Spend, spend, spend? - the mismanagement of the Learning and Skills Council's capital programme in further education colleges - Innovation, Universities, Science and Skills Committee Contents


3  Events in 2008

The Capital Affordability Review: failure of management systems

19. As we have already noted, the FE capital programme was somewhat slow to gather momentum after the announcement of increased funding in 2005. But the pace of demand was increasing, and an internal review commissioned in December 2007 and completed in February 2008[40]—the Capital Affordability Review—included the statement "From 2010 to 2013 however, if current policies did not change and the tempo of capital projects is maintained, the demand for capital grant payments moves in 2010-11 up to £450 million above the funds available for FE projects. This simply proves that the continuation of the current payment profile of projects is unaffordable to the Council."[41]

20. The Review was commissioned by the LSC's Director of Property and Infrastructure Services[42] and prepared by George Edwards of George Edwards Consulting Limited. It included forecast projections of capital spend under different scenarios and was relatively short (29 paragraphs). The conclusions were:

The reduction in flexibility of FE Capital budgets will mean, if about £100 m of the FE budget is not restored, that either the FE renewal programme must be slowed down or prioritising or rationing must be introduced; and

These recommended capital policy changes increase the manageability of the capital payments system and if adopted will help to ensure that the Learning and Skills Council can continue to manage its capital budget within the available funds despite the increasing volatility of capital claims from colleges.

21. The Capital Affordability Review had a limited circulation, although it was seen by the NAO[43] as it prepared its report on the programme (see section 6). Despite Mark Haysom's insistence that "I worked very hard in the LSC to try and create a culture which was really open and where people could actually come directly to me with their concerns"[44] both he and Chris Banks, the Chairman of the Council, confirmed that they did not see the Review until much later in 2008, after the scale of the problem had become apparent. Mark Haysom told us "that report was not escalated within our organisation to the extent that it reached my desk. So I was never aware of that report, and that meant that neither I nor senior DIUS officials nor anyone else was aware that that report existed."[45] Chris Banks, similarly, "To be very explicit on that, I was unaware of the existence of that report, I am afraid, but you should know. The earliest I might have known would be December, it may have been later than that. […] No-one mentioned it or raised it with me."[46]

22. What did happen to the Capital Affordability Review, as is made clear in the 2009 Foster Review, is that it was passed around the LSC's labyrinthine management structure. The Capital Policy Group, after considering the report on 22 April 2008,[47] referred it to the executive Finance and Resources Board in May. A Prioritisation Working Group was also established.[48] David Hughes, then Regional Director for London and Chair of the FRB, and now National Projects Director for the LSC, defended the treatment of the Review, telling us that "I do not think it [the Review] was predicting disaster for the programme. What it said was there were some serious problems on the horizon."[49] He stated that the Finance and Resources Board had referred the matter on to the LSC's Capital Committee:

there are some actions we need to take, including prioritisation, including limiting the grant paid by the LSC and a number of others that we can see in the report, so we said we need to do that, and we referred that, quite understandably, to the Capital Committee and asked the Capital Committee to take that on. They did not do that until September.[50]

23. The Minutes of that September Capital Committee meeting record that the view was taken on 19 September that "further work" was necessary before strategies "could be finalised":

The Committee was told that this year is the first time since the LSC was formed a potential overspend against the current capital budget was forecast compared to the potential underspend usually forecast at the same point in previous years [...] The Committee would have to look at how projects are funded in the medium to longer term as the first regional capital strategy returns indicate a significant increase in forecast projects and a peaking of requirements around 2010-11 possibly influenced by the Machinery of Government outcomes. Further work was likely to be required reconciling these estimates with previous years forecasts before the strategies could be finalised.[51]

THE CAPITAL AFFORDABILITY REVIEW AND DIUS

24. We turn later in this report to the somewhat troubled relationship between DIUS and the LSC, one of its Non-Departmental Public Bodies (NDPBs). Cabinet Office Guidance from June 2006 notes:

The term 'NDPB' has been in existence since 1980 when it was coined by Sir Leo Pliatsky in his 'Report on Non Departmental Public Bodies'. An NDPB is described as: 'A body which has a role in the processes of national government, but is not a government department, or part of one, and which accordingly operates to a greater or lesser extent at arm's length from ministers.'[52]

25. The Guidance notes that the "distance [of NDPBs] from government means that the day-to day decisions they make are independent as they are removed from ministers and Civil Servants." However, it adds "Ministers are […] ultimately responsible to Parliament for a NDPB's independence, its effectiveness and efficiency"[53] and "the relationship between each NDPB and its sponsor department must be clearly defined in a way which supports the appropriate degree of delegation and independence of the NDPB, while assuring the accountable minister and department that financial management arrangements ensure propriety, regularity and value for money, and that risks will be managed."[54]

26. As part of this oversight process DIUS staff had regular meetings with key LSC staff and attended some committees.[55] But, as we were told by Stephen Marston, DIUS Director General of Universities and Skills: "I deeply regret that it [the Capital Affordability Review] was not escalated […] I was not aware of the report until November."[56] He explained:

What did happen is it was a member of my staff who attended the meeting—I think it was actually in April—that first looked at the February report [...] I do not think it is quite right to say it was just ignored. I think a number of things followed from it […] reaction number one to this report was, right, we must sort out the short-term position. The second reaction to it was, 'It is right that we are going to have to think about prioritisation' […] the bit that we clearly just failed to get right was the speed of understanding that we were at a tipping point, the whole programme was changing and we did not react fast enough.[57]

27. When pressed on why that DIUS official had not alerted senior staff to the contents of the Capital Affordability Review, Stephen Marston replied "For me the critical issue is the confidence to escalate, to err on the side of escalating if you see a problem, even if the group conclusion in that meeting you are attending is, 'It is okay. Let us keep it under review. It is going to be all right.' That is what went wrong."[58]

28. The then Secretary of State told us:

so far as Ministers are concerned, none of this (and I think this is accepted) reached Ministers until November, and it is also fair to say that the thrust of the concerns that were raised with Ministers in November were more about the phasing of payments and how well they would match the planned capital payments than they actually were about the problem which subsequently emerged, which was the sheer scale of the number of schemes in the pipeline.[59]

PERCEPTION THAT THIS WAS AN 'IN-YEAR' PROBLEM

29. Foster notes that work within the LSC in spring 2008 focussed on the in-year financial position of the capital programme, rather than the longer-term[60] and David Hughes linked this point to the issue of the Capital Affordability Review:

So when we saw this report, it said: you need £100 million in-year to manage the budget. We had a very strong assurance, unofficially, that we would end up with that money.

Q198 Chairman: From whom?

Mr Hughes: From officials.

Q199 Chairman: Your own officials?

Mr Hughes: We were in discussion about a budget […] in the end there was £110 million brought forward […] so that foresight was right.[61]

30. This was confirmed by other witnesses from the LSC. As Mark Haysom, former Chief Executive, put it "everyone was focused on trying to solve the in-year issues."[62] Chris Banks, Chairman of the LSC said, similarly, "The key issue that we were looking at within the council actually on an on-going basis was the in-year expenditure, and that is the thing that was being reported as the key pressure point."[63]

31. Mark Haysom added:

The £110 million was the right information and we could see that very clearly, but the way that we had anticipated managing that £110 million overspend was through end of year flexibilities. That was not something that proved possible, but that situation was resolved when the budget was brought forward from 2010-11. So that in-year problem was resolved during that period.[64]

32. But, as Sir Andrew Foster noted, this "was not just an in-year problem; even had it been so, the scope for using Train to Gain underspends, a possibility that had been discussed, was reduced by the emergence of other DIUS cost pressures at mid-year. A decision to bring forward £110m of capital funding did seem to disguise the underlying problem in-year but merely amplified it for 2009-10." [65]

CONCLUSION

33. We conclude that the treatment of the February 2008 Capital Affordability Review demonstrates what was going wrong both within the LSC and between the LSC and DIUS. There were failures in communication within and between the two organisations and a shared—but flawed—assumption was formed that this was an in-year issue that had no long-term implications. A central element in this was the failure of the LSC's then Chief Executive and Chairman to have a process where they regularly considered the future direction of a key programme which was to consume up to 9.2% of the LSC's total budget by 2009-10.

May—November 2008

34. The 2009 Foster Review sets out what happened during the rest of 2008 in the various LSC groups, boards and committees:

The LSC's Management Board […] received a paper on capital issues at its meeting on 13 May 2008 warning of increasing pressure on the capital budget and alerting it to expect advice on short and medium term priorities at its meeting on 12 June 2008. No such advice was provided, however, and neither were capital issues discussed at that meeting. Moreover, no recommendations from the Prioritisation Working Group were put to the national Capital Committee until September 2008.[66]

The 30 July Council meeting approved the combined recommendations of the 19 June and 17 July Capital Committee meetings. These determined or recommended 26 FE and 16-19 capital funding applications with a total estimated cost of £1.2bn, including grant support of just over £1bn, payable over the next 5-6 years. The workload of the Capital Committee had become so onerous by June that the Director of Property and Infrastructure requested an extra meeting in August to deal with the large number of projects waiting to be presented.[67]

The Capital Committee met on 19 September 2008 and agreed to recommend to Council 7 Approvals in Principle and 1 Approval in Detail with a total value of £401m. It met again on 22 October 2008 and put forward a further 4 Approvals in Principle and 5 Approvals in Detail with a total value of £530m.[68]

Meanwhile, consideration of project proposals continued. As already noted, the Council had deferred decisions on the recommendations from the October meeting of the Capital Committee to satisfy itself about affordability. However, the November meeting of the Capital Committee agreed to recommend to the December meeting of Council further projects with a value of about £500m (fitting in an extra meeting on 4 December to get through them all).[69]

35. Areas of ambiguity remain in the evidence we received about when different parts of the LSC were aware of potential problems. Dr John Blake of Sussex Downs College reported that Phil Head, LSC Director of Infrastructure and Property Services, visited his College in September 2008 to say that phasing might be necessary: "we were told that maybe it [the College's project] needed to be phased so we began to be a little bit concerned about what that meant."[70] It is not clear to us why, given that we were told that, commendably, Phil Head had been responsible for commissioning the Edwards report which gave the first warning signs over the programme, there appears to have been no discussion about looming longer-term problems between him and the then Chief Executive (or Chairman) through 2008.[71] This seems particularly curious given the then Chief Executive's self-proclaimed 'open-door' style.[72]

36. Minutes of the 17 December LSC National Council meeting seem to indicate that concerns over affordability were in existence at the beginning, rather than the end of November, which puts the positive picture painted to the Public Accounts Committee later that month (see section 6) into perspective:

Council asked that a correction to the report [proposing changes to the management and funding of the FE capital programme] be formally recorded. The report stated that 'At its meeting on 5 November 2008 the Council did not have time to consider and determine the project proposals (both in principle and detailed) recommended at the 22 October Capital Committee meeting'. It was noted and acknowledged that the main underlying reason had been concern over affordability.'[73] (emphasis added)

37. The 2009 Foster Review also refers to the November Council meeting as significant:

When Council met on 5 November 2008 it was presented with Capital Committee project recommendations with costs approaching a further £1bn. Mindful of growing pressures on the capital budget, Council also received an initial report on the future funding and priorities of the capital programme alongside those recommendations from Capital Committee. Council approved the recommendations from September, only £44.5m of which was application in detail, but deferred decisions on October recommendations until its 17 December meeting. Members also requested a report on the funds available in 2008-09 and future years, and a paper forecasting Approval in Principle commitments on the budget across the current and next Comprehensive Spending Review periods.[74]

December 2008

38. In December, as we have noted, the news finally permeated to the top of both the LSC and DIUS that there was a serious problem. Mark Haysom explained that he was "pretty shocked" when the full extent of the LSC's spending commitments became apparent in late 2008, commenting "the speed with which the situation changed is one of the most extraordinary things about the whole episode."[75]

39. The LSC Council met on 17 December 2008 and agreed to a three-month pause in consents to proceed with Approval in Principle (AiP) and Approval in Detail (AiD) applications. [76] Further mistakes were then made. The Council did not immediately carry out a full-sector communications plan because, Foster reported, Ministers considered "that a full action plan needed to be brought forward about the scale of the problem and how to rectify it, before it should be communicated."[77] The 2009 Foster Review states "The Council wanted full communication but it did not happen", suggesting that the LSC did not have the detailed information available to explain the situation.[78] This meant that there was considerable confusion among colleges in early 2009 (the Association of Colleges referred to "chaotic effects"[79]) which compounded an already difficult situation. Mark Haysom, then Chief Executive, wrote to all college principals on 16 January 2009. The letter stated:

there has been confusion recently over the future of the programme. I wanted to write to clarify the situation. There is no freeze on the capital funding programme. However, the pace of demand for capital funding has increased as projects and the scale of Government funding required becomes increasingly ambitious. On top of this some colleges are finding their ability to raise their own funds curtailed by the economic downturn […] In light of these factors the LSC has taken the decision to look at the proposals for all capital schemes in the pipeline to assess the likely impact on funding support for individual projects […] As a result of this consideration, a small number of applications that were due for decision—both in-principle and in-detail—have been deferred from December to March. The 253 colleges that have been given approval in detail and either have work underway or have previously been given the final go ahead for works to begin will not be affected. But the LSC will be in contact with colleges that are in the process of submitting bids to advise them on the steps they need to take. [80]

Conclusion

40. The unprecedented level of capital expenditure on the FE estate between 2005 and 2008 can be regarded as a great achievement by the Government and by the LSC. On the basis of the 2009 Foster Review and the evidence we have taken we conclude that there was a catastrophic mismanagement of the LSC capital budget during 2008 and neglect of oversight by those in the most senior positions in the LSC. The fact that the situation changed quickly does not excuse the lack of recognition of crucial warning signs, in particular the February 2008 Capital Affordability Review.


40   2009 Foster Review, para 15. The Review is published with this Report (Ev 50). Back

41   As above Back

42   As above Back

43   The Review is listed in Appendix Five of the NAO Report ("Learning and Skills Council reviews") which states "The purpose of this review, which reported in February 2008, was to consider the affordability of the current system of capital grant support to further education colleges within the context of the current affordability policy of the Council" and lists "results and action taken" as "The review recommended a number of capital policy changes to increase the manageability of the capital payments system and help to ensure that the Council can continue to manage its capital budget within the available funds. The Council will present the conclusions to the national capital committee and reflect them in updated guidance." Back

44   Q 20 Back

45   Q 9 Back

46   Q 170 Back

47   2009 Foster Review, para 17 Back

48   As above Back

49   Q 193 Back

50   Q 199 Back

51   LSC, Capital Committee minutes, 19 September 2008, para 3.7 Back

52   Cabinet Office, Public Bodies: A Guide for Departments, June 2006, Chapter 2, para 2.1 Back

53   Cabinet Office, Public Bodies: A Guide for Departments, June 2006, Chapter 2, para 2.2 Back

54   As above, para 3.1.3 Back

55   See Annex and Q 260 Back

56   Q 249 Back

57   As above Back

58   Q 255 Back

59   Q 247 Back

60   2009 Foster Review, para 18 Back

61   Qq 197-199 Back

62   Q 50 Back

63   Q 170 Back

64   Q 8 Back

65   2009 Foster Review, para 22 Back

66   2009 Foster Review, para 19 Back

67   As above, para 20 Back

68   As above, para 23 Back

69   As above, para 25 Back

70   Qq 97-102 Back

71   Qq 47-52; Q 157 Back

72   Q 20 Back

73   LSC, National Council minutes, 17 December 2008, para 5.9 Back

74   2009 Foster Review, para 24 Back

75   Q 6 Back

76   LSC, National Council minutes, 17 December 2008, para 5.7 Back

77   2009 Foster Review, para 27 Back

78   As above, para 46 Back

79   Ev 37, para 7 Back

80   Letter from Mark Haysom to College Principals, 16 January 2009 [not printed] Back


 
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