Examination of Witnesses (Questions 60
WEDNESDAY 22 NOVEMBER 2000
BOURN, KCB, PROFESSOR
60. I am sorry, you are still not getting the
point, are you? The fact is that you left them in the lurch.
(Professor Melville) No, I have been absolutely clear.
The demand-led element was open-ended funding on which there was
commitment from the previous Government. Whatever colleges did,
they would be funded at a rate of £6.50 a unit in that funding.
At the end of 1996 and beginning of 1997 the Government withdrew
the demand-led element of funding, the Funding Council simply
did not have the funds for that provision and therefore quite
a number of colleges had what funding they expected to be able
to draw down on a demand-led basis no longer available. That was
the £80-100 million that I referred to earlier. That was
simply a Government decision at the end of the previous Government.
They withdrew that funding, and therefore, of course, we did not
have it to give to the colleges.
61. I think my point is proven then that you
left them in the lurch. If I have time I will come back to that,
but I want to move on to other topics. The funding methodology
is very complex, is it not? I read an article in The Times
which said "Byzantine monster, that stifles participation,
promotes conservatism and is hugely expensive." You actually
agreed with that, did you not, because I have an article here
in which you were quoted as saying that it had too many rules
and was too inflexible. If that was the case, why did you not
do something about it a lot earlier?
(Professor Melville) I came into the
Funding Council in 1996 and it instigated a fundamental review
of the funding methodology. It was followed on with a subsequent
review. We have simplified the methodology to some extent with
the removal of the three rates of funding, for example, and a
number of other complications. Currently colleges receive their
allocations in a much more direct way rather than bidding and
being unsure as to what they get. One has to say that it was a
very detailed funding system. My own view is that it lived its
courseI have been very clear about thatand therefore
we are ready for change. The shift to the Learning and Skills
Council is providing that change, and a new funding system which
is largely along the lines that we have recommendedthat
is, a broader-banded funding systemis being adopted by
the Learning and Skills Council.
62. I take the point that you are making, but
at the end of the day that is the very first point that I made.
My view is that some of them were left in the lurch. This is clearly
proving the methodology also put colleges in a very difficult
position, and because of the way funding was organised it put
colleges in quite a considerable lot of difficulty. Can I just
follow on, because I want to follow on from what Mr Leigh was
saying about agricultural colleges. I am quite sure you will have
come briefed this afternoon on this, because you must have known
I was going to raise itthat is, the mergers. You talk about
mergers being important. The merger that took place in my area
between an agricultural college and a further education college
was originally turned down by the region on the basis that it
was to solve a financial problem, is that right?
(Professor Melville) Yes.
63. So how on the one hand can you argue and
say that you are keen to see mergers taking place because of the
financial situation of particular colleges and yet turn down the
one in my area on financial grounds and only on appeal to the
FEFC did they then allow the merger to take place on the basis
of an educational plan? It seems to me that there seems to be
a little bit of to double talk here.
(Professor Melville) No, I think, with respect, I
believe I have been perfectly consistent on this point. The point
I made to Mr Leigh was that decisions of the Funding Council are
never made purely on financial grounds, our main issue is education
and the capacity for efficiency and the quality of education.
The Regional Committee, when it considered the merger of East
Durham and Houghall considered that the educational case had not
been sufficiently well made. With respect, there was one slight
misunderstanding in what you said. It was not an appeal to the
FEFC. The Regional Committee is merely advisory. The decision
is made by the FEFC Reorganisations Committee, and on this occasion,
as has happened on a number of other occasions, the Reorganisations
Committee saw the proponents, they made a very good presentation,
I was present there, and they accepted the case that they had
done everything properly.
64. What would have happened if they had not
accepted the case?
(Professor Melville) It would not have been recommended.
65. What would have happened to Houghall?
(Professor Melville) Obviously the Funding Council
would have continued its discussions with Houghall.
66. Would it have closed?
(Professor Melville) Not necessarily, no.
67. It was running at a huge loss.
(Professor Melville) You will recall that there were
other colleges who at the time were interested in merger with
Houghall, also I believe in your constituency.
68. But it was in real financial difficulties
and you were not going to fund it indefinitely, were you?
(Professor Melville) The steps that we would take
in the case of a college like that are that first of all we look
to see if it is needed, if the provision is needed, secondly what
steps can be taken to secure it. Sometimes those are associated
with an existing college. In the case of Houghall we felt that
merger was the most appropriate. In all cases we ask colleges
to consider a whole range of options and possible merger partners
and of course Houghall did consider two colleges in your constituency
and chose East Durham. There were still other options, and of
course we would have pursued that.
69. Let us move on, then. Although I am being
very parochial, this can occur with any agricultural college in
the country. I want to give an example of a similar merger, and
the example I am going to give is in Northumberland. When Houghall
merged with East Durham the FEFC gave no financial help whatsoever.
A similar merger took place in Northumberland between a further
education college and an agricultural college, and financial aid
was given. What was the difference between the two mergers?
(Professor Melville) You and I have corresponded upon
70. You have, and I did not accept what you
said the first time.
(Professor Melville) Let me try again. It was simply
a matter of time. At the time the Houghall/East Durham merger
was considered there were no funds that the Council had available
for this process.
71. Yet within a year you had funds available?
(Professor Melville) That is right, it was the following
72. They came back for money a year later and
you still said no?
(Professor Melville) If we had gone back on all the
mergers, as I just indicated you, and said how much would they
have wanted at the time, of course we have would have exhausted
the funds, but they only became available in the year in which
the Kirkley Hall merger came along. East Durham were not treated
any differently from any other college, I do not think, at that
73. East Durham was a reasonably successful
college and was not in financial problems, as I understand it.
Therefore, would it be true to say that FEFC then took advantage
of that and because they were in a financial position they did
not offer them funds, whereas in Northumberland they were not
so financially viable and, therefore, funds were made available?
What I am saying is, where a college appears to be financially
viable no help is given and where a college is not performing
as well help is given.
(Professor Melville) That is not correct. It is associated
with the existence of the funding for restructuring. However,
given I should answer you fully, if the funds had been available
then you are quite right, considerations such as those are taken
into account. Generally, and I believe quite rightly, we take
the view that we only apply scarce funds where we need to apply
74. Is there going to be any incentive for a
good performance, a profitable college to take on a failing college,
when they know they are going to get no help whatsoever?
(Professor Melville) They do now receive help.
75. Are you saying they can apply retrospectively?
(Professor Melville) No. There is an incentive and
we see it working. In particular we have helped a number of colleges.
Unfortunately since the merger you referred to we have helped
a number of colleges in helping them with due diligence. We have
supplied funds for a due diligence study, and we have also helped
them with some additional funding where we see some inherited
liabilities, that we felt would be unfair for a college to take
on. This deals with a number of the issues in this report.
76. Can I ask, firstly, a question about external
auditors. It is clear that the state of college finances has in
many cases gone from bad to worse to a very considerable extent
before it really comes to light. That says to me that the quality
of the external audit has been pretty poor. Can you give any general
reason why external auditing of colleges has been so poor?
(Professor Melville) I think some of the major issues
that are highlighted here, and have been highlighted before by
us in our discussions with the NAO, are to do with the detailed
audit that is associated with the funding system. That is that
external auditors are required not only to audit the accounts
but also to sign off the actual funding unit claim, that is to
sign off the number of students that have been educated. Auditors
found this difficult to take on. It was a task that does not fall
within the scope of a normal audit. This was the reason why this
decision was made to take this particular part of the audit out
of the external audit conducted by college auditors and put it
into the responsibility of the Funding Council.
77. I can understand that if all of the auditors
were small town accountants, if you like. I understand from you
that at least the one auditing Bilston were Deloitte & Touche,
who are not exactly a small firm, you would think they would have
a sufficient quality of people there to audit things like student
numbers. How many of the others were small town firms and how
many of the colleges had been audited in general by quite large,
well known firms?
(Professor Melville) One has to say, first of all,
that we do see variations between offices. They do tend to operate
locally. I am sorry to say that quite a significant number of
the large companies are those that we have concerns about on audit.
In fact we discourage colleges from using small town firms, we
encourage them to use experienced auditors.
78. You are currently suing Deloitte & Touche.
(Professor Melville) We are considering suing.
79. Considering suing. Are you, in fact, suing
(Professor Melville) No.
8 Note by Witness: Times Education Supplement, July
Note by Witness: Deloitte and Touche are the only firm that the
Council is considering suing in relation to the external audit
of final funding unit claim. However, it is also considering legal
action against Garratt and Co in relation to internal audit work
at the former Bilston Community College and Evidence, Appendix
1, p 19-20. Back