FOCUS: MANAGERIALISM, DEMOCRACY AND THE NEW POLITICAL ECONOMY OF ENGLISH HIGHER EDUCATION

FOCUS: MANAGERIALISM, DEMOCRACY AND THE NEW POLITICAL ECONOMY OF ENGLISH HIGHER EDUCATION

Andrew McGettigan, Independent Researcher

Early in January, Wendy Piatt, director general of the Russell Group, provided her now annual defence of the defence of the increased remuneration packages offered to her group’s 24 vice-chancellors. In a challenging economic climate and rivalrous operating environment, these emoluments “reflect their roles leading extremely complex international organisations with annual turnovers of more than half a billion pounds on average”.

Wrapped up in the celebration of the ‘talent’ is a less well-understood truth. Even without planned primary legislation in 2012, the political economy of higher education has shifted substantially in recent years and is on the cusp of further changes that will be difficult to undo. Universities are now corporations coming up against the limits of their current form as charities as their funding moves away from primarily public sources to a diverse range of private income streams, which are less predictable and less stable but increasingly global. One vice-chancellor claims that we are already ‘well beyond the point of no return’.

There’s no such thing as a free market

Readers will be most familiar with the creation of a new market in undergraduate recruitment through the large-scale cuts to direct grant funding, increases in fees and the relaxation of caps on recruitment at individual universities.  As David  Willetts, Minister for Universities and Science, told a fringe event at the most recent Conservative party conference: unleashing the forces of consumerism is the single best means of improving the quality of undergraduate provision.

This aim required overturning the centrally set Student Numbers Controls of previous years; first through the ‘high grades’ policy. December’ surprise expansion of places announced in the Autumn Statement removed another impediment: on neoclassical interpretations, there can be no competition on price while there is significant unmet demand. An additional 60 000 places per year are to be created from 2015/16 and all institutional controls apparently abolished. (No replacement financial control mechanism has yet been announced.)

For a sense of what might ensue in this free for all, we now have the benefit of data on two application cycles under the new fee regime.  UCAS’s latest report for 2013 recruitment, pages 85 to 88, shows that the bounceback in overall recruitment was unevenly distributed: “There has been a wide range in changes in institutional-level total recruitment between 2011-12 and 2012-13 with changes of between -20 per cent and + 20 per cent being common.”

In terms of undergraduate numbers, 84 per cent of institutions had a lower intake in 2012/13 than 2011/12.  Of those, most recovered, but did not make up enough in 2013/14 to restore their intake to previous levels. Others saw declines in both years: ‘38 per cent of institutions [have intakes] around 10 per cent smaller in 2013-14 than 2011-12, and 7 per cent are around 20 per cent smaller’. Those that did increase in size, nearly 40 per cent of large institutions, boasted an average increase of 9 per cent. Freeing up these large institutions has been a major policy objective. They are able to disrupt recruitment plans. Measures such as Birmingham’s 1,000 unconditional offers in 2013 has laid out clear differentiation even within the Russell Group. Birmingham’s claimed 1 in 3 ‘conversion rate’ would have seen an additional 100 high grades students enrolling with them rather than rivals.

This unevenness is further compounded by fluctuations across subjects within institutions, with some subjects at prestigious universities losing almost all ‘high grades recruits’. Besides pressures to compensate through postgraduate and international recruitment, the general trend is that those larger institutions, with turnovers three times higher than the mean for the rest (and so better able to monopolize other resources), are pulling away. As a bullish Minister told the Universities UK conference back in 2011: “How can competition work, whether on prices or quality, if it does not lead to variation and divergent outcomes?”

With universities increasing ‘drilling down’ to treat academic departments as discrete ‘units of enterprise’, such ‘disruptions’ to recruitment may generalise decisions such as those taken by Salford to close their School of Humanities, Languages and Social Sciences entirely.  Most institutions, though, will try to hold off until the REF results are announced at the end of 2014 and the funding implications for research are clearer. 

Is cross-subsidy an anti-competitive practice?

News in October that the Office for Fair Trading was launching a ‘call for information’ into the English undergraduates market (to report in March) only underscores the change.

Mostly concerned about price setting and how applicants inform themselves about their choices, the telling line in the document concerned ‘market exit’. The 2011 White Paper was sanguine about institutional failure – ‘… the Government does not guarantee to underwrite universities and colleges. They are independent, and it is not Government’s role to protect an unviable institution. (§6.9b); the OFT go further seeking answers as to, ‘the best way to balance the ‘orderly exit’ of failing providers in a way that protects students, whilst allowing for the possibility of exit to drive competition.”

That’s a strong conception of market dynamics!  In the end, though, attention may focus on cross-subsidy particularly at institutions with flat headline fees of £9 000 across their provision. Willetts has insisted that ‘pressures to reduce this practice would rise as students asked what they were getting for their money.’  

Consumerism produces a new ‘teaching’ vector: customer-manager-ombudsman-regulator. It displaces traditional academic relations: it is essentially deprofessionalising. It cannot be emphasised enough that, no matter how many regulatory bodies, quangos and paper-trail hounds clog up the sector, the bottom line is that universities have degree awarding powers because they demonstrate (or are meant to) a ‘self-critical community’ of academics and scholars who safeguard standards.

But the OFT will face a different challenge.  The headline fee cannot signal as a price the subsidy built into the loan scheme, and, indeed, the very nature of income contingent repayment loans. It is not rational for an applicant to be too sensitive to various fee levels in the choice of study option. Obviously, the political, fiscal and budgetary ‘reality’ of the next decade will make any general, real upwards revision to fees unlikely, but repeated complaints that the resourcing is insufficient for STEM subjects point to a breakdown in the unitary funding arrangements, whether through private or public arrangements, if the elite can demonstrate that their graduates are ‘good for’ the additional loans needed to fund higher fees. (See both the recent National Audit Office report into the Student Loans Company and the project backed by the Nuffield Foundation into human capital variation amongst graduates.)

Financial repression, or who will buy my lovely loans?

This brings us back to that Autumn Statement and other stories about to break as I write in early January.

It now appears that BIS did not have the budget to support 2013’s recovery in admissions. 2010’s ‘Indian rope trick of public finances’ (Elliott and Atkinson) – delivering more with less expenditure – offers few illusions these days owing to the ballooning ‘RAB charge for estimated non-repayment (now ‘around 40 per cent’!). Budget cuts of £500m (2014/15) and £850m (2015/16) are imminent.

Such mismanagement – now there’s ‘disruption’ for you! – means we should be sceptical of the numbers underpinning the pledged expansion. Proceeds from the planned sale of ICR loans might cover the first four years, though £1.7billion in lost repayments was missing from the impact assessment. The detail on the financial stability needed for long-run institutions such as universities is absent.

A rather blasé Willetts suggested that more loans could be sold after 2020 in order to continue to fund the expansion. This conveniently skates over the current impediments to selling the much larger and riskier ‘coalition loans’: from 2018/19, the Office for Budgetary Responsibility now estimates that £17billion of new loans will be issued annually (with a RAB of £6.8bn, as things stand). Any sale requires a new level of financial engineering, some of which can be gleaned from the Rothschild feasibility review, ‘Project Hero’, that is now available on the False Economy website.

If the government is to achieve a sale that ‘derisks’ the public balance sheet, it will have to find private buyers willing to take the collateral in the deal: the ‘equity stakes’ or ‘junior tranche’ of the security. Rothschild suggest universities, in the private sector, could be encouraged to do this. Since Universities UK and the Russell Group have previously made noises about private finance solutions to the fee cap we may be closer to the day when institutions stump up for the debts of their own graduates. This is what I have elsewhere termed financialisation – instigating a new system of accounts with effects that exacerbate the other ‘vector’ shifts in student-academic relations (graduates become bearers of the unit of account), not to mention new forms of financial fragility introduced into institutions themselves.

‘There is chaos under the heavens, the situation is excellent’

More familiar forms of debt are also undergoing transformation. 97 per cent of finance directors report increased uncertainty, but that points to a window for investment. With banks suffering since the financial crisis, universities have had to: fund capital projects from their own reserves (an estimated £1.5billion spent in 2012/13); use sale, ‘sale and leaseback’ or off-balance-sheet solutions (often for student accommodation); or turn to the public bond markets: LSE has just issued a relatively modest £125million bond joining Manchester (£300m), Cambridge (£350m for the university, £150m for 18 colleges banding together) and De Montfort (£90m). In the last two financial years, the sector’s average debt as measured against income has climbed from 20 per cent to 26 per cent crossing £6bn in total in 2012/13. £575m of those bonds have been issued subsequently.

An increasing number of universities now score over 50 per cent on the debt:-income ratio. There is little sense of what this upwards trajectory might mean for the sector in the medium term. Comparisons with the USA are always tricky, given endowment funds, assets and sports facilities, but in only one decade, the last, there has seen a steep, steep climb in debt there. 500 US HEI’s owe $200billion between them. Levels at state universities doubled: the University of California now owes over $14billion of bond debt.

How could the UK avoid such a fate? The use of non-amortising debt (interest only mortgages and bonds) needs particular attention as the repayment of the sizeable principal is booted decades down the line as a legacy for others. Hyman Minsky’s category of speculative’ borrowers is now central for English universities: they can pay the borrowing costs (with staff ’efficiencies’) but the principal will require refinancing.

As we move to a lightly regulated market of private operations, the manner in which such decisions aggregate is a key concern. For example, are there pinch-points developing when several institutions will need to refinance at the same time? Guidance to charities stresses ‘prudence beyond what would be expected in a commercial operation’, but it is far from clear that prudence cuts it in this new terrain. Already in 2009, unsustainable borrowing was the Hefce benchmark most often breached.

Hence, the current stress on surpluses, whether to replenish those reserves or service borrowing: ergo, more commercialisation and efficiency. It should be underscored: universities are choosing to prioritise investment in infrastructure over staff salaries.

Diversification of income, activities and strategy

Institutions are responding to and shaping these new conditions with diverse and distinct strategies. Attention to income streams must be accompanied by a mapping of national and ‘transnational’ supply chains, outsourcing, partnerships and various subsidiaries and joint ventures (which offer investors equity opportunities otherwise denied as you can’t buy a share in a charity).

This takes us beyond the notion of the third mission (‘the application and exploitation of knowledge’). Yes, universities will be increasingly integrated into regional innovation and science and technology ‘systems’, but we will also see novel estates strategies (‘masterplans’) and a growing trend to what might be termed ‘municipalisation’: taking over functions previously associated with local government. Besides the obvious links to health, we already have universities that own local bus companies and provide leisure and other services to local communities. Universities are increasingly involved in academy and free schools along with university technical colleges.

Commercial form 

Universities are traditionally non-market institutions. They have grown up with governance structures more suited to ensuring the equitable distribution of public money across their range of objects, such as the advancement and dissemination of knowledge. This is instantiated in charitable status, which requires that the institution only pursue public goods.

This is the major faultline in the coming years. The mindset of policy champions, politicians and executives revolves around entrepreneurship, social enterprise, knowledge transfer and exports, where revenue generation is primary (particularly if run through joint ventures where equity investors must be compensated). We are constantly reminded of the role of universities in local economics, industrial policy and macroeconomic growth: 600,000+ jobs, more than £5.3 billion in exports and an overall output in the region of £60billion.

But pushing towards business is not just one component of privatisation: it leads away from charitable status.

This is the acid test for what is meant by ‘institutional autonomy’. We are used to it indicating freedom from direct political interference; it is increasingly used by senior management to mean the freedom to act like a profit-led company.

We do not have a term for the transformation of charities into for-profit enterprises – privatisation does not properly describe it – but we do have a precedent in the £200million sale of College of Law to Montagu Private Equity. The most recent government export strategy extolled ‘this change of governance’  (which appears from the accounts to have been a leveraged buyout since Univeristy of Law now owes £177million to the rest of the controlling group), offering it as a model for other universities to consider.

‘The governance structures and obligations of charities … were not designed to grow rapidly, or to run a network across the world. … A positive strategic commitment to remain at a certain size is one thing. A reluctant ossification and decline, caused by an inability to see how to change a structure that is thought to have outlived its usefulness, would be quite another.’ §§2.12-14

Such explicit reservations about charitable status in an official document confirm the interpretation offered by myself and others of the mysterious paragraphs in the 2011 White Paper (§§ 4.35 and 4.36), where the government promised that it would legislate to allow universities to adopt a corporate form of their choosing, the better to attract private finance.  The export strategy is explicit: private equity is essential to an impact in global HE markets and charitable status is an impediment. The document warns that operations with ‘fewer constraints’ might otherwise grab the dominant market share in the growing market for transnational education.

Changing corporate form, increasing commercialisation and growing debt all point to the pressing question of governance. If, as discussed earlier, universities, are increasing taking over municipal and public functions, how is democratic engagement promoted? Universities are private entities with no opportunity for the public or journalists to observe board meetings, let alone elect members to those councils. How can accountability ensured with no direct representation? Regulatory oversight is mediated through ministerial responsibility, regulatory frameworks, quangos, charity legislation and the function of governors as trustees. It is therefore attenuated.

Governance, or what we can learn from football 

Twenty years ago, the way money moved around English football changed beyond recognition with the advent of the Premier League and Sky TV. Regarding the ensuing stratification and divisions in the professional game, the Manchester Capitalism blog observed a withering of the club as a social institution’ and a fragility attributable to ‘the growing influence of elite networks around the game.’

Vice-chancellors appear to have less oversight than many football club chairmen. And many of them now talk publicly as if they were appealing to fans desperate for silverware. Consider the recent comments of the Sussex registrar: ‘Universities face a choice: to compete on the global stage or to settle for second-rate status. Our staff and students expect us to aim high, and we do. But this is going to become increasingly difficult. … we cannot afford to be in a position in which any part of our offer to staff and students does not match the best in class.’ Its financial statement from 2011/12 revels in its ambitions for growth and efficiency, backed by significantincreases in borrowing: ‘we will replace targets in many areas … with still more ambitious ones’.

Such animal spirits may be welcome to senior players in government, and after all those salaries for vice chancellors and senior managers aren’t justified by doing nothing, but protests at Sussex underscore that very few are getting a say in such radical strategies, the concomitant risk and transformed working conditions. Accompanying those high salaries, a whole ideology has been imported along with the ‘open sector professionals’ and the consultants. One that is antipathetic to the forms of democratic participation universities are meant to advance.

It is not just that the aggregated decisions of 100 plus universities, nearly 200 FE colleges, and however many alternative providers do not a system make. It is the threat of lost capacity. Since the financial transformation of football, we have seen over 50 clubs go into administration. With more money in the game, the conclusion has to be that the changing revenue flows and diverging outcomes showed up the limitations of club governance. I see no reason to believe that universities are immune to similar challenges. What results, for good or ill, will be difficult to undo. Pace Savielly Tartakower, the mistakes are all there waiting to be made with no guardrails in which we can trust and no sense of the lessons that can be learnt from other sectors and other countries.

Moreover, as I wrote for the Australian publication, Arena: “As universities mirror the increasingly unequal nature of English society … their role in advancing social equality, or minimising embedded disadvantage, will be traduced in a ‘meritocratic’ game of spotting talent and ensuring that it is slotted into the appropriate tier.”

I would prefer that universities did not simply become the privileged object through which to observe the transformative power of the financialised, asset-led, money manager economy. Over the last few years, attention has been on fees and loans, and understandably so, but there is a pressing need to assert democratic governance at individual institutions. That’s the challenge and the main ‘impact’ on which to concentrate for university staff, students and others. We are not yet beyond the point of no return.

 

Andrew McGettigan writes on philosophy, the arts and higher education. He is the author of The Great University Gamble: money, markets and the future of higher education (Pluto, 2013). He covers Higher Education financing in more detail on his blog, Critical Education.

 

2 Comment responses

Leave a comment