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

6  The NAO report in July 2008

94. Mark Haysom told us that he was responsible for the NAO reviewing the Building Colleges for the Future programme in 2008: "I was the one that suggested that the NAO came in and looked at the capital programme because I felt that it was a programme that was significant, important and that it was something that we could feel good about. They verified that."[151]

95. The 2009 Foster Review notes that the NAO made some positive comments about the programme, with reservations:

We should perhaps recall the July 2008 NAO report Renewing the physical infrastructure of further education colleges. On value for money, it concluded that the joint funding approach, with the Learning and Skills Council providing additional grant funding to colleges, was enabling the sector to make good progress in rationalising its estate, providing facilities that were of high quality and meeting the needs of learners. The report, however, did state the need going forward for careful risk management and providing DIUS with clearer visibility to achieve a smooth transition to the LSC's successor bodies.[152]

96. The NAO concerns about the programme included:

The organisation and funding of the programme has meant that there has been no national prioritisation of projects, but programme management has improved over time. The Learning and Skills Council initially operated through 47 local Learning and Skills Councils, which might have made it difficult to prioritise projects at a regional or national level. Until it began to fund higher proportions of project costs from about 2004, to build on the strengths of the further education sector early in the capital programme the Council gave priority to projects at colleges that were willing and able to majority fund themselves. In 2006, following internal reorganisation, the Council's regional operations took on planning functions and prepared regional capital strategies that aimed to help target project funding so as to balance educational and property priorities. As a consequence of the initial arrangements, some areas and colleges with the greatest need have not received the highest priority.[153]

Management information on the national programme is inadequate. The Learning and Skills Council relies on spreadsheets for management information, but such systems are not sufficiently robust for a programme of this scale. There are also areas where information needs to be better collated, such as the actual costs of completed projects, contract strategies used and the lessons learned that colleges have identified from their completed projects. The Council is planning to develop a management information and budgeting system that is intended to address these concerns.[154]

Completion of the programme by 2016 will require careful risk management and prioritisation of the capital funds available to the Council's successor bodies. Colleges still to be renewed may be less financially strong or less able to contribute through applying reserves, disposing of assets or raising of loan finance. The cost of renewing the remaining colleges is becoming more expensive, putting the affordability of the programme at risk within the limits of the Learning and Skills Council's capital budgets. The Council will need to consider how best to prioritise funding or encourage colleges to use procurement strategies that require less upfront public funding.[155]

Our assessment of progress in renewing the estate, based on current project costs and grant levels, indicates that achieving the target will be challenging. Assuming the national capital budget is maintained until 2016, to replace the remaining estate with new buildings that conform to the existing cost norms, the Learning and Skills Council is likely to need colleges to provide around half of the funding (which is consistent with estimates prepared separately for the Council). By contrast, the Council support rate for projects approved in principle (i.e. projects that will cost over £10 million) in 2007-08 was 74%. The Council, in consultation with the Department, is considering what changes and possible project prioritisation it will introduce during 2008-09, to make completion of the programme more affordable within the current national budget levels. Colleges may need to find efficiencies, for example through procurement strategies that group projects or by spreading the capital cost over a longer period.[156]

97. However, the comments relating to prioritisation in the recommendations were addressed to the Department, rather than the LSC:

Given the planned changes to the further education system, the Department needs clearer visibility of the programme to achieve a smooth transition of the programme from the Learning and Skills Council to the successor bodies. The Council has had a key role in managing the capital programme. With the dissolution of the Council by 2010, the Department will need to provide continuity of standards in programme management and the setting of programme targets in a clear policy context. To enhance the Department's oversight, it could commission an independent Gateway Review of the programme before it is handed over to the Council's successor bodies. The Department [DIUS] should also be party to the decision on how best to prioritise future projects for funding.[157]

98. The general tone of the report was positive, as demonstrated by the press notice produced at the time, in which prioritisation was not mentioned:

The further education capital programme is enabling colleges in England to make good progress in renewing and rationalising their estate, replacing poor quality buildings with high quality, more suitable facilities. The programme has taken advantage of colleges' accumulated reserves, access to loan funding and scope to dispose of surplus assets. In addition, the Learning and Skills Council approved grants of £1.7 billion towards the £4.2 billion costs of the renewal programme.

Around half of the planned work was completed or underway by the beginning of 2008. The progress of the programme has varied between regions: ranging from only 32% of the estate in Greater London renewed by 2007 compared with 63% in the South West. The variations are in part due to project proposals being developed by the colleges themselves, and differences in the complexity and condition of the regional college estates at the start of the Learning and Skills Council's programme.

Most new buildings are of a high standard, meeting the needs of colleges and learners, and they have been completed on or close to their budget. The earlier projects did not perform well when judged against environmental sustainability criteria, but since 2007 the Learning and Skills Council has required higher environmental standards in new college buildings.

As a result of borrowing to fund the programme, the sector's indebtedness increased to £731 million by 2007, and its interest payable was equivalent to around 1% of its income. Between 2005-06 and 2006-07, the number of colleges that were assessed as being financially weak increased by 21 (from 68 to 89). Whilst this programme is affordable for the sector as a whole, colleges with large debts could be more vulnerable to loss of income if they fail to generate the projected demand for courses.

Tim Burr, head of the National Audit Office, said today:

The capital programme for further education is enabling colleges and the Learning and Skills Council to achieve together what neither could have achieved on their own, and is delivering high quality buildings. The sector has taken on a higher level of debt, and therefore of risk, but the cost should be manageable. If the second half of the programme can maintain the success achieved in the first, further education will be well placed to offer enhanced value for money. [158]

99. Mark Haysom stressed to us that he had taken positive messages from the Report: "Yes, the NAO is not given to praise and I actually thought it was a very positive report […] I felt that it was a programme that was significant, important and that it was something that we could feel good about. They verified that" [159] and also stated that one of the reasons that other warnings were not taken seriously was because of the NAO reassurance:

At that stage, I understand, the [Finance Performance] Committee there were not convinced that what was being said [in the February 2008 Capital Affordability Review] was robust enough [...] I have to say, that was almost exactly at the time as we received an NAO Report, where they had been crawling all over the organisation, which found no really immediate cause for concern. There were some very helpful things in that report, but there were no immediate causes for concern. [160]

100. Similarly, the DIUS press notice announcing that Sir Andrew Foster had been commissioned to review the programme noted "Recent National Audit Office and Public Accounts Committee reports have acknowledged the success of the programme" [161] and the Association of Colleges commented that "the NAO praised the management of projects."[162]

101. The Public Accounts Committee took oral evidence on the NAO Report in November 2008 and the version of events presented by LSC and DIUS witnesses was a positive one:

Mr Watmore: I think the portfolio as a whole is now really well up to speed and the progress is remaining positive on the newer projects. [163]

Mr Haysom: I think at the moment we are content, given the scale and nature of this project, that we are in good shape. [164]

Although Mark Haysom noted that the volume of projects in the pipeline was increasing:

Mr Haysom: In the early days, what we were trying to do when we started this programme was to get a build-up of momentum very quickly with this to make sure that we were tackling as many colleges as we could and to encourage those that were going to be more difficult and more complex to come forward and start developing their plans. That is exactly what has happened and I have to say it has worked very well. It is working to the extent that we have huge applications coming through in huge numbers now, and we are having to make sure that we are balancing those very carefully. [165]

Mr Haysom: It is also true that since this Report was signed off, because the Report captures data up to March, there has been a significant move forward. If I refer you to paragraph 4 on the same page, it talks about £4.2 billion worth of applications. That is now £5.3 billion. It talks about £1.7 billion worth of grants. That is £2.45 billion now. That now equates to 693 capital projects since the beginning of this. That is why I was talking about momentum. We have built momentum very fast and it has been maintained, and there are huge numbers of applications still flowing through the system. [166]

102. We conclude that, while the NAO rightly identified some of the issues in its July 2008 Report, the facts that the report (1) did not give a sense of the urgency with which a prioritisation mechanism was required and (2) did not put the problem in the context of poor risk management diluted its impact. The fact that paragraph 14 of the Report's Summary addressed prioritisation in the context of the completion of the programme by 2016 by the LSC's "successor bodies", alongside the positive tone of the press notice, pandered to the view that was then prevalent within the LSC that prioritisation was a medium and longer-term problem, not something that had to be done immediately.

103. Given the seriousness of the mistakes that were made the NAO report appears in hindsight to be surprisingly positive: we find it hard to reconcile the fundamental problems that became apparent with LSC's capital management, in particular the lack of national prioritisation and planning for this high-cost, high-profile programme, with the tone of the report. This is all the more surprising given that the NAO had sight of the Capital Affordability Review. We conclude that if the NAO had produced a more hard-hitting report in July the worst of the over-commitment would have been averted.

151   Q 84 Back

152   2009 Foster Review, para 31 Back

153   National Audit Office, Renewing the physical infrastructure of English further education colleges, HC (2007-08) 924, July 2008, Summary, para 7 Back

154   National Audit Office, Renewing the physical infrastructure of English further education colleges, HC (2007-08) 924, July 2008, Summary, para 12 Back

155   As above, para 14 Back

156   As above, para 3.3 Back

157   As above, para 22i Back

158   NAO, Press release - Renewing the physical infrastructure of English further education colleges, 11 July 2008 Back

159   Q 84 Back

160   Q 23 Back

161   Denham and LSC appoint Sir Andrew Foster to review College building programme finances, DIUS press release, 27 January 2009 Back

162   Ev 36, para 5 Back

163   Uncorrected transcript of oral evidence taken before the Public Accounts Committee on 17 November 2008, HC 1201-i, Q 1 Back

164   As above, Q 8 Back

165   As above, Q 21 Back

166   As above, Q 22 Back

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Prepared 17 July 2009