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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer chaired the May government’s review of post-18 education and funding and is author of several books on the City and Wall Street
With nearly half of UK universities operating at a loss and a handful in serious financial difficulty, education secretary Bridget Phillipson recently said she expected them to manage “without seeking any calls on the taxpayer”. This uncompromising message was reinforced by skills minister Baroness Jacqui Smith who bluntly said she would allow a university to go bust “if it were necessary”.
It is probably what they have to say to avoid moral hazard, a term used in banking to describe the danger of excessive risk taking when bankers believe the authorities will always bail them out. But just as the British mortgage bank Northern Rock was rescued in 2007 on the day after the authorities said they would do no such thing, the reality in higher education is likely to be very different from the official line. This is because — just like the banks — universities are too big to fail.
The collapse of even a handful of the UK’s 140-plus universities would not have the same cataclysmic effect as a run on the banks but the consequences would be serious. In England, tuition is largely funded by student loans that can be paid off for up to 40 years. Institutional failure would leave a nightmare of liabilities. Should debt for unfinished courses be written off? Would alumni demand compensation for reputational damage?
The economic effects of failed universities are even wider. They employ academic and support staff, sustain local suppliers and landlords and seed spin-off companies. They are powerful economic booster rockets, especially in the “left behind” towns and cities where some of the newer ones are situated.
But this is not just a local issue. Fees paid by overseas students subsidise both university research and the teaching of British ones. The funding model depends on them — without international scholars the whole system would unravel. In a globally competitive market, this would be a real risk of even a single unsupported institutional failure.
Crisis-hit universities are paying the price for over-optimistic strategies set after tuition fees were trebled at a stroke in 2012. Teaching became a profitable activity and in a dash for growth — with government encouragement — universities expanded campuses and student facilities, often funded by selling off assets such as student halls and borrowing at low interest rates. Some overdid it, putting no contingency in place for rising rates and a tougher environment.
In an analogy that the proud higher education sector won’t much like, some responses to the 2012 bonanza were similar to the banks’ reckless expansion — also with government encouragement — in the cheap credit days of the early 2000s. The fixes are also the same. There are three elements.
First, and most extreme, mergers. Half of universities are running profitably due to realistic strategies, good cost control and diverse revenue generation. Some are strong enough to take over weaker neighbours. The financial sector parallel is the government-brokered merger of Lloyds and the failing HBOS, painful at the time but creating a strong institution out of the rubble.
Second, balance-sheet restructuring, possibly with public money. This is awkward. Universities are autonomous. Although they receive public subsidy, mainly from writing off unpaid student debt, they are not on the state balance sheet and nationalisation is conceptually and practically inconceivable. But the sums involved in balance-sheet management, for example in restructuring debt, are not enormous. The authorities need to look no further than the resolution of Northern Rock to find a case study.
Third, new leadership. Their financial problems are not entirely of the institutions’ own making. A tuition fee freeze since 2017, unexpectedly high inflation and a clamp down on overseas students’ family visas have created a difficult environment. But some have thrived through sound strategies and strong management. Only a few are in real danger. For them, new leadership and governance able to drive efficiencies, define a realistic vision and get staff and student buy-in must be part of any reset. The deposed leadership team of RBS and their highly effective successors at NatWest are banking’s example.
Unpalatable though it may be, the UK banking sector shows that reconstruction is possible with official intervention at crisis-hit institutions and strong subsequent regulation. If one or more higher education institutions were to collapse, the government would have little option but to step in to protect the wider reputation of one of the UK’s globally successful industries — regardless of what ministers are currently saying.