UK Insolvency: “3 Rs” of Education - Reading, Writing and… Restructuring?
Significant changes have taken effect and are expected to continue within the education sector, the result of which may lead to an increase in restructuring activity and additional pressure on funding streams.
In the Further Education (“FE”) sector, the Government has introduced “Area Reviews”, whereby FE institutions within a particular geographical area are encouraged to merge with one another in order to consolidate the number of FE providers in that area. The stated aim is to create “fewer, larger and more financially resilient organisations”(1). It is estimated that as many as 1/3 of current FE institutions may disappear as a result of the anticipated consolidations.
These mergers will lead to increased pressure on the management teams of FE providers who will have to deal with all the usual issues that combinations bring, such as integration of management teams, service provision and the cultures of the various entities. If those management teams have not undertaken a merger before, it will present them with obvious challenges and may result in reliance upon professional advisors, which will be an additional cost for the institutions to bear.
The Government has announced that it will make available a “restructuring facility”, whereby Government funding can be made available to meet those costs. However, that facility is only designed for FE providers to use in the event that alternative funding is not available, meaning that the institutions are likely to look to incur additional debt in the first instance, if their balance sheets can support it. The Government has also stated that, once the Area Reviews are completed, no Exceptional Finance Support will be available for those FE institutions that have been through an Area Review.
Separately, Higher Education (“HE”) providers are facing problems caused by increased competition. With the burden of the cost of HE shifting further from the Government to the student, students understandably expect the best “bang for their buck”. Greater scrutiny is being given to the “measurable” aspects of HE, including student satisfaction surveys, employment prospects and staff/student ratios. With approximately 70% of HE providers’ funding estimated to come from tuition fees, a decrease in student numbers for those institutions who can’t compete as well as others within the sector will lead to funding strains.
In addition, the research income provided by corporate and charitable bodies is increasingly focused upon the highest performing HE providers, given increased scrutiny by corporates and charities on their return on investment and research output. This is seeing a flight of funding from the lowest performing institutions, which may make them unviable, especially if the third party funding cuts are met with decreased student numbers.
The problems for the HE sector outlined above were in existence prior to the Brexit vote on June 23rd. Brexit may well bring additional pressures, given the number of EU citizens that choose to study in the UK, with a consequential increase in funding for those HE providers. In terms of staffing, many lecturers choose to base themselves in the UK for research and teaching purposes. It is unclear whether the UK will continue to be as attractive from an academic perspective post-Brexit. If that leads to a perceived decline in the quality of the academics that HE providers employ, then, again, this could mean that research funding follows those academics to wherever they choose to base themselves.
(1) (March 2016 BIS report: “Reviewing post-16 education and training institutions”)