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

Conclusions and recommendations

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Building Colleges for the Future and the 2009 Foster Review

1.  We commend Sir Andrew Foster for his thorough review of the FE capital programme and his perceptive description of events in 2008 and 2009. We have drawn on his work throughout this report. (Paragraph 18)

The Capital Affordability Review: failure of management systems

2.  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. (Paragraph 33)

3.  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. (Paragraph 40)

Lack of a prioritisation mechanism

4.  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. (Paragraph 49)

5.  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. (Paragraph 50)

Role of LSC in liaising with the regions

6.  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. (Paragraph 54)

Risk management

7.  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. (Paragraph 63)

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

8.  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. (Paragraph 69)

Communications between the LSC and colleges

9.  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. (Paragraph 77)

DIUS oversight of the LSC

10.  We ask the LSC and DBIS to clarify the remark made in the minutes of the LSC External Advisory Group meeting in September 2008 that Ministers were considering risks associated with the FE College Capital programme. (Paragraph 84)

11.  Lessons must be learned by DBIS and across Government from the events at the LSC in 2008. DIUS clearly failed in its oversight duties. As we noted earlier in this Report the same management problems that befell LSC were also there in DIUS—a key official did not report back to more senior staff about the Capital Affordability Review; there was a wider lack of challenge; and a total failure to pick-up messages from the sector (or apply common sense) about the scale of commitments which were being made. (Paragraph 87)

12.  The then Secretary of State told us that "the theory of NDPBs when they were first set up, that they protect ministers from the political flack when things go wrong, does not appear to work as well as some of us might have liked […] My conclusion is you should use NDPBs where they are necessary, but not otherwise." Events at the LSC show that NDPBs can diffuse political and financial accountability to such an extent that serious problems are not identified or addressed and responsibility for failure is at best unclear. In this case the situation was made worse by the prospect of the NDPB being wound-up; the Department should have realised that this could affect operations and ensured that its oversight was effective. We conclude that a review of the operation of NDPBs not just across DIUS (now DBIS) but the whole of Government is urgently required. (Paragraph 88)

13.  As far as we can see DCSF was a silent partner in this situation, though it is clear that within the LSC the splitting of the capital budget was regarded as a critical factor in making management of the programme more difficult. We note the points made by the 157 Group about the possible transfer of some projects to the Building Schools for the Future programme and urge DBIS and DCSF to work together to establish whether this is an appropriate way forward. We also recommend that the proposal for a single college capital budget using pooled DCSF and DBIS funds is investigated with the outcome of the review reported to Parliament in the form of a Written Ministerial Statement. (Paragraph 93)

The NAO report in July 2008

14.  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. (Paragraph 102)

15.  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. (Paragraph 103)

Next steps

16.  As it turns out 2008 was indeed a once-in-a-generation opportunity for FE capital expenditure, though not in the way that the LSC and DIUS intended. We are now left with a situation in which funding is scarce and worthy cases cannot be prioritised. Out of over 180 projects submitted to the LSC—of which a significant proportion had received Approval in Principle—only 13 have proceeded to the next stage of consideration. Even they have all been asked to "substantially reduce the cost and scope of their projects and review other sources of funding". For the others there is "no prospect of getting their projects funded this CSR." (Paragraph 120)

17.  This is a difficult situation for all concerned. LSC is making its best efforts to address this prioritisation in a fair way but given the inadequacies of the demand-led process our inquiry has identified, we believe the prioritisation and criteria on which future funding should be committed should take account of all factors relevant to the bids available. This includes the impact of the capital project on the added value of the college's programmes and the vocational development of its student body as well as the impact of the project on the regeneration of the area in which it sits as well as the potential areas from which it recruits its students not simply the chronological status of bids at the time the programme was put on hold. We therefore have concerns about the application of the readiness gateway which we do not believe should be applied in the future when making decisions about funding. (Paragraph 121)

18.  LSC must move to a position where it can show its working on the extent to which the existing budget is committed, the value of projects being considered and how projects have been evaluated. It is particularly disappointing that the announcement of further delays was made only two days before the long-anticipated 3 June Council meeting and we recommend that LSC immediately takes steps to set out the timetable for the remainder of the evaluation process. (Paragraph 122)

19.  The commitment that "no college will become insolvent as a result of capital project delays" does not go far enough. DBIS will now need to work with the LSC to ensure that compensation arrangements for sunk costs are settled as a matter of urgency and the presumption must be that those colleges which incurred significant expenditure moving from Approval in Principle towards Approval in Detail have those costs fully reimbursed. Funding for this should not be top-sliced off the overall capital budget. (Paragraph 134)

20.  The Department and the LSC should be making every effort to help those colleges which will not receive funding in this spending round. We therefore endorse the proposal by the Association of Colleges for a small amount of government funding to support colleges in raising alternative finance for their projects and welcome the announcement by the LSC of the creation of a small projects fund. We see the potential involvement of HEFCE as particularly relevant given the ever-increasing amount of HE delivery via Further Education and the growing convergence between Higher Education and FE in the future for which the Capital building programme is designed. We also see considerable potential to involve local authorities in some projects, given firstly the role of FE colleges in local regeneration and skills development, secondly, the access local authorities have to capital funding, and, thirdly, the authorities' role in 16-19 provision from 2010. Furthermore, colleges should be assisted to share best practice and contacts or to reduce the overall cost of their projects through shared use or redesign. We recommend that funding both for an innovation fund and for small projects is not contingent on the successful 13 Colleges making savings and is not 'top-sliced' from the LSC capital budget. (Paragraph 140)

Conclusions and wider implications

21.  How the LSC now deals with Train to Gain and Adult Apprenticeship funding, where it is again having to introduce additional prioritisation because of potential overcommitment, will need to be monitored closely. We recommend that the new Business, Innovation and Skills Committee maintains our scrutiny of this policy area. (Paragraph 144)

22.  There is an ongoing tension between demand-led and needs-based provision which needs to be resolved between the LSC and DIUS (now DBIS) and across government more widely. The Secretary of State for Children, Schools and Families and the then Secretary of State for Innovation, Universities and Skills told the LSC Council in April 2009 that they wanted "informed demand" rather than prioritisation on a "first come first served" basis. We ask DBIS to set out precisely what is meant by "informed demand", and how this links to the way in which the LSC and the new Skills Funding Agency and Young People's Learning Agency will manage their programmes. (Paragraph 148)

23.  The programme of capital investment in FE Colleges has greatly benefited some colleges, communities and students but in a haphazard manner. We conclude that both DIUS and the LSC are jointly liable for not recognising the weak points of a capital programme which suffered from no overall budget and poor management information, but which was being heavily marketed by the LSC to Colleges. A heinously complicated management structure within the LSC and the approaching Machinery of Government changes bred a lack of responsibility and gave an air of distraction. Everyone wanted this laudable programme to succeed and so failure became unthinkable. Mark Haysom alluded to this when he said "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." (Paragraph 150)

24.  We believe that the greater the freedom given to arms-length agencies by Government departments to carry through major public expenditure programmes, the greater the obligation on the senior management of those agencies to observe due diligence over internal reviews of that expenditure. That includes being proactive in flagging up potential major resource problems to the sponsoring Government department. It is clear that this was not done in the case of LSC and DIUS. It is, above all, a sorry story of management within the LSC compounded by failures of government oversight within DIUS which is likely to cost hundreds of millions of pounds. (Paragraph 151)

25.  Looking forward, the decision-making structure will shortly become even more complicated as the number of organisations involved increases from three (LSC, DIUS, DCSF) to five (Department for Business, Innovation and Skills, DCSF, Local authorities, Skills Funding Agency, Young People's Learning Agency). Both the transition to these new arrangements (which will be led by a new Department) and the new arrangements themselves have the potential to repeat and compound all the problems we have identified throughout this report. The new Department for Business, Innovation and Skills and the new management of the LSC must ensure that this does not happen. (Paragraph 152)

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Prepared 17 July 2009