Continuing a conversation with Andrew McGettigan

When people come to my blog, it’s generally to do one of two things. Either they are searching on Google for something to do with core/margin, or they have come to read this post, which I published in response to an earlier piece of Andrew McGettigan’s about the White Paper. Andrew has now published a further article looking in detail at the case of Middlesex University, and as that piece is now on the public web, I’m going to post a response to it in the hope that it will also be useful.

I am taking the same approach as I did before, not wishing to comment on Andrew’s political commitments or values, which are in any case less prominent in the Middlesex piece. I want to offer data and a pragmatic, practitioner perspective on the issues that Andrew raises. I think in a few cases Andrew’s rhetoric in this piece is slightly overblown, but I understand that he is writing in a particular genre for a particular effect so hopefully when I comment on those examples I will manage to avoid any tone of condescension or superiority. If I fail to achieve that, I should honestly acknowledge that it is probably because the photo of Andrew that I ripped off his academic.edu profile (with that prominent nose and full head of hair) [Update: Photo removed at Andrew's request] reminds me of myself when I was younger. I do still have the nose, but as I am now just a few weeks shy of forty the hair is an increasingly painful thing to be reminded of. 

The Research Fortnight editorial identifies three revolutions in English Higher Education. These are (1) the shift from grants to institutions to fees and loans as the main source of funding (2) the introduction of a competitive market for students and (3)changes to the constitutional form of universities, possibly including outright privatisation. I agree that (1) is a significant matter, particularly for the students affected but also to an extent for some of the institutions. (2) is rather an odd one at the moment. For certain institutions, such as SOAS, the competitive market in AAB students is likely to be a very material issue. For others (Middlesex would be an example) the reality is that centrally-imposed quotas which add up to much less than the overall demand for HE mean that the market for student recruitment has never been less competitive, but (2) is not the focus of the piece. The focus is (3), constitutional change to the universities themselves. The RF editorial describes this leading to:

Degrees without universities – the end of a thousand years of history and the principle that a university is defined by a self-critical community of scholars

Now I confess that the ‘thousand years of history’ line pushes one of my own little buttons as an ex-medievalist, because of course medieval ideas of the university have very little to do with the self-governing community of scholars. Oxford and Cambridge adopted this model in the 1850s following state intervention. Likewise the redbricks were forced to adopt this model by the state – the University Grants Committee went so far as to refuse grant to certain institutions until they emasculated the lay role on their Boards, and the first university to formally establish its own academic staff as ‘supreme’ in academic matters was Durham, not when it was founded in the nineteenth century, but when the charter and statutes were revised in 1937. (See Mike Shattock for more on this). Even as recently as the 1980s we still had the CNAA awarding degrees in the Polytechnics without being a university before the British state – again – broke up this model and established the Polytechnics as HECs. So the history of the ‘self-governing community of scholars’ idea needs to be understood as part of the history of centralisation in the British state more broadly, not romanticised as some medieval survival which – in England at least – it patently isn’t.

But really that is a distraction. Whether we are overturning a thousand years of history or only twenty, a fundamental constitutional change in English universities could still qualify as a revolution. Research Fortnight uses Andrew's detailed case-study of Middlesex to paint a picture of the pressures that might push a university towards privatisation, and the way such a process might take shape. In my response I want to demonstrate (a) that Middlesex is not really all that exceptional as London new universities go (b) that it is under no very immediate financial threat (for all that the VC and/or Finance Director might be motivated to do a bit of shroud-waving to hold costs down) and (c) that the path to privatisation which Andrew sketches is so long, intricate, risky and expensive that any sane entrepreneur with the money and connections to make it happen could make a lot more money more quickly by going another route.

Let’s start with (A). Andrew identifies Middlesex as unusual in its post-2012 fees, degree of internationalisation, level of borrowing, extent of provision in Band C, and redundancy scheme. Middlesex is certainly an international university with some borrowings and much of its provision in Band C, but it is hardly exceptional on any of those lines. Let’s look at some data.

Top ten London institutions by estimated average cost per student after allowance for financial support (OFFA)

	£
Royal College of Music	8,829
Courtauld Institute of Art	8,760
City University, London	8,728
Central School of Speech and Drama	8,711
Guildhall School of Music & Drama	8,689
Middlesex University	8,602
University of East London	8,560
Rose Bruford College	8,543
University of the Arts London	8,541

Clearly Middlesex doesn't stand out from the crowd here.

HE Student FTE by fee status (2009/10 HESA Data)

	Home	Overseas
The University of East London	81%	19%
London Metropolitan University	83%	17%
London South Bank University	89%	11%
Middlesex University	82%	18%
The University of West London	88%	12%
The University of Westminster	86%	14%

These data exclude students studying offshore, which I don’t have to hand. It is true that Middlesex (like Nottingham and unlike most other universities) has an offshore strategy which involves actual campuses overseas rather than just partnership arrangements but the serious money (and the current UKBA risk) is in these onshore overseas students. There’s nothing very exceptional in Middlesex’s numbers here.

Borrowing limits are set by HEFCE. For long-term loans, HEFCE require institutions to seek authorisation when the servicing costs will be more than 4% of turnover. In the 2009/10 accounts, interest payable was £6.093 million – 3.6% of income – so well short. Nor would HEFCE necessarily refuse permission for borrowing above this threshold if it were reached in future. If you think how much of your own income goes on paying the mortgage and the credit card, I think you’d agree that 4% is an extraordinarily low level, so the idea that Middlesex is deeply indebted is highly misleading.

HE Student FTE by HEFCE Price Band (2009/10 HESA Data)

	A	B	C	D	Media	Sport
The University of East London	0%	12%	40%	40%	7%	2%
London Metropolitan University	0%	11%	27%	56%	5%	1%
London South Bank University	0%	16%	43%	38%	2%	1%
Middlesex University	0%	8%	44%	43%	3%	2%
The University of West London	0%	3%	70%	20%	7%	0%
The University of Westminster	0%	9%	41%	43%	6%	0%

Media and sports science are funded at institution-specific rates, but in most cases average pretty close to Band C. You can see clearly that Middlesex is in the normal range alongside UEL, Southbank and Westminster. West London (TVU as was) is the exceptional university here.

As for redundancies, see here, here, here or here for the constant drumbeat of those in the sector recently. They prove nothing except that managers like to reduce costs.

Now if Middlesex is a fairly run-of-the-mill London new university, perhaps that only proves that Andrew did too little to show that the risks extend to many institutions, not just one. So my second task is to show that Middlesex is under no very immediate financial threat. For the sake of shortening a post which is already fairly long, I’m only going to look at Middlesex here, and not UEL, LSBU, Westminster or West London (for the avoidance of doubt, London Met is under imminent threat of financial dissolution, but for reasons that have nothing whatsoever to do with current Government policy or the White Paper)

.

Ultimately, institutional sustainability is about cash. As of the 2009/10 accounts, Middlesex had £27.238 million in cash at bank and in hand, plus £17,495 million owed by its debtors, and falling due within the next year. The university’s operations generated £6.994 million more in cash than they consumed. Let’s assume that half the overseas student fee income (i.e. £15 million) were to be wiped out overnight, and the university took no measures to restore this income or reduce costs. It would then be losing cash at the rate of £8 million a year, instead of making £7 million a year as currently. In consequence (and if no further borrowing, asset sales or other remedial measures were taken) the cash would run out in about three and a half years. But in reality even unsuccessful cost-cutting or revenue generating projects would stretch things out further than that. In the worst case, where revenues collapse and the university responds incompetently, insolvency is realistically possible about five years off. Hardly teetering on a cliff edge.

So now, my third task is to persuade that the path to privatisation is too long, tortuous and risky to make any sense. To go down this road, you will need a lot of time, cash and political support. If you have enough time, cash and support to take Middlesex private, then frankly you have more profitable investment opportunities open to you than a second-hand university in the unfashionable end of London.

For the deed to be done, you need means, motive and opportunity. The constitutional means will arguably be provided by the Government’s new legislation, but as Andrew identifies, the property of a HEC can’t simply be given away. The private company would have either to lease the university’s assets or buy them. If they were bought, then the Exchequer interest would have to be repaid to HEFCE. Of course the Government might be persuaded to wink at payment for assets below market rates, and in an extreme case HEFCE can waive the Exchequer interest but this will take delicate negotiation if it can even be achieved. So even once the legislation is passed, someone very rich and well-connected is going to have to want to buy Middlesex very badly before privatisation can happen. Other than the physical assets (which could in principle be sold tomorrow under existing legislation) Middlesex’s assets are current revenue streams, quota places within the HEFCE cap, and degree awarding powers. Of these (a) of the current revenue streams can support the business, then you can’t have a forced sale, (b) the quota places are certainly valuable because the core/margin limits the number of places that a new entrant can hope for any other way, but they are a wasting asset as continued operation of the core/margin policy will strip them away. Moreover the kind of very rich, very well-connected person who could take Middlesex private could equally well prevail on BIS and/or HEFCE to assign margin places to a new start-up institution, and (since HEFCE staff are, of course, not personally corrupt) not have to pay for the privilege. (C) the DAP issue I have dealt with before.

This leaves the option of an unforced sale – where Middlesex’s (or whoever else’s) current management wish to go private and work together with an investor to achieve a management buy-out of some kind. In practice, however, I think this differs from the forced sale in degree, not kind. The Governors of the institution in question are going to have to be convinced that the institution’s prospects are so awful that the management buy-out makes sense despite the potential for large financial gains to managers. Then HEFCE and BIS are going to have to be convinced too. There have been plenty of cases in the past where Governors have been too cosy with management and winked at large rewards to them, so clearly this could happen, but the crisis couldn’t be made up out of whole cloth.

The only other inducement Andrew suggests for Middlesex to want to move into the private sector is for access to capital. Frankly, in my view, this is absurd. Banks are always keen to lend to universities at favourable rates. Why wouldn’t they be? No English university has ever defaulted on its debts in living memory. Lending to universities is risk-free profit. The tax advantages of being in the public sector are pretty significant and the HEFCE grant income is going to remain significant for many years to come. Complete privatisation would bring very significant costs for marginal or illusory gains.

In conclusion, then: Middlesex, and by extension the other London new universities (London Met excepted) are large, well-financed and stable institutions. There is certainly scope for things to go badly for them, but insolvency or crisis is, in the near-to-medium term, almost unthinkable. If you are a good mate of David Willetts’ and have a couple of hundred million looking for a good home, then you can find far better, surer investments than waiting for a distressed sale of one of these institutions. If you are an enemy of David Willetts’ and want to oppose the Government’s agenda for HE then there are other wolves nearer the sledge. If a few HECs become companies limited by guarantee in the next few years, then I predict that that will make no difference whatsoever to the staff or student experience, just as it makes no difference now that Greenwich is a CLbG and UEL on the far side of the river is a HEC. Student number controls and the UKBA are the factors that are going to prevent students realising their ambitions and drive job-losses in the sector over the next few years.