Tuesday, 10 January 2012

Are Universities starting to resemble Banks?

Traditionally, universities experiencing financial difficulty in the UK have been 'rescued' by the relevant Funding Council. Such rescues have sometimes taken the form of an emergency loan (from the banks) to tide the ailing institution over a difficult period while it restructures itself and cuts its costs, possibly accompanied by some changes in top management;  more often, the financially troubled institution has been forcibly merged with another institution in better financial shape. In effect, the UK university system has 'guaranteed' institutional survival in some form or another, something that has been great for students, as none have experienced sudden institutional closure that would disrupt their studies. Interestingly, the rescue methods used have been strikingly similar to those used to rescue failing enterprises under old-style central planning in the Soviet Union. All of this is also exactly in line with how we handled the failing banks, as the financial crisis unfolded!

There are signs, though, notably in England, that recent higher education reforms might well change this nice, secure picture quite substantially. A fascinating article by Simon Baker in last week's Times Higher Education explains the nature of the problem. Essentially, the riskiness of the sector is expected to increase, as several factors come together:
  • The shift to funding through higher student fees and reduced direct grants from HEFCE makes institutional income much more sensitive to home and EU student numbers - and hence success in recruiting students - than was the case in the past;
  • The new UK visa regime, combined with tougher competition from other providers, makes recruitment of overseas students harder and riskier than it was before;
  • Demographic trends are not all that favourable, with the UK population of 'student age' declining in the coming years; of course, numbers can made up by recruiting mature students and by offering more flexible degree programmes, but there is nevertheless a risk factor here;
  • HEFCE's role in regulating and monitoring universities is under review, and with less income flowing to universities through HEFCE in the future it is unclear how far HEFCE could underwrite all our higher education institutions as it is perceived to do at present.
Taken together, these points add up to a massive shift in the perceived riskiness of higher education. 

Apparently this is already being picked up by the banks. Instead of funding all institutions at pretty much the same low interest rate, as was the practice for decades, there is now a widening institutional spread, with highly rated institutions perceived as 'safer' and attracting a low interest rate; and lower rated institutions being considered 'riskier', having to pay a higher interest rate. Followers of the Eurozone crisis will recognise this evolution right away, since at the start all Eurozone members were perceived as equally 'safe' and could finance themselves by issuing bonds with very low interest rates. But by now, no one believes any longer that there is an open-ended guarantee for all the member states of the zone, with the result that there are now huge differences in funding costs for the different countries. The trouble is, the countries already struggling to manage their finances are the ones now having to pay the highest interest rates, and that makes it even harder for them to manage without default.

The interesting question is, could something like this happen in our universities? Clearly, unlike our major banks, universities are not too big to fail. But if one or more get into serious difficulties, they might be too big for HEFCE to rescue. Once one or two institutions failed, moreover, the banks would immediately react by differentiating interest rates even more than they are already doing, and that could push more universities closer to the edge of financial survival, a sort of contagion effect as Simon Baker put it.

For the highly rated and/or financially strong institutions, none of this worrying material amounts to much. But for financially weaker universities, and those facing potential recruitment problems on a large scale, the prospects look rather frightening. Will some institutions simply have to close down (i.e., in business terms, 'cease trading'), or will there be a scramble to organise defensive mergers to stave off collapse? We shall see.

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