Appendix 2
Reply from the Department for Education and Skills
Proposal for the Regulatory Reform (Voluntary
Aided Schools Liabilities and Funding) (England) Order 2002
1. Thank you for the opportunity to make a presentation
to the Committee on 11 December 2001. I am writing to respond
to the points raised in your subsequent letter, and to provide
some additional contextual information. Please let me know if
there is anything further that you think the Committee might need.
There are some complex issues to cover; I would be quite happy
to clarify anything further, either in writing/e-mail, telephone,
or by meeting.
2. I have dealt with each of your subject headings
in the separate sections attached to this letter, although see
paragraphs 4 and 5 below in respect of Wales and the drafting
of the Order.
3. I am sure that you will find the additional
information reinforces the complexities of the issues. I would
like to follow this up with some practical illustration of the
impact of the changes on existing capital projects at the VA schools
in an area such as Burnley. Unfortunately, because of the impact
of the holiday period, I have not been able to have the information
ready for today; if you are agreeable, I would like to send this
to you by around the middle of next week.
4. I would also like to take this opportunity
to address a point raised during the presentation which we were
not able to answer, relating to the equivalent arrangements in
Scotland. Having checked with the Scottish Executive, I can confirm
that there is no equivalent category of Voluntary Aided schools
in Scotland. All schools, including those designated as denominational,
are funded by Local Education Authorities in the same way as other
categories of school.
5. I have confirmed with the National Assembly
in Wales that their consultation produced no consensus for change
to the current arrangements. This has been agreed by their Minister.
6. The very helpful comments on the proposed
draft Order, together with the other points raised in your letter,
have enabled us to prepare what I hope the Committee and its legal
advisers will consider to be an improved version. I am enclosing
the latest version, although our Legal Adviser is still in correspondence
with Alan Preston on the detail; I understand he wishes to discuss
some of the issues before it is considered again by the Committee.
7. Our Ministers have confirmed they are content
with this response.
DAVID FEWSTER
Project Leader
Transitional provisions
1. The provisions in the draft Order are intended
to give effect to the proposals very much as outlined in the consultation
document at paragraphs 99 - 115. As you will have noted, no major
concerns were expressed in the responses to the consultation,
although we have expanded on some of the more detailed arrangements
in the light of further discussion with our own staff and others
within the Department.
2. In practical terms, the proposed arrangements
can be summarised as set out below. The term 'financially complete'
refers to the point at which all grant entitlement has been paid.
Formula Repair Grant
3. This grant would end at 31 March 2002, as
all revenue repair liability would transfer to the LEA, with funds
being delegated to schools through Fair Funding formulae. To ensure
that schools do not lose any money during this transition, any
unspent Formula Repair allocations at 31 March 2002 would be added
to the school's NDS Devolved Formula Capital balance, and could
then be rolled forward if unspent by the end of 2002-03 for a
further two years. The cash (85%) figure would be transferred,
although it would, from 1 April 2002, be regarded as 90% of the
costs of any work.
4. Although the cessation of Formula Repair grant
would remove a funding process to which VA schools have become
accustomed, necessary protection would be provided by the simplified
proposal to pay all revenue repair funds through Fair Funding
formulae. Our proposal to pay £18 million to LEAs through
the Standards Fund would provide the necessary adjustment, even
to those LEAs which have not reduced their revenue funding for
VA schools (see page [16] paragraph [2]). We consider that the
proposal would protect the position of schools, in that unspent
grant would be transferred to NDS Devolved Formula Capital, and
unspent grant could be carried forward. We accept that the value
of work which any carried forward sum would support would be lower
(because it would represent 90% of the costs), but the amount
of the governing body contribution reduces by 5% - which, as reiterated
later in this letter, ensures cost neutrality).
NDS Devolved Formula Capital Grant
5. This grant would be allocated in full to schools
from 1 April 2002. There would be no need for separate allocations
to be made to LEAs (currently 10% of the total amount of the grant
is paid via the Standards Fund) for their liabilities at VA schools.
Unspent grant - LEAs
6. For 2000-01 and 2001-02, LEAs have received
an allocation through the Standards Fund for their share of liabilities
at VA schools. We would monitor, from Standards Fund information,
whether or not these allocations have been spent, or whether individual
LEAs have rolled balances forward.
7. Later this month we plan to remind LEAs of
this proposal, and encourage them to use any unspent allocations
for work at VA schools in 2001-02. Should any LEA have an unspent
allocation for VA schools at 31 March 2002, we would ask it to
complete any projects already planned, but not yet financially
complete at VA schools. Where no such projects are planned, we
would regard the underspend as being available to the LEA's LCVAP
allocation. For many LEAs, the amounts involved as unclaimed Standards
Fund grant should be quite small.
Unspent grant - schools
8. Any unspent Devolved Formula Capital allocations
held by VA schools at 31 March 2002 would roll forward into 2002-03
and be added to that year's allocation. The cash (85%) figure
would be rolled forward, although it would, from 1 April 2002,
be regarded as 90% of the costs of any work.
Liabilities and rate of grant
9. Devolved Formula Capital can be used by schools
in two main ways: either on its own, to complete a small capital
project; or as a contribution to a larger project.
Small projects - the division
of liabilities will already have been agreed, and the LEA will
have received funding through the Standards Fund to meet its costs.
We therefore propose that this division of liabilities should
remain but that, where the project is not financially complete
by 31 March 2002, and if the school has sufficient grant available,
we would pay grant at up to 90% of the governing body's liabilities.
Contribution to a larger project
- the arrangements for that type of project (Named Project or
LCVAP) would apply (see below).
10. We consider that our proposals maintain the
protection currently available to VA schools, by allowing unspent
grant to be carried forward. Again, there is an impact on the
value of work which any carried forward sum would support, and
the amount of the governing body contribution, as outlined in
paragraph 4.
Named Capital Projects placed on the Design List,
Starts List, or given a Project Development Allocation - from
1999-00
11. LEAs receive Supplementary Credit Approvals
(SCAs) on a project by project basis to meet their share of liabilities
at VA schools. Where the LEA has received an SCA, we propose that
the division of liabilities should remain unaltered but that,
if the project is not financially complete by 31 March 2002, we
would normally increase the total grant element to 90%.
12. If the LEA has not received an SCA by 31
March 2002, we propose that the work should be progressed on the
basis of the revised arrangements, with grant entitlement normally
at 90%.
13. We consider that this approach would provide
the most practical arrangement. Those projects not financially
complete (as in paragraph 11 above) would receive, in effect,
reimbursement for costs already incurred. We have taken this approach
with a view to encouraging schools to continue to claim grant
at the existing rate during the current year (2001-02). They might
otherwise be tempted not to claim grant now, or even to delay
work, and this would lead to a potential underspend on the VA
capital baseline in 2001-02.
Named Capital Projects placed on the Design List
or Starts List—prior to 1999-00
14. These projects should be well on their way
to completion. We do not wish to delay their completion and do
not propose to change the division of liabilities, or to increase
grant support to 90%.
LEA Co-ordinated VA Programme (LCVAP)
15. LEAs receive funding through credit approvals
for their share of liabilities for work funded through this route.
These credit approvals are linked to the grant allocations available
to spend in any given year, rather than related to specific projects.
We would ask LEAs to identify their outstanding liability on any
unfinished LCVAP projects at the end of 2001-02, and then we would
allocate SCAs specifically for the completion of those projects
during 2002-03. This would ensure that LEAs receive appropriate
finance for any outstanding liabilities.
16. For projects begun in 2001-02, but not financially
complete by 31 March 2002, we would increase grant support to
a maximum of 90% of the governing body's share of liabilities.
Projects approved and begun prior to 2001-02 would, however, receive
grant support at the 85% rate. This is because this is an annual
programme for medium scale projects and, as such, any work should
be well on its way towards being completed by 31 March 2002.
17. We consider that this approach would provide
the most practical arrangement. Those projects begun in 2001-02
but not financially complete would receive, in effect, reimbursement
for costs already incurred. We have again taken this approach
for the reasons outlined in paragraph 13.
Projects being funded through the Private Finance
Initiative (PFI)
18. PFI projects are funded in a variety of ways,
with the costs being spread over a number of years (typically
25). We propose, therefore, that the parties to those contracts
which have been signed by April 2002 should consider whether the
new arrangements would be more beneficial (whilst still representing
good value for money). We would consider, on an ad hoc basis,
any revised proposals which we might receive. Any contracts currently
in the course of preparation but for completion after March 2002
are being made aware of our proposed changes to the liabilities
and funding arrangements.
Burdens
19. We do not consider that there would be any
significant additional burdens placed on VA governing bodies or
LEAs in dealing with the transition to the proposed new arrangements.
There would be some minor tasks on the following basis:
VA governing bodies -
would need to become familiar with the arrangements. We will provide
appropriate written information, and whatever additional support
might be required. It would, in any event, be only a temporary
situation, leading to longer-term benefits. We therefore consider
any extra burden to be proportionate to the overall benefits which
would result.
LEAs - in addition to
becoming familiar with the new arrangements, LEAs would need to
identify any outstanding liabilities on some projects so that
they can be met by specific credit approvals. We consider that
this is a benefit, in that LEAs would not need to manage the funding
streams currently available to them. Once again, we would consider
that any extra initial burden would be proportionate to the overall
benefits which would result.
100% grant for condition-related work in excepted
buildings
1. We have not been able to assess the potential
capital backlog in respect of all of the additional liabilities
which would transfer to VA governing bodies. That is because the
information from Asset Management Plans (AMPs) is not available
in a form which we can use for this purpose. As you will be aware,
liability can depend on whether the work is internal or external;
this level of difference cannot be ascertained from AMPs without
making some extremely broad assumptions. We also cannot easily
differentiate between those costs which should be met from revenue
funds and those which should properly be capital costs.
2. By way of illustration, AMP information suggests
that the most urgent backlog of work to electrical and mechanical
services in VA schools amounts to £47 million. What we cannot
do is say how much would be attributable to work which would transfer
to governing bodies and, as indicated in the previous paragraph,
how much is for normal revenue costs.
3. It is for the reasons set out in the two previous
paragraphs that we feel that we need to carry out a specific condition
survey of the excepted buildings; this should provide a very large
degree of security for VA governing bodies. We discussed the position
with the VA sector representatives on the Project Board, and concluded
jointly that our strategy should be one of seeking a reasonable
balance in the first instance. That balance was the basis upon
which we consulted - that 100% funding should apply to excepted
buildings (including kitchen equipment). As with other aspects
of the proposals, we received a very large degree of support for
this approach.
4. In the light of the responses, we also considered
how we might provide additional safeguards for VA governing bodies
(given that we are not able to assess accurately the full potential
scale of the overall backlog). We consider that our proposal to
pay grant at up to 100%, in exceptional circumstances, would provide
that additional security. Our scope for using this flexibility
would, of course, depend on commitments arising from the existing
undertaking in respect of excepted buildings, and the overall
level of funding available for the sector as a whole. But we think
that it is a balanced and reasonable approach, which we are making
transparent to the VA sector through the consultation process,
through the documents required to support our proposed Regulatory
Reform Order, and through the guidance which we will make available.
5. By way of a practical illustrative example,
we would probably regard any school facing a major problem (such
as the unforeseeable sudden need for a complete replacement boiler)
as being exceptional, at least in the first year or so of operation
of the proposed new arrangements. This should prevent any individual
school being substantially disadvantaged. The model used in the
draft Regulatory Impact Assessment demonstrates that, over a standard
lifecycle, the changes are affordable to VA schools. Ministers
would, of course, want to monitor the impact of the new arrangements
as part of our review process.
Protection of governing body capital expenditure
on excepted buildings
1. In the light of the very helpful comment in
your letter, we have decided that it would be appropriate to extend
the proposed amendments to Schedule 22 to the School Standards
and Framework Act 1998 to include all excepted buildings. Our
view remains that caretakers' dwelling houses would, in practice,
be the only potential excepted buildings to be sold as separate
items, with the sale value reflecting any investment by governing
bodies. It is conceivable, however, that there might be examples
of other excepted buildings (possibly swimming pools) where this
might apply.
2. The minor additional burden for VA governing
bodies, identified in paragraphs 40 and 108 of the Department's
Statement which accompanied the draft Order, would be extended
accordingly. We still believe, however, that it remains proportionate
(it would only apply in respect of buildings owned by the LEA),
and is desirable and represents a fair balance in respect of the
overall benefits which would result.
Proposed setting of a statutory de minimis level
1. It might be helpful to provide some further
background to our proposal. It is somewhat lengthy, but I hope
it will give you and Committee Members a more complete picture
of what we are trying to achieve.
2. Until April 1999, the VA capital baseline
was split administratively between 'repairs', 'Basic Need' (provision
of new pupil places) and 'improvements'. Repairs in this context
were defined strictly as being work done on a like-for-like replacement
basis and, in the extreme, could include the replacement of a
whole school. In practice, VA schools had access to funds for
these repairs on an unrationed basis (except that there was a
degree of 'first come, first served', given that the VA baseline
was itself limited). This funding related only to governing body
liabilities, and required a 15% contribution. 'Improvements',
on the other hand, were deemed to be any work which included an
element of improvement to the existing premises. No distinction
was made between what is conventionally defined as revenue expenditure
(that which can be regarded as routine and recurring) and that
which should be defined as capital (generally one-off expenditure).
No de minimis level was applied.
3. This approach produced two major consequences:
- VA schools were relatively well maintained in
comparison with other categories of maintained school (who saw
this as unfair). However, work was often on a like for like basis,
even when this did not represent best value (for example, many
flat roofs were perpetuated when pitched roofs would have been
more appropriate);
- relatively little was spent on improvements to
VA schools, as the overall VA baseline was set centrally at a
level that was equitable compared with LEA schools, and the amounts
available for improvement were squeezed out by unrationed repairs.
4. As part of our development of the Department's
capital strategy, we took a first step in April 1999 towards introducing
a greater degree of consistency, fairness and transparency between
VA schools and other categories of school. We introduced Formula
Repair grant from that date to bring some measure of consistency
and fairness with other schools (which, as mentioned, do not have
such unrationed access to funding for major repairs). At the same
time, we introduced the concept of a de minimis level - a standard
accounting practice used in Local Authorities, and which also
helps distinguish between revenue and capital expenditure in relation
to smaller items of expenditure.
5. When we introduced NDS Devolved Formula Capital
for schools in April 2000, we wanted, as far as possible, to ensure
a consistent approach across all schools. Our consultations at
that time with VA representative bodies confirmed that they too
wished to have access to Devolved Formula Capital, and that they
accepted the need for a de minimis level. The subsequent operation
of these arrangements has demonstrated that, at a local level,
VA schools and LEAs can work effectively within these sorts of
parameters.
6. Associated with the proposed transfer of significant
additional capital liabilities to VA school governing bodies,
we felt that it would be appropriate to establish a formal de
minimis level. Since April 1999, this had effectively been set
administratively at £1,000 as this was considered to be a
reasonable and pragmatic level. We have deliberately proposed
that the level should remain low as this would give reasonable
flexibility to VA schools by allowing them greater choice as to
whether to fund work from revenue or capital. A higher level would
reduce the scope for using capital grant. The results of the consultation
process supported the proposed level of £2,000 (over 70%
felt that the arrangements would be manageable locally).
7. To demonstrate the impact of the proposed
level, it might be worth re-stating the example used in the consultation
document, which was as follows:
Burdens
8. The Committee rightly asks whether this would
impose a burden on schools or LEAs. Our view is that the burden
is already there, in that a wide range of de minimis levels is
already operated by LEAs (ranging from nil to £25,000 in
examples of which we have been made aware) whilst, in respect
of claims for Formula Repair grant, we already set a minimum value
of £1,000. We consider that any resultant burden (for example,
for schools in LEAs where a nil de minimis currently operates)
would be proportionate, however, as it would be a move towards
bringing schools in the VA sector further towards a more consistent
position with other categories of school, and would bring about
the benefits set out in the following paragraph. We are confident
that LEAs would take a pragmatic approach on this issue. We would
wish to keep the de minimis level under review. We are therefore
proposing that the level is made a subordinate provision, to facilitate
changes (if required) as the result of evaluation and review.
Benefits
9. We consider the benefits of having a de minimis
level to be as follows:
- the setting of de minimis levels for that part
of capital expenditure which can be ordinarily financed from capital
resources is conventional practice in Local Government. It is
only right, therefore, that a similar principle should be applied
to all schools funded in revenue terms through the LEA;
- because the funding of capital expenditure in
VA schools is primarily reliant on grant paid on a national basis,
we consider that a national de minimis limit should be set. Whilst
there is already effectively such a limit in operation, this is
not statutory. It seems appropriate, therefore, to move to this
stage at the same time as other statutory changes are implemented
for VA schools;
- because an administrative limit of £1,000
already effectively applies to VA schools, on balance we consider
it appropriate that any revised limit does not depart too significantly
from a level to which schools have been accustomed. This is especially
important, given the extra capital liabilities it is proposed
that VA schools should take on for excepted buildings etc;
- the variable levels currently set by LEAs mean
that there are differential impacts across all types of school.
This already gives rise to significant variations in the relative
ease or difficulty with which schools can use their Fair Funding
budgets. Setting a statutory national level for VA schools might
cause some LEAs to reconsider their own arrangements; and
- having a de minimis level avoids the bureaucracy
of processing many small claims for capital grant.
10. The 'process of transition' referred to in
paragraph 75 of the Department's Statement relates to this continuing
move towards consistency and fairness in relation to other categories
of school. By formally proposing a national de minimis level for
VA schools, combined with the Department's current programme to
introduce consistent financial reporting across all schools and
LEAs, we hope that this will help bring about some greater degree
of consistency and convergence of levels used by LEAs for other
schools. We see this as another step towards achieving the aim
in the Department's overall capital strategy of bringing greater
fairness and consistency in funding between different categories
of school.
11. As far as the impact on maintenance budgets
is concerned, we have indicated that we consider it appropriate
to adjust the annual funding available to LEAs to provide for
their additional revenue liabilities. Our proposal to provide
£18 million for LEAs would ensure that appropriate funding
can be made available to VA schools in their delegated revenue
budgets. It would be paid in proportion to the number of VA schools
and pupils in LEA areas, and would represent a fair distribution
of the estimated annual spend by VA school governing bodies on
revenue premises liabilities. We cannot be certain of actual amounts
paid to schools for repairs and maintenance, because Fair Funding
formulae can operate in varying ways:
- in some LEAs, the amount included for repairs
and maintenance can be stated explicitly;
- in other LEAs, there may be no explicit factor,
but amounts will be included in pupil-led funding;
- other LEAs may have no specific factor at all.
12. On whichever basis the funds are allocated,
the school governing body decides how much it will allocate for
premises-related repairs and maintenance expenditure. The position
is further complicated by the fact that some LEAs have not reduced
Fair Funding budgets for VA schools in recognition of the grant
support available to VA
schools from DfES for revenue premises work. We would
still provide those LEAs with their share of the £18 million
but we cannot be certain how they would use that money (the VA
schools having, in effect, been previously double-funded). Many
of these LEAs may spread the benefit of this funding adjustment
across all schools.
Arrangements for claims and payments
1. Our view is that, taking the balance of risk
into consideration, it seems unfair not to provide the benefits
which our proposals would introduce. We estimate that up to some
£30 million is being 'bankrolled' by Dioceses and others
at any time (anything up to about £½ million in any
Diocese). This was never the intention, it adds additional financial
and administrative costs, and we feel that it is right that we
should do something to rectify this unfair position.
2. There is also a bureaucratic burden which
can be eased. To provide the evidence which we currently require
to demonstrate that bills have been paid, schools often have to
resort to submitting documents such as cashed cheques, or bank
statements. This results from the varied ways in which transactions
take place with contractors, or because the documents are required
for other purposes (e.g. for the school's accounting purposes).
This burden would be significantly reduced under our proposals
- we would simply pay grant on receipt of an approved invoice,
and would not require any subsequent documentation.
3. Although we consider that our proposals are
justified, we would need to ensure that appropriate controls are
in place. We are therefore asking our internal auditors for a
view, by mid-February, on what those controls might be, and would
be glad to make that information available to the Committee. For
information, I am enclosing an example of one of the claim forms
which we currently use; you will note that it is comprehensive
and detailed, requiring at least two signatories. An additional
check is provided by the requirement for every school to have
its accounts audited independently.
Liability for insurance
1. This is another area of past uncertainty and
inconsistency, which we are seeking to clarify. Although not a
direct part of our proposals, there are insurance implications
for stakeholders. There is no existing guidance from the Department
as to what should be an appropriate level of insurance cover for
VA school premises. What has happened in the past, therefore,
is that various arrangements have developed. Some VA school governing
bodies insure only in respect of the 15% contribution to their
capital liabilities; others insure all of the buildings (including
those parts which are LEA liability). And there are no doubt many
variations between these different approaches.
2. We believe that there are also many different
arrangements concerning whether or not LEAs delegate funding to
VA schools for property insurance premiums, whether any adjustment
is made to take account of the 15% contribution, and what (if
any) provision should be included in LEA group insurance schemes.
3. This is not helpful, either to VA governing
bodies or to the DfES. In particular, it leaves the Department
vulnerable to potentially large and sudden calls on the VA capital
budget in respect of the 85% of costs which are not insured. It
also provides little incentive for VA school governing bodies
to take adequate security or other precautions. There are risks
of double insurance, or gaps in insurance cover, both of which
are potentially costly.
4. There are also implications for LEAs. We have
already discussed the issue with other stakeholders, and have
arranged to meet the Local Government Association (LGA, which
represents LEA interests) and the Association of London Government
(ALG, which fulfils a similar role in respect of London Boroughs)
to agree a policy. Initial legal advice suggests that there is
a funding obligation on LEAs. Unfortunately, an earlier planned
meeting was deferred, at the LGA's request; we have rearranged
this meeting for 11 January. I would be pleased to provide the
Committee with a report on the outcome before the Committee's
next meeting which, I believe, is scheduled to 15 January.
Increase in the rate of grant support
1. The Committee has asked what proportion of
the proposed 5% increase in the standard rate of grant support
would be accounted for by the liabilities changes, as compensation
for the effects of VAT, and to help meet contributions to rising
capital baselines. We believe that almost 4½% (i.e. around
90% of the proposed 5% increase) would be required to meet the
ongoing costs associated with the additional liabilities, the
small remainder being available to help with the other aspects.
A more detailed explanation is provided below.
2. The net increase in liabilities shown in Table
B of the draft Regulatory Impact Assessment amounts to an increase
of 36.4% (£375m gross, compared to £275m). The Table
also shows that the level of DfES grant required to support such
a net increase in liabilities rises from £233.75m to £337.50m.
This equates to an increase of 44.4%, not the 36.4% above, because
of the effects of increasing the standard rate of grant from 85%
to 90%. By comparison, the proposed reduction in the governing
body contribution from 15% to 10% would mean, in effect, that
they could 'afford' a 50% increase in gross expenditure from the
same total spend on their part. For example, if the total cost
of some work falling to the governing body is £10,000, it
would contribute £1,500. However, a £1,500 contribution
under our proposals would support work to the value of £15,000.
3. Because a 50% increase in gross expenditure
is consistent with the liabilities changes being cost neutral
for governing bodies, it is appropriate to consider what the equivalent
effect would be if DfES grant increased by 50%. If the amount
above required to support current liabilities increased by 50%,
the £233.75m shown would become 350.625m. The extra grant
needed to pay for the liabilities changes of £103.75m (£337.50m
less £233.75m) can then be compared with the extra grant
needed to support a level of expenditure which ensures cost neutrality
for VA school governing bodies of £116.875m (£350.625m
less £233.75m). The amount of £103.75m is equivalent
to 88.8% of the total of £116.875m (or 4.4% of the extra
grant), leaving only 11.2% of the total (or 0.6% of the increase)
for VAT/rising baseline compensation. The following table summarises
the figures set out above:
| | £m
| % |
| (1). DfES grant required to fund existing liabilities
| | 233.750 |
|
| (2). DfES grant required to fund revised liabilities
| | 337.500 |
|
| (3). Extra DfES grant required to fund liabilities
changes
| (2)-(1) | 103.750 | 88.8
|
| (4). DfES grant to fund governing body cost neutral
position
| | 350.625 |
|
| (5). Extra DfES grant to fund governing body cost neutral position
| (4)-(1) | 116.875 | 100.0
|
| (6). DfES grant to fund other than liability changes
| (5)-(3) | 13.125 | 11.2
|
4. This indicates that almost 90% of the increase in grant
rate from 85% to 90% would be needed to support the liabilities
changes. This equates to nearly 4.5% of the overall increase of
5%. It is not possible to split the remainder between the two
elements; the balance being so small, it is likely to be absorbed
entirely by increased VAT.
5. The Committee asked whether any responses to the White
Paper consultation had referred to our proposals. Although there
was a lot of support for the overall deregulatory approach outlined
in the White Paper, none of the 2,300 replies referred particularly
to our proposal for VA schools.
6. The final point under this heading related to whether VA
governing bodies should still be required to pay, as a matter
of principle, a contribution equivalent to that which they had
paid previously if they are to access the funds available. The
Committee will note from the first paragraph of this section that
there is probably very little help in this direction. This is
a point which we discussed specifically with the Project Board.
The clear consensus was that, whilst it might be argued (as you
suggest) that an even higher rate could be required to give the
necessary help, the standard rate of grant support should be no
higher than 90%.
7. This is, of course, linked to a wish to ensure that the
particular rights of VA governing bodies are maintained. It is
part of the overall balanced and pragmatic approach in our proposals.
Some additional help would, of course, be provided through the
proposed flexibility to pay grant at up to 100% in some cases,
and through the programme of full funding for any condition backlog
in excepted buildings.
This proposal and the Department's legislative programme
1. You are right in pointing out that we regard the Education
Bill as a deregulatory measure. As you may be aware, we had begun
to proceed with our proposals for VA liabilities and funding reform
before we could be certain that proposed new legislation would
be guaranteed a slot in the Parliamentary timetable. We had also
considered the most appropriate date for implementation of our
proposals, and agreed that it should be 1 April 2002.
2. If we had known at the outset that an Education Bill was
being proposed, then we might have considered it appropriate to
include these proposals in that Bill. However, we were keen to
use the powers available under the Regulatory Reform Act 2001,
and also to obtain legislative approval (subject to the scrutiny
process) to implement the proposals from April 2002. There has
been very strong support from the Churches for implementation
from this date. The Regulatory Reform Order (RRO) route has also
helped in building awareness of our proposals, and achieving a
strong consensus for change amongst all key stakeholders. For
example, yesterday we received an e-mail from the Chief Building
Surveyor at Portsmouth City Council, in response to our sending
him a copy of the proposals: he said 'For many years there
has been confusion over 'who is responsible for what' in the VA
school maintenance area. This document is excellent. It finally
seems to reduce the problem to simple terms that can be understood
and implemented by all. I believe that this will have many benefits,
not least of which will be the time (and therefore saved costs)
previously invested in discussion and research when trying to
work out who should be paying for various works. This sort of
advance is very welcome.'
This should help to embed the changes quickly, if approved.
3. The Department acknowledges that the Regulatory Reform
Act 2001 is a very useful mechanism to deliver the regulatory
reform agenda. However, given the large package of deregulatory
proposals, the Department took the view that it would be appropriate
to deliver these proposals through the Education Bill. It was
felt that this route would be quicker and less burdensome on the
Department's resources than embarking on a series of new proposals
through RROs. The Department began to pursue proposed changes
in respect of after-school childcare through the RRO route, but
found that there were wider issues to consider before formal consultation
could be undertaken in accordance with the Act. This particular
initiative, as you have indicated, now forms part of the Education
Bill.
4. The Department remains committed in principle to using
the Regulatory Reform Act 2001. Relevant new policy initiatives
will be considered for implementation through this route.
Financial Implications
1. The Committee has asked for additional information on the
financial impact. Because of the range of factors involved, it
is difficult to give a direct illustration of how individual schools
or LEAs will be affected. It might be helpful to summarise some
of the background and the issues which will have a bearing on
the financial impact.
Revenue
2. The complexity of the current arrangements has caused problems
for LEAs:
- some have not realised that they ought to make funding adjustments
to VA school budgets in respect of the liabilities arrangements
and the grant support available direct from DfES to VA governing
bodies for premises work;
- others have realised that they should make an adjustment,
but have decided for various reasons not to do so;
- others have made an adjustment, but have used differing methods
and so the amounts and proportionate changes have varied between
LEAs.
3. Based on an informal survey of 43% of LEA Fair Funding
formulae for 2000-01, we have estimated that, if a similar proportion
of all LEAs had applied the same rates of adjustment to those
in the survey, the scale of that adjustment would have been in
the order of £9m. If all LEAs had applied the same
level of adjustment, then the total would have amounted to around
£15m.
4. As has been indicated earlier in this letter, funding for
repairs and maintenance can be allocated to schools in a number
of ways. In any event, schools then decide how much to set aside
for such costs.
5. We have already indicated that we think it is appropriate
to transfer funds from the VA capital baseline, in recognition
of the additional liability falling on LEAs for all revenue expenditure.
Because we would pay this money to LEAs through the Standards
Fund in 2002-03, we can guarantee that it would be available to
LEAs in the right proportions (we will be able to show shortly
how the £18 million would be allocated, if the Committee
would find that helpful). This transfer of funds would also feed
into the arrangements for LEA revenue funding for subsequent years.
Particularly in view of the relatively very small sums involved,
there is no reason why there should be any effect on Council Tax
levels. It should also be noted that the £18 million total
is around 50% higher than VA schools have actually spent in the
first two years of the Formula Repair grant, although there has
been a roll forward of unused funds by many schools towards bigger
projects. The sum is also higher than the estimated total level
of adjustments (£15m) referred to in paragraph 3 above, thus
representing a potential gain to LEAs.
6. The impact on VA schools would depend on whether LEAs pass
on the relevant amount as calculated using the same basis as that
used for Formula Repair grant, or an alternative calculation using
local factors. Taken as a whole, LEAs could potentially receive
more funding than is strictly necessary to compensate for the
adjustments currently being made. The effect for the VA schools
will depend both on whether any adjustment is currently made,
and the formulae used by LEAs to allocate extra money in Fair
Funding budgets. We have already advised LEAs that their implementation
of the new arrangements would be monitored through our process
of appraising Asset Management Plans.
Capital
7. At a national level, the position is a little easier to
illustrate than for revenue budgets. I should emphasise at this
point that the VA capital baseline and other relevant figures
quoted below include what is currently paid to LEAs, either as
credit approval or grant, for their share of liabilities at VA
schools. These amounts would, of course, in future be available
direct to VA schools.
DfES - because the VA capital baseline is fixed, the Department
will spend the same in cash terms as it would have done had the
grant rate remained at 85%. However, part of the allocations would
be in 100% terms to fund backlog/exceptional circumstance spending,
and most would be at 90%. So a smaller gross capital programme
would be supported in absolute terms. To illustrate this further,
the 2003-04 VA baseline of £437.4m will support gross programmes
of £514.6m at 85%, or £486.0m at 90%. Of the £437.4m,
potentially £103.75m (see earlier section on "Increase
in the rate of grant support") is now required to fund the
net extra liabilities.
VA governing bodies - the rising VA capital baseline means
that, at a 15% contribution rate, VA school governing bodies would
have needed to increase their share of the total programme costs
from £39.6m in 2001-02 to £77.2m in 2003-04. The amount
in 2003-04 at 10% reduces to £48.6m, still £9m more
than in 2001-02, but a lot less than if they still had to contribute
15%. Once again, funding part of the overall programme at 100%
would impact on these figures.
LEAs - will need to spend less on capital items, but will
receive reduced SCAs etc as a consequence.
8. Having commented on a range of issues which would affect
the financial impact of our proposals, I will now deal with the
specific questions raised.
Changes to Local Authority Funding
9. Paragraph 5 above indicates how we intend to compensate
LEAs for their additional liabilities on revenue repairs expenditure,
and the implications. Similarly, paragraph 7 above sets out the
equivalent effects for capital expenditure.
Value Added Tax
10. You also mentioned the complications of VAT. I agree that
it would be a lot more straightforward if VAT liability could
be abolished. We have, in the past, put this case to the Treasury.
Whilst the Financial Secretary was sympathetic to the arguments,
removal of VAT liability, or full recovery, would not be compatible
with EU law and practice. We have therefore continued to allow
for VAT in funding allocations to the VA sector, and included
it as a pressure in our Spending Review bids to the Treasury.
For information, I have set out below the changes in VAT rates
since the tax was introduced.
1.4.1973 10%
9.7.1974 8%
18.11.1974 higher rate of 25% introduced (for petrol)
1.5.1975 higher rate also applied to domestic electricals,
radios, furs, boats etc
12.4.1976 higher rate reduced to 12.5%
18.6.1979 higher rate abolished, all VAT at 15%
1.4.1991 standard rate increased to 17.5%
1.4.1994 reduced rate of 8% introduced, for qualifying
fuel and power.
1.9.1997 reduced rate decreased to 5%
Validation of the estimates
11. The earlier calculations were verified as reasonable by
PricewaterhouseCoopers. We have shared with them our new calculations.
Mindful of the complexities of ascertaining precise information,
they accepted our revised approach, but suggested that we need
to be confident of the soundness of our assumptions, given that
they relate to an average school and are based on an assumed replacement
period. We have therefore subsequently agreed the figures and
assumptions underlying the model with the Department's professional
quantity surveying and accounting staff, as well as with an independent
external surveyor. They, and the Project Board, agree that this
revised approach reflects a much sounder methodology for assessing
the likely ongoing average annual effect of the proposed changes.
Actual Effects of the Changes
12. Assessing the financial impact of proposed changes of
this nature can only be carried out on a best estimate basis.
What has been spent, or could be afforded, in the past may or
may not be a fair measure of spending in the future, even assuming
reliable, accurate and complete data are readily available. Recognising
the limitations of the previous data, it was decided, in response
to comments made in the consultation process, to adopt the more
complete approach as shown in the model in the RIA. This is felt
to be the best representation the Department can provide of the
actual effects on all of the parties involved.
13. The model is based on the costs of replacing/maintaining
the present stock of VA schools in its current state. In addition
to this, further capital works will be carried out to improve
the stock and cater for additional pupil places etc. However,
because of the fixed VA capital baseline, the Department will
only allocate the same in cash terms as it would have done had
grant remained at 85%. Part of this allocation will now be in
100% terms to fund backlog/exceptional spending. So a lesser gross
capital programme can be supported than previously planned in
absolute terms, as indicated in paragraph 7 above.
14. As stated in paragraph 7 above, the rising baseline means
that, at a 15% contribution rate, VA school governing bodies would
have needed to increase their share of the total costs from £39.6m
in 2001-02 to £77.2m in 2003-04. The amount in 2003-04, at
a 10% contribution rate, would reduce to £48.6m, still £9m
more than this year, but a lot less than if they still had to
contribute 15%. Similar caveats as above apply also to the value
of work etc. LEAs will need to spend less on capital items, but
will receive reduced SCAs etc as a consequence. They will need
to spend more on revenue repairs, but the overall effect of this
is compensated by the payment of Standards Fund grant.
Value of Work to be Funded
15. This has been partly dealt with above. Since the total
value of work could potentially reduce, we accept that the wording
in paragraph 52 is less than clear. We were seeking to indicate
that the equivalent of the resources currently allocated to LEAs
to fund their existing liabilities would now become grant support
to VA schools.
Additional Financial Support
16. I believe we have now dealt with the point you raise here.
Cost Neutrality
17. We have used the term "cost neutrality" essentially
to test that the financial impact of the proposals would not result
in one or more of the parties involved being disadvantaged. What
we are seeking to do is to satisfy ourselves that all parties
can afford the financial consequences of the changes and that
they are fair. We believe that what we have set out in the RIA,
and earlier in this document, clearly shows this to be the case.
18. For VA school governing bodies, the test has always been
that the changes will not cost them more than the existing arrangements.
We believe we have demonstrated this in the RIA, where there is
a small reduction in the cash value of their contribution as a
result of taking on the extra liabilities. Given that the total
VA capital baseline is fixed in terms of the total grant available,
the Department cannot spend more in total than it otherwise would
have done. So for both governing bodies and DfES it can reasonably
be said that, for a combination of reasons, the effect will -
at worst - be cost neutral. For LEAs, there would be a saving
due to reduced capital costs (although we would remove the funding
currently made available to LEAs, there would be no borrowing
charges which would have been financed through credit approvals)
and the proposal to provide £18m to compensate for the extra
revenue repair liabilities that they are taking on.
19. I hope that the above comments now satisfy you on what
is understandably an issue on which clear assurances are needed.
The summary, derived by the Committee's staff from the draft Regulatory
Impact Assessment, of the financial implications is indeed correct.
The only caveat I would add is that, because of the way in which
Local Authorities are funded, it is not only a matter of looking
at 'cash' figures. Whilst that approach is correct for DfES and
VA governing bodies, Local Authorities finance much of their capital
expenditure from borrowing and this spreads the cost to the revenue
budget over a period of years.
Illustrative examples
20. The guidance, referred to at paragraph 97 of the Department's
Statement, relates to training material which we would provide.
We cannot issue any such material until we have legislative approval,
but would aim to have something ready in draft form by the middle
of next month, and would then be able to share this information
with the Committee.
Proposed Changes to Liabilities And Funding Arrangements At
Voluntary Aided (VA) Schools: Illustrative Example
1. To provide an illustrative example of the financial implications
of the proposed changes in liabilities and funding arrangements
at VA schools, we have used, as an example, schools in the Burnley
area over the period since 1996. We have assessed how the liabilities
would change under the proposed revised arrangements, and what
would be the impact on the VA governing body (VA GB), the Department
(DfES) and the Local Education Authority (LEA). The results are
summarised in the tables in paragraph 2 below, with more detail
included in the attached Table A.
2. The summary tables below demonstrate the movements in liabilities
and funding arising from the proposals, and how they would impact
on each of the three stakeholders. It might be helpful first to
highlight some of the issues:
- the existing total cost of the work identified in Table A
is some £2.781m (column (a)). This would increase, under
our proposals, to £2.844m (column (d) + column (e)) due to
the effects of VAT on the items transferring between the LEA and
the governing bodies. We have assumed, in each case, that liabilities
transferring would either attract (where they move to the VA school
governing body) or lose (when moving to the LEA) the full 17.5%
rate of VAT, although in some cases the effect might be less;
- revenue changes relate to the switch of VA GB liabilities
to LEAs on external repair (Formula Repair) projects in Table
A (column (e)); capital changes relate to the other project types.
LIABILITIES CHANGES
|
LEAs
|
VA GBs |
DfES
|
|
£000s
|
£000s |
£000s
|
External revenue repairs transfer from VA GB to LEA responsibility - effect on 'Formula Repair' projects (at existing VA GB contribution rate of 15%)
(note 1)
|
9 |
-1
|
8 |
Switch of capital items from LEA to VA GB responsibility (at existing VA GB contribution rate of 15%)
(note 2)
|
374 |
+56
|
318 |
Extra VAT following switch
(note 3)
|
- |
+10
|
54 |
Increased grant support (85% to 90%)
(note 4)
|
- |
-142
|
+142 |
Total liabilities change |
365
|
-77 |
506
|
Notes
1. LEA increase is taken from Table A, column (e), less the
existing LEA liability on these items in column (c), reducing
liabilities to VA GBs and DfES
2. LEA reduced liabilities total is taken from column (c),
and excludes existing external revenue repair liabilities
3. Increase in total cost of the work, resulting from the
net effect of VAT
4. The gain to VA GBs, and opportunity cost to the VA baseline,
representing 5% of the proposed VA GB/DfES liabilities of £2.834m
(column (d)).
Funding Changes (to achieve cost neutrality)
|
LEAs
|
VA GBs |
DfES
|
|
000s
|
£000s |
£000s
|
External revenue (transfer from VA baseline to LEAs)
(note 1)
|
9 |
-
|
- |
Switch of capital liabilities to VA GBs
(note 2)
|
374 |
-
|
- |
Increased grant
(note 3)
|
- |
-142
|
(opportunity cost +142 to VA programme)
|
Total funding change |
365
|
-142 |
-
|
Notes
1. Assumed value of transfer from VA baseline to LEAs via Standards
Fund (no overall change to DfES)
2. Represents removal of funding to LEAs for their liabilities
(becomes part of overall VA baseline, so no overall change to
DfES)
3. The increased grant support results in a potential reduction
in the overall value of work which would otherwise be supported
from the existing VA baseline.
3. Given the level of VA baselines over the last five years,
and the project activity they have supported, the increased liabilities
for VA school governing bodies in Burnley, as indicated in the
first table above, would be some £65,000. In other words,
this would be the amount required to ensure cost neutrality. But,
as is also indicated, the 5% increase in the rate of grant support
to VA school governing bodies would amount to £142,000. Using
this historical data, the results would suggest that an increase
of around 2.3% in grant rate (to 87.3%) would be required to achieve
cost neutrality. This was the basis used in the Consultation Document.
4. As a result of the consultation process, it became clear
that our initial analysis of the position did not represent the
full picture. The position would change substantially with more
realistic baselines reflecting the capital funding needed to sustain
the whole of the VA school estate to a satisfactory standard.
For example, if we were to use lifetime cost analyses, as in Annex
D to the Department's Statement (the draft Regulatory Impact Assessment),
this would increase the proportion of LEA liabilities under the
current arrangements. Also, the specific examples in Table A cover
only those projects that have either a mix of governing body and
LEA liability, or are governing body liability only. They do not
include projects that were solely LEA liability, and the Department
is often not aware that this type of work has taken place. For
example, this could form part of an LEA-wide contract for boiler
and heating system replacement or refurbishment.
5. Across the country, there are currently many examples notified
to us by VA schools and Dioceses, where LEAs:
- have not funded their liabilities until the problem has reached
an emergency situation (for example, the complete failure of the
school's boiler);
- have prioritised work across the Authority, giving VA schools
the lowest priority, and therefore in practice the work is rarely
undertaken;
- have refused to fund their liabilities, and the Diocese or
VA school governing body has therefore had to fund the work.
The table below indicates the type of work, and estimated associated
costs, that is currently the liability of the LEA and has either
been undertaken without the Department's knowledge, or may not
have been funded by the LEA for a variety of reasons. Under the
proposed arrangements, these liabilities would fall to the VA
governing body.
Type of Capital Project
|
LEA Liability |
LCVAP Led Projects
Internal re-wiring (primary school)
Replacement boiler & heating system (primary school)
Replacement laboratory benches and services (secondary school)
|
£95,000
£140,000
£90,000
|
Sub Total |
£325,000
|
Devolved Formula Capital Led Projects
Playground resurfacing (primary school)
Resurfacing of access road (secondary school)
Resurfacing of paths (primary school)
Replacement perimeter fencing (primary school)
|
£20,000
£15,000
£10,000
£15,000
|
Sub Total |
£60,000
|
TOTAL |
£385,000
|
6. There are also instances where significant sums may have
been expended by VA school governing bodies from their own funds
on other work which is currently LEA liability. This ranges from
fairly small projects that governing bodies would be able to undertake
next year from their NDS Devolved Formula Capital, such as re-surfacing
of playgrounds, to the replacement of antiquated and ineffective
heating systems which they will be able to fund substantially
from LCVAP.
7. The consequence of the increased levels of investment that
will be possible with higher baselines from 2002-03 onwards would
be that the additional funding requirements falling on VA school
governing bodies would rise significantly. This would result in
a much greater proportion of the 5% increase in grant support
being required to ensure cost neutrality. As can be seen from
the following table, taking account of all factors, the 5% increase
in the rate of grant support to VA school governing bodies would
amount to £164,000. As the net increase in VA GB liabilities
would be at least £133,000, a minimum of 81% of the extra
grant would be needed to fund the liabilities changes. These revised
results therefore indicate that a minimum increase of just over
4% in grant rate (to just over 89%) would be needed to achieve
cost neutrality on an equitable basis in the future. Combined
with the factors in paragraph 6, we therefore think that a more
accurate estimate of the required increase would be around 4.5%.
This reflects the lifecycle costing approach included in the tables
in the Regulatory Impact Assessment.
|
LEAs
|
VA GBs |
DfES
|
|
£000s
|
£000s |
£000s
|
External revenue repairs transfer from VA GB to LEA responsibility - effect on 'Formula Repair' projects (at existing VA GB contribution rate of 15%)
|
9 |
-1
|
8 |
Switch of capital items from LEA to VA GB responsibility (at existing VA GB contribution rate of 15%)
|
-374 |
+56
|
318 |
Additional capital work not previously undertaken
(note 1)
|
-385 |
+58
|
327 |
Extra VAT following switch
(note 2)
|
- |
+20
|
111 |
Increased grant support (85% to 90%)
(note 3)
|
- |
-164
|
164 |
Revised total liabilities change
|
750 |
-31 |
912
|
Notes
1. Assumed value of extra capital work based on table in paragraph
5
2. Allows for increased cost of VAT on additional capital work
(VA GB increase is £10,000, DfES increase is £57,000)
3. The revised increased grant support of £164,000 (compared
to £142,000) allows for the extra 5% on the additional capital
work plus the related VAT. The total VA GB/DfES liabilities increase
by £0.452m (£0.385m plus VAT of £0.067m) from £2.834m
to £3.286m. There is no additional cost to central government
arising from the increase in VAT liability (in fact, there is
a small saving of £20,000 due to the additional VAT liability
falling on VA school governing bodies).
| 
