House of Commons - Public Accounts

Select Committee on Public Accounts Sixty-Third Report

THE MANAGEMENT OF GROWTH IN THE ENGLISH FURTHER EDUCATION SECTOR

THE FINANCIAL HEALTH OF THE SECTOR

21. We asked the Funding Council how many colleges would be in financial difficulties in the coming year. Their assessment was that in April 1998, 96 colleges, some 22 per cent of the total, were in poor financial health.[25] They told us that there were a number of reasons why colleges were in poor financial health, but that it was largely associated with the fairly rapid process of reduction in unit costs within the sector and the quality of financial management within some colleges.[26] The Department stated that, over the period 1992-93 to 1996-97, there had been 25.8 per cent growth in the sector and efficiency gains of 12 per cent. In the Department's view, this painted a picture of a thriving sector that had responded well to the demands upon it whilst increasing efficiency.[27] They also thought that colleges were in a much healthier position than in 1992, structured differently and much more flexible.[28]

22. The Funding Council estimate that on average colleges' income from the Funding Council in 1997-98 will be three per cent lower than originally expected. The C&AG's report suggested that the number of colleges in poor financial health might increase as colleges unable to deliver to required efficiency gain were likely to suffer deteriorating financial health.[29] In response to our questioning, the Department referred to the Government's decision to put an additional £100 million into further education for 1998-99 and its intention to restrict further efficiency squeezes to the rate of inflation.[30] The Funding Council said that "New Deal" students who studied in further education colleges would also bring in additional funding.[31] The Department confirmed that a view on how to allocate resources and what incentives to build in would be taken following the Comprehensive Spending Review.[32]

23. The Funding Council told us that the responsibility for colleges' solvency first of all lay with college governors, but said that the Funding Council provided support and guidance in that process. In conjunction with the colleges, they assessed colleges' financial health three times a year. Colleges were deemed to be in poor financial health if they were dependent on others, either the banks or the Funding Council, to continue fulfilling their strategic plan. The Funding Council told us that they focussed very closely on these colleges, providing support and requiring them to produce recovery plans. They had a regional structure with regional finance directors, property advisers, education specialists augmented by inspectors and auditors who knew the colleges intimately.[33]

24. We asked the Funding Council whether, in the light of colleges' independence, they had enough direct power to move quickly and ensure that colleges in financial difficulty take remedial action. The Funding Council replied that it was a matter of negotiation, but that where a college was dependent on the Funding Council for its funding then they could move very quickly and apply a fairly stringent financial regime. They said the more difficult the position of a college, the easier it was to impose their recommendations. They also applied conditions to the continuation of funding to the colleges concerned.[34] We went on to query the ability of the Funding Council to secure action when the college was financially dependent on its bank or another lender. The Funding Council replied that they did not have the same ability, although they could still encourage and exhort colleges to improve their financial position, and provide assistance and advice. However, where a college was seeking to borrow any sum greater than five per cent of turnover, the Funding Council's specific consent was required. As a last resort, the Secretary of State, had statutory power to dismiss governors or dissolve corporations.[35]

25. The Funding Council told us that broadly as many colleges came out of the worst financial health category as fell into it each year,[36] and the Department said that the work undertaken by the Further Education Development Agency to improve management across the sector was an important development.[37] Asked whether any colleges could be in a terminal financially non-viable state, the Funding Council said that this was a possibility and that in those circumstances they would have to take action. This had happened at a college in the North West where poor inspection reports and falling student numbers had weakened their financial position. In this case the Funding Council had managed the closure of the college and effected a merger with another.[38]

26. One of the objectives of the funding system introduced by the Funding Council in 1994-95 was to address, over a period of years, the differences in levels of funding that individual colleges received when they were under local education authority control. This is known as the convergence process.[39] In answer to our questioning, the Funding Council agreed that on the whole sixth-form colleges had higher average levels of funding when they came from local authorities than general further education colleges and therefore, that the convergence process had been more downwards.[40] Nevertheless, the Funding Council told us that sixth-form colleges performed slightly better financially than the rest of the sector, which they attributed to sound financial management by the colleges.[41]

27. The Committee also enquired about the disparities in the funding provided to sixth-form colleges compared with that provided to local education authority controlled schools with sixth forms. The Department said that they were continuing with some work that began under the previous Government examining the relative costs of different qualifications in the different parts of the 16-18 sector. They told us that it was difficult to make comparisons because in a school sixth form students get more than just the qualifications, things that would not be provided in a further education college. However, their initial findings were that there was not a significant difference between sixth forms and sixth-form colleges, particularly if the extra provision in schools was taken into account. They told us that their initial findings had caused some surprise within the various sectors. Accordingly, the Department were continuing to clean the data so that these types of comparisons could be made.[42] The Funding Council told us that, in line with the Secretary of State's priorities for funding, they had allocated £20 million to fund specific expansion in the 16-18 year old cohort.[43]

Conclusions

28. We find it worrying that over one-fifth of colleges are assessed as being in poor financial health and that the number of colleges in poor financial health may increase. Whilst we accept that the primary responsibility for ensuring the solvency of individual colleges lies with the college governing body, we look to the Department and the Funding Council to give urgent attention to improving the general financial health of the sector. We note that an important factor in some colleges' deteriorating financial health has been the reduction in unit costs required of them since incorporation and the Department intend to restrict future required efficiency gains to the rate of inflation. We acknowledge that additional funding has recently been provided to colleges for 1998-99 and that the funding of growth in further education is to be addressed within the Department's Comprehensive Spending Review.

29. We are concerned that the financial difficulties faced by many colleges can be attributed to weak management at college level. We note the action being taken by the Funding Council to identify those colleges in financial difficulties, provide them with support and ensure that they take appropriate remedial action. We urge the Funding Council to take a more pro-active role regarding any college that they consider needs improvements in its financial management. It is not acceptable that decisive action has to wait until a college is in financial difficulties.

25 Evidence, Appendix 1, p19 Back

26 Qs 5, 20 Back

27 Q92 Back

28 Q 41 Back

29 C&AG's Report (HC 259 of Session 1997-98), paras 2.20-2.21 Back

30 Qs 22, 43 Back

31 Q32 Back

32 Qs 9, 43 Back

33 Qs 5, 74, 84 Back

34 Qs 75-76, 85 Back

35 Evidence, Appendix 1, p19; Q94 Back

36 Q5 Back