Supplementary evidence from the Learning
and Skills Council
1. The Committee
would like to know who was present at the "Ministerial reviews"
held on 16 June, 21 October and 16 December; and also who was
present at the "finance stock-take" meetings between
senior managers in DIUS and the LSC Chief Executive and Director
of Resources on 12 August and 13 November 2008 (see para 44 of
the Foster review).
MINISTERIAL REVIEW
MEETINGS
Ministerial Review meetings are held jointly
by the Department for Innovation, Universities and Skills and
the Department for Children, Schools and Families. Each meeting
is chaired by the Parliamentary Under Secretary of State for Further
Education, and attended by a Minister from DCSF, the Director
of the DIUS Learning and Skills Performance Directorate and a
Director from the DCSF Young People's Directorate. The LSC is
represented by its LSC National Chair, Chief Executive and its
key national directors. Other Ministers and officials from both
Departments may also attend depending on the agenda.
FINANCIAL STOCK
TAKE MEETINGS
Joint DIUS/DCSF financial stock take meetings
take place approximately once a quarter. These are official level
meetings, and are attended by the Director-General of the DIUS
Further Education and Skills Group, the Director General of the
DCSF's Young People's Directorate and the LSC Chief Executive.
Other officials from both Departments, and from the LSC, may also
attend depending on the agenda.
2. The Committee would also like to know the
total value of the projects authorised by the Chief Executive
under his delegated authority for projects under £10 million
where the LSC was paying less than 50% of the cost.
The Chief Executive of the LSC has delegated
authority to approve capital projects of below £10 million
total project cost and below 50% LSC rate of contribution.
Between October 2003 and December 2008, the total
values of the projects approved by the Chief Executive under his
delegated authority were £420,643,053 in total project costs
and £115,904,615 in LSC contributions.
3. Further Education Capital Budgets (table
on next page).
The "Other Sector Capital Investment"
is Information Learning Technology spend (JANET costs, etc), LEA
Loans Liabilities, our own IT System Development Costs and expenditure
of Financial Support for Colleges (hence the large increase in
2009-10 where we have made an extra £70 million available
to mitigate abortive costs/impact on colleges of the current Capital
Position).
Further Education Capital Budgets
| | LSC Budget
| LSC Planning Assumptions
| | Treasury Planning Assumptions
|
| Financial Year | 2007-08 £'000s
| 2008-09 £'000s | 2009-10 £'000s
| 2010-11 £'000s | 2011-12 £'000s
| 2012-13 £'000s | 2013-14 £'000's
|
| Original Grant Letter Budget | 595,800
| 694,400 | 819,800 | 849,800
| tbc | tbc | tbc
|
| Subsequent Amendments: |
| | | |
| | |
| Funding Brought Forward | |
| | |
| | |
| —Fiscal Stimulus (PBR 2008-09) | 0
| 110,000 | 0 | (110,000)
| 0 | 0 | 0 |
| —Additional Funding (Feb 2009) | 0
| 22,000 | (22,000) | 0
| 0 | 0 | 0 |
| —Additional Funding (March 2009) | 0
| 10,000 | (10,000) | 0
| 0 | 0 | 0 |
| Budget 2009 | |
| | | |
| |
| —Treasury Investment | 0
| 0 | 167,000 | 0
| 300,000 | 300,000 | 300,000
|
| —DIUS EYF Stock | 0 |
0 | 100,000 | 0 |
0 | 0 | 0 |
| —DIUS/LSC Reprioritisation | 0
| 0 | 63,000 | 14,000
| 0 | 0 | 0 |
| DIUS/LSC In-Year Budget Management | 36,300
| 1,900 | 0 | 0
| 0 | 0 | 0 |
| Revised Budget Total | 632,100
| 838,300 | 1,117,800
| 753,800 | 300,000
| 300,000 | 300,000
|
| Of which... | |
| | | |
| |
| 16-18 Capital | 166,000 | 210,000
| 210,000 | 240,000 | tbc
| tbc | tbc |
| FE Capital Fund | 283,000 |
508,887 | 717,600 | 408,100
| 300,000 | 300,000 | 300,000
|
| Specialisation Funds | 70,030
| 47,213 | 68,000 | 55,000
| tbc | tbc | tbc
|
| Other Sector | |
| | | |
| |
| Capital Investment | 113,070 |
72,200 | 122,200 | 50,700
| tbc | tbc | tbc
|
| Total | 632,100
| 838,300 | 1,117,800
| 753,800 | 300,000
| 300,000 | 300,000
|
| |
| | | |
| |
Capital 2007-08
| | £'000's
| Movement to: |
| Grant Letter | 595,800
| |
| LSC Budget Change 10 | -4,000
| 16-18 Sector Rationalisation |
| LSC Budget Change 20 | -10,000
| Capital Grants |
| LSC Budget Change 23 | 35,000
| FE Capital Buildings Systems |
| LSC Budget Change 23 | 19,000
| Development |
| Virement 08/NO/108 | -3,700
| from Assets Capitalised to Systems Development
|
| 632,100 |
|
| Source: LSC Financial Planning 15 May 2009.
|
| |
|
Annex B
THE AFFORDABILITY
OF CAPITAL
CONTRIBUTIONS FROM
COLLEGES AND
FROM THE
LEARNING AND
SKILLS COUNCIL
Purpose
1. The overall purpose of this paper is to:
— Consider the affordability of the current system
of capital support (or capital grant) payments to Further Education
Colleges within the context of the current affordability policy
of the Council, and in the light of current situation, set out
options and recommend policies for consideration by the Council.
Method
2. This paper:— summarises the background to the
current position;— presents the evidence about:
— the rising curve of College demand for Capital
funds;
— the future capital contributions likely to arise from
Applications in Principle already agreed;
— the demand curve for capital funds arising from
Council contributions;
— present and discuss a simple simulation model
that predicts the future demand for funds from projects agreed
now and in the future, taking the pattern of capital payments
and slippage into account; and
— calculate and comment upon the emerging position
about college demand for funds, if nothing changes.
— discusses these issues;
— develops capital policy payment options which
will alter the relationship between the level of projects agreed
and the pattern of payments due;
— proposes a few further calculations on college
affordability in the light of these options, and
— recommends capital policy changes that will increase
the manageability of the capital payments system and will 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.
Background
3. The Government has continually funded research into
the effects of education upon employability and income.
4. The LSC has conducted research into the effects of new
capital investment on the delivery of education and training.
5. The Learning and Skills Council has known for some
years that the level of annual capital funds made available to
the LSC are programmed to increase significantly.
6. In response to that increase, the LSC developed an
"Affordability Policy" which seeks to maximise value
for money by requiring each college to borrow an "affordable"
loan (which is affordable in that college's circumstances) to
help finance the capital project.
7. That affordability concept has a second significance,
because the demand for capital funds from colleges must be affordable
to the LSC, and the total annual demand for capital funding must
be managed within the annual capital funds made available to the
Council by the Government.
8. The demand for capital funds has increased significantly
in recent years in response to that Affordability Policy, which
has created a stable regime for college investment. The two key
questions are:
— Are these increases in College capital investments
enough to bring the demand for Council capital funds into line
with the supply, or are they too much or too little?
— Given the volatility of capital claims arising
from capital project slippage (defined as project delivery later
than planned) and the rising trend of demand for capital funding,
how can LSC policy develop in order to:
— increase the manageability of the system, while
— preserving and enhancing the conditions for the
rapid capital development of the FE sector?
Evidence
The "Applications in Principle" Projects
9. There were 60 Applications in Principle (AiPs) with
a total value of £2,536,270,144 and a projected Council contribution
of £1,743,413,183 (68.7%) but a closer analysis of these
projects by the Regional Property Advisors led to two of these
projects (with a total value of £127,411,067) being re-classified
as defunct. That left 58 AiPs with a total value of £2,408,859,077.
10. The RPAs have also conducted a sample analysis of these
projects where phasing information is readily available. That
analysis shows that:
— AiP projects coming forward for detailed submissions
are now expected to have, on average, a 22% price increase above
the originally agreed budgets.
— About 14% of the total value of these capital projects
have already come forward and have been agreed in detail by the
National Capital Committee.
— It is forecast that the future distribution of
capital project values arising from AiPs will be:
Table 1
FORECAST ALIP TOTAL BUDGETS 2009-12
| | | |
Year Ending
|
| 2009 | 2010
| 2011 | 2012 |
| % of total | 62.1% |
17.5% | 5.0% | 1.4%
|
| £m | 1,496 | 421
| 121 | 33 |
| 30% slipped | 1,047 | 608
| 267 | 104 |
| +22% costs | 1,227 | 742
| 327 | 126 |
| | | |
| |
The rising curve of College demand for Capital funds
11. From the record of the 2002-08 period, there is an
obvious link between the total annual volume of capital projects
and the LSC contribution. So long as the average contribution
level remained at between 28% and 35%, the annual demand for capital
projects ranged around £500 million to £625 million.
As the affordability system was flexed in 2006-07 to an average
rate of 41%, demand rose to £718 million and when the contribution
rose to 59% in 2007-08, demand rose to £1.095 billion for
the first nine months of the year and will reach over £1.15
billion in the full year of 2007-08.
12. One way of examining this issue is to plot the increase
in the total budget value of all capital projects Agreed in Detail
(AiDs) along with the average LSC contribution through the 2002-03
to 2007-08 period. The result is shown in Chart 1 below, where
the left hand scale should be the average percentage of Council
contribution (£200 million on the left scale is 20% capital
contribution on the right scale, £400 million on the left
scale is 40% capital contribution on the right scale, and so on).
So long as the average contribution level remained at between
28% and 35%, the annual demand for capital projects ranged around
£500 million to £625 million. As the affordability system
was flexed in 2006-07 to an average rate of 41%, demand rose to
£718 million and when the contribution rose to 59% in 2007-08,
demand rose to £1.095 billion for the first nine months of
the year and will reach over £1.15 billion in the full year
of 2007-08. It is clear that higher Council contributions are
associated with better affordability of the capital programmes
by colleges and hence much higher total project budgets.
13. This point can be made more clearly by graphing the
average LSC contribution level against the total value of capital
project that year. The results are shown in Chart 2. An approximate
line can be drawn through these points, with the equation:
Total Annual Value of Capital Projects = (% CC -15) times
33.
In other words, at a 60% capital contribution, the annual
total of project funds agreed can be calculated as:
=(60-15) times 33 = 45 times 33 =£1,485 million.
While at an LSC capital contribution of 30%, total projects
agreed becomes:
= (30-15) times 33 = 15 times 33 = £495 million.
The implications of these observations are:
— Every 1% increase in capital grant may be associated
with an increase in total capital project value of £33 million
and vice versa.
— The total level of capital demand can be controlled
by increasing or reducing the Council Contribution (for example,
a Council contribution of 45% would produce a total annual capital
project value of about £1 billion per annum).
— Because the level of capital project demand is
linked to the percentage contribution, it is possible further
to calculate the approximate annual increase in Council commitments
arising from capital demand, as follows:
| Council Contribution | |
30% | 45% | 60%
|
| Total projects pa (£m) |
| 500 | 1,000 | 1,500
|
| Additional Council commitment (£m) |
| 150 | 450 |
900 |
| | | |
| |
— Because of this linkage, Council commitments increase
according to the formula:
(Contribution times (contribution -15) times 30)/100
Additional Council grant commitment in £m = (30*c(c-15))/100.
— The graph of that relationship is illustrated
in Chart 3 below.
Inputs to the LSC Capital Payments Simulation Model
14. Previously, the LSC has used a simulation model to
forecast the total annual demand for capital grants arising from
previous capital commitments and the forecast new projects. This
is not a simple procedure because:
— For existing payments, slippage shifts the attempted
payment of capital grants over three years into a five-year pattern.
— For future payments,
— forecasts about projects always predict a rush
of projects in the near future, and that rush has never materialised
in practice,
— slippage further discounts the future payments
into a five year pattern.
The Effect of Slippage
15. The LSC planned payment schedule usually involves
payments of 10% in year one with the rest equally divided into
the next two subsequent years. But projects are only agreed part
way (on average half way) through year one, and during a six month
period, at best only about 5% of the grant can be claimed. With
40% year one slippage, this reduces to 3.0% paid in year one,
leaving (if the average grant is 60%) 57% to be paid in equal
amounts during years one and two, or 28.5% during each year. But
if 30% slippage occurs, then only 70% of 23.5% will be paid or
about 20%. This leaves 37% for year three, but 30% slippage again
reduces that to 26%, leaving 11% for year four, which 30% slippage
further reduces to about 7% in year four and 4% in year five.
Hence the attempted pattern of payment changes into actual payments
as follows:
Table 2
THE EFFECT OF SLIPPAGE ON CAPITAL PAYMENT SCHEDULES
| | Year 1 | Year 2
| Year 3 | Year 4
| Year 5 |
| Attempted | 10% | 25%
| 25% | | |
| Observed | 3% | 20%
| 26% | 7% | 4%
|
| | | |
| | |
Forecast of the LSC Year-end 2007-08
16. An estimates of the year-end expenditure and slippage
factor for 2007-08 can be made as follows:
| | £m |
| Current expenditure on capital support grants for period 9
| 199 |
| Forecast expenditure to year end (=199.43*12/9)+ 65*.03
| 263 |
| Forecast expenditure and commitments | 483
|
| Slippage to year end | 45% |
| Budget | 303 |
| Possible FE underspend/acceleration required before year end
| 20 |
| |
17. The capital grant commitment of the Council during 2007-08
is summarised at Table 3 below, which shows the starting position
of £701 million commitment at the start of the year, reduced
by in-year payments of 303 million and increased by new commitments
of £690 million (= 60% contribution towards of total projects
of £1.16 billion agreed in detail during FY 2007-08) to result
in a predicted year end LSC grant commitment of £1,088 million.
Table 3
TOTAL CAPITAL GRANTS DUE 2007-08
| | Year Start
Commitments
| Paid off
in-year | New
commitments
| Year end
commitments |
| 2007-08 | 701 | 303
| 690 | 1,088 |
| |
| | |
18. At first sight it looks as if the repayment rate is about
43% (= 303/701) but that calculation is too high because:
— Capital payments at present are being paid off wherever
possible in two years rather than three.
— The £303 million includes accelerated payments of
about £120 million, with net claims of £183 million.
— Taking account of these factors, the actual repayment
rate of mature projects previously agreed seems to be about 15%
to 25% and that implies a four to five year payment period for
the average project.
Inputs and Outputs of the Simulation Model
Assumptions
19. From the above considerations, we can calculate the
inputs to the simulation model and make estimates of the adequacy
of the LSC capital budget against the likely demand. If we assume
that:
— The total budget of capital projects could rise, given
the evidence, to be as shown in the following table:
| 2008 | 2009 |
2010 | 2011 | 2012
| 2013 | 2014 |
| 1,500 | 1,400 | 1,300
| 1,200 | 800 | 600
| 400 |
| |
| | | |
|
— The attempted payment profile will remain as now (averaging
10%,25%,25%).
— Slippage is likely to average 30% and the effect on Council
grant payments is set out at table 2 above.
— Existing commitments will slip to a similar pattern.
We can then calculate the budget shortfall or underspend.
Results—Provisional
Commentary on Chart 4
20. A reasonable test of any forecasting model is whether
it successfully predicts the recent past. At first sight the model
fails because the predicted out turn for 2008 is £226 million.
However the actual out turn for 2007-08 may be only about £183
million and the only way that claims expenditure may reach about
£300 million is because capital projects that are in build
are being paid for over two years rather than three. This has
a knock-on effect on the following year of 2008-09 and about £120
million of claims that would have been in that year were paid
the previous year. Claims during 2008-09 are likely to be within
the available FE capital funds because of that effect.
21. 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.
22. It should be noted that demands for capital funds
may not actually decline as illustrated in chart 4 because the
demand for funds is only being modelled for the seven year period
2008 to 2014 and the predictions beyond 2014 although they represent
Council liabilities may well not reflect future Council policies.
Commentary on Chart 5
23. Suppose that 2008 was not a freak high year for capital
projects and that the level of detailed projects agreed rises
to and remains at £1,400 million a year. What policies could
cope with that level of demand?
24. If capital grant Council contributions reduce to 50% and
are paid equally over five years then the pattern of claims payments
are as shown in chart 5 above. If the policy of accelerated payments
continues, then it can be shown that the entire demand for capital
grants can be coped with.
25. A reduction in Council contribution to 50%, however,
would probably reduce any funding difficulty to nil because the
annual level of capital projects would fall to about £1 billion.
That would be undesirable.
Commentary on Chart 6
26. If we consider the level of contribution and the
resulting level of demand from colleges simultaneously, it seems
probable that the levels of Council contribution that would meet
the availability of funding would be a contribution of 55% to
57%. If payments are equally spread over five years, that would
create the headroom to meet all likely capital claims while increasing
the manageability of the capital budget system. Chart 6 shows
the likely outcome of a 55% to 57% contribution—capital
projects averaging £1,350 million a year and accelerated
payments in the early years balancing out the funding gap in later
years.
Possible policies
27. The following mix of capital project policies is recommended
for consideration.
— The average level of Council contribution should
be reduced from 60% to about 55% to 57% in order to stabilise
capital project demand at a high and sustainable level (of about
£1,350 million).
— The Council should increase the manageability of the
capital claims system by extending the payment period for all
new projects to a five year period.
— The Council should consider offering a slightly
increased grant in order to cover the increased interest costs
of college loans due to later Council payments.
— Capital projects should not require a College
to contribute cash to a project that would reduce College cash
days below 50. Higher cash days should be kept in hand to enable
higher levels of interim borrowing.
— The Council should continue to reserve the right
to payoff projects early if the capital funds available to the
LSC so permit.
— The Council should consider making affordability
more certain by relating the capital borrowing to an appropriate
range of years of college accounts but adjusting the college borrowing
percentages required to produce a broadly neutral effect.
— The Council should continue to monitor the slippage
level, the level of capital project grants agreed and the effects
of these changes in order to feed back further changes into the
system as required.
CONCLUSIONS
28. The reduction in flexibility of FE Capital budgets
will mean, if about £100m of the FE budget is not restored,
that either the FE renewal programme must be slowed down or prioritising
or rationing must be introduced.
29. 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.
February 2008
|
