Degrees of profit at London Met

This autumn saw the arrival of the first cohort of undergraduate students in England to encounter the new higher education funding regime, which was brought in two years ago by the government’s comprehensive spending review and its snap vote to raise the maximum tuition fees at publicly-funded higher education institutions to £9,000 per year.

The first decision removed all direct central funding to subjects other than science, technology, engineering, medicine, dentistry and veterinary sciences. Grants for those subjects were reduced by roughly £4,000 per student. Allowing increases in tuition fees was aimed at replacing this lost funding.

However, the removal of grants also ‘levelled the playing field’ for the private sector, removing a ‘public subsidy’ and making the fees at commercial institutions competitive for domestic and EU students. The experience of London Metropolitan University illustrates how that privatisation agenda was pursued further by universities keen to be ‘onside’ with the government.

London Met was experimenting with an approach that had the full backing of the Department for Business, Innovation and Skills (BIS), which is responsible for universities. This involved offering relatively low fees, collaborating with the private sector, generating export revenue, advising foreign governments and trialling a ‘shared services’ initiative made possible by the 2012 Finance Act (which received royal assent in July).

In which case, what happened in August, when Damien Green, then minister for immigration, announced that the UK Border Agency (UKBA) had revoked London Met’s licence to sponsor overseas students? That is a different story, one which reveals a large fault line within government but, for London Met, led to a hidden component of the higher education reforms: buyout by private equity.

‘Affordable quality education’

When modelling the impact of the new fee regime back in 2010, BIS made some erroneous assumptions that led the minister for universities and science, David Willetts, to state that not all universities would charge the maximum fee and that the average would be £7,500 per year. In fact, even after allowing for fee waivers as part of sponsorship packages, the average across England is expected to be around £8,100.

London Met bucked the trend and offered a range across different courses from £4,500 to the maximum, resulting in an average of approximately £6,850. For a London institution to come in so low – even below many further education colleges – is eye-catching, given the higher overheads in the capital. And this low-cost positioning is risky in a market where pricing is likely to signal prestige and where the subsidies built in to the government-backed loans mean that fees do not directly translate into the cost borne by the graduate.

In such a context, it is important to remember that London Met is the most socially inclusive university in the country. It told the Office for Fair Access: ‘Examination of our student profile for 2009/10, for example, reveals that over half of the university’s 29,000 students are from minority ethnic communities, compared with 15 per cent of students nationally.’ An oft-cited statistic suggests that there are more black and minority ethnic students at London Met than at all the Russell Group of 24 leading universities combined.

Efficiency gains or investment opportunity?

In order to pursue ‘value’ and efficiency, London Met decided to push ahead with a radical overhaul of its management and administration through a ‘shared services initiative’. This involves two or more separate companies joining forces to tender or pool ‘backroom’ operations such as IT, library provision, catering, recruitment, marketing and so on. Economies of scale ought to be possible here. The 2012 Finance Act removed an impediment to such schemes: the VAT exemption enjoyed by universities and colleges was extended to partnerships formed among these institutions.

Media reports described London Met’s ‘radical outsourcing plans’ as supposedly leaving only the vice-chancellor, Malcolm Gillies, and academic staff in the university. A spokesman indicated that something subtly different was planned: ‘If London Met decides to set up a subsidiary company, it will be 100 per cent-owned by the university. Staff would be working for this wholly-owned subsidiary of London Met.’

The original tender document outlined a phased plan beginning with the appointment of a third party to ‘review the existing administrative business processes of the university, deploying proven expertise to maximise performance improvement’. This contract was worth £74 million over five years and would have seen a tier of existing management replaced by consultants. Subsequent phases involved developing the subsidiary company, transferring existing staff to it and then expanding it to offer services to other higher education providers.

London Met was aiming to award the initial tender in late August. BT Global Services, Capita and Wipro from Bangalore made up the shortlist of three.

In addition to efficiency gains, there was another aspect to the plans: shared services utilising a subsidiary company may also be a means to allow equity investment in universities. While it is not possible to buy shares in public universities as they are currently structured, any new subsidiary could be structured to allow such investment opportunities. Unlike existing higher education institutions, which are required to reinvest any surpluses, a new company could distribute profits to investors under what would effectively be monopoly conditions. The model offers a route for private investors who want a piece of university action.

Shared services offered London Met a potential solution to longstanding problems with its administration. But the lucrative prize of getting in first with this new investment opportunity may have distracted senior management from the problems that developed in relation to UKBA.

Higher education as export industry

The past decade has seen consistent encouragement, often through tightening public purse strings, for universities to become more oriented to ‘customers’, business and industry, thereby contributing more to the ‘knowledge economy’.

Peter Mandelson, then in charge of BIS, wrote in 2009: ‘Universities will need to seek out other sources of funding, from overseas sources as well as domestic ones. The experience of the last decade suggests there is considerable capacity to do this. New money has come from creating greater economic benefits from the knowledge they generate or the teaching expertise they provide and from philanthropic sources of income and increased international earnings.’

Besides overseas campuses and various partnership arrangements, non-EU students at UK institutions have climbed from under 175,000 to nearly 300,000. Overseas students now make up one in six of full-time students, contributing £3 billion in fees annually out of a total sector income of £27 billion. A further £8 billion per year is estimated to result from their other spending in the surrounding economy.

Higher education is now estimated to be the UK’s seventh largest export industry and a key ‘traded service’ in efforts to rebalance the economy, according to Vince Cable.

In the case of London Met, it had been advising the Indonesian government on its new model for affordable quality education as well as recruiting large numbers of international students. These contribute around £22.5 million in fees to London Met’s annual revenue of £150million. In addition, earlier this year, it launched a new ‘deep and integrative’ partnership with the London School of Business and Finance (LSBF), a large, fast-growing private college.

The deal, rumoured to be worth £5 million annually, would see London Met validating a suite of programmes offered by LSBF, which does not have its own degree-awarding powers, and joint sponsorship of international students. In April 2012, UKBA gave permission to London Met to issue the paperwork for 5,000 LSBF students on top of the 4,000 international students it would bring in for itself.

Theresa May, the Home Office and immigration

Barely a month later, UKBA decided it was no longer happy with London Met’s new contract with LSBF. It ordered a fresh audit, which led to the dramatic announcement at the end of August that London Met would be stripped of its ‘highly trusted sponsor’ status. Its existing international students, roughly 2,600 originally, would have to find alternative institutions at which to continue their study (by the 2013/14 academic year, according to the latest concession by UKBA). Although this ‘nuclear option’ had recently been used on private colleges, London Met was the first university to suffer it.

There is much that is as yet unclear about the course of events here. London Met has received permission for a judicial review, which has still not been timetabled owing to congested courts. However, the interim hearing revealed that the case will revolve around the powers held by UKBA, whether it acted unlawfully, and London Met’s record-keeping between December 2011 and May 2012.

Crucially, this is an administrative matter: UKBA has not identified any current students who ought not to be in the country. According to Richard Gordon QC, acting for London Met: ‘Just as the UKBA cannot find a single student studying at the university without leave to remain, it has no example of a student studying at the university who does not genuinely wish to study, or who has used tier 4 deceptively, has forged a document, or has abused the immigration system.”

A further revelation confirmed rumours of a spat within Cabinet. Theresa May took the decision to revoke the licence: it was an executive intervention, not an ‘operational decision’ by UKBA.

The dispute more broadly relates to the immigration figures, within which student visas are counted. David Cameron tasked May with reducing net migration below 100,000 by 2015. Figures released on the day of the London Met announcement showed it was 216,000 for the year to June 2012.

According to a letter leaked in the Daily Mail, Vince Cable and David Willetts want students removed from this measure, no doubt fearing further paroxysms as the target recedes and further damage to the sector’s reputation and export value. May remains unconvinced. She addressed the issue head-on in her annual party conference speech:

‘They argue that more immigration means more economic growth. But what they mean is more immigration means a bigger population – there isn’t a shred of evidence that uncontrolled, mass immigration makes us better off . . . They argue, too, that we need ever more students because education is our greatest export product. I agree that we need to support our best colleges and universities and encourage the best students to come here – but to say importing more and more immigrants is our best export product is nothing but the counsel of despair. We were elected on a promise to cut immigration, and that is what I am determined we will deliver.’

May won the first round and universities are scrambling to ensure tighter compliance in this area. The sector is united in its opposition to further incursions by UKBA. BIS’s response has been to launch Education Services UK, a one-stop shop aiming to boost overseas campuses: if the students cannot come to the country, let’s take the university to them, perhaps?

The future of London Met

But what of London Met? What happens next will reveal how far things have changed. London Met’s experimental positioning with the new higher education economy is no longer viable. It is prevented from recruiting overseas students pending the outcome of judicial review and may have suffered significant reputational damage regardless. It has suspended the full shared services initiative but is proceeding with the hire of consultants to conduct an ‘extensive and rapid business re-engineering process’ directed at adjusting costs. The consultants will likely be determining whether and in what form the university can continue.

In last year’s higher education white paper, the government expressed its reluctance to act as the backer of last resort: ‘It is not the government’s role to protect an unviable institution’. Merger is the normal alternative avenue, but London Met is already the product of one and there is no obvious candidate partner.

Which leaves the possibility of a buyout financed by private equity. London Met is a company limited by guarantee, a private form leaving such decisions in the hands of governors. Faced with insolvency, they could decide to allow the existing institution to be purchased outright and converted to a profit-making business. And there is no doubt that there are those in government who would welcome such an outcome.

Andrew McGettigan’s The Great University Gamble: money, markets and the future of higher education will be published by Pluto Press in 2013