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


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 Year2007-08 £'000s 2008-09 £'000s2009-10 £'000s 2010-11 £'000s2011-12 £'000s 2012-13 £'000s2013-14 £'000's
Original Grant Letter Budget595,800 694,400819,800849,800 tbctbctbc
Subsequent Amendments:
Funding Brought Forward
—Fiscal Stimulus (PBR 2008-09)0 110,0000(110,000) 000
—Additional Funding (Feb 2009)0 22,000(22,000)0 000
—Additional Funding (March 2009)0 10,000(10,000)0 000
Budget 2009
—Treasury Investment0 0167,0000 300,000300,000300,000
—DIUS EYF Stock0 0100,0000 000
—DIUS/LSC Reprioritisation0 063,00014,000 000
DIUS/LSC In-Year Budget Management36,300 1,90000 000
Revised Budget Total632,100 838,3001,117,800 753,800300,000 300,000300,000
Of which...
16-18 Capital166,000210,000 210,000240,000tbc tbctbc
FE Capital Fund283,000 508,887717,600408,100 300,000300,000300,000
Specialisation Funds70,030 47,21368,00055,000 tbctbctbc
Other Sector
Capital Investment113,070 72,200122,20050,700 tbctbctbc
Total632,100 838,3001,117,800 753,800300,000 300,000300,000


Capital 2007-08
£'000's Movement to:
Grant Letter595,800
LSC Budget Change 10-4,000 16-18 Sector Rationalisation
LSC Budget Change 20-10,000 Capital Grants
LSC Budget Change 2335,000 FE Capital Buildings Systems
LSC Budget Change 2319,000 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
20092010 20112012
% of total62.1% 17.5%5.0%1.4%
£m1,496421 12133
30% slipped1,047608 267104
+22% costs1,227742 327126


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) 5001,0001,500
Additional Council commitment (£m) 150450 900


    —  Because of this linkage, Council commitments increase according to the formula:

    (Contribution times (contribution -15) times 30)/100

    or if contribution = c

    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 1Year 2 Year 3Year 4 Year 5
Attempted10%25% 25%
Observed3%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 commitments483
Slippage to year end45%
Budget303
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
2007-08701303 6901,088


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:
    20082009 201020112012 20132014
    1,5001,4001,300 1,200800600 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





 
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