Oral evidence: Overseeing financial sustainability in the further education sector, HC 414

Oral evidence, 19 October 2015.

Witnesses

Martin Donnelly, Permanent Secretary, Department for Business, Innovation and Skills, Peter Lauener, Chief Executive, Skills Funding Agency/Education Funding Agency, and Chris Wormald, Permanent Secretary, Department for Education, gave evidence.

Chair

We will move on to the second part of our hearing. We have as our witnesses the permanent secretary at the Department for Education, Chris Wormald, the permanent secretary at the Department for Business, Innovation and Skills, Martin Donnelly, and Peter Lauener, who is now the chief executive of the Skills Funding Agency and the Education Funding Agency—you might want to briefly explain that at the beginning. Reading the NAO Report, as I said at the beginning, there are a lot of serious issues here, but I certainly got the impression that Departments have been a bit too content to sit back and take a reactive role as problems arise, and we want to probe a bit on that. However, I want to touch on the point that I raised at the beginning about whether you are being fair to colleges and students vis-à-vis universities, which is probably something for Martin Donnelly to pick up. Do you think you are getting involved as you should? Is enough being done to support the sector to develop the skills to tackle the challenges that it is facing, and is it on its way to a sustainable solution? In the end, your Department is responsible for spending quite a lot of taxpayers’ money, and we are hearing of very big challenges in the sector. Perhaps it would be helpful for us all if you could, first, outline your precise responsibilities in relation to the sector, starting with Martin Donnelly.

Martin Donnelly

Thank you, Chair. We have an overview of the further education sector. We have to ensure that we are protecting learners and making provision for learners, and that taxpayers’ money is being used effectively in this area. As the Department for growth, we also have a strong concern to ensure that the education and skills needed by local areas are being provided, including, of course, through the FE college sector.

Peter Lauener

My job, with two hats on, is to be responsible to Martin for the £3.9 billion that BIS spends through the whole of the further education sector—not just colleges—and to be responsible to Chris for the £54 billion that is spent on the school education system, whether that is for academies, colleges for 16 to 19, private providers for 16 to 19, or maintained schools through local authorities, and for a big slug of capital funding there as well.

Chris Wormald

We are responsible for education up to the age of 18, so, for the purposes of this hearing, that is the whole of 16-to-18 education, whether it takes place in further education, school sixth forms or in sixth-form colleges. We are the lead Department for the institutional management of sixth-form colleges and school sixth forms. Martin’s Department has lead responsibility for further education.

Chair

Just to be clear, when the buck stops finally for the future of the FE sector, that would really be with you, Martin Donnelly, as permanent secretary of the Department for Business, Innovation and Skills?

Martin Donnelly

For the provision of learning in the FE sector, yes.

Chair

Perhaps you could outline for us your vision for the future shape of FE. We are seeing a lot of changes coming through, both in capital revenue funding, with different pots of money, and an alphabet soup of regulators. Where do you see FE in future, because that will give a bit of a shape to how we see the money being spent?

Martin Donnelly

Since 2010, the Government’s policy has been clear: to maximise the amount of choice for learners and to provide funds to learners and employers, with an increasing focus on apprenticeships, which you might want to come back to. Within that—the Report is very helpful, if I may say so—it is clear that there is a lot of pressure on the further education college sector to adjust to changes in funding and in local need, and it is very important that we support them to do that while recognising that they are independent statutory corporations that we do not and should not control. We have spent a lot of time with Chris and, particularly, with the SFA working out systems where we can support colleges to go through that process of transition. The most important of those are the area-based reviews, which you might also want to discuss.

Chair

Certainly. Ultimately, we have heard about one college, from our witness panel earlier, that has merged and there are others—I think about 16 have merged so far. Do you care if colleges close or merge? Do you have a vision about that?

Martin Donnelly

We care very much that local provision is effective, flexible and provides a very high quality and choice to learners. Within that, it is pretty clear that the number of colleges, which has fallen from, I believe, over 400 20-odd years ago to 241 now, is likely to continue to decrease. We do not have a target. Our concern is that we end up with resilient colleges able to provide a very high-quality service. It is likely—this is my personal view—that there will be significantly fewer of them, but that is something to be teased out, particularly through the area reviews.

Chair

It sounds like it could be a bit haphazard. In terms of the future shape of the sector, FE colleges particularly have a capital asset and a physical presence, which constrains who they deliver to, to a degree, but also is an important local provision for people who may not be able to travel in the same way that people might do to university. Does the Department have no strategic oversight of what the general geographical spread should be of these institutions, and do you not have any alarms or worries about how area-based reviews may work or throw up mergers that might not deliver for all residents in a particular area?

Martin Donnelly

We are very concerned to ensure that there are available learning opportunities for people throughout England—in this case. Perhaps I could ask Peter to comment in a bit more detail about how we take that into account as we go through the process of supporting colleges and the area review.

Peter Lauener

First of all, a bit of context. As Martin said, there has been a long-term process of rationalisation and merger in the further education sector since incorporation in 1993. When a merger happens it does not mean that buildings are necessarily closed, although there is sometimes a separate process of reducing the number of buildings in a particular area, if there are too many; but very often you get distributed leadership and management over a wider area, which produces savings and efficiency, and improvements in effectiveness. As we go to the area reviews, the big challenge with those is precisely, I think, what you said—to start with what is needed for learners, for communities, for business, and then work back from that to structure. So it is not a sort of “move the deckchairs around”. It is what is needed in this area to provide the best possible service to the three groups—learners, the community and employers—and improve progression through to higher skill levels. It is quite a challenging agenda.

Chair

Certainly we would recognise that, and that there are some benefits to looking at the needs and skills of an area, and that that should be something, I guess, that every provider should be thinking about as well; but there are examples of colleges which received large chunks of capital funding—taxpayer money—to improve their premises and then found that they were not actually meeting the needs locally, because demographics had changed; but of course being independent institutions they cannot be just taken over by anybody, and some of the sites are restricted in what they can be used for. Does it matter to you, Peter Lauener, if a college physically closes? Is that something you worry about at the Skills Funding Agency?

Peter Lauener

Again, there have been very few cases of actual college closure through this process of mergers and rationalisation.

Chair

But don’t you think there is a prospect? There are 70 more colleges projected to be in financial deficit at the end of the next academic year. Surely there is a risk that colleges will be forced to close, because they are independent bodies; there is not an easy, obvious bail-out system for them.

Peter Lauener

There is certainly a risk, and the Government published recently a set of principles that will guide the decisions to be taken through area reviews, and decisions on financial support that the Government will take. Those principles make it clear that the Government does not feel obliged automatically to bail out a college, but might choose to do so to safeguard provision or for other public value-for-money reasons; but it is quite important to establish that principle that there is no sacrosanct pattern of provision. It has got to be determined by what makes sense locally; and that does change over time. Let me give you one example of the way that changes, which is the growth in apprenticeships we are looking to see happen as we expect the levy to come on board. Apprenticeships need a different delivery model, much more on employers’ premises— maybe provision on factory parks close to employers, rather than full-time provision in a college; so colleges will need to adjust to that.

Chris Wormald

You were trying to get at a slightly different point, I think, Chair, weren’t you: there is whether we have an interest in institutions and there is whether we have an interest in publicly funded assets and what happens to them. We undoubtedly have an interest in publicly funded assets and what happens to them, almost regardless of what happens to the institution. I think that is the position.

Chair

That really highlights one of the challenges—that when a number of institutions had loans they could not pay back, those loans were turned into grants. So that was taxpayers’ money going into institutions; but it is not clear what the pattern is, about when that will happen and when not. It seems to me that on one hand Departments are sitting back saying, as Mr Donnelly said, “Well, we don’t interfere with individual institutions; they are all independent,” and on the other sometimes money goes in, but it is a rather haphazard approach. Is that fair to say, Peter Lauener?

Peter Lauener

Can I give you an example of where we have taken the route of making sure the asset is safeguarded, but not taken the route of preserving a college? It is actually a sixth-form college. It is a small sixth-form college called Totton down near Southampton. There were financial problems and quality problems. The corporation looked at the opportunities, and whether there was scope for merging with other local colleges. The decision of all local partners was that there was no need for the A-level provision that Totton college had been offering, because there were plenty of other schools or colleges making a very good offer. The corporation decided to close the A-level provision from September just passed, and move the students into other colleges, even if they were going into the second year of their A-level course. I thought that that was the right decision. Our job there is to support the college and the corporation, and ensure that the students are placed. There was a gap however around vocational provision. We have worked to find another provider, who is coming in and will use the buildings to provide vocational training for young people in the area, but of course we will ensure that there is a safeguard on the assets, because those are publicly funded assets.

Amyas Morse

I was listening to your very interesting answer and going through what we heard from the earlier witnesses. Now let’s imagine that you’ve got a further education college with a sixth form, and you look around and see who else is a credible provider. You’ve got schools in the area that have small, not very efficient sixth forms. Does that mean that you might be moving people from the college into those schools, even though they might be less efficient providers? You heard the concern; it would be quite good for you to answer it fairly directly.

Peter Lauener

We are not prejudging the outcome of area reviews. On the steering group of the area reviews, there are local partners, chairs of colleges, the FE Commissioner, the Sixth-form College Commissioner—

Amyas Morse

But not schools. Schools aren’t taking part.

Peter Lauener

And the Regional Schools Commissioner. You’re correct that not all schools are by definition involved in the area reviews, but the Regional Schools Commissioner is there to bring the perspective of any gaps or problems in the schools sector. It does not quite go by default.

Amyas Morse

Is that the same?

Chris Wormald

As this came up earlier, would it be helpful if I explained the position on schools in area reviews? The fundamental of 16 to 18 funding is of course that funding follows the learner, and we allow further education colleges to expand and we allow sixth forms to expand. To some extent, they succeed or not in the market. We have equalised the funding between the two, so it is a much fairer competition, but if people choose to go to sixth forms, we allow them to do so. If people choose to go to further education, we allow them to do so. There are no plans to change that. In terms of the area reviews, we include schools in the analysis that goes into the area reviews, so they are looked at, but the recommendations of the area reviews are focused on the further education provision. That is for two reasons, and it has been much debated, as you heard: first, because further education is the area where we have the biggest challenges, so that is the area where we are looking to restructure; and, secondly, there is a lesson from history. In 2005, the Learning and Skills Council attempted strategic reviews that included sixth forms and further education, and it just proved to be far too complicated to do. Area reviews are already very complicated. We debated it quite a lot, but we have attempted to learn from past experience and keep the reviews focused on the area of greatest need, which is further education.

Amyas Morse

Just to make sure that I’ve understood you properly, Chris, so we are now in an area review, and you have a school sixth form that is relatively small. Are you saying that it is possible, as a result of an area review and because of the participation of the schools commissioner, that you might decide to discontinue activity in a sixth form and redirect it into a further education college? Is that a possible outcome?

Chris Wormald

Not as a direct result of the area review. If a school wishes to provide a sixth form, and it can get learners and can fund itself with the funding following the learner, it can continue to do so. The occasions where we intervene on sixth forms are on standards grounds. There are some very, very successful small sixth forms, so I don’t think having cut-off points at particular numbers is the way forward. The question is: is that sixth form, whatever its size, providing successful education? In terms of our value-for-money test, well, as I say, the input is fixed. It is basically £4,000 plus deprivation plus area, so the input is fixed. If it is providing a quality outcome as measured by Ofsted and results, we would see that as value for money regardless of its size.

John Pugh

Can we make sure we absolutely understand you on this? It is an absolutely pivotal point. Are you suggesting that in the case of an area-based review, if the area-based review establishes that it would be more efficient, good for the community and good for the learner, as was suggested earlier, if the sixth form was reduced in size or maybe merged with an FE college or altered in some way, you have, in the terms of the framework of this area-based review, any capacity whatsoever to make that happen?

Chris Wormald

No, we don’t constrain student choice.

John Pugh

No capacity to make it happen.

Chris Wormald

If a school saw that as being the right idea, assuming we are talking about a sixth form that is meeting standards, so it is one, obviously, that Ofsted judges, there is—

John Pugh

But it is not an efficient way of providing education in that area.

Chris Wormald

Sorry, I will dispute that point. If it is getting a good or outstanding rating, then given that it is getting the same amount per learner as everybody else, it is providing efficiency and value for money.

John Pugh

But even if it is not, you have no capacity within the area-based review to do anything about it.

Chris Wormald

Not as part of the area-based review. If it was providing inadequate education, we would intervene on standards grounds, but not as part of the area review. I am trying to be very, very clear. There is nothing in the area-review process that would cause us to close sixth forms or constrain student choice.

John Pugh

Right. I just want to follow through something you said earlier. There has been an expansion in sixth forms. Surely there have been some new sixth forms created, as well as expansion in existing sixth forms.

Chris Wormald

Yes.

John Pugh

These decisions were made independently of any area-based review of what might be the most efficient provision.

Chris Wormald

Yes. As I say, we take decisions mainly driven by learner choice—

John Pugh

I am talking about a school that may decide to have a sixth form. Let’s say that a lot of people are electing to go there and you are providing extra places, as with this grammar school story we have on the monitor at the moment. You are saying that if a school decides to have a sixth form, that decision, when it is made, is based independently of any—

Chris Wormald

Not quite. It is slightly different for academies and maintained schools, so I will take an academy. If it is an academy, it has to put a business case to the EFA for its change of age range, which has to involve local consultation; and you are only allowed to do that if you are a good or outstanding school, so you have to—

John Pugh

If that is done in the future, it presumably will be done in the context of any area-based review, will it?

Chris Wormald

As I say, we do not constrain student choice; and the area-based reviews—[Interruption.] Sorry, I am trying to be very clear. The area-based reviews are not—

John Pugh

I am not trying to harass you, Mr Wormald; I am just trying to get it precise. Let’s say, for example, that a business case is put by an academy for an additional sixth form and, simultaneous with that, an area-based review is going on that clearly indicates an over-provision in 16-to-18 provision and the 16-to-18 provision is judged to be adequate or good in that particular area. What I want to find out is whether the decision to answer that business case, to respond to that business case as put by the academy, will in any way whatsoever be influenced by an area-based review.

Chris Wormald

Not at this moment, no. The Government does keep these criteria under review. There is one thing, however.

Chair

Very briefly. We are going down the sixth-form route.

Chris Wormald

There is one thing I want to say about the sixth form and FE position, as it has come up; I thought some numbers might be helpful. Further education remains the biggest supplier of 16-to-18 education. About 45% of all 16 to 18-year-olds go to further education colleges, about 36% to school sixth forms, 13% to sixth-form colleges and 4% other. When we look back at 2010, the proportions were 50% into general FE, 33% into sixth form and, again, 13% into sixth-form colleges, so while there has been a shift over five years towards sixth forms and slightly away from general FE, it is not actually that big. In individual local areas, it can of course be much bigger than that, but when we look nationally, there has not been a big move from further education into sixth forms.

Chair

What we have heard from you, Chris Wormald, on that issue is an example of the Department sitting back and leaving colleges to be independent. But, between the two Departments, you fund them. These are your funding decisions. We heard, very graphically, about the unpredictability of funding from the principals in our first hearing and a lot of colleagues from across the House have raised concerns with me about this. By acting in this way—without seemingly joining up your funding—you are causing some of the distress and challenges that may be forcing merger or closure, and are certainly forcing financial deficit. Do you take some responsibility for that? Does that make them not as independent as you keep saying?

Chris Wormald

In the case of 16-to-18—very independent. There is no point when we decide, “This is the amount of money that we will give to further education to do 16-to-18.” The figures for what is spent on 16-to-18 is the number of pupils they manage to recruit multiplied by a funding formula. It goes up and down depending on further education’s success or otherwise in recruiting pupils. We do not sit down one day and decide that it will be £2.8 billion. That is the result of individual recruitment. Likewise, we do not decide how much we will fund sixth forms. That is the result of the formula playing out, so it is a market.

Chair

Like many of these markets in Government, it is quite rigged because there are bits of money coming from one Department, bits from another and capital funding.

Chris Wormald

I think the changes that we have made to 16-to-18 funding to equalise it, which were widely welcomed in the further education sector—so, a learner is worth a learner regardless of sector now—

Chair

Not in the sixth form where there is still the VAT issue still, and sixth-form colleges.

Chris Wormald

Yes, they still pay VAT.

Chair

An average sixth-form college is losing something like £318,000 a year because of the VAT issue. Is that right?

Peter Lauener

That is about right, yes.

Chair

Is that being actively looked at, or whatever the jargon is in Government? Are you going to sort it out?

Peter Lauener

It is something that Ministers have looked at from time to time. It is always a difficult thing to address when budgets are very tight.

Chair

Is it something that your Department is considering putting in for in the spending review, Mr Wormald?

Chris Wormald

We look at the overall levels of funding for 16 to 18. It is obviously for the Chancellor to decide on tax matters.

Chair

So the answer is no.

Chris Wormald

Tax decisions are taken by the Treasury, not by Departments.

Chair

Happily for you perhaps, in this hearing. This issue is exercising a lot of my colleagues around the House from throughout the country.

Chris Wormald

I know, but I should say that colleges get an advantage from their independent status—in particular, the ability to borrow commercially—which schools do not have. There are swings and roundabouts.

Chair

It is not a level playing field. With sixth forms in schools, sixth-form colleges and FE, there are different funding regimes. There is the VAT issue as well. Martin Donnelly, on the point I raised about the joining-up of your decisions and the impact on the institutions—

Chris Wormald

Sorry, Chair, there are not different funding regimes between sixth forms, sixth-form colleges and FE. It is all done on the same formula. There is a different cost base for the reasons that you say, but the funding formula is identical.

Chair

Forgive me for my loose tongue. But there is a difference with the VAT still.

Martin Donnelly

It is a fair challenge and one that we take very seriously, not least because we know that the people who run FE colleges have a very challenging job. We do not want to make their lives any more difficult so, over the past few years, we have pulled together. Now, under Peter, regarding how the SFA and the EFA work—we will look actively at what more we can do to make that happen. I think we already have a joint HR function. It is very important that, from outside, Government looks to be and, indeed, is joined-up. That said, there are genuinely different funding streams where we are funding different things, from apprenticeships through to adult learning and so on. Naturally, those are slightly different streams because we are purchasing a different product. I believe that we have produced a much more unified system and we will go on listening carefully to what college principals are telling us. What comes out to us in this whole process is that the quality of leadership of FE colleges in responding to the market is the critical factor in success. We need to support that and that is what we try to do through the SFA—

Chair

Although I take your point, having heard from our witnesses and from other evidence that we have received, I think that if you are receiving one amount of funding before you go on summer holidays and—as Ian Ashman rather graphically explained—you come back from your short summer break to find out that you have lost another £600,000, however brilliant a leader of an FE college is, that is pretty difficult to deal with. Can you explain why, so often, those decisions seem to be so late? Do you routinely assess the potential impact on colleges and other providers when taking decisions like that about funding and on policy terms, because that does affect the funding. Perhaps, Mr Donnelly, you could answer that first.

Martin Donnelly

If I could kick off on policy and then pass over to Peter on the mechanics of funding, we try to stay in very close touch with colleges on the forecasts they are producing and on what is actually happening. In terms of funding decisions for policy, these, as we know are taken by Ministers, but we do highlight very clearly—

Chair

But it is your job to advise Ministers about the impact of that policy and the sustainability of the sector.

Martin Donnelly

Yes, and I was about to say that we highlight very clearly precisely those points, because we are aware that at the end of this process, something has to be delivered to learners and you cannot separate the policy decision from what is going to happen on the ground some months later.

Peter Lauener

On the mechanics of this, and I quite understand the concerns of colleagues from colleges, this was part of the Government’s cuts when they were re-elected in May. It was part of the Chancellor’s challenge to his Cabinet colleagues. It did mean cuts in the 15-to-16 budget, and there were cuts across government in different budgets. The skills share of the BIS budget cuts was £60 million out of £450 million, and we did indeed work with policy colleagues to assess: “In the situation of having to make these late cuts, where is the best place to make them?” and those were the judgments that we reached. We looked in particular at the budget for what is called ESOL-mandated learning—education as a second language for unemployed people who will face benefit sanction if they do not go on the course—and we thought that that was going to under-deliver against the allocations, so we thought that that was a sensible place to make the allocation. You can make those decisions nationally, but it comes down to difficult decisions at college level where plans need to be hastily remade. I should emphasise that that was a start-of-Parliament, unusual situation. There was a comparable situation in 2010, of course, when austerity cuts had to be made in short order. We are now into the spending review that will set budgets for the next few years, so this was an exceptional situation.

Chair

Are you saying that it will not happen again?

Mr Bacon

You should have had more warning this time. You as Departments should have known ahead of time that something was likely to happen. I fully understand that there were going to be cuts, but what I cannot understand is this. The election took place on 7 May, and that leaves the rest of May, which was 24 days; the whole of June, which was 30 days; and the whole of July, which was 31 days. These institutions find out 10 days before the start of term in September. That was the burden of the complaint—not necessarily that there might be cuts in a rather difficult environment, which we knew was going to continue being difficult, but that the decision and the information to the institutions came so extraordinarily late.

Peter Lauener

It was late, but it was not as late as that. The revised letters went out towards the end of July.

Mr Bacon

In the evidence we heard, it was 10 days before the start of term. It was so late that it was not practical to give redundancy, and they had to pay in lieu of notice.

Peter Lauener

And when a college gets such a letter, they have to work out how to respond and what to do. I can quite understand.

Mr Bacon

It was late July, was it?

Peter Lauener

It was late July.

Mr Bacon

It was still nearly three months after the general election.

Peter Lauener

There was a proper decision-making process—

Mr Bacon

A quarter of a year, Mr Lauener. The whole of May, apart from seven days, the whole of June, and the whole of July. That is three whole months.

Peter Lauener

I am sure that Members will recall the process with the discussions across ministerial teams about where cuts should be, and then there had to be a proper calibration of the best place to make these cuts, which was not just about within the skills area but, in the context of BIS, it was about the whole of this very wide policy area.

Chair

You said that this was a precedent from the previous Parliament that politicians get in the way and make these decisions, but are you making a commitment that it will not be quite such short notice in future?

Peter Lauener

I would have thought that it is not something I would expect to happen every year, by the very nature of it.

Chair

So when do you think would be a good time to let colleges know what their budgets are? Are you looking at multi-year budgets under the spending review, which is obviously a multi-year review?

Peter Lauener

We always try to let colleges have the allocations for the subsequent academic year by the end of March, so by the end of March 2016, I would expect to let colleges know their budgets for the August 2016 to July 2017 operational year. That is quite a few months to plan and implement any staffing changes or curriculum changes that need to be made.

Chair

But you are doing this annually, and you are consistently driving this rationalisation of courses and, to a degree, of colleges, possibly through mergers. We have heard quite a lot from the witnesses about the transitional costs of redundancy and generally adjusting their courses. Every year, they are making cuts. There is a huge challenge for them with those transitional costs. It seems to me that the Department and the SFA do not take proper account of that.

Peter Lauener

There is a lot of information about the budgets that colleges can expect to be allocated. Taking the 16-to-19 budget, once a college gets to September or October and it has its intake for that academic year, it should have a pretty good idea of what its budget will be for the following year, because it is a rules-based funding system. The number of learners recruited in one year determines the budget for the following year. There is always a bit of uncertainty about the precise funding level, and so on, but the biggest issue is the number of learners. Every year when I look at the allocations for 16-to-19, it can go from -40 to +40 because of the variation in the number of learners[1]. Colleges have plenty of time to adjust to that. They know right away whether they are going to have to make big adjustments in the academic year that has started because they have not recruited up to target. There are all kinds of things that affect that, including local demography. The adult skills budget is a little less certain, but we try to make sure that the budget is allocated to where it is being used best. We have taken account of the performance of colleges and other providers in making the subsequent allocations. I am looking very hard at whether we can simplify the allocation of the adult skills budget for 2016-17 and 2017-18. Someone mentioned the issues of looking across two funding agencies, and I think some of the adult skills budgets have been too complicated. I have talked to Nick Boles, who is of course a Minister in both Departments covering this territory, about the need to simplify the budgets. He is very sympathetic and has encouraged me to develop plans for simplifying the budgets for 2016-17 and 2017-18.

Chair

What is the timescale for that? If it is for 2016-17, when would you have discussed it with providers?

Peter Lauener

We have already had some discussions with providers. Over the last year we have made some simplifications for 2015-16, and I hope we can go further for 2016-17. Clearly, we need to discuss that and agree it all in light of the spending review and in time to issue the budget allocations in March 2016.

John Pugh

Previously, I had an opportunity to talk to all the principals of further education colleges across Merseyside, who had a number of things to say. We have touched on this area with you before, Mr Lauener, and I think you said that it is about getting the right outcome for communities, learners, employers and business. Those principals said that it is all about culling colleges and cutting budgets. I am afraid that you haven’t persuaded me that they are wide of the mark, simply because so far we have decided that other areas of the sector that are not FE do not need to opt-in and that, as Mr Wormald has confirmed, any decision about their future and destiny is made independently of the area-based review. I will not dwell on that any further. I draw to your attention the extra burdens under which some of the colleges in Merseyside are suffering. A large number of pupils from the school sector, from Mr Wormald’s sector, have to attend a college in order to do GCSE maths and English again. That is an objective the colleges support, but does Mr Donnelly think that the funding for doing that is sufficient, particularly in those areas, such as Merseyside, where there are fairly large cohorts of people who do not get English and maths?

Martin Donnelly

If I may, I will ask Peter to talk about the detail of how we provide that funding. I echo the point made earlier that getting English and maths right is fundamental to helping move people, particularly youngsters, up the skills ladder. We cannot do the rest of it if we do not get that right, so it is very important.

John Pugh

What they are saying, just to help you answer, is that, essentially, they have a sudden influx of people and that they need to find additional staff—the appropriate staff who can deal with people who, so far, have not been successfully educated in English and maths are at a premium. That is an appreciable burden that is potentially underfunded. Does Mr Lauener think that it is not?

Peter Lauener

I think the issue you are referring to is the changes to 16 to 19 education which followed the Alison Wolf reforms in 2012, and that replaced a qualifications-based funding system, with study programmes. In the study programmes were a major qualification, work experience and, critically, English and maths, which were a condition of funding if young people had not achieved the GCSE in English or maths at school. This was a big challenge to the college sector. Why did Alison Wolf recommend that? Because you get the biggest return on English and maths compared with any vocational qualification, so it is absolutely fundamental. I guess we all recognise that in the people we deal with, or employ—

Chair

It is not so much the policy as the funding of it that we are questioning.

Peter Lauener

I apologise.

John Pugh

Nobody disputes the policy.

Peter Lauener

It then became the top priority for the envelope for funding. I do think colleges have responded very well to that challenge, so the proportion of students studying English and maths if they did not have their GCSE has gone from in the 50s to 97%. That is absolutely tremendous. I visited South Leicestershire College recently and they were achieving higher GCSE pass rates for the group of young people that had not previously passed than other local schools. They really had taken on this challenge and were doing terrifically well.

Mr Bacon

Can you say that again? They achieved higher pass rates than the other schools?

Peter Lauener

For this group of young people that they had taken in. They were using innovative teaching methods, they had a quite inspirational tutor, who I talked to, and they were achieving very good results.

Mr Bacon

They were higher than—

Peter Lauener

I should slightly qualify it. He was hoping and expecting that when all the results were confirmed—he was very optimistic about the results for this group of young people.

Mr Bacon

I am just trying to get you to reiterate with whom you were comparing.

Peter Lauener

Higher than the GCSE rates at schools for 15-year-olds.

Mr Bacon

In the locality?

Peter Lauener

Yes. If he achieves that, it is great, and I saw some very good evidence of it.

Mr Bacon

Presumably you are going to get the person who is doing it better to explain to the others how they did it so that they can improve.

Peter Lauener

Indeed, and this is one of the great challenges with the challenge that the colleges have taken on. It has been a participation challenge first, and then we need to look at the success. In the end, participation without achievement is not worth that much, so we need to work very hard—

John Pugh

Mr Bacon’s point is very important, because, on retake, the pass rate is something like 30%—it is fairly dismal—for English and maths. Someone who gets it right needs to be lauded far and wide and their practice broadcast.

Peter Lauener

Indeed, and I was very encouraged by what I saw. I need to see all the evidence of it, but they had really addressed it and they were actually extending retake classes to some of the adult college members—

Mr Bacon

Here is my point—it does also raise the question of what the others were doing previously.

Peter Lauener

That is absolutely fair—

Chair

We are straying a little—rather a lot in fact—into performance, which is great, but we are trying to focus on funding today.

Peter Lauener

We need to gather the research properly on what is working with this group of young people who have clearly not been successful at school. We need to look at the pedagogy, we need to look—

John Pugh

You have successfully evaded the question of whether you think the funding is adequate. Can we press you on—

Chris Wormald

Shall we answer the funding question?

Chair

It would be good if you could—

John Pugh

And incorporated in the answer, a point was made by one of the other witnesses that there was funding for special needs, capital funding and demographic growth funding, which was mentioned earlier, which has disappeared off the agenda, and that sort of thing would appear to be part of the response to under-achievement.

Chris Wormald

We do not fund the English and maths challenge separately—that is all part of the £4,000 unit of funding. We have not allocated a specific sum to individual colleges to do that. What we did do is invest £30 million in supporting the FE sector to improve the quality of their post-16 English and maths, which most colleges spent specifically on additional staffing and training of people to do it.

Chair

So £30 million across the whole country?

Chris Wormald

Yes. So you get your standard rate and then there was a £30 million one-off investment which was about upping the capacity—

Chair

And that is spread across all providers?

Chris Wormald

That was for the further education sector specifically. We are extremely pleased with the results of this—as I say, 97% of people are doing it and we have, compared with 2014, 4,000 more passes in English at age 17 and 7,500 more passes in maths.

Chair

But that is the policy; the policy was to achieve that.

Chris Wormald

Yes, but this is an area where we feel colleges have risen very well to the challenge.

John Pugh

The key factor there is not the number of people participating in it, nor the number of passes, but the percentage of people who participate who gain passes.

Chris Wormald

No, that is 4,000 individuals who now have English and would not have done in previous years.

John Pugh

I accept that. I just have one small point about post-18 provision. Was that changed in January 2014?

Peter Lauener

Do you mean the reduction in the funding rate for 18-year-olds?

John Pugh

Yes.

Peter Lauener

This is for a group of young people who are in their third year, post the original compulsory leaving age.

John Pugh

Am I right in thinking that the impact was greater on the FE sector than on sixth-form colleges?

Peter Lauener

That is correct.

John Pugh

What was the reason for that?

Peter Lauener

This was a very difficult decision for Ministers. Ministers were very clear, when they had to take this decision because of the 2013 spending review settlement, that it was not a reduction they wanted to make. They looked round at all the places it could be made in the post-16 budget and decided this was the area that would have the least adverse impact on students. We looked at an equality impact assessment and found very little difference between the characteristics of students in their third year and—

John Pugh

Just quickly on that—are you inclined to revise that? You are now getting a large number of 16 to 18-year-olds who may have finally got over the hurdle of a GCSE in maths and may actually be looking for some further qualification. At that point, the funding is gone. Given that new cohort, are you inclined to review the impact assessment?

Peter Lauener

Clearly that is a policy issue for Ministers, but I do not actually draw quite the same connection because I think they are separate and independent issues. One thing I have talked about with colleges is whether there are ways of pushing young people through more quickly and easing the path of progression to apprenticeships, rather than going through two years and then, in some cases, a third year. Can we get more of those young people through to apprenticeships, which give them the job they really want, with training as part of the job? There are a lot of opportunities still to build a better system.

John Pugh

Okay. The colleges raised the matter, so I raised it.

Karin Smyth

I have a similar point. We have talked a lot about the impact on institutions, but I am much more interested in the impact on the young people. In Bristol, we have classically a lot of increased competition and more academies going to 18, I think, than anywhere else in the country. One college has leadership rated “good” but a £7 million deficit. My constituency of Bristol South is the one where you are the second least likely to go on to higher education. The sector is absolutely critical to the life chances of young people in the city. I still do not know who is responsible for the outcomes of young people aged 16 to 18 across all those sectors under this funding regime.

Peter Lauener

Who is responsible for the outcomes of 16 to 18-year-olds at the college?

Karin Smyth

At the college, at the schools and at the academies that are now in competition for numbers of people on seats.

Chris Wormald

Obviously, the Department for Education has overall responsibility for 16 to 18 standards. Those institutions have always been in competition—well, certainly since 1992. It has been the policy of successive Governments that 16 to 18 should be driven by choice and competition for learners.

Karin Smyth

But at some point, the local education authority would have been able to intervene in that to ensure quality was assured across schools and the college. It no longer has that power.

Chris Wormald

Here we are, getting into a policy question. As you know, my Ministers would argue that the policy of local authority responsibility did not deliver high standards and that a system of academies and independent providers is likely to provide higher standards, but that is a policy debate I should probably not have with you.

Chair

What Karin Smyth rightly raises is that there is a plethora of organisations looking at the effectiveness and quality of provision in the FE sector. You have the Departments, the SFA and EFA—though they are now under one person, so maybe they are merged—Ofsted, the Sixth-form College Commissioner and the FE Commissioner. There are an awful lot of people looking at different elements of academic and financial performance. Would you still say, Chris Wormald, that the buck stops with you?

Chris Wormald

For 16 to 18 education, Ofsted is obviously an independent organisation. The Sixth-form College Commissioner is in fact part of the EFA, and most of our responsibilities in this area are discharged via the EFA, and then the Regional Schools Commissioners—who, as you know, look after academies—are also part of the Department, so one way or another, with the exception of Ofsted, all those bodies come to us. There are, of course, maintained school sixth forms that remain part of the local authority, because at the moment we have a system in which there are two providers.

Chair

Before I bring Karin back in, you talk about policy issues, but for FE colleges this was a very stark Report about a whole sector, so you can see, whether or not you agree with it, that there is the competition policy, effectively in every area, and there may be individual winners and losers, but the whole sector is struggling. It is like a “Heads I win, tails you lose” approach. Whether you are looking at school sixth forms or university provision, there are hard decisions being made in Whitehall, but it seems that the FE sector is the loser in many of these decisions.

Chris Wormald

No, I don’t quite agree with that. When you look at what the previous coalition Government did for 16 to 18, it equalised the funding between school sixth forms and further education, which was very big move. It carried out the Wolf review of vocational education, to try to put it on a level playing field, and it, and the current Government, massively expanded the number of apprenticeships, which is a big opportunity for further education, so I don’t think we’d accept that there have not been opportunities for further education. But the bottom line is that, as Martin has said already, we are talking about autonomous institutions that own their own destiny, and—there is no getting away from this—we don’t plan it as a sort of national system.

Chair

But they are funded nationally.

Chris Wormald

As I say, for 16 to 18 we fund the learners. What we are doing is this—this is a response to the financial pressures on the system, and nobody denies the financial pressures on the system that the National Audit Office has identified. That is why we went first for the system of the FE and Sixth-form College Commissioners in 2013—that was a very big move—and then to the area reviews in this Parliament, which are an attempt to ask those bigger strategic questions about the future of the provision in the area. So the Government—both the previous Government and this Government—is moving in the direction you’re suggesting.

Chair

Possibly shutting the door after the horse has bolted?

Chris Wormald

No, I wouldn’t accept that. It is a difficult balancing act between wanting a system of vibrant autonomous institutions that own their own destiny and the requirements of strategic planning that the funding pressures create. I am not going to say we have always got those right, but that has been the balance.

Chair

I think it is fair to say that if that’s what you’re aiming for, it doesn’t come across as anything other than a struggle to manage to maintain both those positions at the same time.

Karin Smyth

The issue for me, certainly in Bristol South but also for the city, is how that affects children from lower-income families in particular. Much like Sarah Wright said about East Sussex, we are a booming economy and we are a net contributor to the Exchequer in terms of employment and taxes, but those young people are falling further and further behind in their ability to access the opportunities and the work available, partly because of their skills and educational base, which, in a competitive environment—I accept that might breach into policy areas—still makes it unclear to me who is really taking responsibility for improving those young people’s life chances, in particular helping them through the levels that they might need to get through to access those better jobs.

Peter Lauener

My answer to that is that the primary responsibility, as in any institution, is with the governors and the leadership of that institution.

Karin Smyth

They have got a 2 for leadership and management and the neighbouring college has a 1, but they’ve got a £7 million deficit—which is why this is such an important Report for the city—in terms of their ability to survive and therefore give those life chances to those young people.

Chris Wormald

As I said, no one doubts the financial strains on the sector, and we all know where those issues come from. What I would say is that, as discussed by this Committee in its previous form before the election, when we took a Report on 16 to 18 education, we are now getting more output for less spending in this sector, along with the lowest NEET rate we have had since we started measuring. I am trying to be very clear here: there are big pressures on the sector—nobody denies that—but we do have a lot of colleges, schools and sixth forms that have stepped up to the mark in terms of improving outputs.

Karin Smyth

Apologies, but I didn’t quite pick up the answer to John Pugh’s question about equality impact assessments on the children who I am talking about.

Peter Lauener

For 18-year-olds.

Karin Smyth

No, for 16 to 18-year-olds.

Peter Lauener

The answer I gave to Mr Pugh was about the 18-year-old group on its own, rather than 16 to 18-year-olds.

Karin Smyth

So, given my point about the ability of the young people in that cohort, are there equality impact assessments on 16 to 18-year-olds?

Peter Lauener

I come back to the area reviews. There is not one set up yet for the Bristol area—I think you are referring in particular to City of Bristol College.

Karin Smyth

That is the main college providing it.

Peter Lauener

That has been subject to a review by the FE Commissioner, because the college was referred to David Collins because of inadequate financial health.

Chair

David Collins is the FE Commissioner—those who are watching might not know that.

Karin Smyth

There was its financial health, but it was better for leadership and management. We may ask questions about the inspection regime as well.

Peter Lauener

Those issues have been highlighted. David Collins has published his report. You are quite right to draw attention to City of Bristol College; it has significant financial challenges.

Karin Smyth

We are good for report and inspection and not very good for action and the ability to do something about it.

Chair

There’s a tip to Mr Lauener. Perhaps you can have a chat about that outside of here, because it is a fair point to make.

Peter Lauener

That is why the area reviews have been set up.

Chair

I want to move us on to oversight arrangements. Mr Donnelly, I have just listed the alphabet soup of organisations—the plethora of bodies—that are looking at and supporting FE. It’s not very streamlined and one could argue whether it’s very effective. Given that the sector is facing such significant challenges, do you think this system of oversight works?

Martin Donnelly

I think we have improved it significantly.

Chair

Do you mean that there were more bodies before?

Martin Donnelly

As we were saying earlier, we have brought them together. As feedback from colleges confirms, having an FE Commissioner who is a very experienced leader in the sector, with a very small team—I think, 20-odd people now, also with similar experience—is enabling us to support colleges and their governors to make the decisions that they need to to succeed.

Chair

We have heard evidence—indeed, from colleges who have had support from the FE Commissioner—about that being good. As you say, it is a small team, and the NAO says 70 colleges could be in financial deficit—rated as inadequate in terms of financial health—at the end of the next academic year. I keep repeating that because it is a stark figure. Have you got plans to support the FE Commissioner more if it is such a good model? Why did it only come into place in 2013 when this was, if you like, work in progress—or there were problems in progress—before then? And have you got any plans to make sure that he is well resourced enough to support colleges as he needs to?

Martin Donnelly

I think we became aware in 2012-13 that there were increasing issues for colleges and that it was important to provide intervention support earlier. Obviously there is a balance here, because colleges are independent and we do not want to interfere unnecessarily, but I think we have found a good balance with the combination of the FE Commissioner. We have increased significantly the resources we have provided to him over the last 12 months.

Mr Bacon

How much does he get now?

Martin Donnelly

He has a team of about 24 or 25.

Peter Lauener

Colleagues in BIS are recruiting at the moment for additional support for David Collins to make sure that he can deliver the very challenging agenda that is ahead.

Mr Bacon

The Chair mentioned 70 colleges in deficit, as referred to in the Report. Paragraph 4.9 talks about 27 colleges visited in eight months between November and June. At that run rate, he would not be able to do 70 in a year, would he? Given the resource changes that you are making, are you expecting that he will be able to support, as you call it, all the colleges that are in difficulty? Is that the idea?

Peter Lauener

That is the intention. We are going to staff it appropriately. It is not just about particular colleges, because David Collins also has a leading role in the area reviews. We are also supporting that with a joint team to prepare all the data for the area reviews. I have put one of my people from the EFA at the head of a joint EFA/SFA unit working with BIS and DFE colleagues, so there is a very joined-up process to support the area reviews. The numbers have already increased—the number of cases that David Collins has looked at is already a little bit higher than that.

Mr Bacon

He comes with a very good reputation; we hear only good things about him.

Chair

He has got a big job.

Mr Bacon

I am just concerned that he has got what he needs and is sufficiently staffed up. Does he have a budget whereby he can buy in services as well, or how does it work?

Peter Lauener

We recruit the advisers, who generally have got FE experience, to support him. They are often retired from previous successful executive roles in the FE sector.

Mr Bacon

You recruit them? He doesn’t recruit them?

Peter Lauener

Well, David has a big say in recruiting the right people. I was very pleased to be on the panel that appointed David Collins and I think that he has been a tremendous asset to the sector. The NAO’s Report recognises the contribution that he has made and there is a lot of very good feedback, despite the fact that he delivers a lot of very hard, difficult messages when he reviews the colleges.

Chair

Given that there seems to be an acknowledgement that he is doing a good job, how many colleges do you think will be rated inadequate in 2016-17 as a result of his intervention and other interventions that you have been overseeing?

Peter Lauener

The current number of colleges rated as inadequate is 29. The forecast that you referred to is 70. I should say that that is not a forecast; it is a projection based on a series of standard assumptions. But we are doing our latest review of the number of colleges in inadequate health now, based on the budget forecasts that colleges returned in September, and we expect the number to go up from 29 to the mid to high 30s. I cannot give a precise number, because we are still moderating and—

Chair

So you think it will be lower than 70?

Peter Lauener

I really can’t make a forecast based on all the variables at the moment. It depends, critically, on how quickly colleges themselves adjust, it will depend on the budget settlements from the spending review and it will depend on the decisions taken as a result of the area reviews. There are a lot of moving parts there.

Chair

One of the factors for colleges, as we heard about in our evidence session at the beginning and elsewhere, is that you now have a twin hat for two different funding regimes that allocate their funds in different ways. Therefore, that is quite complicated for colleges; it does not aid their planning and forecasting. Would you not agree that it doesn’t make it easier? Yes or no?

Peter Lauener

One of the reasons that I—

Chair

Do try yes or no; it would be good if you think you can.

Peter Lauener

I think we are already joining up much more than previously, but there is more to go.

Chair

But what will you do to make colleges be more realistic in their financial projections, because that was a comment in the Report? It said that some colleges are better than others at projecting ahead. You have got the FE Commissioner coming in. Is there something that you will be doing with your hat on?

Peter Lauener

One of the things that we need to do as a funding agency is to be much better at feeding back to colleges all the data that we have got—and there is a lot of it—so that they can understand their own context more clearly. We have started feeding back dashboards; we are doing more work to look at a wider range of factors, looking at the data that leads to financial inadequacy. I think there is a lot more we can do, and it is SFA and EFA people working jointly together. I am busy joining up my finance teams as we speak.

Chair

Are you convinced then? You sound positive, Mr Lauener—I have to say that you always sound positive in front of us—but the key thing is to prevent the crisis in the first place, rather than to intervene afterwards. How can you convince us as a Committee that you are going to be better at preventing the crises that are being predicted?

Peter Lauener

There are three things that we’re doing. First, we are trying to do much more on early intervention and putting all the data that we have got together, rather than just the pure financial health indicators, which tend to look backwards a bit. We want to look forward as much as we can. We will be sharing that with colleges, and we are planning a series of events to take the results of that work to college governing bodies next spring. That is the first thing. The second thing is the programme of area reviews that we have all talked about, and that I think is absolutely fundamental. It is due to cover the whole country by March 2017. Implementation will take longer, but that is the pattern for the area reviews. The third thing is that we are very keen to learn from other areas where this works. The NAO Report referred to Monitor. I have been looking at that and we have some meetings with Monitor people next week. We have actually done quite a lot in the Education Funding Agency and I am taking things into the Skills Funding Agency, because we have had the small matter of 5,000 academies to deal with over the last few years. The big advantage is that you get a lot of data to develop forecasting techniques with. So there is a quite a lot we have done, which I have talked about in this Committee before, to develop analytical techniques, and I think that there is a big scope for working together and learning from different organisations.

Martin Donnelly

I just briefly want to highlight one point about the intervention policy and the “inadequates”. We have had 15 colleges that have successfully got themselves out of that category—in places such as Stratford-on-Avon, Weymouth and Wolverhampton—and it has been through support to the leadership of the colleges. So it is not just a one-way process; it is intense support for the leadership of the organisations.

Chair

But those are the independent bodies that you do not want to interfere with too much—there is an interesting tension there. Very quickly, Mr Wormald.

Chris Wormald

Unsurprisingly, I discussed this hearing with the FE Commissioner before I came. One of the points he makes is that, of the colleges he has worked with, he has yet to find one where there isn’t an answer, that is, applying things that other colleges already do is the answer to the financial problems of the colleges he has been working with. There is, therefore, a very key bit, which is about feeding back what he has learnt into the sector, because everything he is doing is already being done by some other college.

Chair

That is interesting, because there is always an answer to funding and that is cutting services, but that might not be good for learners in value-for-money terms.

Chris Wormald

Well, as I say, it is something another college is already doing around management and leadership instruction and so on.

Mr Bacon

I am very relieved about that, Mr Wormald, because if you reverse what you just said—that he has yet to find one where there isn’t an answer—it suggests that if you found one where there wasn’t an answer, the only words you could utter to them would be “You’re doomed”, which does not help very much.

Chris Wormald

I am glad to have reassured.

Mr Bacon

Mr Lauener, you are the chief executive of these two bodies. At the moment, am I right in thinking that they are broadly separate executive agencies with their own infrastructures, apart from the fact that you are the chief executive of both? You have said that you are working more closely together but that there is more to do. You are still two bodies, pretty much, aren’t you?

Peter Lauener

Yes, there are two bodies, but I am increasingly joining up so, as Mr Donnelly said, I have a shared HR service from the DFE. I am developing shared finance and assurance services by joining up the EFA and SFA teams, and I will get savings as a result.

Mr Bacon

What is the cost of running the Skills Funding Agency and what is the cost of running the Education Funding Agency, distinct from the money you give out? Correct me if I am wrong, but I have got that for the EFA it is £54 billion and for the Skills Funding Agency it is £3.7 billion. Does that sound about right?

Peter Lauener

The programme costs are £54 billion in the Education Funding Agency and £3.9 billion in the SFA.

Mr Bacon

But the running costs, as distinct from that, are what?

Peter Lauener

This is a figure I should know.

Mr Bacon

As chief executive of both, I would hope so.

Peter Lauener

The running costs of the Skills Funding Agency—I may need to write to confirm these because I might get them slightly wrong—are about £75 million[2].

Chair

Someone behind you is nodding.

Peter Lauener

That is always a good sign, which you can see and I can’t.

Mr Bacon

It depends whether what you are saying is in contradiction to what they are saying or not.

Peter Lauener

It is a very similar figure for the Education Funding Agency. We get some economies of scale and obviously, again, that is why I am joining up some of the finance and assurance services.

Mr Bacon

Obviously, we cannot predict the whim of a Minister at any point any more than you can, but an obvious direction of travel would end up with your merging, even though there would be managerial functions that would be focused specifically on one cohort of these FE colleges and others that were much more specific to the somewhat different requirements of schools. But were that to happen, would you be confident that you could merge effectively and efficiently and also that you could do so in a way that did not create problems of its own, as we have seen so many mergers do, in the public sector and indeed in the private sector?

Peter Lauener

I took the job on the basis that there was no planned merger.

Mr Bacon

But isn’t that an obvious direction?

Peter Lauener

I am perfectly happy to operate in any way that Ministers ask me. Regardless of that issue, I have just been busy joining up all the functions.

Chair

I think that your knighthood is winging its way towards you, Mr Lauener.

Mr Bacon

In terms of releasing funds and creating efficiencies that mean there is more money for the frontline, in Mr Wormald’s words, we have been funding an FE sector that has been able to get more for less. The cost for that is £150 million—

Peter Lauener

And that is exactly what I have been doing. I have been joining up across the EFA and the SFA. I have been joining up leadership teams. I have a single director responsible for a joint area and review unit. Lots of colleges have been going through this type of process, finding ways of making savings in leadership, finding ways of being more efficient and more effective. I am spending a lot of my time trying to do that as well.

Chair

I know that both permanent secretaries want to come in; if you can both be brief, you can share the time between you. I will then bring in Deidre Brock.

Chris Wormald

Clearly, the decision Mr Bacon describes is possible, but that would be for future decision making. There is currently no decision to merge, but we keep the arrangements under review. The only thing I would say is that the history of this whole area has been constantly to reorganise the middle tier. There has been the Learning and Skills Council, TECs, the Further Education Funding Council, and I think Peter ran the YPLA at one point[3].

Mr Bacon

The one constant, Mr Lauener, has been you.

Chris Wormald

I have made the same point myself at times. I am not sure that all those reorganisations have always added a lot to the party.

Chair

Mr Bacon was rightly raising the saving of money.

Chris Wormald

Exactly. Our entire focus is on how we make the existing system work best as opposed to how we rearrange it. You can obviously take a decision to rearrange, but the focus has to be where described.

Martin Donnelly

Very briefly, I will not repeat what Chris has said, but we are totally committed to getting the most value we can get out of the least administration, while still delivering. Your point is well made, and it is also one we are aware of in relation to mergers of colleges. Mergers are not straightforward or easy and have to be very well planned if they are going to produce savings and not affect but hopefully improve quality.

Chair

And often well-resourced at the point of the merger.

Martin Donnelly

The transition can require resourcing.

Chair

Glad to have that on the record.

Deidre Brock

What actions will you be likely to take as a result of the area-based reviews? What outcomes are you expecting—what are you hoping for?

Peter Lauener

We have now set out along the road, and seven area reviews are under way. The first one out of the box was Birmingham. The steering committee will have the first substantive discussion in the next week or so about some of the early findings, so we are at an incredibly early stage with the area reviews. As I have already described, the guidance that Ministers gave is that area reviews have to start from analysis and go to structure, but we have a clear expectation that they will result in fewer, larger, more specialised colleges that are less dependent on public funding. That was a very clear message that was given, so I would expect fewer independent institutions, but that does not mean closing particular sites down—it is the process we discussed earlier.

Deidre Brock

Okay. What are you doing to ensure that those reviews take place? For example, if you get a local institution that does not proactively initiate the reviews, what actions can you take?

Peter Lauener

I would say there has been a lot of support for the reviews across the further education sector and sixth-form colleges. There has been a lot of engagement. Our intention is always to have a local chair if there is a combined authority. In Manchester, the review is chaired by the chief executive of Trafford Borough Council who leads for the Greater Manchester combined authority on skills. In Sheffield city region, again there is a local chair. Where there is not a combined authority, the chair may be taken by David Collins as the FE Commissioner, but it does bring together all the parties that we discussed to start with the data and work from that.

Deidre Brock

So you generally feel that there has been buy-in from the different areas you have approached so far?

Peter Lauener

I would say so. That does not mean that really difficult, hard issues won’t come out of the area reviews, but the reasons for having them is a recognition of what a lot of Committee members have been saying: the sector faces significant challenges and we cannot just go on as we are, addressing them on a sort of college-by-college basis.

Martin Donnelly

From that point of view, the early pilots in Norfolk and Suffolk or Nottingham have been encouraging and produced real outcomes that I think improve learner provision.

Mr Bacon

In that particular respect, the Norfolk college, Easton college, was in my constituency and merged with Otley. Takeover is a word that probably wouldn’t be diplomatic, but it was managed to a very considerable extent with the skill of the principal of Easton college at the time, David Lawrence, who is an exceptional manager. I am not confident that the FE sector as a whole has people of his calibre, so it is something you need to watch very carefully.

Deidre Brock

If you come across a college through these review boards that is felt to be failing, what is the ultimate action and who out of the different oversight bodies in the area makes that decision? Who ultimately takes that decision? I know it is the responsibility of governors, but they might not be inclined to agree with you.

Peter Lauener

We are looking for, and hope that there will be, agreed recommendations coming from the area review steering groups. If a particular governing body does not agree with the recommendations, Ministers would need to consider whether those objections are reasonable or whether we should apply funding conditions to secure the outcome that local partners want.

Deidre Brock

When you say “apply funding conditions,” do you mean take the funding away?

Peter Lauener

It would be possible to apply conditions to funding to secure co-operation.

Deidre Brock

Would the Minister step in?

Peter Lauener

The Skills Funding Agency or the Education Funding Agency would be the means of implementing any funding conditions. There are, of course, quite a number of colleges, as Members have mentioned—

Chair

Can you detail what sort of funding conditions you are talking about? There is a bit of puzzlement on the Committee when you talk about funding conditions. Could you give a couple of examples?

Peter Lauener

If there is a well-founded case where all the partners in an area thought that there should be a rationalisation of provision—let us say that there is duplication of provision—and one governing body said, “There might be duplication of provision, but we are very fond of that provision and we want to keep it,” but all the other local partners agree that there is a better way, a funding condition might be that the college should co-operate with the other colleges in the area.

Chair

But, from what Mr Wormald was saying, that would not apply to sixth forms.

Peter Lauener

As Chris explained, sixth forms are not formally part of these area reviews.

Martin Donnelly

I emphasise that the area-based review is very much a local-based process that will produce recommendations, and part of its strength is to allow the local area, with the LEP, the local authority and so on, to look together at their needs going forward. We see this as an opportunity for regions to take control of their own destiny.

Chair

I think we have covered that ground already, Mr Donnelly, with respect. Any last points, Deidre?

Deidre Brock

No.

Chair

The Comptroller and Auditor General wants to come in, and then I have a few areas that we still need to cover. I hope that we might finish in 20 minutes.

Sir Amyas Morse

I only wanted to make sure—thinking back to your comments earlier, Peter—that the objective of this is to produce a smaller number of larger, more financially independent colleges. Where the rubber will really hit the road in the local reviews is where you need to take out or amalgamate one of the colleges. That is the most likely difficulty. When you say “taking away provision,” the most difficult dialogue will be about whether you say, “Well, you actually have too many colleges in this area. We need to rationalise and have fewer.” That is the same discussion we have in relation to hospitals, and it is difficult to have in a local area, isn’t it? It is the same idea. That is where it will be difficult, and it puts great pressure on local consensus if you are looking for decisions that achieve quite large savings. I am trying to be clear about it.

Peter Lauener

I think Martin captured it very well. It is about local consensus, which will be a very powerful driver of what should happen. It is quite right that this is about all the parties that I talked about earlier. It is about representatives of the community, local authorities and business through the LEPs. If there is that consensus, and if it is rationally presented and rationally argued, I hope that all parties would work together to produce the outcome.

Sir Amyas Morse

As the discussion goes on, and I see this as necessary, you have already said that your teams will be providing the staff work and the analysis to support all this so, notwithstanding that you need local consensus, the actual analysis and a lot of the thinking about what looks viable and what does not will be supported by your people.

Peter Lauener

Yes.

Martin Donnelly

Can I just underline the difference? The analogy you made, as we know, does not go all the way. Hospitals are not the same as local colleges.

Sir Amyas Morse

I am not trying to take it too far.

Chair

He was just trying to illustrate with the nearest comparator.

Chris Wormald

Also, to be clear, we are not trying to nationalise decisions. It has come out very well from the Committee’s questions that we need to have a very detailed understanding of particular areas and particular economies. We are trying to create a system that allows the local conversation to go on and a consensus to emerge so that people can take independent decisions. It is not about, “Here is the master plan from Whitehall.”

Chair

Okay. Anne-Marie Trevelyan has a brief point on this subject.

Mrs Trevelyan

I have a quick remark. In my area in Northumberland we have one college, Northumberland College, which is relatively small, but it covers a vast area—thousands of square miles—and there is a real anxiety that the area review will force them to get sucked into the Newcastle College framework as a satellite. There is a real anxiety that there will not be, as you clearly described, the local partnership voice, because they will be outnumbered. It is a huge rural area, but with a small number of people. I imagine there are other parts of the country where that mix of urban and rural can be a real tension with these reviews.

Peter Lauener

The issues will come out in the reviews. I recently met your former principal who went down to Chesterfield College. He did a great job at Northumberland working with Jacqui Henderson to turn round the college. Again, we do not have a template for saying it ought to be this way or that way. We are genuinely hoping and expecting that the area reviews will produce new and maybe innovative solutions.

Chair

Can I take us back to the intervention process? We want to tease out a couple more points on it. The NAO’s report found that some colleges had doubts about the effectiveness of the notice of concern process. Can you explain to us what that process is intended to deliver?

Peter Lauener

On the process we go through—I talked about it earlier, so I will try not to repeat it—we make a twice-yearly assessment of financial health on clearly set-out factors; people can do it themselves. We feed that back to the colleges, and if we conclude that the college is in inadequate financial health, now the thing that we do, which was not available two years ago, is to refer the colleges to David Collins, the Further Education Commissioner, for review, and he will go in with his team and produce a financial assessment of the college.

Chair

But is there an example of getting things so bad that the FE Commissioner needs to come in? Perhaps a bit more preventive work at that point would be better for the health of colleges.

Peter Lauener

That is why I talked earlier about the work I am now trying to take forward with my own team to try and get a better analysis of the factors that lead to financial inadequacy, and I am absolutely clear that I want to share those with the sector. I do not want to do it in a little Whitehall box. The earlier that those issues can be shared with leadership teams and governing bodies, the more pre-emptive action can be taken to prevent deterioration. Again, this is one of the things that David Collins has talked about. He has said that in a number of the difficult cases that he has looked at, he can see decisions that should have been taken earlier. The good news is that he is giving clear messages about that. We need to take that back in our discussions with the sector. That does not mean we are telling people what to do. It just means we are being as transparent and open as possible with the data so that the governing bodies can take the appropriate decisions. I will give you an example. One of the very clear messages that David Collins gave in one of his letters to the sector was that governing bodies should have a very wary eye if there is any suggestion that the ratio of borrowing to income goes above 40%. He says that very clearly. There are quite a number of colleges with that, but that kind of transparency of message puts up a flag. I went to a college governing body away day recently. I said, “What is the figure that David Collins has said you should not go above?” I was pleased to find that that particular governing body—

Chair

The message had penetrated.

Peter Lauener

They knew the answer. Fortunately, they were quite a bit below it.

Chair

I want to move on to capital costs. There has been encouragement—we heard from Ian Ashman earlier and about his case—to build new premises. That has left a number of colleges saddled with large capital debts, so what is the plan? A lot of taxpayers’ money has gone into that. For all the area reviews and so on, if you have got a college that has expensive premises and no one in them for demographic reasons or because the market is not sending people in that direction, what are you going to do about that?

Peter Lauener

First of all, the capital programmes that have run over the last five years have helped to reduce the size of the estate by about 70,000 square metres, which makes quite a considerable contribution to efficiency.

Chair

But if they are servicing a large debt as a result—

Peter Lauener

We estimate the reductions in very poor-quality estate, which is very expensive to run, are actually saving the sector about £57 million a year.

Chair

This is one of the things that may be different for the sector as compared with some individual colleges. That is what I am driving at. How are they going to survive?

Peter Lauener

It is certainly the case that there are individual colleges with a large debt, which dates back to the Building Colleges for the Future programme in 2008-09 when that programme was stopped. We heard the example earlier of Central Sussex college, where they have got very real problems because of large debt incurred when there was no grant to support the final phase of their programme. We have tried to reflect that in the decisions that were taken since then in the allocation of capital funds, but that is never a perfect process. The remaining capital funding now sits with the local enterprise partnerships to allocate to meet local economic needs, so the decisions are now taken by LEPs. Again, we heard some interesting examples earlier where some colleges have got support from their LEP for particular new initiatives linked to skills priorities. I think that that is quite a powerful model.

Chair

In a number of cases, the loans were turned into grants, so the taxpayer has got a double interest, if you like. Taxpayers’ money has directly gone into colleges, which may have been a good way to sort out a particular college’s problems, but it is slightly worrying that that money was given as a loan and turned into a grant, seemingly to bail out a college and perhaps for good reason, but without real regard for the impact on the public funds.

Peter Lauener

We always seek to minimise the cost to the taxpayer of any exceptional financial support that we put in place. We also seek to maximise the proportion of any exceptional financial support that we put in place that can be converted into long-term loans with the college. There are certainly some cases where we have to write off the exceptional financial support. There was the case of K College two or three years ago where a significant amount had to be written off as part of the restructuring of the college. I do not like doing that at all, and we always seek to minimise it. We are having very close, careful and intensive discussions with colleagues in BIS and Treasury about the best ways of managing any interventions we make to minimise the cost to the taxpayer. Area reviews are clearly part of this as well.

Mr Bacon

For the record, is it not worth saying that the only reason there were exceptional financial interventions is that those colleges proceeded on the basis of promises that were made to them and later snatched away? If you have a four fifths or three fifths completed building and you suddenly find the funding is not there, logically the only thing to do is to finish the building rather than leaving it like the Montreal Olympic stadium. Suddenly they were faced with the bill for this, which they were not expecting because of the “bigging up” process, as it was called at the time under Building Colleges for the Future, and the promises that had been made to them under that. Now you are saying to us that the decision about future capital funding is out of your agency’s hands because it has been handed over to the LEP, so there is only a limited amount that you can do. That seems pretty unfair on the colleges, in some ways, doesn’t it?

Peter Lauener

Well, the Building Colleges for the Future problems go back to 2008-09. There have been quite a number of years since then, including some significant capital investment programmes by the Skills Funding Agency. This is before my time, but some funding went in in 2010-11 and into the last Parliament, which recognised the particular circumstances of some colleges. I very often meet college principals who feel that they were disadvantaged by the mistakes that were made with Building Colleges for the Future. The Skills Funding Agency tried to remedy some of those under ministerial programmes, but we were not able to remedy all those problems. Some of those problems caused the financial difficulties of some of the colleges now.

Chair

Karin Smyth and I did a representative visit to Bristol to talk to the LEP there. It really struck me that the LEP has a lot of power to make decisions about spending, but ultimately the accountability falls with other bodies. In some cases, that is the council tax payers of the local council, but in this case it is the colleges that carry the problems if there is a problem with funding down the line. Given the experience of Building Colleges for the Future, when, exactly as Richard Bacon said, the deal was done and then the last bit of money was withdrawn, how can colleges and providers have confidence that any capital money will run through and be delivered? You have not even got a handle on that now. Whom do they go to? They have to go to their LEP, which can wash its hands of the problem at that point. Do you bail them as well, as you have done in the past?

Peter Lauener

We never seek to bail anyone out.

Chair

Most taxpayers would say that turning a loan into a grant is bailing people out. It is like a bank manager giving you cash instead of an overdraft. Most of us would like that.

Peter Lauener

We sometimes seek to support a recovery plan if we think that it will take a college to a more stable platform and that it is in the interests of learners, the community and local employers. That is always the thing we look at first. I gave the example of a college—

Chair

Bailing out with a purpose. That’s all right, then. I am putting words into your mouth, Mr Lauener. I know you don’t like it. Carry on; sorry, I interrupted.

Peter Lauener

I will go with that phrase. We face some difficult decisions over the next few years. The National Audit Office Report refers to some of the amounts on exceptional financial support. As I have said already, we always seek to minimise them and convert them into loans. Where there is a merger, our normal expectation is that loans will be taken on by the new body. What we are seeking to do in the area review process, working with the strategy coming from local partners, is—what’s the best word?—to reset the equilibrium of the college sector in this country. It is such an important moment and such an opportunity to restructure provision. If I can give one little example to illustrate—

Chair

Briefly, because we are running out of time.

Peter Lauener

I was at a college recently, and if anything the result of an ambitious building programme was that they were left with a rather larger building than they needed. They were having productive discussions with local HEIs, which were interested, on a widening-access agenda, in putting in some of the HE provision in their building. That was likely to release some capacity for the college to develop more outreach with employers and to put a different kind of provision out to the community, rather than the traditional, full-time provision, where people go to the college building five days a week.

John Pugh

On learning lessons, I want to mention just a small point. The colleges, in their submission, complained that they are having to cope with a capital funding regime that works on an April-to-March timetable. That is them saying it, not us. Do you understand the point they are making, and do you think the LEPs will do things differently?

Peter Lauener

I can’t speak for the LEPs, but the Government of course has an April-to-March regime. Capital programmes often—

John Pugh

Go beyond that—

Peter Lauener

—are over a longer period. The last capital programme the Skills Funding Agency ran was planned and delivered over a two-year period. We had a particular cliff-edge problem with that programme, because from 1 April this year the money went to LEPs.