Are universities too big to fail?

With the future of tuition fees in England suspended in uncertainty, questions swirl about the financial fitness of some of our HE institutions. Will they fail? Can they? Glyn Mon Hughes investigates

What’s happening?

It’s more a case of what’s not happening. The post-18 tuition fee review led by Philip Augar has once again been delayed. Originally slated for late 2018, the report was pitched into ‘early’ 2019 and, once that vague deadline started to look less tenable, the higher education can was booted even further down the road. May? September? In more outspoken quarters there is talk of the whole affair being quietly shelved.

Needless to say, the finger of blame has been turned on the complications surrounding Brexit. But those are far from the only flies in this particular ointment: changing student demographics, restructuring of student loans, overzealous expansions coming home to roost.

Piling uncertainty on uncertainty, it is little wonder that rumours abound of troubled finances at multiple universities. Paralysed by external indecision, beleaguered institutions are being left to flounder. And insolvency beckons.

What happens when a university goes bust?

No one knows, because it hasn’t happened before in the UK. The I newspaper recently suggested three universities – one in North West England, two on the South Coast – already face insolvency.

Business leaders are wading into the debate. As far back as 2014, the Organisation for Economic Cooperation and Development (OECD) said: “Knowledge has become the key driver of economic growth.”

The umbrella group Universities UK produced a report entitled Solving Future Skills Challenges in which it argued educating more people at university could bring significant benefits to the UK economy. Graduate vacancies are also forecast to increase. By 2024 almost half of all jobs will require workers to have completed some form of higher-level education, according to the CBI.

A cut in tuition fees would be a gross abrogation of responsibility – Carolyn Fairbairn, CBI

Carolyn Fairbairn, director general of the Confederation of British Industry (CBI), recently called on the government to maintain England’s university funding system. She says: “A cut in tuition fees would do profound harm to universities, students and, ultimately, our economy.” 

She adds: “There are areas in which our country punches far above its weight – life sciences, aerospace, financial services and creative industries. But just as impressive is our university sector. Four of the world’s top 10 universities are British and many more are close behind. Per capita, no other country is close.

“Not only do universities educate people to the highest levels, but they are also some of our biggest regional employers, supporters of new businesses and incomparable vehicles of soft power, a precious national asset. They should be protected and nurtured. A cut in tuition fees would be a gross abrogation of responsibility.”

Are universities too big to fail?

According to Andrew Burn, restructuring partner at KPMG: “Universities have a multitude of complex financial and social facets that make an insolvency event hard to imagine, but also very different from those that might occur in other sectors. Not least, the Insolvency Act is untested on HE entities.

“It is also worth considering that the ‘student contract’ would require provision of comparable alternative courses for learners to those provided by the failing institution. This would be an enormous challenge and the ongoing operation of the university would incur considerable cost if the process were to drag on for a significant period.”

Everything possible would and should be done to avoid insolvency – Andrew Burn, KPMG

Alarmingly for any university facing a challenge, Sir Michael Barber, head of the Office for Students, has reiterated the fact that the regulator would only act to protect the interests of students. Speaking at Wonkfest HE festival in London in November, he said the OfS would not bail out providers in financial difficulty. He said: “This kind of thinking – not unlike the ‘too big to fail’ idea among banks – will lead to poor decision-making and a lack of financial discipline, is inconsistent with the principle of university autonomy and is not in students’ longer-term interests.”

Burn further suggests that rather than protecting the business, an administration could accelerate challenges facing an institution and add further constraints on cashflow and ability to trade. 

He says: “Most likely, we would see some sort of intervention long before an insolvency to replace the management team and radically redirect its strategy or even break up or sell the institution. We believe everything possible would and should be done to avoid insolvency. We already see restructuring work happening as boards address finances, offload non-core assets, cut costs and build more sustainable, realistic operating models.”

He notes that a great deal of work is already taking place but that the sheer scale of the task at hand should not be underestimated. “The hardest work is yet to come as the sector awaits the results of the Augar review before making deeper, more incisive and fundamental changes.”

How do universities adapt?

Those changes could be difficult for many university cities. The last estimate by the research-intensive Russell Group universities, reflecting the academic year 2015/16 suggested that they inject £87bn into the UK economy, supporting 261,000 jobs. In many areas the university is the biggest employer, driving regeneration and supporting local services. From new-build accommodation blocks, through the buzzing night-time economy in many city centres to the provision of student-focused services, the importance of the university sector cannot be overstated – especially in smaller cities less equipped to absorb the blow of a closure. Then there are clusters of spin-out businesses, led by Oxford, Cambridge and London, but also with considerable impact in other regions.

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“Universities support almost a million UK jobs,” says Alistair Jarvis, chief executive of Universities UK. “Any MP knows intimately how their local university is woven through the fabric of civic life, contributing to health, sport, culture, charitable endeavour and economic growth.”

But is a closure a real prospect?

“HE providers in England registered with the OfS are expected to be financially sustainable. No UUK members have had specific conditions of registration linked to financial sustainability,” adds Jarvis. 

“In a more competitive environment all institutions will be actively examining ways they manage costs and deliver best value, including how they operate in the current climate of political and economic uncertainty. In 2016/17, reporting by the then HEFCE (now the OfS) shows savings of £912m, including significant benefits in areas such as collaborative procurement.”

All universities registered with the OfS must have Student Protection Plans in place which set out what students can expect should a course, campus, or institution close.

“The recent closure of Heythrop College, previously part of the University of London, shows how this can be appropriately managed in difficult circumstances,” notes Jarvis. “It is not yet clear what role the OfS would play in the event of closure beyond ensuring a provider meets its obligations to its students.”

It is right that the interests of students and staff are front and centre in discussions about a course or a university closing, but universities do much more than teach students. Any closure would hit communities hard. We could be sailing into uncharted territory.

In numbers

1 million: The approximate number of jobs supported by UK universities

£6,000–7,500: The expected recommended maximum amount universities could charge if the Augar review is heeded

2024: The year by which the CBI expects nearly half of all jobs to require ‘some form of higher-level education’

£912m: HE savings in the 2016/17 academic year, according to HEFCE

£87m: Estimated contribution of Russell Group universities to the UK economy


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