Oral statement to Parliament

HEFCE Annual Conference

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Good afternoon. It has been a crucial ten days for the development of higher education in our country. I am very grateful to HEFCE for this…

Good afternoon.

It has been a crucial ten days for the development of higher education in our country. I am very grateful to HEFCE for this opportunity to set out how the Coalition Government sees things now. But my debt - our debt - to HEFCE goes much further than that. Alan Langlands brings sagacity and stability - qualities we need in such a turbulent world. Tim Melville-Ross makes an excellent contribution as chairman and I am delighted to announce that Tim has agreed to serve as Chair of the Board of HEFCE for a further three years.

The Browne Report is up there with Lionel Robbins’ report of 1963 and Ron Dearing’s report of 1997 as a serious, paradigm-shifting publication. We will not necessarily accept all of it, but many experts have already recognised its quality - with praise coming, among others, from the vice-chancellors of Leicester, Imperial and the Open University. It has also been praised by our leading papers. Perhaps I can quote their words as if on a billboard outside a West End theatre: “genuinely radical”, the Financial Times; “sophisticated” and “persuasive”, Daily Telegraph; “attempting to uphold a core set of policy principles that should be broadly supported”, the Guardian.

There are lessons we can take from those two great reports which preceded Browne. Robbins has gone down in the history books as the report which drove university expansion. But the key driver of that expansion was decisions already taken on student finance following the Anderson Report of 1960. It is right that we should look at university reform and finance together, rather than separately - while of course recognising that finance is only one aspect of a university’s mission, and that the social and moral purposes of higher education are its bedrock.

I was actually my Party’s higher education spokesman when Dearing came out. And I remember the shock we all felt when David Blunkett effectively tore up Ron’s report the day before it was released; instead of considering Ron’s proposals, he announced an alternative package. That crucial mistake is one reason for the turbulent and messy history of university policy ever since.

We are not going to repeat that mistake. There will be a very careful process of deliberation in light of the Browne Report. So my reactions today on some of the broad outlines of John Browne’s report are necessarily provisional, as we consult in the weeks and months ahead.

There are some decisions, however, that can’t wait. We do need to set out in the next few weeks the way forward for graduate contributions and student support if we are going to have any chance of implementing changes for the Autumn of 2012. Many prospective students will visit universities and decide on their applications in the Summer of 2011, and so they need to know the likely costs by then, and how the Government will help them to meet those costs. In turn, universities have explained to me that their prospectuses - with information on graduate contributions - will go to print in April 2011. It is rather like A. J. P. Taylor’s thesis that train timetables determined the outbreak of the First World War: once the presses begin rolling, everything is fixed.

This means that amendments to regulations governing the current fees structure and student support need to happen sooner rather than later. Prompt decisions will mean we can then implement in regulations the commitments we make. We hope to bring proposals on regulation of graduate contribution levels to Parliament before Christmas. Following Lord Browne’s proposal to introduce a real rate of interest on contributions, we will also need to seek an early opportunity to make the limited changes to primary legislation on that specific issue, and also update repayment regulations to enable a more progressive system.

We are keen to hear the views of the sector on the wider issues that Browne considered, such as governance and regulation, private providers, and student number controls. In fact, we are already listening, and more lengthy consultation here will tease out the ramifications. We aim to publish a White Paper in the Winter and then - Parliamentary time permitting - hope to introduce a broader higher education bill perhaps later on in this current, extended session.

The central proposition in Browne is this - that the bulk of the teaching grant which is currently distributed to universities via HEFCE should be replaced by spending power placed directly in the hands of students, who will be lent money to pay for their university education. Students will not, of course, have to find any money of their own for tuition during their time at university, but they will make contributions subsequently as graduates. That is the big shift in the funding of higher education put forward by the Browne report and endorsed by the Coalition. Vince and I both believe it is the right way forward. It both delivers a big saving in public spending - reflected in yesterday’s spending review - and reforms the financing system so that it is shaped by the preferences of students. This new model is what lies behind the Chancellor’s statement yesterday.

We have said in the spending review that the overall resource budget for HE, excluding research funding, will reduce from £7.1 billion to £4.2 billion - a 40 per cent, or £2.9 billion, reduction - by 2014-15. By far the greatest part of that reduction flows from our acceptance of the approach presented by Lord Browne - that, starting from the 2012/13 academic year, we will start to reduce HEFCE teaching funding, and institutions will be able to replace it, if they can attract students to their courses, with funding flowing via the graduate contribution scheme. Obviously, the details of this will vary between different institutions, and will be affected by the decisions we quickly need to make about the fee regime.

The spending review also contained several assumptions about efficiency, both within the public sector, and for bodies to which the public sector contributes significant funding. My own department is facing a 40 per cent headline cut in its administration costs. It is not for us to say precisely what efficiency savings a university should make, but crucial areas to look at will be pay and pensions, procurement and shared services. I know most of you already have plans in train here.

I know that you will have many detailed questions about higher education funding for 2011-12 and beyond, which, you will understand, we are not yet in a position to answer. As usual, we will send a grant letter to HEFCE, with more details, around the turn of the year.

I know too that people in this room will have anxieties about the shift in spending, but I have to ask what the alternative is. Given the fiscal crisis and the pressure that we are under, there is no option of carrying on as we are. We would have had to do something - even the previous Labour Government had set out £600 million of cuts over a shorter time scale, albeit with no indication of how they were to be delivered. One possibility would have been a big reduction in the unit of resource per student, threatening the quality of the student experience. Alternatively there could have been a big reduction in student numbers, depriving thousands of young people of a crucial step on the ladder of opportunity. A third option was a pure graduate tax, which would risk a brain drain with its incentives for people to study or work abroad. The graduate tax also breaks the link between student and university. There is an excellent guide to these problems and more: a report from December 2003 called “Why not a pure graduate tax?”, published by the last Labour Government.

These options, therefore, all have enormous disadvantages. Lord Browne’s considered approach, which we endorse, actually shows a pathway towards a positive and viable future for higher education - a way through the “valley of death” to which Steve Smith has often referred.

The HE system that we develop between us must be as fair and as progressive as possible. In the current economic climate, therefore, we simply cannot afford a fiscal subsidy to the wealthiest families. Looking at the Browne proposals, the Institute for Fiscal Studies found that the poorest 30 per cent of graduates would be better off than now, while only the richest 30 per cent of graduates would have to pay off their loans in full.

The figures we end up with may not be quite those. But broadly, that is the right approach. In fact, we in the Coalition have set ourselves the task of improving on Browne and coming up with proposals that offer even more help for students from the poorest backgrounds but without unfair penalties on success. I have to say to the strongest universities that they have not been successful enough in improving access to young people from disadvantaged backgrounds.

Back in April, Sir Martin Harris duly noted that, collectively, universities have made clear progress on widening participation. But he concluded that the participation rate among the least advantaged 40 per cent of young people at the top third of most selective universities “has remained almost flat” since the mid-1990s. The Government is committed to good universities, but it is equally serious about social mobility. The two must go hand in hand. And I hope you will recognise the strength of feeling within the Coalition that one of the non-negotiables in all this is that universities must deliver on broadening access. The challenge is to achieve this with imaginative and equitable policy - not with clunky quotas or crude social engineering. I believe we can do it.

We can do it by focussing on three key groups: young people at school and college, students with modest incomes at university, and graduates with low earnings. We will offer them a fairer deal which applies at all three stages: routes for people to get into university, from school, college and through other avenues; increased support for students from poorer backgrounds while they’re at university; and better support for people on low incomes once they have graduated.

In his important speech last Friday, Nick Clegg pledged £150 million of government money for a national scholarship scheme to improve access for students from families of modest means. It will be fair, affordable, and make a real difference to some of the poorest students. At the same time, it will not add to the burden of regulation on institutions or duplicate arrangements under the more generous and coherent student support system that’s being developed as Browne recommended. I will be inviting the National Union of Students, Universities UK, the Office for Fair Access, the Sutton Trust and other interested parties to help us design a scheme for both young and mature students.

The second stage involves a more generous maintenance package for students from poorer backgrounds, details of which we hope to announce shortly. We are looking closely at the Browne recommendations for a more generous maintenance grant, supplemented by a more generous loans package. It would be a great achievement to increase maintenance levels on a progressive basis, with more generous grant than now, even in these austere times. If the Coalition Government can deliver this as proposed by Browne, then the obligation on universities to deliver their side of the bargain on access will be even greater.

Improving the deal for part-timers is a key part of broadening access. For the first time, part-time students will - as Browne proposes - be eligible for loans to cover the full cost of their tuition, on the same basis as full timers. I see this as a genuine milestone - something that neither Robbins nor Dearing tackled. It is a vital part of creating a more responsive and diverse HE sector.

The third stage is fairness for graduates. We will reform graduate contributions, by increasing the threshold at which people begin to repay loans, and by introducing a positive interest rate. It is crucial for the Coalition that contributions should be related to ability to pay without making the mistake of the pure graduate tax and losing the link with the actual cost of a university education. We specifically asked Lord Browne to address the issue of progressivity and he has come up with ingenious and practical proposals which we intend to work with. We can see the case for setting the income threshold for repayments at £21,000, as Browne suggests - way above the present £15,000 - with nine per cent of salary payable above that threshold.

As for terms on early repayment, the arguments have become rather muddled thanks to a misleading report in the Guardian and some rather sloppy work by the Social Market Foundation which does not appear to understand that money in the future is worth less than money now. We are examining this issue carefully. There is a feeling that it would be unfair if the better-off could reduce their payments by paying early. But for many people with modest earnings, the delay in repayments at a less than commercial interest rate is an advantage, not a disadvantage.

This, then, is the direction in which the Coalition Government is heading. Even while public spending is being reduced, we are seeking more progressive outcomes than at present. As the Institute of Fiscal Studies commented, “The proposed reforms to student support and graduate repayments would be a welcome development if they were to be adopted. By continuing to provide up-front cash support for the full amount of fees and for living costs, the system should preserve access to higher education regardless of family background.”

There are, of course, some very difficult issues around fee caps and the levy. For Lord Browne, there is - in theory - no upper limit to fees. He would argue that, provided admissions are needs blind and provided that the Exchequer doesn’t take on any of the risk of high loans, the problem is resolved. But we understand the very strong concern about the level of graduate contributions.

Lord Browne’s proposed levy to avoid any Exchequer subsidy for loans has also aroused quite a lot of concern across the sector. It means that as soon as universities raise their fee above the threshold level, they face a rapidly rising levy which can drive their fees up even higher in order to reach a given level of income. Another objection, for example, is that a levy could become an obstacle to philanthropy if the upfront payment of fees via donors were to attract it. If you didn’t have a levy, however, there would be a need for some sort of upper cap. We recognise there are arguments for a lower rate for the levy, or for not having a levy at all and sticking with a fee cap instead.

We have not reached a final decision on the levy and the fee cap, but there is an interesting feature within the current arrangements for higher education funding, which consist of a basic cap of £1,310 and a higher rate cap of £3,290. It would be possible to set new levels for each, with stringent conditions on access which any institution would have to meet before setting a graduate contribution at the higher rate.

The key legal condition, of course, is access and progression - enforceable by OFFA. There is still a dangerous temptation for universities to blame failings in the widening participation and fair access agendas on schools - instead of dealing with the world as it is. We can’t just sit on our hands and wait for schools to be reformed - although that must happen. Universities must act now, and we would look carefully at the conditions that OFFA demands.

There is also an important question around teaching quality. This is where I think the sector is most in danger of losing contact with its supporters. On the one hand, we should naturally expect high standards of teaching in all publicly-funded institutions. On the other, universities who wish to charge more for undergraduate courses need to produce compelling evidence as to what the extra money would buy in terms of better teaching, contact time and services for students. And it is legitimate for students to ask why the finance reforms introduced under the previous government failed - in some cases - to deliver improvements to their educational experience.

In a reformed system, students will expect a better experience in return for higher contributions as graduates. If we are to win the argument for reform, universities must demonstrably respond to the perception that some students are being short-changed. We must do better and we will. This is one of the reasons why I attach so much importance to supply side reform. Competition is a great driver of improvement. We want to see innovation and a diverse range of choices for students - two-year courses, for instance, and more vocational degrees. In speeches we have made in recent months, both Vince Cable and I have challenged the traditional model of three-year degree courses for 18-year-olds away at college, and especially championed part-time learning. It is for you rather than us to carry through reform, but now is the time to identify anything in the arrangements for public financing or regulations which would stifle these options.

I am also aware of substantial concerns within the sector about Lord Browne’s proposal on controlling student numbers via UCAS tariff points. This is an especially thorny problem: maintaining macro control over student numbers while leaving micro freedom to individual institutions. John Browne’s is an imaginative solution, but has raised questions about practicalities. And it is important that we do not deter mature students, for example, who may have not achieved academic success at school - which is why he suggests a second admissions route separate from UCAS points. But running two separate systems creates a new set of problems. Meanwhile UCAS is doing important work looking at how their points system could be reformed. There is a lot more work to do in this whole area before any changes are implemented.

Some people have also raised doubts about the idea of a single council which incorporates HEFCE, OFFA, the QAA and the OIA. The Coalition is instinctively attracted to any proposals which reduce the number of such bodies, but we need to tread carefully. The OIA’s special role as an alternative way of resolving disputes without going through the courts does require independence. The QAA, of course, is not a Government quango - it is jointly owned and sponsored by the HE sector with HEFCE, and any changes need to be discussed with the sector. Clearly, we need to think through all this carefully. We won’t rush into any decisions. But Lord Browne, as so often, does have a powerful logic behind his central argument. HEFCE has, in effect, operated as the regulator of the sector through its power to make grants. As the relative size of these grants falls, so the regulatory role comes out into the open more. This must be must be used with care and discretion. But clearly, a key role is going to be in broadening access. What we’re also seeking to do, of course, is reduce regulation and external intrusion into higher education, in favour of greater freedom and autonomy.

My own current thinking is that merging HEFCE and OFFA would be sensible once funding to universities is channelled through students rather than through HEFCE. I assure you, though, that the institutional landscape will not change before the academic year 2012/13; it would require legislation, and therefore Parliamentary approval. In the meantime, I can announce that I have reappointed Sir Martin Harris as Director of the Office for Fair Access for a further 12 months. His experience will be invaluable as we work more on improving access.

I can also announce the appointment of Ed Smith - a HEFCE board member - as the new Chair of the Student Loans Company. The processing of student loan applications has gone well this year. Figures published today show that 94 per cent of approved applicants had their full entitlement available to them when they arrived on campus. We owe Deian Hopkin, Ed Lester and their team a substantial vote of thanks. This is a transformation, compared with last year’s appalling performance.

I also want to take this opportunity to thank the National Student Forum - and its chair, Maeve Sherlock - for its contribution to improving the student experience over the past three years. The Forum has published its final report today, which again provides some excellent material for universities to consider together with their student bodies. It is this active partnership, often at a detailed course level, which can vastly improve the knowledge and skills of undergraduates, as well as helping institutions to fulfil their missions. We will continue to listen to students and make sure that we understand their varied concerns and priorities.

The other main news from the Chancellor yesterday concerned funding for science and research. It is good news for HEFCE’s QR funding and Higher Education Innovation Fund, and good news for the Research Councils and National Academies.

It is proof that this Government recognises the fundamental role of science and research in rebalancing the economy and restoring economic growth. Despite enormous pressure on public spending, the overall level of funding for science and research programmes has been protected in cash terms. And as we implement the efficiency savings identified by Bill Wakeham, we should be able to offset the effects of inflation - thus maintaining research funding in real terms.

There has also been a great deal of pressure to maintain flexibility in government spending. A stable investment climate for science and research - as we all know - allows universities and research institutes to plan strategically, and gives businesses, public services and charities the confidence to invest in the research base. I am delighted to confirm, therefore, that the ring-fence for science and research programmes has therefore been maintained.

Across the country, we have excellent departments with the critical mass to compete globally and the expertise to work closely with business, charities and public services. This £4.6 billion settlement for science and research should mean that we can continue to support them.

We must, though, continue to develop an assessment framework that combines recognition of the highest levels of research excellence with reward for the impact it has on the economy and society. HEFCE is making good progress with the Research Excellence Framework, in partnership with many academics from across the spectrum of disciplines. I too have had lively discussions with academics on this, and look forward to seeing the results of the pilot exercise later this year.

We are also continuing to support capital investment where it is a high priority. We have allocated £69 million over the spending review period, in partnership with the Wellcome Trust, to the next phase of the Diamond synchrotron in Oxfordshire to support ground-breaking research in the life, physical and environmental sciences. And the Department of Health is joining my department, University College London and medical charities to fund the UK Centre for Medical Research and Innovation. The Department of Health will put £220m into this important venture that will accelerate the translation of basic research into care for patients.

The Government is committed to getting business and universities working more closely together. I am therefore working with HEFCE to reform Higher Education Innovation Funding (HEIF) to increase the rewards for universities that are most effective in business engagement. Some exciting ideas have emerged from the community about how to improve the effectiveness of university IP management. We will explore with HEFCE the opportunities to release this potential.

To conclude, let me make three final points.

The first is to repeat that we are determined to manage the process of transition carefully - avoiding disruption unless it is a necessary aspect of reform. That is why the spending review savings will be focused towards the second half of the spending period. Indeed, I believe that higher education, as well as research, should be able to maintain overall levels of activity throughout this time of austerity.

The more important point, though, is that, despite the risks associated with any change, the reforms we undertake will improve higher education in the long run. Those institutions which attract more students and pull in businesses seeking to boost the skills of their employees will be able to grow. They will reap the rewards of good teaching that students and employers recognise and value. They will be able to innovate, to make the most of greater autonomy, to pursue their institutional missions, including research.

And thirdly, although this speech has inevitably had to focus on finance and organisation, Vince and I never lose sight of the sheer inherent value of the intellectual activity that happens within our universities. Any structure and any government department is just there to serve this greater good. Our changes have to fit with and reinforce the core values of higher education, that motivate those who devote their lives to it.