- This blog has been kindly written for HEPI by Julian Gravatt, Deputy Chief Executive (Policy, Curriculum and Funding) at the Association of Colleges.
- Julian argues a reclassification of universities by the Office for National Statistics is unlikely but, if it were to occur, could result in a suspended sentence in which institutions retain the freedoms they’ve enjoyed pending changes to get them back into the private sector.
- On 30 March, HEPI will be running a hybrid event with the UPP Foundation on Public Attitudes to Higher Education in England. For details on how to get a free place, see here.
Universities value their autonomy. Academic freedom, freedom of speech, freedom of research and freedom to make decisions are all important. So, is it a threat that the Office for National Statistics (ONS) is looking at the status of UK national accounts? ONS recently reviewed English colleges and reclassified them to the public sector. This has had lots of implications for the colleges that I work for.
In recent months, I’ve heard lawyers, vice chancellors and journalists suggest there’s a risk for universities.
To quote Lord Willetts, it could be a case of ‘universities next’, ‘growing the public sector by stealth’ and the Department for Education looking forward, ‘with relish’, to introducing extra controls’.
There are many things that universities can worry about but, having thought long and hard about the subject, I think ‘nationalisation by stealth via the ONS’ is well down the list of risks. In the rest of this article, I’ll cover three topics:
- Whether it is likely that universities will be reclassified into the public sector
- What might happen if the ONS put universities in the public sector
- A new binary divide in higher education
- Whether it is likely that universities will be reclassified into the public sector?
Universities are currently classified as ‘not for profit institutions serving households’ in the UK national accounts. They’ve been in this category for decades and this is the status currently under review. A review that is taking quite some time.
The ONS first announced their review of the status of universities six years and seven higher ministers ago, in January 2017. In their most recent statement, published on 28 February 2023, they say they expect to make a decision by the end of 2023.
Understanding the ONS process
This is what we know about the review:
- The ONS have consistently said they are looking at where in the private sector part of the UK accounts universities should sit: are they ‘market providers’ (private non-financial corporations) or ‘non market’ (not-for-profit institutions serving households)?
- The ONS publish a list of around 10 topics that they plan to review over the next 12-to-24 months. They update this list every month on the last day of the month.
- The original promise – back in January 2017 – was that the review of universities would take 12 months but the date has repeatedly been put back.
- The ONS is a large organisation (more than 3,000 staff in normal years when it isn’t carrying out the Census) but is has a vast range of responsibilities. It is quite hard to think of a public policy issue where the ONS isn’t involved in some way. It’s therefore not surprising that UK national accounts reviews don’t happen when planned.
- The ONS works with a framework set by UK law, is overseen by a regulator – the UK Statistics Authority – and explains that its decisions are based solely on facts and on international standards.
- An internal committee oversees each decision which is signed off by a third-tier director. The fact that the Chief Statistican, Sir Ian Diamond, is a former Principal / Vice-Chancellor is irrelevant because he’s not directly involved in the decision making.
- HM Treasury rules ban government departments spending public funds on influencing ONS decisions.
- Like many ONS announcements, there is no pre-briefing because of a wish to avoid disruption to the markets.
The ONS, and its predecessor the Central Statistical Office, has been making classification decisions about organisations for decades, including – for example – the reclassification of Polytechnics when they were transferred out of local government control in the late 1980s. But it is only in the last twenty years that classification decisions have become public and the subject of political debate. A good, early example of this is the argument between Gordon Brown and Alan Milburn over NHS Foundation Trusts. Created in 2003, NHS Foundation Trusts have always been classified as public sector organisations and have never had the financial autonomy originally envisaged.
Other decisions have changed, either as a result of changing circumstances or deliberate policy. The ONS classified Network Rail as a private sector organisation in 2003 but changed that decision to public in 2013. Housing associations, on the other hand, were private until 2015, were reclassified as public on the basis of government plans to use powers they’d had since 2008, and have been put back in the private sector in all four parts of the UK in the last few years.
The recent trend, when it comes to the public/private divide is for the ONS to err on the side of public sector classifications. In the last four years, the ONS has classified train operating companies, Pool Re and Bulb energy as public sector organisations. In all cases, new tighter, international standards – the ESA2010 rules introduced in the wake of the financial crisis – seem to be a factor. It certainly was when it came to English colleges.
The ONS and English colleges
It took the ONS six months to reach its decision about English colleges but, as soon as it started its review, the Department for Education appointed a group of officials to prepare a response. The ONS decision, when it came, was pretty all encompassing:
- all colleges, including institutes of adult learning which get their majority of their income from student fees and the college subsidiaries of universities, are now in the public sector; and
- the reclassification decision is backdated to 1993.
In their explanation, the ONS explain that ESA2010 has changed their interpretation of a law passed in 1993 from the judgement made when they last looked at the sector in early 2012.
The likely verdict on universities
So, is it colleges now and universities next?
I think not, for the following reasons:
- Taking the ONS statement at face value, the review is about where to place universities in the private sector. Their question – are they market or non-market institutions – is a great one to discuss in a café, bar or seminar room but doesn’t, in itself, shift the boundaries of the state. There is nothing to stop the ONS extending or changing the terms of the review but, until or unless they do so, it seems sensible to proceed on the basis that this is a second order issue.
- The fact the review is in its seventh year of waiting suggests a lack of urgency.
- The ONS include an assessment of the fiscal impact of each item they review. Their assessment for universities is that there is a ‘small’ impact on fiscal aggregates, with the definition of small being less than £100 million. Total university debt is over £10 billion, so this is further evidence of the limited nature of the review. However, in their 31 January 2023 update on the plan, ONS added a note that it is their ‘initial estimate’ that the fiscal impact is small.
- In a useful article on the legal aspects of the university reclassification risk, Smita Jamdar notes there are ‘there are no intervention powers akin to FE, and so the risk is whether legislation or regulation which constrains the ability of individual institutions to determine their general policies or to make decisions about their day-to-day activities could cross the threshold of control.’
Having set out a confident verdict, I’d add that Kremlinogists often got things wrong. The ONS are a law unto themselves and will decide what they choose to decide. So what would happen if I’m wrong?
- What might happen if ONS put universities into the public sector?
What would happen if – unexpectedly in my view – the ONS reclassified some or all universities into the public sector?
Universities are unique but I think there are two relevant cases to help think through what might happen. These are colleges and housing associations.
ONS reclassified English colleges to the public sector and, within an hour of their announcement, the Department for Education made a public statement introducing new controls on colleges. The work of a Department for Education reclassification team and instructions from the Treasury resulted in the immediate implementation of as many as 16 new controls.
The three most notable new controls are:
- An effective ban on new borrowing from banks. The Department for Education has allowed a small number of colleges to roll over overdrafts but has turned down as many requests as it has granted. This has caused some havoc to college capital projects but the Department plans to introduce a loan scheme in summer 2023 to replace commercial borrowing. In the past three months, we’ve had the extraordinary spectacle of a Conservative Government driving banks out of a market because of a view that the private sector adds no value to a public service. I didn’t expect Tories to be so negative about neo-liberalism to the dismay of bankers but there you go.
- An approval regime for high pay which requires approval for jobs advertised at more than £150,000 from May 2023 onwards. There are fewer than 80 relevant people on this salary right now and I am sure that the Department for Education will approve some requests, but I also think it’s likely the approval threshold will work like a pay cap for many colleges.
- A three-year project to consolidate college accounts into the Department for Education accounts, which may include a change in the year-end from July to March for 2025/26, creating a new risk of disorder in college budgeting, accounting and auditing.
On a more positive note, public sector status for colleges has confirmed new DfE responsibility for their finances and buildings. The Department is paying colleges earlier in spring 2023 to improve their cashflow and has offered several new capital grants. The DfE has even, in the last few weeks, offered to help colleges identify whether their ceilings contain dangerous concrete.
The reclassification of housing associations to the public sector in 2015 produced a different set of responses from its sponsoring department – the predecessor to the Levelling Up Department.
The response of Ministers to this reclassification was to do nothing in terms of immediate controls but to secure a u-turn. In the words of the Office of Budget Responsibility (OBR), ‘the Government took legislative steps to reduce its control over housing associations. It was unusually candid in admitting that those steps were precisely calibrated to relinquish just enough control to allow the ONS to reverse its decision, but no more’. The Regulation of Social Housing (Influence of Local Authorities) (England) Regulations, 2017 limited the powers that local authorities had to nominate housing association board members and secured a reclassification back to the private sector.
A similar in / out process – reclassification, deregulation then reclassification – took place for housing associations in the other three parts of the UK.
Assessing likely behaviour if universities end up in the public sector
It is difficult to predict ministerial behaviour when ministers keep changing but one lesson from college and housing associations is that the Treasury directs events and the amount of debt seems to make a big difference.
College debt is a rounding error in the national accounts – cut in half in the last seven years to less than £1 billion – so there is no great fiscal need to reduce this but, perhaps, in Treasury calculations no great difficulty in annoying a handful of UK clearing banks
The decision-making on housing associations was different. At the time of their reclassification the sector had £75 billion in loans. This was enough to make a difference. In the years since, this figure has crept up above £100 billion. It would have been inconvenient for the Treasury to have to manage this within the envelope of the public finances.
University debt stands in the middle of these two sums but is nevertheless large, growing and complex. There’s been a shift from standard bank loans to bonds traded on international markets and there are lots of people with financial stakes, including very rich donors and faraway investors.
HM Treasury would be understandably and wisely cautious with university lending and, as with the reclassification of housing associations in 2015, wouldn’t act hastily. I don’t think the Government would dare to disrupt the flow of funds in the way they’re messing about with colleges because they’d be worried about the financial markets. They’d send a ‘business as usual’ message instead and – depending on exactly what the ONS said – look for immediate actions to prompt a housing association-style statistical u-turn. This would require legislation but, as it would be in the deregulation direction, it’s unlikely that the 150 members of the House of Lords declaring university connections would raise too many objections.
As for the other aspects of public sector controls, there is always a period of two or three years before Departments consolidate accounts and restate the public finances. As long as the DfE, the Treasury and the ONS were to act promptly, they could avoid the biggest accounting challenge in the Western world. Pay controls might excite more interest, particularly among MPs but I doubt the Government would dare extend the £150,000 approval rules given the international university labour market and the average pay of vice-chancellors. They’re trying it out in colleges in 2023, having not pushed academies on its for years. And if decisions on loans, pay and accounts are dodged, why would government bother with all the smaller controls like those relating to write-offs, guarantees and novel transactions?
I have to add that I think class would be a factor in the differing treatment between the two education sectors. I can’t think of a single Treasury official who has taken up a role on a college governing body (while still in that Department) but I can think of a few who’ve moved from the offices overlooking St James’s Park in London to Oxbridge colleges and university boards.
Dividing up the sector?
There are, I should add, plausible scenarios in which the ONS divides up the UK university sector in a way that puts some institutions into the public sector while leaving others private. The two I’ve heard discussed are:
- a division within the UK with, perhaps, English universities staying private and universities in other parts of the UK becoming public because of subtle differences in legislation / regulation; and
- a division between older and newer universities based on some difference in their charters.
I’ve not sure the ONS will have the time to study things at this level of detail and I’ve already raised a question about the scope of the review. If, nevertheless, one of these scenarios were to happen, I think the motivation to restore the status quo before reclassification would be even stronger
So, in a sentence, my prediction is that a university reclassification, which I think unlikely, would result in a suspended sentence in which institutions retained the freedoms they’ve already had pending changes to get them back into the private sector.
- A binary line that becomes a Berlin wall
None of this means that reclassification is not something to think about.
Colleges in England are now subject to state controls but they’ve been teaching higher education courses (Higher Nationals) for a century and there are more of them (155) on the Office for Students’ Register than there are universities. Thanks to the ONS, the OfS now finds itself overseeing a higher education market in which 40% of its providers are ordered about by its sponsor, the Department for Education. There are a few small and one big implication of this.
Insolvency for colleges now seems an unlikely event which make Student Protection Plans a bit of a waste of time. Meanwhile the decision that colleges can only borrow from the DfE will make it harder for them to develop Higher Technical provision without more help. It also calls the backdated Student Loans Company payment profile into question (25% / 25% / 50%). If a college, or its Institute of Technology, is too successful in growing its HE student numbers, the DfE will be on the hook for a bigger overdraft.
At an institutional level, the reclassification of colleges makes the boundary line with universities a bigger one to cross. Three university / college partnerships were created in 2019 and I can think of three sets of discussions that were floated in the year before COVID struck in 2020. They’ve become more difficult since 29 November 2022 because of a new wall between the two sectors.
As for regulation, the confident Augar report recommendation that the OfS should regulate courses from Level 4 upwards might get a rethink. The DfE might find itself on a slippery slope of controls over colleges because, once it starts consolidating their accounts, it may find things that it wants to stop to make the life of its accountants easier. We’re in a three year period of college financial reform. What happens after 2025, under a new government and following a new Spending Review is anyone’s guess. The need to improve skills to increase productivity and restore growth will be as pressing as ever. How government delivers this may change.
So to conclude on this point, a line between two parts of the education sector has now become a bit of a wall. We have the Treasury to thank for this. And while the college tail won’t wag the much larger higher education sector dog, it might shape future policy-making towards universities in a way that it would be worth preparing for.