Governments want many contradictory things. They desire high levels of government spending but not high levels of taxation. They want to reduce carbon emissions whilst not charging the full rate of VAT on domestic fuel. And many in government want the university sector to contract without any universities actually disappearing. Now is the time for the government to show that it has backbone in this area and to allow universities to fail.

It is not widely realised that universities are private institutions even though they are regulated and subsidised by the state. They are responsible for their own management and they must be held to account if that management fails.

During the COVID crisis, a special regime was set up to manage failing universities – the ‘Higher Education Restructuring Regime’. It was intended to deal with universities that got into financial difficulty as a result of COVID. The establishment of this quango was heavily criticised at the time but, whatever its merits, it should be wound up in November, as soon as the financial consequences of this round of admissions are known. And what should replace it? Nothing.

Just as in the banking sector, the possibility of being saved by implicit or explicit support by the government creates moral hazard in higher education. It incentivises universities to develop business models built on the assumption of unsustainable expansion. It incentivises over-gearing of university balance sheets. It encourages universities not to get to grips with their pension costs. University management and governors know that, in the event of failure, there is likely to be a financier of last resort. Most universities have significant amounts of property. So any university that has managed its balance sheet prudently should be able to obtain private sector loans to deal with year-to-year fluctuations in income.

Government support distorts competition. Not only does it benefit the imprudent over the prudent, but, when universities receive emergency support from the regulator, they remain in business and have a strong incentive to fish for students, taking them from better-managed universities whose courses might be more appropriate for the students and which have more sustainable business models.

Unlike in the banking sector, no university poses a systemic threat to the whole system if it goes bust. All universities have a student protection plan so that there can be an orderly resolution that is not significantly to the detriment of students.

But there is another reason why universities must be allowed to fail. If you add up the proposed expansion plans of all universities, they are not consistent with the likely trends in demand. In 2019, the OfS reported that universities were, collectively, expecting 10 per cent growth over four years while the number of 18-year olds was expected to fall by 5 per cent. Universities either need to be able to develop sustainable business plans based on the assumption of lower or stationary income (which will require a reduction in regulatory as well as other costs) or the number of institutions needs to shrink.

A failed university may be resurrected in another form; it might merge with another university; it might take radical decisions such as the sharing of back-office facilities with another university. The regulator can help with these kinds of discussions – especially if confidentiality is needed. However, there should be no financial bailouts, implicit or explicit.

Indeed, life will be a misery for university staff and management over the next generation if the sector has more institutions than can be justified by student demand. There will be 25 years of radical, or at least stealthy, cost cutting across the sector.

The message needs to go out loudly and clearly from government: no university has a right to exist forever. Universities should be more independent and not less. There should be less regulation and not more. And the quid pro quo is that no university will be bailed out financially, either implicitly or explicitly – ever. Prudent management and realistic growth plans must be rewarded and not penalised.

 

This article was first published by the Higher Education Policy Institute.