3 February 2011 | Andy Davies and Martin Vincent

Does the rise in tuition fees funded by loans mean English universities can drop EU public procurement rules? Andy Davies and Martin Vincent consider the arguments.

Purchasers in English higher education (HE) are facing a period of monumental change. The reform of university funding has been a battleground for the coalition government, culminating in December’s vote in Parliament. This endorsed the government’s proposals to slash the teaching grant and increase the cap on tuition fees to £6,000 from 2012, or in “exceptional circumstances” to £9,000 a year. Only teaching of some sciences, technology and key foreign languages will receive government support.

The impact of this decision is yet to become clear. Some institutions, particularly the elite Russell Group of 20 universities competing on the global stage, will welcome the shift in emphasis to a more market-based model. Other institutions, especially those historically more reliant on public support for courses in humanities, social sciences and the arts, will face difficult choices both in the courses they offer and the way they manage their resources.

What is clear is that with this shift HE will become a distinct proposition, unique in public service. Universities are already largely autonomous, mostly charitable institutions. Many collaborate in the interests both of learning and for the public good, while at the same time competing both academically and in attracting income from overseas students, private research, alumni, benefactors and commercial activities. This puts HE in a wholly different bracket to police forces or local authorities. At the same time, competition from private sector provision is growing fast.

HE buyers are pointing to the change in the funding model, where a greater share of income will come from students funded by government-backed loans, in the hope that this will increase their commercial freedoms. Indeed, some argue their institutions will no longer be subject to the EU public procurement rules.

An enticing prospect

EU rules impose constraints upon buyers and sellers when negotiating and building longer-term relationships, together with increasing levels of litigation. Freedom from EU directives offers an enticing prospect.

A number of Russell Group universities and some specialist colleges, such as London Business School, already claim to be exempt under what has become known as the “50 per cent rule”. Specifically, this relates to Regulation 3(1)(w)(i) of the Public Contract Regulations 2006, which defines a body as a “contracting authority” and is thus subject to the EU rules if it obtains more than 50 per cent of its funding from another contracting authority. Those institutions whose income from the Higher Education Funding Council of England (HEFCE) represents less than the total of income from private sources therefore argue they are exempt. 

But will the government’s new proposals, where most teaching funding is to be replaced by student loan funding, mean more universities will now fall under this exemption?

Some buyers are arguing that, since the loan is repayable (at least for the most part) by students this counts as private, not public, funding, meaning many more – perhaps substantially all – institutions becoming exempt under the 50 per cent rule.

On closer analysis, however, the news may not be good for them. The relevant issue is the definition of “contracting authority” under Regulation 3:

“[A contracting authority is] a corporation established, or a group of individuals appointed to act together, for the specific purpose of meeting needs in the general interest, not having an industrial or commercial character, and (i) financed wholly or mainly by another contracting authority;
(ii) subject to management supervision by another contracting authority; or
(iii) more than half of the board of directors or members of which, or, in the case of a group of individuals, more than half of those individuals, are appointed by another contracting authority.”

The Student Loans Company is wholly owned by the secretary of state for Business Innovation and Skills (BIS) and the secretary of state for Scotland. It is 98 per cent funded by grant-in aid, which it pays out as tuition fees directly to universities. The question is therefore whether it is a “contracting authority”. Under the first definition in Regulation 3, it would appear to be so. Even if it isn’t, universities probably fall under the remit of the regulations as they are “subject to management supervision by another contracting authority”, i.e. BIS. After all, BIS is introducing the new funding model, handles the student loan system, has taken over as charities regulator for HE in England and controls HEFCE.

Some institutions might argue that they have a “commercial character”, but their charitable status is likely to count against them in that respect. Even if universities do manage to construct an argument to the contrary, Regulation 3(1)(x) adds a further definition of a contracting authority as “an association of or formed by one or more of the above”.

Most, if not all, HE institutions are established under an Act of Parliament, which again supports the status of universities as contracting authorities.

Joint forum

So where will this leave university buyers? As higher education adopts a more market-based, competitive model, so it will require a far greater contribution from professional procurement in the sector as universities seek to gain competitive advantage, both nationally and internationally. Buyers will need to critically evaluate their current procurement response and models of operation.

A new collaborative forum, English National Procurement (ENP), brings together procurement professionals, purchasing consortia and key stakeholders. A new national strategy – aimed at greatly reducing costs, improving value and efficiencies through co-ordinated and systematic, collaborative procurement – is to be implemented. In the new scheme of things, HE procurement professionals will be under even greater pressure to prove their worth.

☛ Andy Davies is director of the London Universities Purchasing Consortium and
a member of CIPS Council. Martin Vincent is head of the education division at law firm Mace & Jones