David Willetts

In this speech delivered to Universities UK, David Willetts looks at ways to improve the student experience by improving existing funding streams and increasing revenue to universities.

Introduction

“I was asked to talk to you today about the so-called funding jam-jars, but as I was sitting down to prepare my speech, I felt we needed to range a little more widely and speak about the general funding challenges that our universities face and how we might hope to tackle them.These funding challenges are ultimately linked back to our vision for Britain’s universities which I know most people in the higher education sector share. In the poetic words of my colleague Boris Johnson, the Conservative vision for the future of Britain’s universities is that they should become the “Athens of the Global Economy.” They should become the place any intelligent person might think of going for a civilised and valuable education - just as people across the ancient world would have travelled to Athens to soak up the wisdom of the Greek philosophers and mathematicians.

But in order to build and sustain that vision, universities may need more resources than they currently have. Using an OECD calculation based on purchasing power parity, the total public and private annual expenditure on tertiary education was 1.1% of GDP in the UK in 2003. The equivalent number in the US was 2.9%. So how could we tackle the financial challenges Britain’s universities are facing? I want to cover briefly 4 different areas: incentives for donations, asset sales, fees and, yes, the promised jam jars.

Donations

Let’s start with donations. One important reason why American universities are in a stronger financial position is because they receive far more donations from individuals and companies and they are better at building up endowments. And that is by no means restricted to the Ivy League universities. An interesting recent report from the Sutton Trust points out that “the model for UK universities should be US state universities which, 25 years ago, raised very little from voluntary giving. However, through a combination of investment in fundraising activities and matched funding schemes introduced by many states, they now raise a significant proportion of their revenue from donations.

That is why I welcomed Tony Blair’s announcement earlier this year to launch a matched funding scheme in the UK. In fact, this had already been recommended by the Voluntary Giving Task force report from 2004. The scheme should have been launched then, when top-up fees were introduced, and is therefore long overdue. It will provide some useful, if modest, support for universities.But there is no point encouraging universities to take, but not alumni to give. The Government also needs to reform the unnecessarily complicated Gift Aid scheme to encourage a greater flow of donations. I very much regret that Gordon Brown stopped that important reform earlier this year. That was Tony Blair’s last chance to get a more comprehensive endowment initiative off the ground.

Asset Sales

Another way of building endowments are asset sales. In the 2005 general election manifesto, we had proposed a large endowment-building programme for universities based on the privatisation of the Student Loan Company. Gordon Brown has announced in this year’s budget that he is proposing to sell around £6b of assets from the student loan book, but he has not told us whether the receipts from that asset sale are going to universities or not. Top-up FeesYet arguably the biggest change in university finance in recent years was the introduction of top-up tuition fees which took effect last autumn. The introduction of top-up fees was the culmination of a trend which has seen students making an increasing contribution to the costs of their university education in recent years. Based on research from UUK itself, in 2005-06 (the last year before the introduction of top-up fees), students contributed about 20% of the income of higher education institutions. About 7% is made up of fees from international students, and the remaining 13% from domestic students. UUK estimate that after the introduction of top-up fees last autumn students will provide more than a quarter of the total income of our universities.Let me make clear again what I have said many times before: I believe that a key test for university top-up fees will be what impact they have on the overall number of student applications and in particular how they affect access to university for students from disadvantaged socio-economic backgrounds. The initial statistics on this are encouraging, suggesting that the proportion of successful applicants from lower socio-economic backgrounds has actually risen for England (which has top-up fees) in 2006, while it has fallen for Scotland (which does not have top-up fees). However, we will need to look at a number of years’ evidence before we can reach proper conclusions on the effect of top-up fees.

Another key test for top-up fees is their impact on the student experience. One of the most frequent concerns that students have raised with me is that top-up fees were meant to improve the university experience, but many students are frustrated because they haven’t yet seen the full benefits. Where do they think universities are falling short? A survey from the Higher Education Policy Institute reveals that the biggest two issues for students are teaching time and facilities. Nearly a third (31%) of students rank smaller teaching groups or lecture sizes as their top priority and more than a quarter (26%) consider better laboratory or library facilities the most important issue. Universities should take pride in the fact that 63% of students still believe they receive good value for money from their course. But one in every six students (16%) felt that they do not. More worryingly - given that their fees represent 8% of universities’ income - international students are more picky, and nearly one in three (30%) felt their course represented poor value for money.

Looking more closely at the reasons behind these figures, dissatisfaction is not necessarily concentrated in the post-92 universities, as some traditionalists might suspect. The 2006 Times Higher student satisfaction survey awarded the first place to Loughborough University. In fact, the real cause for high or low student satisfaction is the quality and amount of teaching time. A survey from Opinionpanel shaows that students’ attitude towards top-up fees is influenced by the amount of tuition they receive. I have also received a lot of anecdotal evidence that students dislike the trend towards teaching being conducted by post-graduates rather than qualified academics.Tuition fees have significantly raised the level of interest of students and parents in the quality of teaching. There is even a website now called “Will I See My Tutor” where applicants can compare staff/student ratios and learn from current students what their experience is like in the different academic institutions. If universities are hoping that the cap on fees will be lifted after 2009, they need to carry on improving the teaching experience for students. Universities will rightly point to the investment which has gone into both teaching and other areas which affect the student experience, such as accommodation. Universities will also emphasise the various financial constraints under which they operate. So what could be done to remedy the situation?I hear that Lord Dearing has been addressing you earlier with the idea of introducing a graduate tax on top of the existing top-up tuition fees. I have not yet seen his detailed proposals, but I would like to sound a note of caution. With a graduate tax, it is uncertain how much of the money raised universities will receive themselves in the end, even if the tax is hypothecated. Funds often don’t stay ring-fenced - the Lottery is a good examples. It would therefore need to be shown that a graduate tax delivers sustainable income for universities. Also, a graduate tax deprives students with a lever over the quality of their own university experience. With fees, students can more easily use their money to extract a better teaching experience (via their application choices), or to encourage costs to be kept within reasonable limits. Finally, the idea of a graduate tax was actually carefully considered in Lord Dearing’s report on universities back in 1997. The report stated: “We have concluded the disadvantages are such that we do not support a graduate tax as the means of providing contributions from those who have undertaken courses of study in higher education.” It would be interesting to hear from Lord Dearing in greater detail what made him change his mind over the past 10 years.

Jam jars

This is where the issue of jam jars comes into play. It is a fundamental Conservative principle, in higher education policy as in other policy areas, that we want to trust professionals more than the current Government does. Therefore, I have been looking at some of the ways in which we could “liberate” our universities. One important area are the so-called jam jars, in other words earmarked funding where the spending is not decided by the Vice Chancellors themselves, but by Whitehall.

In principle, getting rid of such jam jars is a good idea. In a competitive market, institutions themselves are the best judges of where scarce resources should be invested. In addition, hypothecated funding creates a version of the problem economists refer to as “budget maximisation.” People or institutions are applying for money they would otherwise have spent more productively. For example, a university with a high quality infrastructure might apply for a dedicated buildings grant simply because the grant exists, but if the funding had not been earmarked, it might have used the money on improving their mechanical engineering department instead. And we are talking about large amounts of money: of the total HEFCE grant of £7.1b for 2007-08, £1.2b is either special or earmarked funding which universities are not allowed to attach to their own priorities.

However, there are also some good reasons for hypothecated funds. First of all, there are certain social objectives that Governments want to implement and earmarked funding is the easiest way of doing that. A good example here may be the ‘widening access’ agenda. Secondly, there are some initiatives which extend beyond individual universities and which may need specific funding to exist. Examples here could be the Joint Information Systems Committee (JISC) or the Higher Education Policy Institute (HEPI). Thirdly, earmarked funding can help to address perceived market failures. Some minority subjects, such as some of the ancient languages, might not survive unless they received specific funding.

So, does that mean we should loosen the rigid distinction between teaching funding and research funding? I think there are important reasons for maintaining that distinction. Investing in academic research affects not only the prestige of our universities, but also has a direct effect on ability of British companies to innovate and compete internationally. However, there are other, less dramatic steps that we could consider.For example, we should improve the student teaching experience is the career structure for academics. Maybe we need to secure a better balance between the academic rewards and status of teaching versus research. At the moment, there are strong incentives for university lecturers to focus on the latter at the expense of the former. Surely the contribution of a dedicated lecturer who brings his subject to life and manages to enthuse students and to expand their intellectual horizons is at least as valuable as that of a researcher writing an article for a learned journal. We need to ensure that academics who want to focus on teaching have the same career opportunities as their more research-oriented colleagues.

Finally, should we smash some of the funding jam jars within the non-research funding they receive? That way, individual institutions could decide whether to invest in additional teaching hours or bonus payments for outstanding academic teaching.

Which jam jars we could cut

While there are therefore strong reasons for some specific jam jars to be retained, we may nonetheless ask whether we need all of them. I am not trying to come up with a definitive list here, but I think the best example would be the e-university launched with great fanfare by Gordon Brown in 2000. £50m of hypothecated funding and 4 years later, the e-university closed, having attracted a mere 900 students during that period. Potentially, one might also debate whether initiatives such as Rewarding Quality Enhancement or Centres of Excellence in Teaching and Learning fulfil the criteria I have set out above for retaining jam jars. Together with some other smaller earmarked items, these alone add up to roughly £100m which is around 10% of all earmarked funds. Year after year, that would give each university around £1m in funding which it could allocate to its own priorities.

Similarly, in the context of trusting professionals and liberating universities, there is of course also a lot of earmarked funding for administrative and regulatory bodies. In fact, one of my advisors told me there are 22 in total, including amongst others the Community Research and Development Information Service (CORDIS), Regional Development Agencies, Training and Development Agency for Schools, the Higher Education Academy and lots of additional professional and statutory bodies which are not even included in my list of 22 organisations. How many days are there in a year when a Vice Chancellors does not have to deal with at least one of these bodies?

Now, I do not believe in endlessly reorganising departments simply because a new Government or Secretary of State has come into power. But the question remains whether some tidying up could be done that would reduce the burden on academics. As part of the Better Regulation initiative, the DfES asked PA Consulting to estimate the regulatory cost burden for the HE sector. In 2004, they came up with a figure of around £210m. This is not an imagined problem.But there are always ways in which things could be simplified. Do we really need to have the QAA inspect all university courses on a rolling 3-5 year basis, with requirements for self assessment in between? Apparently, one department had to cope with 3 inspections in one term.

Surely, the whole point is to ensure that students are getting a high quality teaching experience. Wouldn’t an equally good indicator be a series of well crafted student surveys coupled with basic university statistics about graduates’ employment rates and salaries, and wouldn’t that be a lot less bureaucratic to assemble? In fact, quite a lot of that information already exists, although not in a single, publicly accessible location. For example, we already have a National Student Survey published by HEFCE, and graduate pay levels are known to the Student Loan Company which manages the loan repayments of graduates.

Conclusion

To summarise: there are a whole number of ways in which we could help universities overcome their funding challenges and create the Athens of the global economy. Some of them are designed to unlock private investment in higher education, such as matched funding and gift aid schemes. Others, such as fees, focus on the direct contribution of students themselves, but they need to be carefully evaluated in terms of their social impact. I do want to smash some of the jam jars currently in the system. Universities could invest that money into better teaching if they so wished. I would also want to change the career and incentive structure for academics so that universities can choose to reward good teaching more easily than at the moment.

Finally, we also need to consider a completely different, but equally important contributor to a good student experience which has been increasingly ignored amongst education policy-makers. In recent years, the debate has been conducted entirely in terms of what universities’ contribution to the economy might be and how that can be enhanced. But academic qualifications are not just a utilitarian tool - they are an intellectual accomplishment in their own right. Learning and research advances our understanding of the world around us, and can be the source of deep personal pleasure and satisfaction for those who engage in it. In our legitimate chase for economic growth and prosperity, let us not forget that higher education has some intrinsic value as well. By celebrating this intrinsic value through their teaching, our universities can make an additional, very different contribution to a good student experience. That would make them the true heir of ancient Athens.”