The monitoring, inspection and funding of Learndirect Ltd. Contents

1Learndirect Ltd.’s funding, performance, and contracting arrangements

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department for Education (the Department), Ofsted, the Education and Skills Funding Agency (ESFA), and Learndirect Ltd, on the monitoring, inspection and funding of Learndirect Ltd.1

2.Learndirect Ltd is the UK’s largest commercial further education provider, engaging with around 75,000 learners each year. Its core business is skills, training, and employment services. Most of its funding comes from the ESFA, an executive agency of the Department for Education, but Learndirect Ltd also has contracts with other government bodies.2

Learndirect Ltd’s declining performance

3.Learndirect Ltd received around £488 million in total from ESFA in the academic years 2013–14 to 2016–17. The company’s income from all its central government contracts in 2016–17 was around £121 million, of which £106 million (88%) was from ESFA.3 Learndirect Ltd’s performance in apprenticeships was in decline after the 2012–13 academic year, and in 2015–16 the percentage of apprentices achieving their qualification stood at 58%, which was below ESFA’s minimum standards threshold of 62%.4 However, the company told us that it did not put an improvement plan in place until autumn 2016, after the end of the 2015–16 academic year.5 It was during the same year that Learndirect Ltd set up Learndirect Apprenticeships Ltd as a separate entity within the Group, as part of a long-term plan to sell off the apprenticeships element of the Group’s business. Learndirect Ltd entered negotiations to sell Learndirect Apprenticeships Ltd to another education provider in mid-2016, seeking a large cash injection into the Group.6

4.Learndirect Ltd explained that, in September 2016, it contacted Ofsted to ask whether, if an inspection happened to be planned, the ongoing sale negotiations regarding Learndirect Apprenticeships Ltd might prompt Ofsted to defer the inspection until after the sale was complete. Ofsted further explained its conclusion that, if Learndirect Ltd were to apply for a deferral, it would most likely be granted under Ofsted’s deferral policy. Ofsted therefore decided to delay a planned inspection of Learndirect Ltd until the sale had concluded.7

5.Ofsted decided to re-schedule its inspection for March 2017.8 When Learndirect Ltd was informed of the inspection, a few days before it was due to take place, the company again sought a deferral, on the grounds that it was about to move all of its apprenticeships activity into Learndirect Apprenticeships Ltd. The inspection went ahead, and Ofsted concluded that the company’s overall effectiveness should be rated as ‘inadequate’, based on outcomes for learners and apprenticeships provision being ‘inadequate’. All other elements of the inspection produced a ‘requires improvement’ rating.9

6.Ofsted told us that conducting the March 2017 inspection was a more challenging task than usual. It had difficulty in accessing information, and logging on to systems which held data on how learners’ progress was being tracked. Ofsted believed that there was a poor level of co-operation from Learndirect Ltd, which culminated in the company declining to attend the normal inspection feedback meeting at which findings are discussed.10

7.Four days after the inspection, knowing that Ofsted intended to rate it as ‘inadequate’ for overall effectiveness, Learndirect Ltd made a complaint to Ofsted about the inspection and asked for publication of the report to be withheld until the complaint had been resolved. The company claimed that Ofsted had not taken account of the process to separate its activities into two distinct businesses. It also believed that Ofsted had not taken a large enough sample size of learners to reach reliable conclusions.11

8.Having been informed that its complaint was not upheld, Learndirect Ltd began legal proceedings against Ofsted on 2 June.12 This action included an injunction, which prevented Ofsted from publishing the report. Ofsted told us that it understood this injunction also prevented it from discussing the case with any other parties, including government bodies. The judge ruled fully in Ofsted’s favour, and the report was published on 17 August 2017.13

Government’s ability to take action

9.Learndirect Ltd is ESFA’s largest provider, receiving £106 million of funding from ESFA in the 2016–17 academic year. It also received almost £15 million from its other central government contracts in 2016–17.14 It is the sole supplier of the UK citizenship tests for the Home Office, and the initial teacher training tests for the Standards and Testing Agency (STA). The company also provides employment related services for the Department for Work & Pensions.15

10.In May 2017, following the March Ofsted inspection, ESFA set up a team in preparation for terminating Learndirect Ltd’s funding, in line with its policy on providers whose overall effectiveness is rated as ‘inadequate’ by Ofsted. As part of this process, ESFA entered into discussions with other government bodies and Learndirect Ltd about their contracts with the company.16 Learndirect Ltd told ESFA that unless it received £48 million of funding from the Adult Education Budget (AEB) in the 2017–18 academic year, the company might enter into insolvency or administration. Learndirect Ltd also stated that these circumstances would pose a significant threat to its work for the Home Office and STA, and to provision funded by ESFA’s European Social Fund projects.17

11.ESFA said it concluded that, given Learndirect Ltd’s size and reach across government, withdrawing funding from the company would have a disruptive impact on large numbers of learners and risk the continued delivery of services for several government bodies. Accordingly, it decided to take a different approach from its published policy, and to fund the company through the whole 2017–18 academic year. ESFA awarded Learndirect Ltd £45 million of AEB funding for the year. Total ESFA funding for the company in 2017–18, which additionally covers pre-existing apprenticeships, advanced learner loans and European Social Fund activity, is likely to be around £95 million. In total, Learndirect Ltd expects to receive around £105 million from all of its main government contracts in 2017–18.18

Subcontracting arrangements

12.We asked Learndirect Ltd to justify the seemingly high management fees it charges its subcontractors. The company explained that, in its adult education business, the standard management fee is 20%. This amount covers its administration of the funding and audit compliance activities. Learndirect Ltd charges for additional items such as: access to training content; marketing material; IT systems; and quality assurance. The full suite of additional services takes the management fee up to 40%. Learndirect Ltd told us that around 30 of its subcontractors are paying the full management fee of 40%. We were also told that subcontractors working on Learndirect Ltd’s European Social Fund contracts pay a 20% fee, and those working on apprenticeships pay between 15% and 20%.19

13.ESFA explained that Learndirect Ltd charges a higher management fee than the great majority of providers in the market. ESFA does not give specific guidance on the level of subcontractor fees that it deems appropriate. However, in an effort to encourage greater transparency, ESFA requires all lead providers to disclose the level of management fee that they intend to charge.20

1 Report by the Comptroller and Auditor General, Investigation into the monitoring, inspection, and funding of Learndirect Ltd, Session 2017–19, HC 646, 14 December 2017

2 C&AG’s Report, para 1

3 C&AG’s Report, paras 1, 1.6, Figure 3

4 C&AG’s Report, para 2.5, Figure 5

5 Qq 48–51

6 Qq 27, 66, 96; C&AG’s Report, para 1.8

7 Q 45

8 Q 45

9 C&AG’s Report, paras 3.7–3.8, Figure 7

10 Qq 45–46

11 Qq 68–72; C&AG’s Report, para 3.10

12 C&AG’s Report, para 3.11

14 Q 36; C&AG’s Report, paras 1.6–1.7

15 Q 63; C&AG’s Report, paras 4.17–4.19, 4.22

16 Qq 36, 63; C&AG’s Report, paras 4.2–4.3

17 C&AG’s Report, paras 4.10–4.11

18 Qq 16, 64–65; C&AG’s Report, para 4.3, Figure 8

19 Qq 4, 7

20 Q 4

28 February 2018