan and that interest is payable.  (As an aside, I first contacted Reading in mid-January and spoke to them at length over a week before publication, when I gave them a list of questions. These were reiterated in the email to which the letter refers. They have still not answered these.)

Following a staff vote of no confidence, van de Noort published an Open Letter on Reading’s website. It contained the following paragraph:

Undoubtedly, some past activities and investments, such as our Malaysia campus, have not performed as well as we would have liked. Others have given a positive financial return for the institution, which we have reinvested in necessary improvements to our campus environment, teaching and research infrastructure and student experience – including the redevelopment of a modern library. Despite views to the contrary, the NIRD land sale is one of these and all considerable net proceeds of the sale will over time be reinvested in research in food and agriculture at the University. (my emphasis)

The future of the loss-making Malaysia campus is now under review. More pertinent to our concerns, Reading management here appears to admit that money coming from the trust should have been spent on research relevant to the trust’s objects.

The key point is that Reading does not have that money currently to hand and “over time” funds will have to come from elsewhere to match the £120m. That has financial implications for university, despite what has been said so far and irrespective of arguments over what exactly constitutes a “debt”.

In a blog originally intended for wonkhe but appearing today at Times Higher Education, van der Noort expends a lot of words saying not very much but does confirm the outlines of what we reported:

The article in The Guardian highlighted an issue that we have already dealt with, relating to the sale of land belonging to a charity for which the university was both trustee and beneficiary. Acting on the best advice available, we took steps last year to resolve this, and there are no wider implications for the university group’s finances. This concerned a historical issue of governance that needed to be put right.

Reading have as yet not explained how the matter has been resolved (if it has – we have yet to hear from Office for Students) and, again, the article makes no mention of the loan.




Has Reading milked its dairy trust?

Back in December, I made an offer via Twitter to look over the accounts of any universities where academics and/or students had any concerns about what was happening.

A member of staff at Reading approached me. A quick look at the latest financial statement (for 2017/18) flagged up a few issues. The main one was contained in Note 19 “Creditors: Amounts falling due within one year”.

reading amounts

It looked as if the University was committed to paying £120m to the trusts for which it acts as sole trustee.

That seemed unlikely. It was not as if the University was in a position to produce such sums and anyway the figure included for 2017 indicated that a slightly smaller sum had been in the same category in the previous financial year.

The accounts offered no explanation. I would have expected to see something either in this Note or in that devoted to “Related Party Transactions”. This prompted me to look back through Reading’s previous financial statements.  I had to go all the way back to 2014/15 to see the first clue:

“Included in other creditors is an amount of £40.9m owing to the University’s endowment trusts (2014: £13.2m). This total increased significantly in the year due to land disposals by the trusts.”

In subsequent years, the amount owed to the trusts increased rapidly, climbing to £87m and then the £107m of the 2016/17 accounts. What I now know is that this reflects the manner in which the proceeds arrived from the sale of land at Shinfield belonging to the National Institute for Dairying Research Trust: £20m in 2014, £50m in 2015 and a further £50m in instalments over the next 3 years.

The University spent these sums and noted that it owed NIRDT the £120m. In a statement issued on Saturday in response to our Guardian story the University argues that the sales were fully documented in its accounts.

“The University is confident that it has responded appropriately to the issues relating to the sale of land that formed part of the assets of the National Institute for Research in Dairying trust. The details have already been set out in the University’s published financial statements.” (9 February 2018)

I don’t disagree. But what is missing from all recent financial statements is any account of the loans, which the University says were made to itself by the Trust. The University has nowhere disclosed the terms of the loan and, although it told me interest was payable, it was not able to say what interest was due and indeed whether any had been paid.  The terms of the loans should have been published in the accounts and declared in the notes devoted to “related party transactions”.

There are prima facie conflicts of interest when a trustee is also the beneficiary of a trust. In this case, Reading appears to have accepted that it should have acted differently …

“The appropriate governance arrangements are now in place relating to the university’s management of the trust …” (my emphasis)

but is still being less than clear regarding how the matter is going to be resolved. I was told that two independent panels with legal representation have been convened: one to represent the interests of the trust, the other, the university. And that the university has also informed the regulators of what Office for Students called “a reportable event”. OfS said it had received this notification “recently”, but would not give any more specific timeframe.

There is obviously a broader question about what this means for the university’s finances and whether such a loan should be thought of as a “real debt”. I take that to be part of what needs to be resolved. Since the trust is designed to fund research at Reading, it is never going to be in trust’s interests to precipitate a brutal reckoning, but it seems clear that the loan is on generous terms (rolled over and increased each year) and isn’t being used solely for agricultural research. This indicates two sets of questions: was the conflict of interest properly managed? should the loan have been approved and extended annually?

Setting those questions aside, and returning to the finances: it is clear that the university has used proceeds from the sales to cover over problems in the last few years (deficits from ordinary activities of c. £20m in each of the last accounting periods).* It is not all clear what additional pressure may be put on the university’s position when the matter is fully resolved. (If anyone knows more about trust law and potential precedents, feel free to comment below).

More broadly, there is a question regarding how appropriate it is to “consolidate” the accounts of related trusts into university statements. NIRDT accounts do not appear to be published. Since it is a trust connected to an “exempt charity” , its accounts do not appear on the Charity Commission website; since it is not a company, there is nothing at Companies House. Reading does produce an annual statement regarding the investments held by another of its trusts, the Research Endowment Trust, but does nothing similar for NIRDT. Does anything prevent OfS from requiring universities to also publish the accounts of such trusts? (Again, if anyone with more knowledge in this area wants to comment, please do so below).

Judging from my inbox, this story has wider pertinence. My offer is still there. Please email if you want me to have a look at something.

*update: while over £110m was spent on acquiring fixed assets.

SOAS: cuts to library & management strategy

I was recently asked by SOAS UCU branch to review the financial situation of the institution and assess the current management strategy.

Here is a recording of a public event from last week, where I outlined my concerns about plans for the School to shrink. The other speakers are from the library and academic staff at the institution.


I am always happy to help union branches dissect management accounts and plans.

Please contact me by email for details.


Trust, standards & the DDD tariff

If you’ve seen one of my talks over the last 18 months, you’ve probably seen me pull up a slide referencing a Browne review proposal that was rejected by the Coalition government:

“Entitlement to Student Finance will be determined by a minimum entry standard, based on aptitude. This will ensure that the system is responding to demand from those who are qualified to benefit from higher education.

“All students who meet the standard will have an entitlement to Student Finance and can take that entitlement to any institution that decides to offer them a place. Institutions will face no restrictions from the Government on how many students they can admit. This will allow relevant institutions to grow; and others will need to raise their game to respond.

“Rather than create a new test of aptitude, our proposal builds on the UCAS tariff admissions system, which is currently used by around 70% of full time undergraduate students. … The minimum tariff entry standard will be set every year by Government shortly after the UCAS deadline for receiving applications.”

Securing a Sustainable Future for Higher Education, p. 33 (my emphasis)

I have underscored ‘qualified to benefit’ because I think this point is missed in the current furore around a proposed DDD tariff.

Browne’s idea wasn’t simply to limit the financial costs of an uncapped system: it was an argument about standards. Browne doubled down on his proposal when he appeared before the Treasury Select Committee in December 2017. He described the idea as a key part of efforts to drive up quality. And indeed, he went on to provide an additional gloss: the minimum tariff should move upwards over time.

When I wrote my report, one of the things we said was we should set a standard for entry qualifications every year that made it tougher and tougher to get into higher education provision. We did that because we thought that was one of the aspects of improving quality and one of the aspects of getting the right people with a graduate degree, as opposed to some other form of qualification.

There was some evidence to show that the tariff points that you got when you went into university bore a strong relationship to the quality of the degree you eventually achieved and your employment. There were exceptions, and we covered that under the participation activity to make sure that disadvantaged schools did not create disadvantaged people.

He returned to the point later in his evidence:

When I looked at this a little while ago, the thing that was really concerning to us was maintaining and expanding quality. A lot of what we looked at was doing just that transparency but in a much more detailed way: suggesting that we qualified lecturers much as we would qualify teachers. It was the same idea: that we would look at tariff points—ie prior attainment—and make sure that that was rigorously applied across the system and made better every year. We are in a competitive world, and we have to improve the quality of our output every year. This was the most important thing that was driving the report.

Back in 2017, it seemed clear to me that the Higher Education & Research Act prefigured something like the return to the “quality wars” of the late 1990s and early 2000s. Trust in universities to provide appropriate undergraduate education to students who can benefit has been eroded. See the concerns about graduate inflation, graduate earnings and the comparatively low levels of numeracy and literacy amongst English graduates. Note how Browne would like to accredit lecturers and tie that in with current consideration of the feasibility of accredited external examiners (tasked with ensuring comparability of degree awards across the sector).

In short, I think it is a misjudgement to see the DDD tariff idea solely as an elitist variant of “more means worse”. It is also entirely possible to view the proposal from a different perspective: that students with lower tariffs should be nudged towards preliminary courses before embarking on a undergraduate study or to approach undergraduate study piecemeal by achieving levels 4 and 5 first.  (If it is meant to drive some students down a technical, vocational path rather than others, then it is a divisive proposal).

I am not backing this proposal, I am suggesting it needs to be better understood in the broader context of (i) a loss of trust in the quality of undergraduate courses and (ii) concerns that the post-2004 expansion in undergraduate numbers has been a bad deal for students and government, because low-tariff students were recruited onto low quality courses.

That is, the sector will misunderstand this proposal and be poorly placed to contest it if they fail to realise what it’s about.

As I stressed in my talks, it’s legitimate for government to ask how public money is spent (whether loans or grants). Reviewing who gets funding does not directly impinge on institutional (academic) freedom (deciding who gets offered a place). That matters legally, given the way HERA is written. But indirect controls are powerful.

You might also see the DDD-idea through the lens of “varieties of neoliberalism”. The weaknesses of market competition in English HE are already visible. I perhaps have more sympathy with the idea than some because I have seen up close what has happened in the private HE sector. You can find some frightening completion rates amongst new providers in the newly available Unistats data. As May said in her 2016 party conference, “where markets are dysfunctional, we should be prepared to intervene”. At the time I wrote:

If May is consistent then I would expect to see a shift away from the idea that competition (with easier market exit and entry) will drive up quality and a move to shore up (or impose) standards so that ‘university means university’.

… May announced a more interventionist policy with a bigger role for the state here, citing utility markets as a contender for reform. … [F]rom a certain perspective (that of the lender), the HE market looks dysfunctional with a large amount of misinvestment or even over-investment …

What Browne desires is to open up teaching and academic judgement to view. But if that cannot be done then what he (and others) seeks is a safeguard that funded students are in a position to benefit. They are inclined to trust A-levels, but that’s a whole other story.



Student loans accounting – a personal history

The Office for National Statistics’s recent decision on student loans coincides with the traditional period for reflection. From a personal perspective, it offers a somewhat ambiguous opportunity to look over my writing and campaigning on this issue.

It’s a little over seven years now since I first wrote about accounting and student loans. In the early days, I made a lot of mistakes — until I learned not to treat academics as authorities on the matter and realised that national accounting and departmental budgeting were live issues subject to surprisingly regular changes.

After the publication of The Great University Gamble, I decided to focus more on the subject. I settled on this somewhat quixotic project for two reasons. Firstly, after 2013/14, I was spending most of my time on setting up the Fine Art Maths Centre and teaching the associated history and philosophy of mathematics. I could only concentrate on some aspects of HE policy; secondly, the accounting and budgeting of student loans was neglected and appeared to be having an undue influence on policy decisions.

My particular interest was in the sale of student loans, which despite promising to lose money for government was being pursued primarily because of the composition of the headline debt measure, Public Sector Net Debt. Student loans were excluded as an asset for being “illiquid”. This meant that PSND was one-sided in that it only reflected the liability side of loans: the borrowing used to create them.

I had also seen how close the English sector had some to radical cuts in Autumn 2013 and early 2014 after budget over-runs. These were only averted after a new, retrospective budgeting procedure was agreed in 2013/14. This was designed to “incentivise” BIS (and then DfE) to manage the estimated losses on student loans to an agreed level of 36 per cent of outlay. The “target” mechanism has had a confusing life since its introduction and is currently suspended while the review of tertiary education funding is being undertaken.

A pamphlet for HEPI appeared in 2015. In retrospect, it seems odd that it left out any discussion about the “fiscal illusions” around the deficit that prompted the ONS review.

Read more…

ONS adopt the Hybrid model

Updated at 4pm, 19/12/2018

On Monday, the Office for National Statistics announced its chosen approach to classifying students loans in the national accounts.

It has chosen to adopt the option known as “Hybrid” or “Option 3”. It will probably go on to be known as the “Partition” model as its main innovation is to split student loans into a part estimated to be repaid (“lending”) and a part expected to be written-off (“spending”). An estimate for the latter will be classed as capital expenditure and be recorded at inception.

In effect, expenditure on loans has been brought forward from when the accounts are closed (and losses known) to when the loans are issued (and losses can only be estimated). There will be an as yet undetermined method for reconciling actuals, which may see the partition (specific to each cohort year) move both ways over the life of loans. (Some of the documentation refers to loan “cancellations” but this is misleading as the part determined to be “spending” will continue to exist from the perspective of borrowers.

I had a first go at writing about the new treatment for wonkhe. You can read it here.

What that article tries to make clear is that ONS have only announced a general approach and the detail of the new treatment is yet to be determined. We can expect a fully worked up methodology in June 2019 and some official estimates of the impact on the deficit then.

What we got on Monday was ONS gesturing towards potential implications for the headline public sector finance statistics though reference to a £12billion hit to the deficit as calculated by the separate Office for Budgetary Responsibility in its October Economic and Fiscal Outlook.

It turns out though that OBR’s interpretation of “hybrid” differs from ONS.

I have spent the last two days trying to work out the differences.  But in simple terms (or at least as simple as I can make it), it comes down to the following:

In the new accounting treatment, there has to be an identity between repayments and the combined total of  interest treated as income and the portion of loans considered to be “lending”.

That is,  Repayments = Interest as Income + Lending

Repayments are fixed in relation to the models run by the Department for Education (both OBR and ONS use these for their independent projections).

It is therefore a decision as to how you determine the relative balance of lending and interest as income. Whichever you determine first leaves the other fixed as the residual outcome of the equation.

OBR chooses to determine Lending first. Its method:

Calculate the ratio of Repayments to Loan Outlay plus Interest Charged. In figures used by both bodies

Repayments = £18bn
Outlay = £16bn
Interest Charged = £30bn

Repayments then represent roughly 40% of total. So 40% of initial outlay is lending (£6.4bn) and 60% is spending.

Having determined lending then you have a deflator (the same ratio above) which turns interest accruing each year against outstanding balances into interest recorded as income (£11.6bn over the lifetime of loans).

ONS take a different tack. They determine the Interest as Income figure first, with a much more complicated method, still only indicative. It basically involves assuming the “lending” balance is cleared by the mid-2050s and working back from that using projections of repayments and interest charged to borrowers to calculate a starting lending balance. They reach the conclusion that lending is roughly 50% of outlay. A 10 percentage point difference from OBR.

Repayments = £18bn
Interest as Income = £9.7bn

Lending = £8.3bn

which makes Lending roughly half of the £16bn outlay

If you are issuing £15bn of loans each year, that difference between methods equates to a variance in capital expenditure of £1.5bn.  With some of that offset by differences in Interest as Income. Perhaps counter-intuitively the method that generates lower Lending records a higher level of Interest here (but remember the key accounting identity).

In their October EFO, OBR provided a split for the £17.1bn they estimated would be added to the deficit in 2023/24 by the new accounting treatment (on current projections).  A £12.5bn reduction is due to the upfront capital expenditure (against £22.6bn of loan outlays), a further £4.6bn is due to the reduction in interest as income (from £8.3bn to £3.7bn).  This is the capital expenditure for the loans issued that year; the interest is derived from that accruing on all loan balances.

OBR has confirmed they will adopt whatever ONS decides on. ONS are very clear – what they outlined on Monday is provisional and still needs work and refinement. In particular, they will have to fix a method for revising the figures when actual repayments are known and diverge from initial projections.

So while the general principle is outlined – expected losses will be declared upfront as expenditure – the £12bn figure should only be read as a ballpark impact. What is also still to be determined is how that figure breaks down into a reduction in income (lower interest) and an addition of capital expenditure (write-offs brought forward). This may matter in terms of the scope any government has for choosing different measures of the deficit (in an effort to avoid a big hit to their headline fiscal targets).

The headline for my piece for wonkhe declared that fiscal illusions have gone, but the complexity of the new approach may leave us still dealing with the nebulous.

ps ONS’s accounting changes are UK-wide.

pps. for the sake of clarity I have tidied up some minor discrepancies between the OBR and ONS figures.



ONS decision imminent on student loan treatment

Here are my slides from my recent talk at wonkfest.

wonkhe nov 2018 fiscal illusions & ONS review

The talk was given on the day that the Office for National Statistics announced that Monday 17 December would be the day when it announces its decision on the new treatment of student loans in the national accounts. All indications are that we will get a new system and we might therefore be able to wave goodbye to “fiscal illusions”. ONS has alerted us to the fact that it expects to take a year to implement the new convention. As I joked on the day, this shortens the odds on a 2019 General Election, since the Chancellor will get to use his current deficit figures until the new convention comes in – and then they are likely to be exploded.

The slides include some assessment by the Office for Budgetary Responsibility for the deficit impacts of different alternatives. They do not though assess “Option 2” – treating loan repayments first as repayments of principal, rather than interest. My penultimate slides offer an assessment of Option 2 using OBR figures.

Option 2 has less impact on the deficit in 2023-24 than the OBR’s other alternatives, but it still comes in at £8billion. By 2023-24, that adds nearly 50% to the deficit.

The accounting treatment doesn’t change the cost of student loans, only the presentation of that cost. But the government’s fiscal mandate targets such headline figures to the detriment of sound economic policy.

If you do find the slides helpful, please consider donating.

More detail on fiscal illusions can be found here.