Going private is no panacea for universities

Out-Law Analysis | 07 Apr 2011 | 2:03 pm | 4 min. read

OPINION: Universities may be considering throwing off the burdens of bureaucracy and state control associated with public funding and going it alone as commercial enterprises.

A more generally commercial approach might be of more value than focusing on government interference, though.

In many ways, public money does not come cheap. Universities must abide by freedom of information laws; quality assurance regulations; funding council demands, and seemingly endless other rules and regulations in return for public funding.  And, as state funding shrinks, state regulation - an alternative means of control - inexorably grows.

But fixating on regulations will not reap the biggest rewards.

Universities would be forgiven for thinking that many problems would be solved by going it alone, raising money and going private. They could focus on being lean, efficient and competitive, on driving down costs and responding to students' needs. Isn't it the perfect solution?

But they would be wrong to think that private organisations are free from checks, balances and supervision. And, in fact, they would be wrong in thinking that the biggest distinction is between those organisations that take public money and those that don't.

The key is that universities are charities.  A university might choose to go private by not taking public funds, but would still be a charity, and it is charitable status, and not state funding, which makes the most difference to how it is run.

All the publicly funded universities in the UK, and some of the private ones, such as the University of Buckingham or the College of Law, are charities. They will remain charities whether or not they continue to take public money.

Their assets are charitable and must be used for charitable purposes. They will still have to show that their objects and activities are for the public benefit, and if student loans are not available to students this is more difficult. As with fee-paying schools, they would need to provide generous scholarships and bursaries to ensure that those in poverty are not excluded. Token schemes would not be sufficient.

Universities might be able to stop taking public money, but giving up charitable status is almost impossible. If they did so they could not hold on to and profit from their charitable assets. This is a big hurdle to becoming a for-profit organisation.

Existing assets of a university would remain part of the existing charity – the new for-profit entity would need substantial funds to buy assets from the existing charity.

A non-charitable university would also lose the substantial tax benefits of being a charity. It may be more difficult to attract donations as a for-profit organisation.

So giving up charitable status is not going to be practical for most institutions. But could giving up state funding release them from some of the administrative and regulatory burdens that come with state funds?

That is not a simple question either. The most obvious bonus would be freedom from the regulation and supervision of funding councils and, in England, from the body that promotes equality of access to university, the Office for Fair Access (OFFA).

While newly-private universities would probably breathe a sigh of relief at removing themselves from the FOI regime, as charities they would still be very much accountable for their activities.

The EU public procurement rules would not apply. A small number of universities are already outside this regime as they get most of their income from non-state sources, but even some of them still choose to follow the EU rules.

English universities would no longer be regulated by the Higher Education Funding Council for England (HEFCE), but they would still have to be registered with the Charity Commission, so would not escape regulation.

Complaints about bureaucracy often focus on data protection, health and safety, human rights, employment and discrimination laws. These would still apply, whether universities took public money or not.

And even where they were not strictly obliged to, the newly private university would probably remain signed up for the Quality Assurance Agency for Higher Education (QAA) and, in England and Wales, the Office of the Independent Adjudicator (OIA) regime.

Going private, then, is not likely to bring release from the burden of state regulation. But universities could adopt some lessons from the private sector without formally joining them.

As we highlighted in an article about funding reform, there are many ways within current structures that an institution's autonomy can be exploited to increase commercial revenues, raise capital, and improve operational performance.

In the current environment, universities might want to look again at ideas which have in the past been labelled too difficult or not worth the trouble. For example, pay is a major issue. Is national pay bargaining still fit for purpose, or is it time for institutions to seek greater autonomy and control over a key part of their cost base? Could activities and operations be structured differently, for example by using subsidiary or joint venture companies, to create a more competitive commercial offering?

Radical moves towards sharing services may in fact be able to generate sufficient savings to overcome the current VAT disadvantage. And there are private sector service providers out there who are keen to demonstrate how they can deliver substantial savings and high quality results to universities who want to outsource non-core services.

The radical thing for universities to do in the current environment to improve their lot would be to do what companies would. Consolidate, disinvest from areas of weakness or where costs are too high, and bring discipline to costs control and staff performance. Universities are not about to change their spots overnight, but evolution in this direction is probably inevitable.

In reality the private and public universities in the UK are not very far apart. They are subject to most of the same legal regimes. Those which are purely for profit do not have to show that they are for the public benefit, but nor do they have the tax advantages that go along with charitable status.

The Coalition Government is busily rubbing out the remaining dividing line by making it easier for private institutions to gain university title and degree awarding powers, albeit at the moment only for six years at a time, and by proposing to fund them if they provide strategically prioritised courses.

In the process, these institutions are obliged to take on board the QAA regime, and may well opt in to the OIA as well, further blurring the line.

For those universities with the benefit of state funding it makes sense to take the money, but at the same time to look at ways of exploiting their autonomy to compete as effectively as possible in a tough environment.

By Nicola Hart, head of the universities group at Pinsent Masons, the law firm behind OUT-LAW.COM.