Financial support for registered higher education providers

(1) The OfS may make grants, loans or other payments to the governing body of an eligible higher education provider in respect of expenditure incurred, or to be incurred, by the provider or a qualifying connected institution, for the purposes of either or both of the following—

(a) the provision of education by the provider;

(b) the provision of facilities, and the carrying on of other activities, by the provider, which its governing body considers it is necessary or desirable to provide or carry on for the purposes of, or in connection with, education.

Higher Education and Research Act 2017, Paragraph 39

There is huge anxiety in the higher education sector at the moment about its financial and structural issues, as there has been for some time, but things are really ratcheting up. National media are now much more aware of the challenges facing institutions and of the risk of possible failure. The most striking example of this is the University of Dundee where there has been a very public exposition of the financial travails of the institution.

In England, where the Office for Students (OfS) is the principal regulator, there is a duty under the Higher Education and Research Act 2017 (HERA) for the OfS to monitor and report on the financial sustainability of institutions. It did flag concerns in May 2024 on this score, followed by an update six months later but has also now issued another survey to establish the current position.

In the November 2024 update the OfS observed:

Our analysis suggests that the outturn recruitment picture (having accounted for key factors that have changed the financial context for providers) could result in an aggregate net reduction in annual income for the sector of £3.4 billion against the forecast position, and could, without mitigating action, result in up to 72 percent of providers facing a deficit in 2025-26. 

The OfS is getting much more serious about this too and says it has increased its direct engagement with institutions and

with sector representative bodies, financial experts, lenders and audit firms to discuss the wider risks facing the sector and the important role that effective governance and leadership play in addressing these challenges.

Say Hello, Wave Goodbye

A central thrust of HERA was the aim of increasing competition in the sector and  market exit was very much expected as well as the entry of new challenger institutions, all of which would shake up the old order. The principal architect of HERA, Jo (now Lord) Johnson, is still a strong advocate of the approach; indeed in a recent piece on HEPI he was stressing the importance of breaking down the barriers to entry and expressing concern about the OfS suspending its consideration of new applications for registration whilst it focused on the financial issues facing its current roster.

I’m not sure though that he or anyone else involved in drawing up HERA really imagined a situation like the current one. The expectation I think was that one or two, almost certainly newer and smaller institutions, might end up going out of business each year and this would be a perfectly normal state of affairs with the market doing its job. But the “market” really isn’t that kind of a market and the HERA champions certainly did not anticipate a system-wide challenge like the one institutions are currently facing. It is of wholly different order and will require serious action both at institutional and sector level to address it. Allowing a few more bold HE start-ups to teach pile ‘em high business degrees is not going to help anyone. 

Tough Times

The decline in the real value of the home fee (in England), the squeezing of international student numbers (and over-optimistic predictions of their recruitment by many) and increasing costs across the board are just some of the factors making things challenging for institutions right now.

There has been a good deal of reporting about the University of Dundee where the full picture is yet to emerge but the elements that have do not look positive for the university. Significant retrenchment measures, including substantial redundancies, are now underway and financial support from government has been required. It really looks tough there and no-one in a university wants to be subject to the level of hostile questioning that the acting Dundee leadership team recently experienced in the Scottish Parliament.

Every institution has a responsibility to do what it can to navigate these stormy waters and all are now taking actions to a greater or lesser degree to address the financial challenges. 

No-one Wants a Disorderly Exit

The consequences of the failure of a significant university are huge, not just for that institution but for the whole sector too. We do therefore need some meaningful measures to prevent an institutional failure and the possible knock-on effects this would cause. 

Disorderly collapses of one or more institutions would be hugely challenging, messy and expensive to manage and would be a massive diversion from wider sector issues too. The consequences of any failure like this for students, employees, alumni, stakeholders, the economy and the towns in which they are anchor institutions and indeed the sector as a whole would be enormous. 

A 2024 report from Public First on managing the risk of disorderly exit, as reported on Wonkhe, makes a number of sensible recommendations for supporting institutions and avoiding university failures:

the creation of the Higher Education Enhancement and Transformation Scheme (HEEATS) worth between £2bn and £2.5bn over the Parliament, to offer loans to institutions that can make a compelling case for restructuring their university such as to deliver a more sustainable and high quality provision – thus pre-empting either exit or forced closure of provision where that is not in response to student demand. 

A creation of a new Special Administration Regime, modelled on that which exists in Further Education and other critical national sectors such as railways. This would allow for a more orderly form of exit should restructuring not be possible or effective, and would allow for protection for students and other national public assets under the law, in advance of a more orderly wind-down.

As quoted at the top of this piece, under HERA the OfS has the power to make loans to English institutions for the provision of education or educational facilities. Unfortunately, according to its latest published accounts, it doesn’t actually have any spare cash to talk of. The OfS gets money in from the Department for Education (DfE) which it distributes, and it gets money from institutions to pay for its services which it spends on staff and operations leaving only a small amount of cash in reserve.

Therefore we have this Public First proposal for a government-funded Transformation Scheme which would provide loans to help institutions get themselves into better shape. Public First also suggest there should be some kind of special administration regime with one or more commissioners appointed to support universities in the greatest difficulty – this is probably a necessary step, albeit a challenging one for an autonomous institution to accept. This would see temporary leaders taking over to keep the show on the road, address the immediate financial challenges, leading organisational changes which are required and maintain confidence among all stakeholders.

We have been here before as this piece from David Kernohan on Wonkhe from a couple of years ago shows. And it is worth scrolling to the end to read the comment from David Palfreyman on the rescue in Cardiff in the mid-1980s.

Government Action

Financial support: terms and conditions

(1) A grant, loan or other payment under section 39 or 40 may be made on such terms and conditions as the OfS considers appropriate.

Higher Education and Research Act 2017, Paragraph 41

If the government did decide to make a loan pot available and the OfS then lent to universities in significant distress, the conditions it might impose under paragraph 41 could include sending in commissioners. Before doing so though it would undoubtedly seek agreement with key parties and look for support from UUK. The clause does point to consultation and, given the significance of such a step, this will have been discussed with the Secretary of State for sure.

It is worth noting that the Secretary of State does have powers to make financial interventions themselves under paragraph 77 where they can issue financial support directions. But this is only in the case of mismanagement:

Secretary of State’s power to give directions

(5) The Secretary of State may also by regulations give the OfS financial support directions in relation to a particular registered higher education provider.

(6) Financial support directions may be given only if—

(a) it appears to the Secretary of State that the financial affairs of the provider have been or are being mismanaged, and

(b) the OfS and the provider are consulted by the Secretary of State before the directions are given.

(7) “Financial support directions” are such directions about the provision of financial support under section 39or 40 in respect of activities carried on by the provider as the Secretary of State considers necessary or expedient because of the mismanagement.

Higher Education and Research Act 2017, Paragraph 77

Of course the definition of “mismanagement” is a reasonably elastic one and there does appear to be considerable discretion for the Secretary of State in this clause. But enacting it would potentially have major additional consequences for the institution, its leaders and governors so would very much be an intervention of last resort. 

Forward to Solvency

Linked to all of this are the priorities for universities set out by the Secretary of State in late 2024 which include “delivering efficiency and reform for better long-term value.” Obviously market exit would not represent better long-term value for anyone and would lead to all sorts of unhelpful knock-on consequences for the economy and society.

The Public First recommendations are serious, well thought through and worthy of consideration. Although universities have to find ways to save money, reorganise and manage themselves to best effect with reduced resources, it does seem inevitable that government assistance in some form is going to be required. It does seem clear though that the means to enable this assistance already exist in large part in England under the current HERA legislation. Although HERA was not anticipated to operate in quite this way, these are very different times to even eight years ago.

Beyond these steps though there is also the need to address the perceived brake on collaboration as noted in this recent piece on the impact of the Competition and Markets Authority Framework. And, as noted many times before, government has to address the excessive burden of higher education regulation. This will save money for all in the sector but also ensure that any new requirements placed on institutions relating to their finances will not be entirely additional. 

These remain extremely challenging times for universities and colleges and they aren’t going to get much easier in the near future. In the meantime all institutions have to aim to keep going, continuing to deliver excellent research, high quality teaching and great learning experiences which meet the changing needs of students while also trying to map a way forward to a sustainable future. And for those who really can’t get there it is to be hoped that some form of loan funding or other support package is made available. Very few institutions were prepared to accept the conditions for funding from government during the pandemic – things may be a bit different now.