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

4  Wider issues

41. In our evidence sessions we sought to resolve remaining areas of ambiguity about the chain of events in 2008 and 2009 and also assess how Sir Andrew Foster's recommendations were being taken forward. We focussed our attention on prioritisation, risk management, the role of the National Council and the Chairman of the LSC, communications between the LSC and colleges and, finally, the relationship between the LSC and DIUS.

Lack of a prioritisation mechanism

42. The lack of any clear prioritisation strategy for this programme is clear in several key LSC documents:

43. Foster rightly identified the lack of "a fully integrated management approach at the LSC. The strengths of capital planning and weaknesses in financial foresight have sat side by side without apparent grip from the overarching general management and corporate governance functions."[84] He stated "Over-commitment should have been detected and challenged sooner [...] If it had been anticipated strategically, the surge could have been mitigated and managed."[85]

44. Foster also referred to the lack of regulation of the demand-led approach and the fact that there was no "robust LSC policy framework for making managerial choices."[86] He concluded, damningly, "where has been the routine analysis, projection and reporting of aggregate, year-on-year cost?"[87] Added to this was a cultural short-sightedness, despite the fact that these were long-term projects. Foster referred to a perceived need within the Council "to use or lose in-year budgets"[88] and we have already referred to the perception that the budgetary problems were in-year.[89]

45. Projects were assessed on individual merit and financial viability rather than against the total budget and national need; Foster refers to the "rigorous and diligent" project assessment process at individual project level, but "diametrically poorer quality of overall financial and management information."[90]

46. David Hughes, National Projects Director at the LSC, stated that "we were starting to move towards a prioritisation scheme",[91] but only after it was too late. Mark Haysom made clear what the LSC's perception had been—one in which prioritisation was simply not required:

the world was pretty much as we had understood it to be for the previous five years where we had a very successful programme that was running within budget and where our biggest challenge was making sure that there were sufficient projects in the pipeline that would come to fruition in a timely fashion so that they could be delivered in future years. And that was the situation right the way through the summer of 2008. That was the situation, incidentally, that was confirmed by a National Audit Office Report at that stage. [92]

47. It is worth noting that other large scale national capital programmes have clearly identified "need" for the funding (rather than being first in the queue) as an important factor to consider. Guidance for Local Authorities on Revising and Resubmitting Expressions of Interest for projects in waves 7 to 15 of Building Schools for the Future, for example, stated:

BSF was prioritised on the average social and educational need of the groupings of schools proposed by authorities. Eligibility for free school meals was used as proxy for social need, and GCSE results for educational need. In 2004 we announced the first authorities to start in the programme. In early 2005, we gave all authorities an indication of where all their projects were prioritised in the national programme. Further waves were subsequently launched, most recently in June 2008, when 8 authorities joined the programme in an interim wave 6a, selected on readiness to deliver criteria from those prioritised in waves 7 to 9. [93]

48. The hospital building programme has also in the past been subject to a form of national prioritisation. The guidance for the "2004 prioritisation round" stated:

The host Strategic Health Authorities will submit SOCs [Strategic Outline Cases] to the Department of Health for prioritisation. These will then be peer-reviewed by other Strategic Health Authorities operating as part of a Technical Group, co-ordinated and guided by the Department of Health. The Technical Group will then report to the Department's Management Board, which will make a prioritisation recommendation to Ministers, who will then decide the relative priority of schemes and announce those schemes that are approved to be further developed.

To be prioritised, schemes must demonstrate compelling evidence of health service need and deliverability. The assessment of health service need will be undertaken by the host Strategic Health Authority, because its role in leading and managing local service strategy makes it best placed to make this assessment. National prioritisation will then focus on the factors that influence the delivery of the scheme, including the quality of stakeholder support, project management arrangements and technical considerations.[94]

49. The evidence we took revealed a strange world in which staff at the LSC believed prioritisation would not be needed in the short to medium term because the programme had historically been underspending. Hence they could defer difficult decisions, for example on how to rank projects within and across regions, to someone else—perhaps the LSC's successor organisations. But this meant that the programme in the end operated on a first-come, first-served basis, with no consideration given either to need or wider departmental or government policy objectives. Some colleges received funding for iconic buildings when something much cheaper would have served perfectly well. Other worthy projects, perhaps in areas of greater deprivation, will now not be funded at all.

50. This should not have happened and must not happen again. We recommend that it should be a requirement for all national capital programmes to have an agreed mechanism for prioritisation built in to them from the start, even if they initially underspend. In this case the perceived need within the LSC to "use or lose in-year budgets" was a key factor in the Council's decision to seek to build up demand in the early stages of the programme, a build-up which proved impossible to manage. Consideration should be given to how to mitigate the tendency to focus on in-year budgets and therefore make short-term decisions, for example enabling greater flexibility to carry-over funds in the early stages of a programme to ensure that growth is managed sustainably.


51. Sir Andrew Foster noted that "the Regions were playing an effective role in scrutinising the building plans, but there was no effective monitoring or control of costs—they had no delegated budgetary responsibility and it was assumed that it was being done centrally."[95] David Hughes, now National Projects Director at the LSC but Regional Director for the London Region during 2008 and also Chair of the Finance and Resources Board which had had sight of the Capital Affordability Review in May 2008, confirmed that "It was a national budget to which we were pushing through projects, so we had no regional budget."[96]

52. When asked whether the LSC had been consulting the Regional Directors about the scale of applications in the pipeline Mark Haysom explained:

one of the things that had happened was that we had gone round all of the regions, asking what was in the pipeline and for their best estimate of future demand. And in 2007, I think, the figure that came back was that there was £8 billion worth of activity in the pipeline. One of the things that happened in 2008 is that, when that came back again, and I think that was in the September, having reviewed it, that number had leapt to £16 billion […] we were very anxious about that.[97]

53. The NAO noted that Regional Directors themselves had authority to approve expenditure on projects;[98] according to a 2006 LSC paper, the Capital Committee had delegated authority to determine applications for consent and capital project grant support (including borrowing consent) for projects estimated to cost up to £30 million, the Chief Executive for projects estimated to cost up to £10 million where the Council's grant contribution was 50% or less and Regional Directors for projects estimated to cost up to £5 million where the Council's grant contribution was 35% or less.[99] We were told by the LSC that the Chief Executive had authorised £115.9 million of LSC expenditure between October 2003 and December 2008.[100]

54. We conclude that the senior management of the LSC made two significant mistakes in dealing with the regions during 2008. They should have been consulting Regional Directors much more frequently about the programme to establish likely overspends, whether or not they were aware at the time of the Edwards report and its implications, and Regional Directors should have been given a responsibility to monitor and report on the number of projects coming through the system.


55. Mark Haysom's evidence revealed that there had been a general lack of longer-term strategic thinking at the LSC following the announcement of its imminent demise, which may have been one of the reasons why this looming problem was not addressed:

the way we were thinking about the future had changed pretty dramatically. We were in the business of steering the organisation towards an end point of April 2010, and that kind of longer-term strategic thinking […] suffered. As a consequence of that the whole organisation becomes focused on that end point rather than managing the way that you would previously.[101]

56. The 2009 Foster Review referred to this as "'eye off ball syndrome' associated with organisational change",[102] stating clearly that "The impact of the demise of the LSC and uncertainty about arrangements for the new agencies should not be underestimated. Many meetings took place about areas of contention and disagreement and the main focus of management was on these issues",[103] concluding:

Of course it is no good saying that organisational change should be reined in: it has always happened, as circumstances change, and it always will. It is very often essential and inevitable. The point is that the distracting and even blighting impact of change must be anticipated and positively managed at all levels. There is no shortage of wisdom about this in the manuals of management.[104]

Risk management

57. At the same time as these events were unfolding LSC was responding to previous criticism of its risk management systems made by LSC Internal Audit in both 2006-07 and 2007-08. Mark Haysom's 2007-08 Statement on Internal Control, published with the LSC's 2007-08 Annual Report and Accounts, stated that "Internal Audit performed a review of risk management during the year which gave a restricted assurance and has resulted in a qualification to the Internal Audit Annual Report. In the last quarter of 2007-08 the failure to properly embed corporate risk management was recognised at the highest level within the LSC as the National Audit Committee reported the matter to the National Council"[105] and added "The assurance provided by Internal Audit has been qualified in regard to risk management […] [T]he 2006-07 Annual Report identified significant action was required across the LSC to properly embed risk management."[106]

58. In response to this, in July 2008, the LSC's Management Group and the National Audit Committee agreed the LSC's top four risks, which were:

  • Machinery of Government;
  • Finance and Systems;
  • Performance: Train to Gain and Apprenticeships; and
  • Demand Led Funding: Provider Capacity.[107]

59. The September 2008 Delivery Report added "LSC has a refreshed risk management process which will ensure that there is a clear line of sight between risks identified from across the organisation and the four corporate risks set out above. These risks will be managed by national and regional risk champions and overseen by the Risk Management Board reporting to Management Group. Issues will be escalated to Council as appropriate." The December 2008 Delivery Report (LSC Management Group Report to Council) noted that "EMA and National Apprenticeship Service" had been added to the top risks.[108]

60. But even as a result of all this work the capital programme was not flagged up as a potential major problem. As Chris Banks told us "because of the various changes that were going on and the uncertainty, we did instigate [...] a full review of all of our risk management so that we could get a better grip on it, but you are right, it failed".[109] This review was also mentioned by Mark Haysom:

we revisited our whole risk management approach during 2008 because it was not as robust as it should have been previously—and the Audit Committee were doing a very good job for the LSC and flagged that up. So I put in place very prompt action to address that and we put in place, what I considered to be, a pretty robust risk management approach. Next question: why was the capital programme not on the risk register? I think, well, I know, because it was seen to be a success, that flipping into, in record time, a situation of over-demand was not seen to be an issue on the radar. I am sorry, but it was not.[110]

61. DIUS was well aware of the problems in risk management at the LSC, and the issue was mentioned in its Accounts for 2007-08:

The Learning and Skills Council (LSC) is one of the Department's key NDPBs and an area of concern has been identified with regard to the failure to properly embed corporate risk management across the organisation and respond to concerns raised by internal audit in the previous financial year. This has been disclosed in the LSC Statement on Internal Control for 2007-08 and is being addressed as a matter of priority. The LSC has undertaken a redesign of its approach to risk management and is working to achieve prompt and genuine progress in this area for review by the LSC's National Audit Committee.[111]

62. But DIUS chose not to include this specific risk in the table listing risks in Annex 3 of its 2008 Departmental Report. When we scrutinised the Report we were highly critical of the way in which that risk table was put together and the way it differed from the list in the annual accounts, noting:

The risks listed in DIUS's accounts appear to us to be matters for which public officials—and ultimately ministers—have control and should be accountable if they do not address and take all reasonable steps to reduce the risk. We are concerned that the list in the audited accounts has not been reproduced in the list of risks in the Departmental Report. Instead DIUS has produced a list that includes items that are likely to defy accountability.[112]

63. The fact that the LSC's weak risk management system was being addressed as these events were unfolding, and that even as a result of this the capital programme was not identified as a major potential problem is astounding. In this context we repeat our criticism that DIUS did not place key risks it had identified in its Accounts—including poor risk management at the LSC—in its 2008 Departmental Report.

The role of the National Council and the Chairman of the LSC

64. The LSC's website states:

The National Council is the top tier of decision-making in the Learning and Skills Council. The National Council is responsible for all of the functions of the LSC unless it chooses to delegate those functions. It steers LSC strategy and provides leadership to the LSC and delivery system as a whole.

It provides challenge and support to the LSC's chief executive and senior management team, monitors and evaluates the LSC's performance nationally, ensuring that local and regional activity delivers national priorities and targets. Members of the National Council also act as national ambassadors for the LSC and for learning and skills.[113]

65. Chris Banks, the Chairman of the LSC, came with a background in business, having founded Big Thoughts, a company which was set up following a management buy-out from The Coca-Cola company in 2001. He was previously Managing Director of Coca-Cola Great Britain. His post at the LSC is on a part-time basis (approximately two days a week—though he told us he worked more than this[114]) for a salary of around £51,000.[115]

66. We asked Chris Banks a series of questions on his role in the events in 2008 and his decision not to stand down at the same time as the Chief Executive. He explained that the Council was "a corporate body of almost entirely non-executive members plus a chief executive [...] we took the decision early on that we would delegate all the day-to-day operations of the organisation to the executive team, if you like, the experts, and also the people who are working day in day out on the detail of these, and I think it is worth having that model in mind because it is a different model from business or some other agencies or organisations that people have seen."[116]

67. He added that he had been unaware of any problems until the end of 2008, and that as soon as the Council had become aware of the crisis it had acted quickly and decisively.[117] He also acknowledged major failings in the way in which information was dealt with and the fact that, as he noted, "capital was not on the risk register."[118] When asked whether he had considered his own position he told us:

Of course I did. It would be only natural to, would it not, in the circumstances, and I do want to put on record my personal apologies as well as those of the organisation to all of those people who have been affected by the difficulties that we have had and the consequences to everyone else, but my belief is that, as the day-to-day responsibility for the management of that programme rested with the chief executive and that he has resigned as a result of this, that is the right thing, and my job is to try and ensure that this organisation delivers all that it possibly can between now and the time when it is dissolved in the spring.[119]

68. Cabinet Office guidance notes that the Boards of public bodies have "a collective responsibility for the proper conduct of the body's affairs and for ensuring that staff maintain the strictest standards of financial propriety. Where the Public Body has been set up by statute, the Board has a duty to ensure that the requirements of propriety, regularity and value-for-money are met in its use of public funds."[120] As Chairman of the Council Chris Banks had a responsibility to ensure that the executive team had systems in place to manage key programmes.

69. We note the points made by Chris Banks about the position of the LSC Council and his own position as Chairman of that Council. While the LSC Council delegated responsibility for management to the executive team it retained a responsibility to provide high-level oversight, set overall strategy and to challenge and question what the management team were doing, and the Chairman of the Council should have been leading the Council in achieving this. The Chairman and the Council clearly failed in this oversight during 2008.

Communications between the LSC and colleges

70. The 2009 Foster Review alludes to encouragement given by the parts of the LSC to colleges to bring projects forward in the context of a programme which had been underspending. Foster stated that "There was strong encouragement for the programme from Ministers and the LSC Chief Executive throughout 2006 and 2007. Mindful of the need to use or lose in-year budgets, the LSC promoted the programme intensively and supplemented client capability in the sector to support the more cautious cohort. Spurred on by the stated policy of renewing the entire estate, local LSC teams actively solicited projects from colleges and worked with college principals to turn more modest proposals into wholesale upgrading of the entire college estate." [121]

71. Our evidence session with college representatives provided us with specific examples of this "bigging-up process":

about three and a half years ago we had a quite modest project of about £8 million to replace one of our sixth form colleges. At the beginning of the LSC process [...] it went up to £30 million, then it went up to £90 million, and at the end it was £175 million, and in the end most of that was a bigging-up process, and that happened through the regional LSC property process.[122] (Dr John Blake, Sussex Downs College)

To begin with I think he [Mark Haysom] was frustrated with the sector that they were not coming forward fast enough [...] I suspect, although I do not know from the inside, that he [Mark Haysom] sent out instructions, or his team sent out instructions, to the regions and to the local areas for them to go out and talk to the colleges about their plans and asking were these plans transformational enough. I know in the West Midlands, for example, in 2007 we were all invited to share with the local LSC and the regional LSC what our expectations and hopes were, so there was a regional capital plan. What it could have been was a capital plan that was based on need and business case and so on. What I think it was was actually a wish list of what colleges wanted to do [...] I knew what my priorities within the structure were but I was constantly questioned, 'You are missing an opportunity. This is a once-in-a-lifetime opportunity for the sector.' (Graham Moore, Principal of Stoke College and Chair of the 157 Group)[123]

72. Dr Blake continued "I can remember going to a meeting with the LSC in Sussex where all the principals and all the chairs were basically told that they were being too conservative."[124] Martin Doel, Chief Executive of the Association of Colleges, confirmed "Those conversations were still going on [in summer 2008] and that was the National Capital Team coming round to say, 'No, it is not sensible for you to leave part of your estate untouched, you should be coming up with a plan to refurbish the whole of the estate' […] The final thing I would say is a term which has been bandied around a good deal during this period—and I understand it and I was there—is that this was a 'once-in-a-generation rebuild', a 'once-in-a-generation opportunity'."[125]

73. This phrase was also used by Mark Haysom when he gave evidence to us:

I was giving very clear messages, as were ministers at the time, that this was a once-in-a-generation opportunity to rebuild the capital estate and that what we wanted to do, where it was possible, was to create great buildings and what we did not want to do was to just put up buildings that replicated the existing buildings, just a bit more modern. [126]

Although he also said:

I do not think we were asking people to go from modest to major. The signal that we were giving was, 'If we're going to put up new buildings, can we make sure that they are buildings that are right for the community, right for learners and right for employers and use this opportunity, wherever possible, to create great buildings'. That is the message that consistently went out.[127]

74. We raised these issues with David Hughes. He responded:

I have heard a lot of anecdotes about this, but I have seen no evidence, and Foster said the same. I have never talked up a project, I have never bigged-up a project. [...] I am absolutely confident that no-one in my team ever did that. What I am clear about is that there was lots of ambition in the sector and there were lots of iconic schemes being put up, and other colleges looked at those and, I think, thought, 'We want one of those.' I do not think we were in the game of saying, 'Go away and re-write and make it two or three times as big.' I certainly have never done that.[128]

75. And when questioned further during the same evidence session:

Mr Marsden: […] please, for the record, understand that the reason we are asking these questions is that we have had two college representatives before us this morning who have already said exactly what the Chairman has said, that these projects were talked up by regional LSC advisers, and that is why. You must have been an oasis of rectitude compared to the rest.

Mr Hughes: As I said, I can confirm that absolutely we did not do that.[129]

76. He was quoted in LSC London Magazine in January 2009 as saying:

For the last couple of years we have been accelerating the approval of big capital schemes in colleges across London. We want the colleges in London to be good to look at, good to learn in and offering modern facilities and kit. That's what today's learners demand: exciting, modern, aspirational environments with cutting-edge facilities and carefully designed learning and social spaces […] There's a strong association between new buildings and high achievement.[130]

77. The extent to which individual colleges were urged to increase the scale of particular projects may be a matter of some debate between the LSC and the colleges themselves. But given the historically cautious expectations of the majority of the FE sector, it is in our view highly unlikely that colleges would have "bigged up" their projects without direct encouragement from regional officers or national directors at the LSC. The evidence appears more than anecdotal that LSC was encouraging bigger and bigger schemes to come forward: the use of phrases such as "once-in-a-generation opportunity" and "a strong association between new buildings and high achievement" was irresponsible and bound to build up excess demand that could not be satisfied and the LSC as a whole, and those individuals involved, should accept responsibility for this.

81   LSC, LSC Capital Handbook, November 2006, para 32 Back

82   LSC, Building Colleges for the Future: the LSC's National Capital Strategy for 2008-09 to 2010-11, March 2008, p 3 Back

83   As above, p 10 Back

84   2009 Foster Review, para 39 Back

85   As above, para 38 Back

86   As above, para 39 Back

87   2009 Foster Review, para 37 Back

88   As above, para 13 Back

89   See paras 29-33 Back

90   2009 Foster Review, paras 35-36 Back

91   Q 228 Back

92   Q 6 Back

93   DCSF, Guidance for Local Authorities on Revising and Resubmitting Expressions of Interest for projects in waves 7 to 15 of Building Schools for the Future, September 2008, para 13 Back

94   www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/

95   2009 Foster Review, para 22 Back

96   Q 207 Back

97   Q 67 Back

98   National Audit Office, Renewing the physical infrastructure of English further education colleges, HC (2007-08) 924, July 2008, para 2.14 Back

99   LSC (2006) Capital Project Support, Paper LSC 50/2006.See also National Audit Office, Renewing the physical infrastructure of English further education colleges, HC (2007-08) 924, July 2008, para 2.14 and Ev 48 Back

100   Ev 48 Back

101   Q 72 Back

102   2009 Foster Review, para 59 Back

103   As above, para 41 Back

104   As above, para 42 Back

105   LSC, Annual Report and Accounts for 2007-08, HC (2007-08) 783, Statement on Internal Control, para 12 Back

106   As above, para 18 Back

107   LSC, Delivery Report: LSC Management Group Report to Council, September 2008, p 10 Back

108   As above, p 9 Back

109   Q 181 Back

110   Q 74 Back

111   DIUS, Resource Accounts 2007-08, HC (2007-08) 864, p 38 Back

112   Third Report of the Committee, Session 2008-09, HC 51-I, para 44 Back

113   www.lsc.gov.uk/aboutus/organisation/aboutnationalcouncil/ Back

114   Q 163 Back

115   Q 161 Back

116   Q 153 Back

117   Qq 156-159 Back

118   Q 181 Back

119   Q 182 Back

120   Cabinet Office, Public Bodies: A Guide for Departments, Chapter 6, para 2.1.1 Back

121   2009 Foster Review, Summary, para 13 Back

122   Q 110 Back

123   Q 108 Back

124   Q 112 Back

125   Q 120 Back

126   Q 79 Back

127   Q 83 Back

128   Q 214 Back

129   Q 225 Back

130   LSC, the magazine, January 2009, p 5 Back

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