"The Governor View" - University finances and sustainability

The state of university finances was barely mentioned by the political parties in the run up to the General Election, with higher education perceived as a low voter priority. But fears of a potential “catastrophe” in the face of falling international student numbers, on top of the inflation-led pressures, have hit the headlines this month.

As thousands of teenagers prepare to take up their places, the University and College Union (UCU) has warned of the potential financial collapse of up to three institutions. Suddenly, the stakes could not be higher. 

The Union’s demands for a rescue package are echoed in a Public First/Warwick University report which calls for the government to draw up a £2.5 billion emergency loan pot to stop universities from failing.

As universities grapple with actual or potential deficits, more than 60 have put in place cost cutting measures such as hire freezes, redundancies, voluntary severance and restructuring schemes.

While many institutions still have robust finances and are able to fill places many times over, others are “really suffering from the decline in international students”, a governor at a Russell Group institution told Advance HE.

“If you are a university that is financially healthy, you may continue to be,” he said. “Your conversations are going to be different to the university that is facing a £20 million loss on a £200 million turnover, and which has a £300 million debt which it has to start repaying quite soon.”

The possibility that an institution might fail “is real and worrying”, according to the governor.

“Almost more worrying is a domino effect,” he said. “One fails and then others fail because lenders call in their debts or there is a crisis of confidence, or the Office for Students doesn’t know what to do.”

At a recent board meeting at a new university in mid England, governors were shown a balance sheet of the institution “basically going from green to red”.

“It is the first time that has happened,” she one of the board members. “There will be lots of conversations going on across higher education about ‘how we are going to meet our banking covenants?’”.

Governing board discussions are increasingly dominated by finance; what can be cut and how to minimise the impact of such measures, while hoping for a change down the line. 

Education Secretary Bridget Phillipson’s response to warnings of “catastrophe” seem to put the ball firmly in the sector’s court. Speaking to BBC Radio 4’s Today programme, she said that universities were autonomous and are expected to manage their own finances “without seeking any calls on the taxpayer”.

Days after these comments, Sir David Behan’s Public Bodies Review into the work of the Office for Students (OfS) was published. The review says that volatile market conditions are expected to continue and  that many of the risks to the sector outlined in the recent OfS financial sustainability report and a UUK/PwC analysis, “are now rapidly crystallising”.

Effectively managing these risks is a key challenge for the regulator, government, and the sector, said Sir David, who has been appointed as interim chair of the OfS. Failure to do so will “undoubtedly lead to market exit, potentially in the near-term of one or more larger providers”, he said.

In light of the review’s conclusions, the government has announced that "the role of the Office for Students will be refocussed to prioritise the financial stability of the higher education sector and deliver better quality and outcomes for students". New free speech duties that had been due to come into force in August will meanwhile be paused, with the Education Secretary promising to tackle “burdensome” regulation in the sector.

The review warns that as architects of the infrastructure of the higher education system, the government should consider whether a university exiting the market is “conducive to a more strategic organisation of HE in England” and whether a non-interventionist position is “appropriate for meeting the challenges of today and truly protecting the interests of students”.

If intervention is warranted in some or all circumstances, the review warns that the OfS does not have the legal powers or the capacity to intervene, or to assure the financial sustainability of the sector.

But intervention does not necessarily equal a bailout, according to a governor of a new university in the north of England.

“I think any short-term response from the government is highly unlikely to involve money,” she said. “I think it is more likely to be something like a higher education insolvency regime or a focus on how the OfS will handle a crisis.”

In the medium term, a small rise in tuition fees could help institutions that are near the edge, said one governor.

“A small tuition fee rise would not be the big political hit that people seem to think it would be,” he argues. “Welsh Labour raised the fee level from £9,000 to £9,250 and nobody in England knew it had happened and no one in Wales seems bothered by it - it wasn’t a big thing.”

However other governors think that a rise in tuition fees is too politically unpalatable for the government, at least in the short term.

“I don’t think it is going to happen quickly,” said a governor at a post-1992 institution. “Labour does not want to be seen to be ramping costs on the younger population it has just been reliant on for votes. The optics would be that they are taxing students.”

She predicts that if a fee rise comes it will be in tandem with an increase in maintenance thresholds as part of a package that can be presented as aiding students. 

Most governors who contributed to the governors’ view expect these kind of details to be hammered out in a major review of HE, but there are concerns about the time frame and the fate of cash-strapped universities in the meantime.

“Reviews take years, and then implementing consultations and changes on the back of reviews takes another year or so, so you are looking at the back end of the parliament or even the next,” said one governor. 

A board member of a northern university agrees: “I think it will be kicked down the line so the new government does not have to deal with uncomfortable issues immediately.”

Any review is likely to consider a graduate tax, just as previous reviews have, governors believe.

“Everybody flirts with a graduate tax before rejecting it,” said a governor. “No country has a graduate tax. Labour has also hinted at tweaking repayment rules to make them more progressive, and they can do that without ripping up the system.”

Governors do not expect to see a numbers cap although one governor said the wording in the Labour manifesto around eligibility for university was ambiguous.

“It talks about equality of opportunity for anyone to go to university who desires to do so and meets the requisite criteria. Does that mean minimum grades to get loans are on the cards? If the sector is going to get more money, that usually means more accountability and the government having more of a fingerprint on it.”

For some board members, the appointment of Jacqui Smith as minister of state for skills points to a longer-term review rather than immediate action on finances.

“I know some in the sector are saying ‘great, we've got a big hitter’ but I think appointing a House of Lord’s minister means we are not going to see big legislation through the Commons and I don’t think we’ll see changes to the funding system any time soon,” said one. “I think Jacqui Smith is in to stabilise the ship for the next couple of years.”

A governor at a northern post-1992 points to the size of the remit. 

“It is a massive brief, with responsibility for FE, HE and skills,” she said. “There’s the launch of Skills England which is a big thing. It would be more helpful to have someone solely focusing on HE.”

A change of rhetoric on international students - with the education secretary telling the Embassy Education Conference “be in no doubt: international students are welcome in the UK” – was well received by governors.

However, some point out that there is no indication that Labour will row back on the new rules on student dependents.

“Labour did not oppose the Conservative change to visas for dependants,” said a Russell Group governor. “Also other countries such as Canada and Australia with progressive governments are tightening up their student migration rules.”

At a recent board meeting at a new university, the vice chancellor’s optimism about what the change in government means for international students was not shared universally. 

“Just because the government has got rid of the Rwanda plan, it doesn’t mean there will be concrete positive changes in the international student market,” said a board member.

A governor at a northern university raised concerns that warnings of universities going to the wall and demands for rescue packages could unsettle international students, and even home applicants, potentially compounding the funding problem.

“The press coverage could have a negative impact at a time when students are waiting for results and preparing to come, and the last thing institutions need now is a big drop in student numbers,” said a governor. 

Without growth in student recruitment, the OfS financial stability analysis suggests that finances across the sector will continue to weaken across the period to 2027-28.

Such forecasts have led Sir David’s OfS review to conclude that the already large number of institutions pursuing measures such as redundancies or the closure of provision to rebalance their accounts, is likely to “increase markedly”.

Governors whose institutions are facing such issues will no doubt want to consider what measures can be taken to steady the ship and manage any potential reputational impact as much as possible. All eyes will also be on what steps a “refocussed” OfS will take, with a view to identifying and responding to any implications for university governance.