By Marcus Leach

Next month, the Coalition Government will mark its first year in power. Today, I want to reflect briefly on what has been a somewhat frenetic period in higher education, consider some of the challenges we face ahead of the incoming funding system, and signal where we want to get to by the end of this Parliament.

Making the higher education system more responsive to students — your consumers — is not something we can achieve overnight. Yet that is one of the central purposes of our reforms — and we will clarify that through the forthcoming White Paper, which will contain further proposals on competition and the future shape of the sector.

Coalition achievements

Let me assess recent events first. In response to — but also in spite of — a dire financial inheritance, we have — with your help — found a way to provide sustainable funding to this vital sector. Universities will have a secure income stream, while students will have access to a fairer and more progressive loans system. Young people and their families are understandably anxious about the prospect of making bigger contributions to the cost of their degrees — albeit as graduates and over a longer period — to the cost of their degrees. In the coming weeks and months, we will make sure that they have clear and definitive information about how the system will work.

And because we are concerned that people from low-income households with no experience of higher education might be put off by the thought of student-related debt, the new system will also include higher maintenance grants, a new National Scholarship Programme and more fee waivers. This is a key feature of the social mobility strategy published yesterday. In addition, we are seeing a range of employers in different sectors willing to help pay for tuition costs incurred by their new recruits. We welcome this — a belated realisation of Ron Dearing’s vision of greater employer sponsorship for HE.

There has been some disingenuous but effective propaganda exaggerating the cost of student loans. Even with interest payments, the subsidised loans available from next year will be on generous terms. This is not like normal debt. There's no mortgage or credit card whose conditions allow for non-repayment when the borrower’s income falls beneath £21,000 — none that allows low earners or those out of the labour force to write off their debt. As the Council for Mortgage lenders has made clear, a student loan is unlikely to affect anyone’s ability to get a mortgage. I know universities will be keen themselves to counter this propaganda.

In addition to subsidised student loans, the HE sector also benefits from the decision, in last October’s spending review, to maintain the ring-fenced science and research budget at £4.6 billion per annum over the next four years. This ran counter to most decisions, in which cuts were, unavoidably, the norm. Nor was that a one-off gesture. On the capital side, we found money for ISIS, the Diamond light source, for the latest Birth Cohort Study. In this Budget, we allocated an extra £100 million to invest in research base infrastructure — and we will be spending £200 million on Technology Innovation Centres, which will only succeed if they work closely with university departments.

I also believe we achieved a sensible outcome on international students. There is — and will continue to be — no restriction on the numbers of legitimate overseas students in either further or higher education. And from 2012, when the new post-study work arrangements come into effect, there will be no cap on the number of graduates who can stay on in graduate-level jobs. Students who wish to continue their studies can remain in country, so long as the new course they wish to embark upon is at a higher level than the one they have just completed, while other graduates will have the option to apply for an entrepreneur’s visa. This strikes a sensible balance between attracting genuine students and operating a robust migration system that denies entry to people with ulterior motives for coming to the UK. We recognise that recruitment of overseas students represents a major success story for British universities and colleges, and has become a big export industry. We want it to continue to expand.

Government continues, therefore, to support HE. Even after 2012, the contribution from the taxpayer to the HE sector will be significant. It is made up of the remaining HEFCE teaching grant, estimated — under current assumptions — to be around £2 billion in 2014/15; about £6.5 billion in tuition loans; £2 billion in maintenance grants and scholarships; and £3.5 billion in maintenance loans — plus the ongoing investment in research. Taking together funding for teaching and research and the upfront costs of graduate contributions, Government investment in HEIs in England could actually increase by 10% in cash terms by 2014-15.

Managing change

These figures mark the limit of the spending envelope — but there is no truth at all to recent political claims, some of them rather hysterical, that there is a £1 billion “hole in the budget.” There is no hole in the budget. The agreed spending envelope will remain as it is.

The excitement has been created by reports that universities are all bunching around £9,000 charges. The Leader of the Opposition has claimed that 80 per cent are doing so. It depends on how you measure this, but current estimates suggest that 22 out of 46 Universities are aiming for £9,000. I know adult numeracy is a problem — but under no system of mathematics that I am aware of does 22 out of 46 represent 80 per cent.

And, of course, the headline £9,000 figure disguises fee waivers and scholarships. I can only hope that prospective students are not deterred from higher education by the wilful exaggeration of opposition politicians for whom party point-scoring is the dominant concern.

The fact is, though, that our view on the levels at which universities can deliver high-quality teaching doesn’t tally with some apparent bunching of proposed charges at the higher end of the scale.

Lord Browne estimated that for the most common types of course, institutions would need around £7,000 per student to match current income — or £6,000, once expected efficiencies are accounted for. That was why we set the basic amount — the point at which an institution does not need to make an access agreement with OFFA — at £6,000. We set the higher amount at £9,000 to allow increased investment in our world-class universities. We then envisaged an average fee of £7,500 because it delivers sufficient resources for a high-quality student experience, protects the financial interests of graduates and taxpayers, and means we do not have to reduce university places.

As David Willetts has pointed out, four-fifths of students fall within HEFCE’s Band C and D. For each Band D student, universities currently receive around £6,000 via tuition fees and HEFCE grant. In 2012 prices, this would be more like £6,350 — so a charge of around £9,000 would represent an increase of over 40 per cent in teaching resource. For Bands A and B, the increase would be around 20 per cent. Even at £8,000, we are talking about a 25 per cent increase for Band D.

Now, I concede that the sticker prices released to the press by some institutions is not the same as the actual price to many students, once substantial waivers are factored in for applicants from poorer backgrounds. It is a shame that reporting in the media has tended to focus on the maximum institutions intend to charge — rather than on the charge that their students are likely to experience on average. Moreover, there could and should be variability in charges within institutions, reflecting the costs of delivering different courses and the laws of supply and demand.

I also appreciate the dilemmas institutions face in carrying out their own modelling. I accept that you still face certain known unknowns — maybe even some unknown unknowns.

Universities, however, can't expect to operate in a cost-plus world. Private companies in competitive markets cannot operate in this way, and heads of public sector organisations — chief constables, generals, council chief executives, hospital trust managers — cannot operate in this way either. They have less money, and are having to work out how to reconfigure their services in radical ways.

Let me pose the problem in a different way. Many of your students will arrive at university having just experienced high-quality, intensive teaching from professional staff, for instance in sixth form colleges. For 2011/12, an average sixth form student could have 620 contact hours per year, with the unit of funding being £4,800. To then receive less intensive teaching — perhaps with academics not appointed on the basis of their teaching abilities — will leave them wondering why university is so expensive.

I expect to see, in a university sector faced with the onset of more competition and more demanding students, a ferment of creative thinking on how to redesign course structures and manage major change among staff so as to promote higher quality but lower-cost teaching. I may be missing something, but I haven’t seen much evidence of this.

I'll go further. Attempts by universities to pitch their charges near the top of the range is a zero sum in terms of available resources. It is economically irrational on a collective basis — and it's very likely irrational in individual cases too.

Of course, no university has had approval from the Office for Fair Access to charge higher than the basic level; OFFA scrutiny is ongoing. Indeed, as the Government strives to optimise the student experience, it will review OFFA's powers. In our recent guidance to OFFA, we were clear that it should examine not just access but drop-out rates as well. In future, we may ask it to consider other student-related criteria.

Living within our means

In the meantime, we need to think about the signals going out to potential students and their families. Choosing to go to university and picking the right course is life-changing moment. One of main purposes in reforming the HE system is to give applicants all the information they require to make that decision — and that includes the ability to assess value for money. The biggest mistake a university could make is to underestimate its consumers. Students will search for value for money and compare the offers of different universities.

Under the new principle whereby funding follows student choices, some institutions could very well find themselves in trouble if students can't see value. That trouble would only intensify as those institutions who prove themselves capable of attracting students and keen to expand their provision are given opportunities to do so. The current HEFCE system of damping the impact of year-on-year funding changes will no longer apply.

As you know, we want a system that’s more responsive to demand. In circumstances where places are unfilled, we might then withdraw those places, and institutions should not assume they will easily get them back.

The idea, therefore, of using high charges as an insurance policy against other factors pre-occupying institutions can itself serve to magnify risk. Universities need to think of subsequent years — not just in terms of funding levels but also what challenges will arise from new competitors promising high standards at lower prices; from young people opting for high-level apprenticeships rather than HE; or indeed higher national qualifications and foundation degrees that represent a direct route to jobs with prestigious employers. They will need to think about whether putative links between public reputation and price will work in their favour or not — because, fundamentally, those setting the highest prices should logically be making the very strongest offer to their students, especially on teaching and employment. Institutions already set different prices for international students and postgraduates, so there is no precedent for assuming that prestige only comes through high fee levels.

David Willetts and I have made clear in our letter to the Director of OFFA that we hoped the use of financial waivers for those who need them would be supported, because it had the effect of reducing the cost of borrowing to the public purse, and to the student. But we have also made clear that we do not expect this to apply to untargeted large scale discount packages, which is why I urge everyone in this room to think carefully about what you believe students are prepared to pay for your services. I hope you will do more work yourselves on pricing before OFFA finally reviews bids across the sector.

I must also ask whether you have done everything possible to drive down running costs. It's a question that families will be asking if they see fees increase this summer by considerably more than universities need to cover the loss of teaching grant — especially in light of Monday's Dispatches programme on Channel 4. More significantly, I am certain — based on the continuing efficiency measures being absorbed in central government — that more can be done to reduce administrative overheads, wage bills, and to run campus facilities more effectively. As with every other part of the economy, the pensions burden must be tackled head on. And some universities should be thinking seriously about a narrower and more viable mission as specialist teaching institutions — perhaps following the example of the great liberal arts colleges in the US.

I would welcome detailed publication of what individual universities are doing in these matters. It would help people to understand the broader rationale informing their pricing decisions. I also look forward to the outcome of the UUK review on efficiency, led by Ian Diamond. It will be an important piece of work.

My main point here is that Government essentially has two ways of dealing financially with collective over-pricing: either cutting the teaching grant or student numbers. We are very reluctant to go down either route, and do not believe we need to. On the contrary, I want Government to step back at the earliest opportunity, so that university independence is enhanced and competition operates.

Competition and number controls

But let me say more about that: about some ideas we're exploring — short and longer term — to achieve a more market-based, freer HE sector, one with downward pressure on charges. We want, of course, funding to follow student choice, and we want greater transparency in the sector. Ultimately, we want more competition, and so, ahead of the White Paper, allow me to share some of our thinking around increasing competition in HE.

There are institutions as well as universities which can offer higher education to students, and who tell us they are able and willing to expand. There are FE colleges achieving high standards which can provide higher education courses, particularly in vocational areas. There are also private providers who can offer good quality university courses, and we want them to operate on a level playing field. If these providers can offer places that students want — at prices students want — we intend to help them grow. The corollary is that institutions not offering provision of recognisably good value — but who pitch for high prices — could be seriously squeezed. We would rather avoid institutional failure.

At the same time, I hear from some FE colleges that, even when they have been in long term partnership with a University and have regularly filled their places, they are being blocked by universities from maintaining their student places. They allege anti-competitive practices. If there is substance in these suggestions, then this must end.

As I've repeatedly emphasised, the intention is for student choice to drive supply, not Government intervention. But it is a legitimate role for Government to examine options for intervention in markets which are not operating to best effect — and to support fair competition, for example between FE colleges and universities. Where we see barriers to entry, or uneven playing fields, we will take steps to address them.

One egregious constraint on competition in the HE sector is control of student numbers at the level of individual institutions. Let me be clear. This is heavy-handed intervention which we would love to get rid of. So long as there is a Government subsidy, Government will rightfully insist on some form of overall control for budgetary reasons. Over time we want to go as far as possible in removing institutional student number controls. Where there is excess demand, however, Government via HEFCE will continue to have to allocate scarce places.

To reward the most competitive providers, we are considering whether we might modify student number limits on any institution that decides to charge lower amounts for its courses, whether a university, college or private provider. At the moment, there are such flexibilities for private institutions which do not receive HEFCE funding. We are examining the level of Student Loans Company support available to students studying at such institutions in 2012/13, to level the playing field. With creative thinking, we can find other ways of rewarding the most competitive players.

But we also want there to be maximum chances for students to attend their first-choice institution, if they have the talent and if the institution wants to take them. That's not possible at present, because of number controls.

Another measure for the longer term could be to remove student number controls which inhibit universities’ ability to recruit students who represent no burden to the public purse. For example, I don't believe that universities should be prevented from expanding courses where employers cover students’ costs — such as the model KPMG has been developing with universities like Durham. We would want to ensure any further moves in this direction are taken in a progressive way, consistent with our approach to widening access.

To recap: so long as there is Government subsidy, there must be some control over student numbers to ensure that the costs are manageable. We envisage a selective relaxation of controls, potentially to reward more competitive providers, or to maximise the chance of students attending their first choice institution. We want to make the controls as limited and flexible as possible.


These ideas, then, indicate the direction we're heading in and the destination we wish to reach.

By mid-decade, I want to see a sector whose global reputation is enhanced beyond current high levels; whose contribution to economic growth is commensurate with its potential to stimulate growth; a competitive sector — with a healthy presence among FE colleges and private providers — where institutional autonomy means more than it does now, because there are fewer price or number controls; and a sector in which student choice extends beyond subject and location to mode and length of study.

Every Government in living memory has spoken about the decisions of students having a real impact on HE — as did both Robbins and Dearing. We will finally make this happen. Supply-side reform, flexibility of student numbers, needs-blind off-quota places, more HE in FE, better part-time and two-year degree funding are all means to that end.

I'm the first to acknowledge that the pressure on the sector is considerable right now. I've no guarantee that there won't be difficult times ahead, but my wish is that these changes bed down sooner rather than later. David Willetts and I will do everything within our powers to facilitate that — and we continue to welcome your full input.