Support for higher education in England

Personally, I've always found it rather hard to make committees sound at all exciting, and at first sight parliamentary committees sound worse than most. But such a hurried judgement is actually wide of the mark, as many of our parliamentary committees do some really interesting and important things, investigating and reporting on topics that governments would often prefer not to pursue in such depth, or topics that reflect popular or topical concerns. They provide a valuable channel of accountability both for government departments, and for various public bodies and publicly funded activities.

Higher education is a case in point, and earlier this week our Public Accounts Committee (PAC) (and what could sound more boring than that?) published a report entitled, Regulating financial sustainability in higher education. Like all parliamentary reports nowadays, this report is available free from the PAC website (unfortunately, only as a web-document, rather than as a more useful pdf-file), part of the general UK parliamentary website.

Focusing on higher education in England, and hence the role of the Higher Education Funding Council for England (HEFCE), the report highlights several important issues that have been a bit neglected, possibly even conveniently 'forgotten about', in the recent debates on student fees and the new student fee regime that comes into effect from academic year 2012-13. So what are these issues? Actually the report identifies many, and is therefore well worth a read simply to find out what they are and why they matter. Here, though, I focus on just two, of which the first breaks down into two subsidiary questions.

• New student funding system (higher fees, lower HEFCE teaching grants) will very likely put some institutions in a difficult financial position. This raises two points to think about:

1. How will HEFCE monitor and report on the financial position of higher education institutions?
2. How would an institution's (financial) failure be managed?

• Then there are the public finance implications of the new higher education funding model. Because many institutions appear to be setting their fees for 2012-13 at or close to the permitted maximum, the budgetary impact will prove rather higher than Ministers expected (or hoped).

Let us now discuss each of these points in turn.

HE institutions in financial difficulty

Traditionally, institutions running up unmanageable losses in the UK, for whatever reason, have tended to be merged with a neighbouring institution in better financial shape, usually with some accompanying job losses and other structural changes. Basically, though, the institutions keep going in some form, and students taking degree courses are not disadvantaged - they can still finish their courses and get their degrees. I call this the 'socialist model' of higher education restructuring, because it mirrors exactly what used to happen to failing socialist enterprises in Eastern Europe when the region operated under communist government (i.e. until 1989).

It's possible that this could happen again, once the new fee and funding regime settles down. But if it turns out that the overall scale of our HE system or the structure of provision by broad subject area has to change, then the old approach might not prove workable any longer, and a few institutions might, in the end, need to close. Clearly, closing a university is going to be rather harder than shutting down, say, a biscuit factory, since the latter doesn't typically have long-term contracts with its customers, and the customers always have readily available alternatives in their local supermarket.

Students enrolling for a degree, however, expect the institution to be in place until they've completed and graduated, and so naturally think of themselves as having a long-term contract with their university or college (though course credits could be transferred to another institution if needed). Thus the idea of a university going out of business - going bankrupt - is bound to be a trickier process than bankruptcy for a 'normal' business. Think of all the concern just now over the possible closure of care homes for the elderly (notably parts of the Southern Cross chain), where it is quite clear (politically if nothing else) that homes will not be permitted simply to close, with the old folk then turfed out onto the streets. While not as traumatic, it is equally clear that universities will not be allowed to close as abruptly as other businesses do. Yet we actually do not have, at the moment, an orderly and well understood procedure to help us manage such a potential closure. The situation is not unlike that for banks, where at the time of the financial crisis in 2007, 2008, we had no procedure in place to help us manage a failing institution. For the universities, this is an area that would benefit from a great deal more thought in order to formulate workable - and not excessively costly - procedures to manage institutional closures.

As for HEFCE, it regularly monitors the financial state of the institutions it funds, and maintains a list of 'institutions at risk', presumably also offering some fairly heavy 'advice' to the financially most vulnerable universities to get them to take whatever decisions are judged necessary to get them through their financial difficulties. HEFCE does not publish its list of financially fragile institutions, though the PAC report seemed to think it could provide more information than it currently does. I'm a little doubtful, as surely publishing the list would largely destroy student recruitment at such universities, and would hence prove to be a self-fulfilling prophesy. This is an area where I'm not convinced about the merits of greater openness.

Budgetary implications of higher education funding

The emergence of this issue should not have come as a surprise to anyone, though apparently it has.

First, it was moderately predictable that most institutions would choose to set their fees for 2012-13 at or near the maximum permitted level. Why? Well, unless you think that demand for places from students will be highly responsive to the price (the fee), that's the way to maximise revenues from teaching. Second, the new funding system ensures that students can get loans to cover the fee (and often part of living costs as well); these loans are on favourable terms and repayment is income contingent, so no one has to worry about the costs of being a student until they are already earning a decent income. These facts tend to support my expectation that student demand will not respond much to price.

Puzzlingly, the Government failed to see things this way and kept claiming that the average fee would come out at about £6500 to £7000 - I have no idea where that 'guess' came from! The result, though, is that funding the Student Loans Company will cost the government's budget a lot more in the next few years than Ministers had bargained for. More fool them is all I can say to that, they should have known better.

So, at least in England we are embarking on a more student-led model of higher education funding and it will be most interesting to see where it takes us. Probably a few institutions will close, some new ones will start, and a fair amount of systemic restructuring will take place. What all this might mean for higher education in Scotland is another story all together, one that I shall come back to at a later date.