Tuesday, 20 September 2011

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
Courtauld Institute of Art
City University, London
Central School of Speech and Drama
Guildhall School of Music & Drama
Middlesex University
University of East London
Rose Bruford College
University of the Arts London

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

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

The University of East London
London Metropolitan University
London South Bank University
Middlesex University
The University of West London
The University of Westminster

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)

The University of East London
London Metropolitan University
London South Bank University
Middlesex University
The University of West London
The University of Westminster

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.


  1. Thanks for the thorough response. I will respond on my blog rather than here. But two quick points - the editorial was not written by me but the series editor and I'd appreciate not having the photo up like that (and you might have misjudged my age). Cheers.

    ps I interviewed some banks for the next in the series on Bonds - out tomorrow.

  2. Will remove the photo of course - but if I have misjudged your age that really only makes my own feelings worse...

  3. well, the photo's probably 2 years old, so don't feel too bad. I'll try to have something up in the next couple of days.

  4. Hi Andrew

    Looking at this in more detail, it's probably best to approach your criticism piecemeal.

    I don't think your snapshot indicators quite get at the main points.

    1. Tim Leunig latches on to MDX's unusual fees. The point about the MDX article is that fees are not simply a matter of pricing in a positional market. To give Leunig credit, I think it's important to remove the music conservatoires and specialist art & design colleges from the Offa cost measure you cite.

    2.The sectoral average for o/s students is 9-10% but is higher in London. Middlesex's overseas strategy is/was unusual and ambitious not just on this measure (where it is in the top quartile). You also have to factor in the number of validation & articulation agreements (100s) and the overseas campuses.
    Its focus on South Asia made it vulnerable to changes out of its control - UKBA changes, as you say. (Incidentally, the US-based multinationals are very keen on using UK institutions to get to these students and the potentially huge markets in China & India).

    3. I know HEFCE use the 4% score as a trigger (annual cost of servicing borrowing:income) but is it really very good?
    There are other indicators and debt:income is considered more important by credit ratings agencies and JNCHES. MDX could be close to 70% there once 2010/11 financial statement is in. The sector has been averaging 20% for the last decade.

    4. Yes, MDX looks similar to those other institutions on Band C / Band D. But it's the change at MDX that is important - losing Band D subjects and investing heavily in new expensive art&design buildings. It now looks like the wrong call.

    5. Don't I know about redundancies in the sector! But it's the way in which the redundancies develop at MDX in the last few months that is telling. It's not a planned restructuring. 300 jobs by the looks of it.

    It's this unravelling of its fundamental strategy that I try to trace - including the sudden collapse of the Delhi campus. But we don't say MDX is unviable.

    6. Bank lending is contracting. MDX was intending to use up its 55million facility. I would think it unlikely it could raise more without selling something.

    And it should be said, the main points of the article were put to MDX. We requested an interview but were rebuffed. It's 'commerically sensitive'.

  5. 1. I've given Leunig credit before, and lived to regret it (see http://heplanningblog.blogspot.com/2011/06/i-wouldnt-normally-link-to-tim-leunig.html) but you are right that there is an apples-to-oranges quality in that tabe which I've avoided elsewhere. Will update the post.

    2.I agree that Middlesex is doing more than other institutions, but London is the main issue here.

    3. Don't want to defend HEFCE's criterion particularly, but I do think it is clear that 4% is a very low threshold.

    4. Not going to defend any specific decisions Middlesex management may have made...

    5. See (4), but I've never seen a restructuring in the Sector that looked at all 'planned' to me.

    6. If you have been talking to banks recently, I will respect your view, but it very greatly surprises me.

    Look forward to the rest of the series.

  6. Hi Andrew

    Thanks again for the responses.

    on the 4% - it is a low percentage, but not all borrowing involves 'amortizing' the debt (as is typical with household mortgages). If you have an interest-only mortgage, a large loan facility or a bond issue, then significant amounts of debt can be racked up against without floating that measure since servicing only involves fees, interest etc.

    This is why JNCHES, S&P etc run a suite of indicators across instituions. Though as I said, this is not the only material i use with Middlesex. It's part of an overall picture.

    Just a couple of additional points:
    you might want to look at Greenwich's 1998 bond issue for a difference between what a ClbG can do that a HEC can. Wasn't to Greenwich's advantage as far as I can tell (I would dearly love to see the covenant they signed but have my suspicions about what's in it).

    And from today:

    there is a lot of chatter about venture capitalists.

    Bear in mind, along with the different conditions under which writing is produced, journalists also have to consider what we can publish and substantiate adequately. That's not always the same as what we 'know'.


  7. I can barely even spell epistemology, so I shall leave the question of what any of us 'know' alone.

    I did like the bonds piece. I wasn't aware of some of the private placements you referred to, or the final outcome in the Greenwich case. Is that going to go public later? Will post a link if it does.

  8. Hi Andrew

    I hear you met William yesterday. The bonds article will remain behind the subscription wall but given that most HE institutions subscribe, I've asked the relevant people at Research Fortnight to provide a clear guide on how to access the articles through 'IP range', rather than name+password. I think it's unclear at present how to get to them.