Extra funds for cash-strapped unis must come at a price as IFS warns 13 could face insolvency

The widely respected think tank has put the sector’s coronavirus losses at between £3bn and £19bn, leaving some institutions with thousands of students at risk, writes James Moore

Top institutions tend to have substantial reserves (Getty)

The coronavirus crisis seems to produce a new and unhappy twist every day, both biologically and economically.

This morning’s comes courtesy of the Institute for Fiscal Studies, which suggests that as many as 13 universities could be tipped into insolvency.

Travel restrictions are making it hard for international students, and while the fees charged to UK students are absurd, they’re a lot lower than what students from overseas are asked to pay. That’s hit number one.

If top tier universities lose international students, they may be inclined to tweak their entrance requirements to attract more UK students to help plug the gap, subject to the government’s cap on numbers. So lower ranked institutions, which are more reliant on domestic students’ fees, may share in the pain.

Revenue from commercial actives such as catering, and hosting conferences, has, obviously, dried up.

Then there are the staff pension schemes they operate, which, thanks to the turmoil on the markets, are likely to be experiencing deficits. This may be the biggest problem of all.

The level of uncertainty in the IFS’s estimate of total losses makes it almost a guesstimate. It ranges from £3bn to £19bn, with a central scenario of £11bn. The pension issue could contribute up to £7.8bn, with a central estimate of £3.6bn.

Here’s the rub. According to the IFS, the net losses in the central scenario are only slightly larger than five years of surplus at pre-crisis levels of universities’ profitability, which is something that chancellor Rishi Sunak is probably likely to hear loud and clear.

Nor are the institutions which experience the biggest losses among the most in danger. Top tier institutions tend to have substantial reserves which they can call upon and rebuild over time.

But the 13 most at risk still account for tens of thousands of students, some five per cent of the UK total. Some of the worst-placed are small establishments with fewer than 2,000 students, but the largest, the report says, hosted 24,000 in 2019, compared with a sector average of around 15,000. Their going under would come as a devastating blow to their students, but also to their business partners and lenders. These institutions are often highly important economic engines in their locales too.

So how to handle this? The report offers some ideas. One would be to increase teaching grants by £1,000 for UK/EU students on a one-off basis. This would cost the exchequer £1.8bn. The trouble with this is that it would only push three of the at-risk institutions above the line.

Option two would be a tightly targeted bailout covering the strugglers. They IFS thinks it could costs as little as £140m to keep the wolves from their doors.

Given the sums the government is currently spending on the pandemic, that’s a mere rounding error.

So this looks like the most attractive and cost-effective course to take, but also a worthwhile one given the institutions’ importance to their students and their local economies.

Have you spotted the problem yet?

It’s the moral hazard. If the IFS is right, and you bail out the strugglers like this, it sends out a very bad message to those who have exercised better control of their finances. It tells institutions that they really don’t need to worry about flinging cash around, and appointing bad leaders at vastly inflated salaries to do that in future, because there’ll always be a pot of taxpayers’ gold at the end of the rainbow if things go wrong. It’s very unfair on universities that have been badly bruised but remain above the line.

In some of these situations it may be worth raising the question of whether mergers with other institutions with more expansive reserves would be preferable to a bailout.

If the latter is seen as the only way, then any extra money should, at the very least, come with strings attached.

One should be a demand that the institution so assisted accept a cap on executives’ pay. Last year six universities in England paid their vice chancellors (VCs) £500,000 or more, taking into account salary, bonus and benefits. Figures from the Office for Students also suggested that calls for restraint have had little effect, with average VC pay, not including often lucrative benefits, jumping by 3.5 per cent to £253,000.

It would be unconscionable for a university with a megabucks VC who had presided over a financial failure to be going cap in hand to the government. If these people prove unwilling to accept restraint in that event, then they should go.