Incentives and University Finances

Now that the London Olympic Games are over, apparently judged by most to have been a resounding success, it's time to get back to business and think about our universities and how they operate.

Focusing on the reforms to university financing shortly coming through in England, with most universities set to charge much higher fees (mostly at or close to the legally set upper limit of £9000 per year per student), it is quite striking how little the government seems to have understood about incentives, both for institutions and for students.

Institutions
Universities naturally want to pull in student numbers, as that is where the bulk of their funding will be coming from, via the tuition fees. For home and EU students, the fees will either be paid up front, in cash, if the student's family so decides and has the necessary wherewithal; or a student loan will be taken out covering both the fee itself, and often the bulk of living costs. Where student loans are used, the university gets the full fee right away, and so has no need to worry about so called 'non-performing loans'.

But what about repayment of these loans? As noted, individual universities don't need to be concerned, but the Student Loans Company certainly does. For graduates who remain in the UK and work, repayments are collected by HMRC through their income tax returns, with any outstanding debt written off after 30 years. No repayments are made until a graduate is earning at least £21,000 per annum. Even with pretty decent administrative arrangements in place to collect these repayments, it is estimated that about 30% or so of outstanding student debt will never be repaid - due to low earnings, spells outside the labour market, and default. In the end, this shortfall will need to be picked up by the taxpayer, via the government's budget.

Now, this outlines the situation for UK students who continue to work in the UK after graduation. For UK students who work abroad, they still formally have an obligation to repay their loans (and this would catch up with them if they returned to work in the UK at some point), but it's not clear that there is any sort of enforcement mechanism in place to make that happen. Likewise for students from other EU member states. They, too, have an obligation to repay, but how can they be compelled to do so short of expensive and complicated court action in various countries? So the more pragmatic of these students might well conclude their their education at an English university is essentially free. Again, our taxpayers end up footing the bill.

The effect of all this has already been twofold:

(1) Universities have mostly felt free to set their fees at or near the maximum level, contrary to the government's stated expectations.

(2) The government has felt obliged to cap some elements of student numbers to constrain the possible public spending costs of the new student funding system.

I'm not convinced that the new funding model will prove to be viable for very long, so in a few years' time we can expect another round of re-thinking, one that will, I would hope, pay a bit more attention to institutional incentives.

Interestingly, the way in which universities deal with non-EU overseas students, at either undergraduate or postgraduate level, is totally different, and far more sustainable. For with students in these categories, we have had high fees for some years already and student loans are generally not available from the UK's Student Loans Company. Hence not only is there no contingent liability for the taxpayer to pick up, but institutions have to take great care to make sure they get their money. Normally, for instance, we don't even allow such students to register and start their courses until all or most of the fee is safely 'in the bank', and in the few cases of default students are unable to graduate (we don't allow anyone to graduate while in debt to the university), and their debts are pursued through the courts to the extent possible.

Students
Aside from deciding to pursue their higher education at an English university, young people have several other options:

(1) They can choose to get a job, either in the hope of getting training through work and possibly going to university later, or simply because they judge it to be a more suitable option for them than university.

(2) They can take a university course in another EU member state, benefiting from much lower fees. Increasingly, European universities are offering many courses taught in English, the academic quality is often high, and such overseas experience can often look very good on someone's CV (especially if another language is learned along the way).

(3) They can go to the USA for their higher education, which has the advantage of a common language (more or less). Fees are high, especially at the really good institutions, but the new high fees being charged in England might well push some students in that direction (if their families can pay).

(4) They can consider the rapidly expanding range of distance learning and online options to take their education forward. This is a huge topic in itself, and I'll return to it at a later date.

For now, the main point is that potential students have lots of options, and their choices are going to be influenced by the incentives they face, including both the fee levels, and their perceptions of the likely wages different types of course might lead to (though I must admit I hadn't a clue about that when I was a student myself!). Hence in designing policy, some attention ought surely to be paid to student incentives, too.

What makes universities special places?

In the past few months I've been part of a group at Heriot-Watt University overseeing a small project - involving some outside consultants - to produce a report estimating the economic impact of the University. Where possible, this impact is being assessed for the local area, for Scotland, for the wider UK; and since we also have a campus in Dubai, some attempt is also made to estimate the economic impact over there.

Our report isn't quite finalised, but it's almost done, and the draft final report should not need much further change. And I think it tells a pretty good story about the direct and indirect impact of the University on local and national incomes and employment, these impacts coming through various channels. What the University does with the report once it's completed remains to be seen, and I'm not sure whether anything much will be placed on the University website. But I imagine it will be useful for the University to have some reasonably firm estimates to quantify our impact when it engages in discussions with funders, the government, and so on. So overall, probably a useful exercise, and certainly an interesting one to have been (a small) part of.

It seems that reports like ours have recently become quite the thing for universities to do, as several Scottish universities and universities elsewhere have commissioned such reports in the last two-three years. I imagine that like us, institutions are thinking that at a time when budgets are under pressure, we need all the arguments we can muster to justify and protect our spending, and a well written report with some good solid numbers in it can surely only help.

However, it struck me a day or so ago, that all these reports - and not at all through any fault of the various consultants - lack one rather important dimension of what universities are all about. This has to do with their research and contribution to knowledge.  True, our report, and those of some other universities that I have read, do include research, but the impact of research is typically estimated via what we spend on it, supported by research grants and other diverse funding. What this means is that we're measuring research inputs, which is not too hard, but we're not measuring the outputs.

The problem is that measuring research output, especially across an entire institution containing numerous departments in different academic disciplines, is an absolute nightmare. Most research output takes the form of research papers published in academic journals or as book chapters, and since different disciplines have different styles of doing their research and reporting the results, the typical pattern of output is not at all the same in different departments. This is why the REF, and previously the RAE, effectively assess research across all UK universities by department (termed a Unit of Assessment). These exercises count publications, assess their quality, look at citations and other measures of impact, review PhD training and assess the research environment in each Unit. This is all quite complicated and time consuming so it is not done very often - hence the last Research Assessment Exercise was RAE2008, and the first run of the new Research Excellence Framework will be REF2014.

In terms of measuring research output, these exercises are a step in the right direction, since they are mostly measuring outputs in various ways, or attempting to do so. But how does this carefully measured research output all add up to a contribution to knowledge? And where is the time and space for creative thinking by academic staff in our universities? It seems to me that universities need to find a way of highlighting this aspect of their activities in a really positive way. For research is one of their core functions in society, and just measuring how much we spend on it, and how many jobs are associated with our research activity, seems fairly inadequate.

Perhaps the way forward would be for universities, periodically, to produce reports about these more intangible aspects of their research, their contribution to knowledge. If so, we need to think hard to figure out good ways of doing it! Such a report would have to show just what makes universities such special places, what makes them totally different from any other kind of organisation.