Tom Miers: Bonds may hold key to funding education

Reform of university funding - a strategic necessity for some years now - is now urgent. As John Swinney's budget on Wednesday showed, the fiscal squeeze has made it very difficult for the Scottish Government to provide an adequate settlement for universities that will allow them to compete in the global academic marketplace.

In England, the Browne review will lead to an expansion of the fees-and-loans system which will give higher education there a major competitive edge. The sector in Scotland is united that something must be done. "Kicking this crucial issue into the long grass is simply not good enough," says Liam Burns, of the National Union of Students.

But there is no agreement on the right way forward. The political response has been to delay decisions while ruling out the most unpalatable options, such as fees. Alex Salmond has promised a "uniquely Scottish solution", but only by late next year. As the debate polarises between advocates of a graduate tax and deferred fees, both of which have flaws, the most likely outcome is now a fudge along the lines of the ill-fated graduate endowment, leaving Scottish institutions exposed to long-term decline. Yet it need not end like this. A solution does exist that would be unique, Scottish and superior to the funding models currently used elsewhere. Developed by Ben Reilly, a one-time student representative at St Andrews, it would provide Scottish universities with the opportunity to leapfrog their competitors. Most importantly it would give Scottish students and Scottish society major economic advantages.

First of all, it is worth emphasising the strong, if eroding, position that Scottish universities enjoy. Although not among the global elite, the top Scottish universities are well placed compared to their peers in the two main studies of university performance. This puts them in the top 5 per cent of colleges globally. The very highest positions are dominated by well-financed US institutions plus a smattering of elite colleges from around the world, including Oxford and Cambridge. Outside the US, no country performs markedly better than Scotland.

Another strength is that Scottish universities have already diversified away from reliance on central government funding.They now receive half of their income from fees (from non-Scottish students), research grants, philanthropy and commercial activities. In other words the politicians only need to come up with a partial solution. Add to this the undoubted advantages of the traditions and historic setting of Scotland's medieval universities and you have a sound basis for success.

Nonetheless it seems inescapable that some kind of contribution from graduates will be necessary. Many on the left who acknowledge this promote a graduate tax. This accepts the premise that those who benefit directly from higher education should pay towards it, a concept with a long history in Scotland. The tradition in Scottish universities was for students to pay fees for their tuition, sometimes on a per lecture basis. This meant teaching had to respond to student demand, and was part of the reason Scottish universities overtook Oxbridge during the Enlightenment.

The problem with a graduate tax is that is that it does not pay for the service which the graduate experienced - funds are pooled and redistributed to universities regardless of their ability to attract students. In addition it has serious administrative flaws, not least that those who work outside Scotland would make no contribution.

A system of fees makes more economic sense. Universities that can attract students are rewarded for doing so. This pressure leads to a much more focussed university experience, with students demanding value for money in the form of intensive, relevant teaching.

However, the advantages of fees are overshadowed by the issue of access for poorer students. It is debatable whether fees really deter poorer students from going to university. In practice, universities make bursaries available to the poorest. The wealthier and more successful a university becomes, the more support it can afford.

Besides, the financial advantages of acquiring a good degree outweigh the costs of investing in higher education. This calculation should be well within the capability of anyone qualified to go to university. One survey by the consultants PWC found that graduates earned 23 per cent more than non-graduates with the same school exam results.

But all the promises of subsidised loans and bursaries have failed to win the argument for fees in England. In Scotland, the inevitable reaction against policy made in London has set firm. So although deferred fees, in practice little different from fees financed by loans, are advocated by respected voices such as Universities Scotland, it will take a political contortion act to see them implemented.

Which is where Ben Reilly's idea comes in. His starting point was another big flaw in charging fees for education. Education is a service provided over a long period of time. Paying upfront fees means that the student is taking a gamble on the college's past reputation, rather than buying something he knows.In other words, universities trade on their reputation, rather than their actual teaching prowess.

Reilly's system - University Bonds - is based on an idea for funding schools devised by the economist Milton Friedman. Instead of paying a set fee, graduates would pay a proportion of their income on graduation. Universities would thus be rewarded for how well they taught the student because this would be reflected in higher earnings, rather than their reputation, providing a greater incentive towards excellence.

Reilly developed the Friedman idea further using the potential of modern financial instruments. Universities could issue bonds backed by the future earnings payments. This would allow them to generate an upfront income stream, something missing from many of the fee-loan proposals. The beauty of the scheme is that universities would receive an immediate assessment of performance in the market value of the bonds they issued - a far more sophisticated measure than the various league tables in the newspapers. Limits could be placed so that graduates only paid once their earnings reached a certain level, or for that matter to prevent future billionaires paying over the odds. And certain courses could be cross-subsidised if their earning potential was deemed lower than their academic or social value merited.

Overall, University Bonds would provide a clearer understanding of the economic value of different courses provided by different institutions. Income would flow to where value was being added through teaching, encouraging greater investment in study that was really worthwhile.

This concept has the potential to give Scottish institutions an advantage over competitors reliant on government funding, fees or a graduate tax. It introduces incentives that more accurately mirror performance, leading to greater productivity improvements, to the benefit of students and wider society.

Politically it would allow us to escape the language of fees, debts and loans, and move to a "uniquely Scottish" solution, sold to the electorate on the grounds of equity as well.

Scotland's universities have a great tradition and great potential. It is high time for our devolved politics to fulfil its purpose of finding Scottish solutions to Scottish problems in a way that actually benefits the country. Resolving the student funding issue would be a great place to start.

• Tom Miers is an independent public policy consultant. More information on University Bonds is available from http://tommiers.wordpress.com/