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January 21, 2011

Competition or partnership: could private providers solve UK higher education's supply and demand problem?

December's tuition-fee legislation is a turning point in UK higher education, but it has diverted attention from the coalition government’s intention to encourage private providers to to generate competition for state-run HE. Should the ‘traditional’ university sector fear the private providers or, as Paul Marshall suggests here, embrace the opportunities they offer?

Future generations will mark the passage of new tuition-fee legislation in December 2010 as a turning point in the history of UK higher education. The merits of the withdrawal of the state from the blanket subsidy of undergraduate degree programmes and the transfer of the costs to the student, to be repaid through a generous graduate contribution scheme with repayment contingent upon earnings, has been much discussed, debated, argued and, indeed, rioted about. These debates, however, have created a foggy cloud under which other changes have developed and taken root.

Potentially the most controversial of these are the coalition government’s intention to encourage private providers to enter the newly formed marketplace in an attempt to generate competition. The intention is to drive down costs and increase efficiency while, at the same time, solving the huge imbalance between supply and demand for university places. So should we in the ‘traditional’ university sector fear the private providers or embrace the opportunities they offer?

The truth is that private providers as competitors have existed within the UK landscape for many years. Where these providers are delivering excellent support and satisfaction to their students, this poses a challenge to the traditional universities to continue to enhance their student experience. This challenge is good for students and a good way to enhance quality and standards.

The conditions upon which the private and traditional providers are operating, however, is not level. The rules governing the existing private providers’ access to government funding are complex. Those institutions that have sought and gained degree-awarding powers receive them on a heavily conditional basis for a limited period as opposed to the lifetime award to traditional universities. In these circumstances, private providers have remained small and specialised, generally focusing on the delivery of professional qualifications. In the last year, however, two factors have shifted the dynamics greatly in favour of the rapid expansion of this private activity.

The potential for reaching saturation point in their expansion within the US market, along with the likelihood that congressional pressure will reduce access to federal loans, has encouraged US private providers to look for opportunities overseas. In the UK, they see an ideologically sympathetic government and, one month into the formation of the Conservative-led coalition, the for-profit BPP College of Professional Studies—owned, like the giant US private provider University of Phoenix, by the Dow Jones-listed Apollo Group—became the first private provider to be awarded the university college title for more than 30 years.

There is also strong potential demand. The attractiveness of the English HE system to UK and EU citizens has created a hugely disproportionate, unaffordable demand for places, with over 200,000 applicants unable to find a place within the traditional universities in the 2010 admissions cycle. Within an extremely constrained funding environment, encouraging private providers to enter the market potentially enables the government to accommodate this over-demand without increasing costs to the taxpayer. The details of the government’s proposals in this area will be included in legislation to follow early in 2011 but to me it looks as if there is one giant sticking point.

As we have seen in the US, an important underpinning for the expansion of the private providers has been the access to federal student support. We assume that part of the quid pro quo of an attempt to balance supply and demand will be private providers receiving access to the newly enhanced student-support arrangements. However, the financing of such a significant expansion of an extremely expensive and generous student support package simply doesn’t add up.

In its analysis of the government’s funding proposals, the UK Higher Education Policy Institute concluded that the costs of the student-support subsidy accounted by the Treasury would increase from about 30 per cent—it costs the Treasury 30p to lend every £1 of student support—to about 50 per cent under the new model. The coalition disputes this number but, with average tuition more than doubling and the student support system becoming more generous, even if the Treasury subsidy remains at 30 per cent this represents a significant additional cost to the taxpayer. Put simply, this means that the reduction of £2.5 billion in direct teaching subsidy to institutions announced by the government alongside the increase in tuition will largely subsidise the cost of the enhanced student-support system. I am not sure that this is what the Treasury intended. What is does mean, however, there is little or zero headroom to expand of student numbers.

Indeed, one doomsday scenario put to me is that, if the Government pushes ahead with expanding access for the student support arrangements to private providers, it cannot afford to do this without reducing the numbers of students accessing student support at the traditional universities.

All of which does nothing to solve the supply and demand problem. It also suggests that the market conditions for private providers are not as attractive as they might initially appear. In this context, it is interesting that in the autumn of 2010 it was reported in Times Higher Education that Apollo had written off more that 25 per cent of the purchase value of BPP because of "uncertainty surrounding the UK higher education market's future".

Yet the focus on competition masks the complexity of the private provider’s relationship with Higher Education institutions. In the majority of cases, they are important partners rather than competitors. It is here, I believe, that there are the greatest opportunities for significant expansion in the UK system. Why spend taxpayer money when it is possible to develop a joint venture and use private capital to achieve the same benefits at a potentially higher efficiency and standard?

Since 2006, INTO University Partnerships have successfully launched 10 joint venture partnerships for international students, eight in the UK and two in the US. These joint ventures provide pre-degree programmes of academic and language study. Students have first-class, custom-built on-campus teaching and residential facilities. INTO students are recognised students of the university with access to all of its facilities; and have the chance to engage with their future academic degree programmes. The Universities have retained full control of academic quality and its own brand with INTO supplying the student recruitment network and managing the venture. The centres directly recruit academic staff while adhering to the high standards of the university partner.

Similarly, a rival private provider, Study Group, has established a network of 12 ‘International Study Centres’ providing specialist on-campus degree preparation including highly personal academic monitoring and support for international undergraduate and postgraduate students.

When the University of East Anglia launched its INTO partnership fewer than 50 international students were enrolled on academic-preparation programmes, with 13 full-time staff. Today there are 136 full-time staff and 700 students. Exeter has seen similarly impressive results, with increases in student numbers from 30 to 600 with 65 per cent of INTO Exeter students progressed directly onto university programmes.

University Partnerships Programme (UPP) offers another model. Since 1998, UPP has worked with an expanding range of university partners to supply risk-free solutions for the funding, design, build, and operation of high-quality academic and residential facilities. These range from new developments through to estate transfers and the refurbishment of existing premises. Schemes are delivered at no cost to universities, at specifications developed in close consultation with student users, are financed on a non-recourse basis and at the end of the lease are handed back to the institution in their entirety.

The group has already invested almost £1bn in the higher education sector and, supported by Barclays Capital, plans to invest a further £1bn. The aim of the company is to provide strategic options that allow universities to more efficiently meet their immediate and long-term financial commitments. By removing from the equation funding otherwise tied to student accommodation, universities are free to invest in other facilities.

For example, the 963-bed Eco Residence Lancaster University opened in 2009 is the last phase of the existing partnership agreement between the university and UPP dating from 2003. The largest accommodation project in the higher education sector, UPP’s work with Lancaster University has delivered 4,347 rooms over three phases, with an investment of £180 million.

Developing these public/private relationships is not simple, and clearly can create uncertainty amongst faculty and administrators who might find it difficult to deal with the realities of this new more market-oriented environment. This is where true partnership rather than outsourcing seeks to provide a bridge in the provision of services between the traditional university and the private provider for mutual benefit. In each of these cases a strategic decision has been taken that working in partnership rather than the university acting on its own is the best way of delivering what students need.

There is a UK government drive towards the expansion of private providers, but it remains unclear whether in a complex policy and constrained fiscal environment the private providers will find market conditions favourable to expand their activity to a sufficient scale to generate genuine competition with the traditional sector. However, while the eyes of the press and politicians have been focused elsewhere, a whole range of private providers have established flourishing and growing mutually beneficial partnerships which need little encouragement or government intervention.

I suspect that in the UK, ultimately, it is in collaboration with the traditional universities that the private providers will ultimately find the most long-term, sustainable success and leave the government’s supply and demand problem unresolved.

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