1.The Treasury and the Department for Education have not made clear how this transaction decreases the long-term risk to the public finances. This first sale is part of a series designed to de-risk public finances and reduce public debt without affecting borrowers, however there does not seem to be a long-term strategy. The government’s current plan is simply to achieve sale proceeds of around £12 billion by 2022 for loans issued before 2012—this focusses only on debt reduction. In the first sale, it achieved this debt reduction by selling the rights to an estimated £3.3 billion of future repayments for a £1.7 billion lump sum now. But it is an example of selling off assets for short-term capital gain, without demonstrating how the deal is in the best long-term interests of the taxpayer given the scale of future repayments that has been sacrificed. Government’s own analysis suggests that, had it not sold the loans, it would have recouped the £1.7 billion in only eight years, and a further £1.6 billion over the next 25 years. Of all the student loans government has issued, the ones before 2012 are more likely to be repaid, and therefore represented a lower risk to public finances. This is because loans issued after 2012, are of a higher value, with a higher repayment threshold, and a higher interest rate. The government has not decided whether to sell these riskier loans: the Prime Minster has launched a review of post-18 education and funding which will include the terms of these loans. Government aims to report in early 2019. Any changes to the terms of these loans are likely to affect their value to investors in potential future sales programmes.
3.The government’s objective to reduce ‘public sector net debt’, as with previous asset sales, runs the risk of being prepared to sell at any price. The sale of student loans falls into a wider programme of asset sales aimed at helping reduce government debt. This sale has reduced Public Sector Net Debt (PSND) by £1.7 billion. However other measures demonstrate the sale worsens public finances. For example, the sale increases Public Sector Net Financial Liabilities by £1.8 billion, and the impact on the Department’s accounts is similarly negative with the 2017–18 accounts recording a loss on the sale of £0.9 billion. We acknowledge that each measure accounts for the loans in different ways and has its limitations. However, the narrow focus on PSND as a measure of success often makes a sale look positive, at any price, regardless of the true impact on the public’s finances. This is like previous asset sales the Committee has reported on, such as the sale of Eurostar, and the sale of former Northern Rock assets.
4.Recommendation: Government must develop public sector finance objectives for future sales that go beyond the simple focus on reducing Public Sector Net Debt before any more asset sales are concluded to give a true picture of the value of the sale to the public purse.
5.The uncertainty over future repayments undermines the government’s ability to accurately value the loan book. The Department developed a model to forecast future repayments from the loan book so that it, and potential investors, could assess value. This forecasting is challenging because it must attempt to estimate the income of over 410,000 borrowers over a 34-year period, until the loans are settled or written off. If the forecasts in the model around macroeconomic and repayment assumptions are correct, then the sale price of £1.7 billion suggests an average return to investors of around 6.5% a year—with some receiving an estimated 13.1%. The data quality behind the forecasting affects the price investors will pay for the asset—more uncertainty means more risk for the investor, and so they apply a higher risk premium which lowers the price they are prepared to pay. So far the Department has only one full data-point against which to evaluate the model, so its accuracy is uncertain. It is vital that the Department continuously improves the model and monitors its accuracy to better inform valuations for future sales of the loan book—reducing the level of risk from an investors’ perspective and thus increasing the amount they are prepared to pay. The model is tailored to the sold loans only, and government has no similar model for the other loans issued either before or after 2012.
7.In deciding whether to sell, Treasury does not take sufficient account of a range of valuations, instead relying on a conservative ‘retention value’.
UK Government Investments (UKGI) calculated the value of the loans in a number of different ways, but the government’s sale decision relied solely on its ‘retention value’. This value is calculated by discounting the estimated future loan repayments to assess what they might be worth today. The higher the discount rate, the lower is today’s value of those future repayments. Based on HM Treasury’s Green Book guidance, the Department and UKGI used a high discount rate component of 5.5% compared to the lower market discount rate of 1.6%, which resulted in a low retention value. Like all other recent asset sales the Committee has reviewed, government takes a conservative approach when calculating its retention value creating a risk that it sells its assets for less than they are worth. There are a number of other valuation approaches which use different rates, all of which produce a higher value for these assets. Focussing only on the retention value, which is the lowest, increases the risk that government is prepared to sell its assets for too little.
8.Recommendation: When deciding to sell an asset, the Treasury’s Value for Money criteria should include a wider set of valuations than solely the retention value. This must include, but may not be limited to, the value the market might be prepared to pay for the assets: 1) at the point of sale, with a clear indication of any novelty discount, and 2) at points in the future, under different scenarios, as the novelty discount reduces and risks change.
9.We are concerned about the lack of transparency to the public and Parliament surrounding this sale. Government has not disclosed the identity of the investors as it feels that to do so would negatively affect the demand for this and future sales and could put value for money at risk. However, UKGI made no actual assessment of the trade-off, if indeed there is any, between increased transparency and the potential for reducing value for money. Although we understand the sensitivities around some aspects of the deal, we expect transparency and openness wherever possible. In this case the public is not being allowed to know who a public asset has been sold to, even though beneficiaries of funds that invested may themselves be aware that their fund has done so. As such, decisions to withhold information should be made based on evidence, rather than assumptions, and the impacts considered. We have seen similar instances on previous asset sales, such as the Green Investment Bank transaction, where UKGI made untested assumptions.
Published: 22 November 2018