Peter Ainsworth is the Managing Director of EM Applications and is the author of Universities challenged: funding higher education through a free-market ‘graduate tax’.

The review into the electorally toxic system of Higher Education funding was announced a week ago today – and is to be welcomed. But the evident mis-diagnosis of the problem, and the restrictive constraints set out in the terms of reference, do not hold out much hope for winning student votes.

The stipulation that any “recommendations must be consistent with the Government’s fiscal policies to reduce the deficit” means no magic money tree. The way forward must therefore be for universities to have some skin in the game to align their interests with those of their graduates; share the risks and costs more evenly between them and taxpayers, and free up resources to fund more opportunities for other forms of post-18 education.

In her speech last week, Theresa May made four main points: (i) Universities are too “academic” and insufficiently “technical”, (ii) they don’t compete on fees, (iii) they don’t offer two-year courses and (iv) hardly anybody takes post-18 qualifications other than degrees.

Her first point lacks substance. She herself admits that universities offer both technical and academic courses, and she relies on the simplistic notion that we need more “technical” graduates because of the growth of technology. Contrary to that assumption, Google concluded that in 2013, among the eight most important qualities of Google’s top employees, STEM expertise was placed last.
The top characteristics of success were all soft skills: communicating well; understanding other people’s points of view; having empathy; critical thinking and problem solving; and being able to make connections across different areas. This is all consistent with the views of the CBI, which says that attitudes and aptitudes are more important for career success than subject studied. Subsequently, Google has increased its recruitment of humanities graduates.

May’s second and third concerns are the direct and obvious results of Government policy. The regulations allow the charging of the full £9,250 a year, regardless of the cost or employment value of a course – so it is not surprising that there is no relationship between fee level and cost/value. As the fee is chargeable per year of study, and not in exchange for a degree level education, three-year courses are much more profitable than two.

Perverse outcomes are the usual result when governments try to achieve a multi-faceted objective from a highly complex organisational system through the use of regulation. Each rule will be interpreted literally, and their intention gets lost. There is little that could be more complicated than the education of millions of individuals to prepare them for a highly uncertain future world of work, making higher education particularly unsuited to management by fiat.

Nassim Taleb, of “Black Swan” fame, has recently published Skin in the Game, which makes the argument that: “if you have the rewards, you must also get some of the risks”. He shows how risk-sharing, where all parties to a venture stand to lose out if it fails, has strong historical roots and is fairer than “risk transfer” where one party gets all the gains while another party takes all the losses.

Currently, the way we fund our universities is on the basis of risk transfer. Post 2012, the sector saw a significant increase in income – the gain – but all the risks of the regime fell to students and taxpayers. Not only is this unfair and morally questionable, but it leads directly to the undesirable outcomes that May highlighted.

The system could be re-oriented by simply changing the payment of the fee income to the University from being essentially a gift to being in the form of a loan, and paid for the provision of a degree level education, not per annum. This loan would be deemed to be paid off based on the earnings (and student loan repayments) of its graduates. If they do not repay their loans, a portion of the liability would then fall to the institution. This would give the Universities skin in the game – a risk of loss if the education they provide is ineffective – and would reduce the burden on the Treasury, so freeing up funds to spend on, for example, sub-degree level courses.

With universities sharing in the costs of the system, they would be focused on ensuring that students got into high skilled jobs post-graduation. They would not do this by changing the subject mix, since that is driven by demand, but would work to develop the soft-skills needed to turn them into the self-sufficient self-teaching continuous learners that are needed by businesses in the fast-paced internet/AI age. Where even that would not enhance earnings potential, universities would have the incentive to develop shorter, possibly part-time, lower-cost courses to meet the needs of those who do not want the full University “experience”.

The number of 18-year olds is now falling year on year. Universities thus have the capacity to accommodate those who want shorter, sub-degree level courses. Indeed, the original polytechnics used to do this. It would be more efficient to enable them to expand to meet this additional need, which is currently a small fraction of the demand for degree level courses, rather than trying to wind the clock back pre-1992 and create another new type of institution. All that is needed is for the appropriate financial incentives to be in place.