Today sees the introduction of the concept of insolvency for colleges. I really hope the sector embraces this positive move. It is almost a “get out of jail” card that could transform our overall financial health.

At the moment, colleges that get into difficulty are obliged to pass on those problems to another college, meaning the financial pain and risk is picked up by other (blameless) communities, staff and college corporations. In the commercial sector that doesn’t happen.  Directors must act quickly when they know things are going wrong, but then the pain is shared. Shareholders lose out, but so might creditors, bankers, HMRC, staff. Often the good bits of the company can be rescued and continued without any heavy burden.

Insolvency is, therefore, a good way of ensuring problems are quickly addressed and sustainable activity can be quickly continued. This is exactly what we need in the college sector.

Transaction unit ‘performed dismally’

Of course the area review process was intended to create a sector resilient enough to avoid insolvency.  A transaction unit was set up to provide appropriate financial support, but has performed dismally.

I know we are supposed to now live in a world that does not trust experts. But setting up a unit with absolutely no expertise of running colleges led to lawyers and accountants resorting to their comfort zone of silly, fictitious spreadsheets as a basis for making decisions - grandly called a financial model - rather than properly trying to understand and engage with the real issues.

It has been a lazy, reactive approach resulting in a lousy job while they make easy money despite having no skin in the game.

Sharing the pain

Insolvency improves on this approach.  An education administrator clearly will have skin in the game. If they don’t preserve educational provision, presumably they will be dispensed with as quickly as we currently dispense with principals who make mistakes?

The ridiculous spreadsheets, too, can be consigned to history. Instead the administrator can consider ideas from colleges wishing to take on the sustainable elements of the insolvent college, the best assets, the best people, the best programmes.

Insolvency also forces others to take their share of the pain. Banks will see loan repayments stopped, suppliers will go unpaid and staff may even find their redundancy pay reduced (though their pensions will be safe).

Of course it will take time for the new regime to take effect and make a difference, but over time this will mean these groups changing behaviour to moderate the new risks. Banks usually take security for loans. Suppliers may seek to change their terms or limit the credit they offer. Staff may expect higher salaries.

A new equilibrium?

But these groups do not operate in a vacuum and a new equilibrium could be quickly established. Who knows, if banks are unwilling to shoulder risk we may find government rediscovers the virtue of capital funding using its own ability to secure credit at lower rates than we do now.

Many companies that go bust do so because people stop wanting their products or, in the case of retailers, can get them cheaper online. Demand for the product of colleges remains high, but our finances are suffering because government reduces or alters the products we can offer, and underpays for the services we provide.

Insolvency forces government to confront this problem of their own making by providing continuity for current and future learners, and eliminating debt and deficits from the system.  My hunch is that having to find a solution in the full view of the affected communities will force an improvement in funding levels.

My only big reservation with the arrangements is the messaging.  Our governors have been told that insolvency should focus their minds. There have even been hints that insolvency could damage their personal reputation as a non-executive director. Disqualification is even mentioned sotto voce.  This is both insulting and dangerous.

‘No shame or fear’

In the US you aren’t regarded as being a business professional unless you have the scars of a few failed ventures. The idea that college governors sleepwalk into failure is plain inaccurate. If governors are afraid to declare when things are bad, for fear of their professional status, they could be in danger of breaking the law.

Insolvency demands directors are honest and act as soon as possible.  It is the sign of a good director or governor that they act as soon as they know a situation cannot be recovered. There should be no shame or fear in non-executives calling time on a financially-failing college.

Julian Gravatt at the Association of Colleges has produced excellent guidance for college boards and leaders on the new regime and we are all well advised to follow it.  Other guidance is also promised from the Department for Education.

However, we must not be afraid of insolvency, especially if it reduces the financial burden on the sector, and forces those whose policies have damaged our sustainability to face up to the consequences of their decisions.

Ian Pryce is chief executive of Bedford College