The Further Education Funding Council for England...(para~aph 4,19), e) In evaluating their work, there is scope for the Inspectorate to extend their analyses comparing their judgments

((

..

NATIONAL AUOIT OFFICE

REPORT BY THE

COMPTROLLER AND

AUDITOR GENERAL

The Further Education FundingCouncil for England

ORDERED BYTHE HOUSE OF COMMONSTO BE PRINTED30 JANUARY 1997

LONDON: HMSOHC 223 Session 1996-97Published 5 Februav 1997 El 1.65

The Further EducationFunding Councfl for England

I’hls report has been prepared under Section 6 of the National AuditAct 1983 for presentation to the House of Commons in accordancetith Section 9 of the Act.

.,,

John BournComptroller and Auditor General

National Audit Office20 January 1997 ‘

The Comptroller and Auditor General is the head of the NationalAudit O~ce employing some 750 staff. He, and the National AuditOfice, are totally independent of Government. He cerfies tbeaccounts of afi Government departments and a wide range of otherpublic sector bodies; and be has statutory authority to report toParliament on the economy, efficiency and effectiveness with whichdepartments and other hodles have used their resources.

The Further EducationFunding Council for England

Contents

Page

Summary and conclusions 1

1: Introdnctims 9

2: The funding methodology 15

3: Secwing sufficient and ade~ate facfities forfurther education 36

4 Promoting improvements in the qua~ty offurther education 49

5: The ~mancial health of the sector and the monitoringarrangements of the Funding Coucfl 60

Annex

National Audit Office survey of colleges 80


Summary andconclusions

1 Under the Fmther and Higher Education Act 1992 (the Act), theFurther Education Funding Council for England (the Funding

Councfl) administer funds in respect of colleges and otherinstitutions providing fmther education in England. The grant to theFunding Council from the Department for Education andEmployment (the Department) for the financial year 1996-97 isexpected to total f3.15 bflhon.

2 The Act requires the Funding Council to secue the provision of

sufficient and adequate facilities for fmther education, and to makeprovision for assessing the quafity of further education. The Funding

Councfl’s Financial Memorandum with the Department requiresthem to monitor the financial health of colleges.

3 In 1992 the Secretary of State set a target for the sector of achievingcumtiative ~owth in student numbers of 25 per cent over the theeyears from 1992-93 to 1995-96, while mating significant efficiencygains. Projections of total student numbers have since been updated

and the most’recent Government plans envisage 20 per cent ~owthover the five years from 1993-94 to 1998-99. The Funding Councilintroduced a new funding methodology from 1994-95, which wasdesigned to be able to achieve a number of objectives including the

~owth sought by the Government to secure sufficient and adequatefacilities for fmther education in England.

4 The National Au&t Office examined

. what impacts the funding methodology was expected to achieve

and what etidence there is to date of the expected impacts;

. whether there is early evidence that the Funding Council havebeen effective in securing sufficient and adequate facilities forfurther education and promoting improvements in the quality offurther educatiom and

● the financial position of the sector and the effectiveness of theFunding Conncfi h monitoring the financial health of institutions.

The fundingmethodolo~


5 The funding methodology implemented in 1994-95 was developed toachieve the key tires specified by the Secretary of State for findingfurther education: to be capable of achieving growth in studentnumbers, expand participation and secure greater efficiency. Therewas also an emphasis on securing improvements in studentretention and achievement rates.

6 The Fun&ng Councfl involved the sector in the development of thenew funding methodolo~, and succeeded in buOding a consensusfor the introduction of a methodology which broke new ground andwas highly flexible. The National Audit Office’s mtin conclusions onits impact to date are:

a) The funding methodolo~ has been successfti in enconra@gcolleges to achieve the levels of growth expected of the sector andto make significant increases in efficiency (paragraphs 2.11 and2.25).

b) The Funding Council have t&en effective steps to secure thefinancial stabihty of the sector wtie mating progress towardsconvergence of funding levels, which varied greatly whencolleges entered the sector in 1993. Progress on securingconvergence is close to the Funding CounciUs three-yearobjective. Faster progress codd affect financial stabfi~ when thenumber of colleges in financial diffictity is rising(paragraphs 2.28,2.31,2.32 and 5.19).

c) As regards diversity of mission within the sector, coUeges havenot reduced the range of provision they offer except in a verysmall number of cases (para~aph 2.33).

d) Despite pressures on pubhc funding, colleges have not yet

succeededin increasingtheir leveloffundsfromprivatesouces(para~aph 2.38).

e) The funding methodology has had a positive effect on increasingflexibihty in teacting and learning methods (para~apb 2.39).

O The link between quality assessment and the fnutig aUocationprocess means that colleges which are assessed as having poor

quahty provision in partictiar cnrrictium weas cannot expand inthose areas until the quality has improved (paragraph 2.40).


g) The funding methodology is seen in the sector as an incentive toimprove retention and achievement, but it is too early to saywhat impact this has had on co~ege performance(paragraphs 2.41 and 2.42).

h) Colleges generated less than one per cent of their funds in1994-95 by franchising provision out to other organisations. Thishas risen to about two per cent in 1995-96. Franchising helps toimprove college-employer finks and widen participation

(para~apbs 2.13 to 2.18).

i) However, franchising carries particdar risks. CoHeges may

experience WcdV in achieving high wtity in franchisedprovision wbicb is remote horn the coUege. There is also a risk thatorganisations may attempt to use Funding Conncfl funds as asnhstitute for their efistig expenditme on tr-g, hd there is anincreased risk of funding training which does not take place or

which is ine~gible for Funding Councfl funding (paragraph 2.19).

j) Tbe Funding Councif have recognised these risks and have issuedguidance, stating that they wotid continue to fund franchisedprovision where coUeges implemented that guidance hy the end

of the 1995-96 academic year. It is possible that provision beforethat date could be inehgible for funding. If the new controls toprevent duphcation or substitution of other funding are found notto be effective, the Funding Council shotid take further action toreduce the risks, or consider whether they wish to continuefunding protision in future funding a~ocations(paragraphs 2.20 to 2.23).

7 The funding process depends ukimately on audited data on studentactivity in co~eges, and colleges in any case needed, onindependence, to improve their management information systems.The Fnndmg Councfl have worked with the sector to develop a newdata collection strategy. They set an ambitious timetable for theimplementation of the strategy and many colleges had difficdty indeveloping the systems to meet the Funding Counci~s timetables formaking data returns on 1994-95 (para~aphs 2.44 to 2.49).

8 A a result, about 11 per cent of colleges’ audited returns on student

data for 1994-95 are outstanding and there are delays in makingfinal settlements of the funding claims from these colleges. TheFunding Cmmcfl have taken steps to ensure that colleges which havefafled to meet their targets do not receive an uodue cash flowadvantage, Cash has also been withheld from coUeges whose

The Further Education

Securing sufficient 9

and adequatefacfities for furthereducation

Funding Council for England

returns are excessively overdue. A at 4 November 1996, morecolleges had been able to meet the 1995-96 timetable (paragraph2.50 and 2.51).

The Funding Councfl’s mechanisms for assesstig the sficiency andadequacy of facilities include coUege strategic plans, regional andnational analyses by the Funding Council in conjunction tith theDepartment and representatives of Naining and EnterpriseCouncils, and the Funding Councti’s consideration of proposals fornew or reorganised protision. The National Audit Otice conclude

that:

a) At a national level, the Funding Council and the Department havemade progress in matching labour market needs withwork-related further education protision and are undertaking ajoint pro~amme of work to improve information about both tbedemand and supply of protision nationtiy and regionaUy

(para~aph 3.8).

b) The Funding Council, working titb the former Department forEducation and the Employment Department, developedprocedmes to assess systematically for the fwst time the

sufficiency and adequacy of protision at a regional level. Thesewere apphed for the first time in 1994-95 and worked we~ butthere is scope to improve the guidance on the task and the dataavailable on tbe protisimr offered and student destinations. Inparticular, different approaches were adopted to the assessmenttask and information on the labow market was variable(para~aphs 3.9 to3.16).

c) The Funding Council have estabhshed an effective strate~cplanning framework for colleges. There were weaknesses in the

needs analysis section of some colleges’ 1994-97 strategic plans,but the Funding Council have taken steps to encowageimprovements in college practice and the Department have actedto improve local lab our market inte~lgence. In the cases wherecolleges have tithdra- protision, alternative protision hasnormally been available tithin reasonable traveUing distance.(para~aphs 3.17 to 3.22).

d) The model developed by the Frmdmg Councfl to assess sticientand adequate facilities in a specfic locatity has potential for

application to other areas where there are concerns Aout tiesufficiency and adequacy of facilities (paragraph 3.24 and Box 5).

4


e) Procedures developed by the Funding Councfl to assess the

effects of a co~ege closure cotid be used to address gaps inprovision shotid they emerge (para~aphs 3.26 to 3.31).

Promoting 10 The Funding Councfl gained the consensus of coUeges in putting in

improvements in the place their arrangements for assessing the quality of fmther

quatity of further education provision, including the estab~shment of an Inspectorate.

educationInspection arrangements are now well estabhshed and have beenweU received by the further education sector. The National AuditOffice conclude that:

a) The Inspectorate are on target to complete the four year cycle ofinspection tithin the planned timescale (paragraph 4.6),

b) The national and international reports produced by theInspectorate cotid be taken further by Mghhghting more

systematically the lessons to be learned (paragraph 4.9).

c) Notwithstanding the growth and efficiency gains achieved bycolleges, the majority of cnrricdmn (68 per cent) and

cross-college areas (64 per cent) inspected in colleges to datewere awarded the two highest grades, 1 and 2, where strengthsoutweighed weaknesses (para~aphs 4.14 and 4.15).

d) There are no substantial differences in quahty between types ofcollege, and there is no evidence that the quafity of teaching andlearning has been affected hy colleges’ individual funding levels(para~aph 4,19),

e) In evaluating their work, there is scope for the Inspectorate toextend their analyses comparing their judgments aboutindividual coUeges against other performance indicators as ameans of monitoring any impacts on quahty arising from otherfactors, checking the robustness of inspectors’ judgments andtargeting inspections on areas of identified weakness (para~aph4.20).

U The outcomes of the reinspection of colleges which wereawarded low wades in particdar curricnhnn areas inticate thatthe link between poor grades and restrictions on applying forgrowth appears effective as an incentive to colleges to improvetheir grades (paragaphs 4.21 and 4.22).

g) There is currently no incentive built into the funding allocation

process for colleges which have achieved the highest assessmentgrade for a curriculum area. This issue has been considered by

The Fwther EducationFunding Council for England

the Funding Councfl in estabhshing the methodology hut wasdeferred until a sufficient body of inspection evidence wasavailable. It wi~ be reconsidered during their review of thefunding methodolo~ (paragraph 4.24).

The financial health 11 Colleges collectively are incurring deficits and their fiancid

of the sector and the position has worsened since incorporation 280 out of 452 coUeges

monitoringwere in deficit in 1995-96 compared with 214 coUeges in 1993-94.Colleges forecast that the position wfll improve from 1996-97. The

arrangements of the National Audit Office conclude thakFunting Council

a) Long term debt in the sector, although slowly increastig, is sticomparatively low (pwagraph 5.4).

b) Specialist co~eges and stitb form co~eges tend to have a betterfinancial performance than general further education coUeges.This may be related to the higher funding levels they inheritedand the effect is reducing as funding levels converge. OveraU,

there appears to be no statistical relationship between averagelevel of funding and financial performance (para~aph 5.1 1).

c) Of all the nine Enghsh regions, co~eges in Yorkshire andHumberside have the weakest financial performance(paragraph 5.12).

d) Mthough gener~y h~idity is reasonable, 83 coUeges cmdd notcover current habfities in 1995-96 and need to improve theirposition in the coming period (para~aph 5.16 to 5.18 andFigure 17).

e) From the etidence avaflable, poor fmancisd health at a coHege

appears to be the result of the circumstances applying to

individualcollegesandtheir management,rather thansector-wide factors (para~aph 5.19, 5.30 md Figure 21).

0 Colleges’ financial forecasts are reasonably rehfile, and theiraccuracy is improving. But poor forecasting is a common featie

of colleges in difficdty. The Funding Cmmcfl have assistedcolleges in improving their forecasting but many coneges,including a significant proportion of co~eges in dtificti@, havebeen slow to provide forecasts and other financial returns to theFunding Council (paragraphs 5.27 to 5.29).


g) The Funding Conncfi ask co~ege external auditors to vahdateforecasts in some circumstances, hut they shotid consider

extending this to obtain vahdation of forecasts where dotits overaccuracy exist. They also need to encourage colleges to providefinancial returns more promptly (paragraph 5.31).

h) The Funding Councfl’s financial monitoring procedue is based onrelevant criteria, is consistently app~ed and has genera~ysucceeded in identifying potential and actual problems early(para~aphs 5.39 to 5.42).

i) The main financial monitoring challenge facing the FundingCouncil is not identifying the potential problems but encouraginga prompt and appropriate response from co~eges

(paragraph 5.42).

12 The National Audit Office found dnring their visits to colleges that

arrangements for governance and financial control had improvedsi@lcantly since their previous examination of these issues inco~eges in 1994. But some colleges still needed to improve theirprocedures for:

. asset recording and securi~,

. cash flow forecasting

. commitment accounting

. capital project appraisal;

. registering financial interests of governors and senior staff;

. recruitment of new governors; and

. financial reporting to governors (paragraphs 5.43 to 5.46).

13 The Funding Counc~s Audit Service have achieved their target ofvisiting au coUeges by 31 Jdy 1996. N co~eges bar 16 had receivedby 1 August 1996 at least the draft report of the visit containingdetailed recommendations. 312 co~eges have received final reportsincluding an action plan setting out the college’s response to therecommendation. The Audit Service identified problems with

governance and management arrangements at 14 per cent ofcolleges they visited in 1994-95. Moreover, weaknesses in the workof college internal auditors, on whom tbe Audit Service placereliance, meant that the Funding Council cotid not obtain assurance


on the financial controls in some 40 per cent of coHeges. Dtictitieswith the timely dehvery of Audit Sertice reports were associatedwith under-staffing, and have largely been overcome

(paragraphs 5.50 to 5.58).

OveraU conclusion 14 The new funding methodology has been successti in achieving itsmain objectives of encoura~ng growth and securing greaterefficiency. Many colleges had diffictities in develophg managementinformation systems which enable them to protide data for funtigand other management purposes. The greater use of franchising todeliver provision offers increased value for money and participationhut involves some risks to re@arity of expenditure which theFunding Council acted to address in 1996. If the new controk toprevent duplication or suhstitutimr of other funding are proved notto be effective, the Funding Councfl shotid take further action toreduce the risks, or consider whether they tish to continue to fundthe protision in future allocations.

15 OveraU the Funding Council have been effective in meeting theirduties under the Act to secure the provision of sufficient andadequate factilties for further education and make protision forassessing the quahty of further education. The etidence to date,although hmited, does not indicate that there are si@cant gaps infurther education protision, but there is scope to develop further themechanisms for assessing sufficiency and adequacy of provision.Procedures for assessing quahty in colleges are we~ estahhshed andhave been well received. Arrangements for monitoring financialhealth have successftiy identiled colleges in diffictity and enabled

the Funding Councfi to work with these colleges to recover theirfinancial hedtb, They show that the number of colleges in financialdiffictity is increasing, and it is important for the Funding Cmmcfl toensure that they receive timely and rehable financial returns from

colleges.

8

Le~slativefra-mework


1. Introduction

1.1 The Further and Higher Education Act 1992 (the Act) made coUegesindependent bodies and established funding coucifs for England

and Wales to administer the central government grant for thefurther education sector. The Further Education Funding Cowcfl forEngland (the Funting Councif) have resprmsih~lty for administering

funds in respect of 452 co~eges (Figure 1), and to other institutionsproviding further education. The grant to the Funding Councif fromthe Department for Education and Employment (the Department) for

the financial year 1996-97 is expected to total E3.15 bi~on.

Figure 1: Distributionof sector colleges bytype

(a) Distribution of sector colleges (b) Distribution of FTE studenlstby type 1995.96 be~een college type 1995.96

,@ ,*

(Art and design less than 17,)

(c) ~stribufiom of funding allocationsbetween college types 1995-96

,:’a/”l”he2- General FEand tetiiaq- Stih form

,, = Agriculture- Am and designm Designated

Source: Fuflher Education Funding Council (numbers of colleges atJuly 1996)

General further education and tetiary” colleges represent a majotity within the sector

“TefliaW colleges were originally established by local education authorities to provide all post.16fuflher education for a defined area.

t F“[l.~me e~”ivalent

9

1.2

1.3


Financial memoranda govern the financial relationships betweenthe Department and the Funding Cmmcfl and between the FundingCouncil and individud sector colleges. The financial memorandaspecify the terms and conditions on which ptihc money is provided.ResponsibiEties and accountabihties in fnrther education in Englandare summarised in Figure 2, and were described more Wy inAppendix Two of the National Audit O~ce report Mana@ng to beIndependent. The responsihihties of the Chief Executive of theFunding Council include:

. satisf~ng himself that colleges have appropriate mrangementsfor financial management and accounting

● promoting value for money though the grants paid to coUegeX

and

. monitoring their financial health and borrowing.

~gUre 2 Responsibilities and accountabilifias in further educafiorf in England

+.

Depaflmant for Education and Employment

Role to set the policy framework fo[the sector and monitor the I—performance of the Funding Council

Fhranc”al Memofa‘alum’i!

Further Education Funflng Council

ROIC to distribute funds in I

4accordance with the policy framework

and monitor the value for money

Financial Memoranda’

‘Institution; [d

‘Rnancial Memoranda govern the financial relationships batwaen the body maMng the grantand tha racipient. They specify the terms and conditions of funding. They require recipients tohave in place sound systems of financial control: Each funding body monitors compliance withthe memoranda.

The Act places a duty on the Funding Councfl to secure the provisionof sufficient facihties for the ftil-tirne education of 16-18 year olds,

and adequate faci~ties for the part-time education of those over16 and full-time further education for those over 18. The Act also

10


1

(

1(

The Government’s 1.4

aims in relation tofurther education

<

1.5

1

1

1

1.6

1.7

,

,

:equires the Funding Councfl to make provision for assessing theIuahty of education in the sector. In response the Funding CouncUIave established an Inspectorate to carry out external assessments)f colleges by means of a four-year cycle of inspection visits.

rhe Government’s main aims in relation to further education are:*

to increase the proportion of young people undertaking high

quality education and training, in a way which encouragesinstitutional efficiency;

to give colleges the freedom to respond fletibly to the demands oftheir customers;

to promote parity of esteem between academic and vocationalquahfications; and

to make good quahty education avatiable to adtits to help them

improve ~heir qua~cations and update their skills.

rhe Government support the National Targets for Education andrrtining which were launched by the Confederation of British[ndustry in 1991. The targets seek to increase participation and

.evels of attainment in education and training amongst young peopleind the workforce. The Department, formed in 1995 from a mergerbetween the former Department for Education and the EmploymentDepartment, have estabhshed new aims and objectives for further

ind higher education and youth training, which integrate the above

tires tith those for other sectors.

[n 1992 the then Secretary of State set a target for the sector of%cbieving cumdative Wotih in student numbers of 25 per cent over

the three years from 1992-93 to 1995-96. Projections of totalstudent numbers have eince been updated and the most recentGovernment plans envisage 20 per cent grotih over tbe five years~rom 1993-94 to 1998-99. The gross resources a~ocated initially

to the sector through the Funding Council have increased byjeven per cent in real terms from 1993-94 to 1995-96, before fallingin real terms in 1996-97 (Figure 3 overleafl.

Polloting the 1994 Competitiveness Wte Paper the Secretary ofState for Education and Employment formaUy clarified the FnndlngCouncfl’s remit by asking them to seek to ensure, in fulfilling their

* Letter of ~idance to the chtiman of the Funtig Comcfl from the then Secretary of State for Education, dated 17 Jtiy 1992

figure 4 Central Governmentexpenditure on furthereducation 1996-97

(f million)


~gure 3: SeCtOr funding 1993-94 to 1996.97

_ Funding (fro)- FrE students (000)

4000

0

1993-94 1994-95 1995-96 1996-97

~; FEFCadministration- Capital (indicative)= Demand-led element_ Other recurrent funding

Source: Government expenditure plans (1996-97 pr/ces)

Resources allocated initially to the Funding Council increased by seven per cent from1993-94 to 1995-96, but reduced in real terms in 1996-97. Student numbers were expected toincrease more than funtinn,

Source: Department for Education andEmployment

Of the f3.1 Mllion made available to thesector by the Oepaflment for Educationand Employment, some f3.O Oilionrepresents recurrent funding ofinSfitutiOnS, of which one ttird is exemptfrom cash limits.

Fmtig for coUeges 1.8

statutory duties to secure sufficient and adequate facfities forfurther education, that provision is responsive to the needs of theIabour market nationally, regiondy and locally by:

.

.

continuing to work with the Department to identify SW needs

and priorities for growth in specific occupational areas; and

increasing fletihility in the schedfing and dehvery of courses,

hnual letters from the Secretary of State inform the FundingCouncil of their funding allocation for the following year and statethe assumptions on sector growth and eficiency which underhe thisallocation. It is for the Funding Councfl to determine how the fundsfor the further education sector shotid be allocated to individualinstitutions, The allocation includes an indicative sum to be spent on

capital, and to date the Government have made part of theallocation, the demand-led element related to qowth, exempt fromcash limits (Figure 4). The Funding Council introduced a newfunding methodology from 1994-95 which was designed to be ableto achieve a number of objectives inchrdlng the growth sought by

the Government to secure sufficient and adequate facfities in

England.

12

Scope of theexamination andmethodolo~

The Futher EducationFnuding Conncfi for England

1.9 CoUeges are re@ed hy re@ations under the Act to prepareaudited annual accounts for each fmancid year. In addition, theFunding Councfl pnbhsh reports on inspections, and they havedeveloped a series of performance indicators for coUeges to be

pubhshed annually. The first set of performance indicators, for1994-95, wiU be pubtished in early 1997. They are Ested inBox 1.

Box1: Collegeperformance indicator

Indicator Description Indicator of

1. Achfevemant of funding target Units of activiv as % of Effectivenessfuntin~ br~et

2. Student number trends Change in student numbe~ Responsivenessfrom previous year

3. Student continuation Y, of enrolled studenb Programmeattending in 3rd term effectiveness

4. Learning goals and qualifications 0/0of quaHflcatiOnaims Studentachieved achievements

5. Attainment of National Vocational Numbers achieving Contflbution toQuafficatiom or equivalent quafificatiorrs wkch National Targets

contribute to National Targets

6. Average level of funding Funding Counci funding per Value for moneyunit of activiv .

1.10 The National Audit Office pubhshed their first report on colleges inthe further education sector, Managing to be Independent, inFebruary 1995. This report focuses on the Funding Council and

their impact on the sector.

1.11 The National Audit Office examined:

. what impacts the funding methodolo~ was expected to achieveand what evidence there is to date of the expected impacts(Part 2);

. whether there is early evidence that the Funding Councfl havebeen effective in secuing sfllcient and adequate facfities forfwther education (Part 3) and promoting improvements in thequahty of fwther education (Part 4); and

● the financial position of the sector and the effectiveness of theFunding Council in monitoring the financial health of institutions(Part 5).

13

The Further EducationFunding Council for Englmd

1.12 The National Audit Office exasnination included

● analysis of statistical and financial data provided by co~eges tothe Funding Council, including the fist set of annualperformance indicators for sector coUeges produced by theFunding Councfl;

. examination of how the Funding CouncWs procedures operatedat their office in Coventry and at two regional offices, where they

also interviewed members of the respective regional committees,including representatives of Training and Enterprise Councfls;

. a survey of 100 colleges to ask them shout their experience of thefunding methodrdo~ to date and of their contact with theFunding Council. The survey was conducted by postal

questionnaire and 93 coUeges responded; and

● examination of governance and finwcial controls at 17 colleges

Qncluding four which had been assessed by the Funding Councfias being in financial diffictities), the findings of the FundingCouncVs Audit Service at 142 colleges, and the Inspectorate at258 coUeges.

14

2.1

The development of 2.2

the methodolo~

1

i

(

i

i

i


2. The fundingmethodolo~

;rom the 1994-95 acadefic year the Fnndlng Council havemplemented a new fnnfing methodology which is intended to make~major contribution to many of theti tires. The National Audit

3ffice reviewed the development of the methodology and examinedts impact to date. They considered its impact on the key aims of?unding which were specfied by the then Secretary of State in his.fitial letter of guidance to the Chatiman of the Funding Council in1992 (Box 2).

Box 2 Key aims of funding

The letter of guidance to the Chtiman of the Funting Council from the Secre&W of Stste for Education,dated 17 July 1992, stited that the key aims of funding should be to

(a)

(b)

(c)

(d)

(e)

(9

(9)

provide a direct incentive for colleges to expand participation by relating an element of theirrecurrent funding to actual student enrollments (paragraphs 2.10-2.121

secure greater efficiency as student numbers increase (pamgmphs 2.2+2.301

secure shtitity of funding for institutions as they entered tie new sectoc avoiding year-on-yearchanges in income greater than institutions could accommodate (paragraphs 2.31- 2.32~

maintin the diversity of missions which currently exis~ amongst institutions(paragraphs 2.33- 2.35L

encourage institutions to take advantige of oppoflunities for funting from private sources(paragmphs 2.36-2.381

futiherthe development of flexible and pad-time approaches to the teachfng process, inclutinotisbnce learning (paragraphs 2.39] and

maintsin and enhance qualty by relating funding to the Funding Counci~s assessment of quahv(paragmph 2.40)

[n June 1992 the Funding Councfl estabhshed a working group toadtise on the new funding system to be introduced from the1994-95 academic year. The group’s membership was drawn from

colleges in the sector, local authorities, Training and EnterpriseCouncfls, the Confederation of British Industry, higher education,Government departments and staff of the Funding Council. Interimfunding arrangements apptied in 1993-94 and were intended tomaintain stabfity of funding while encoura@ng growth.

15


2.3 The Funding Councfl pubhshed a constitative document, findingLearning, in December 1992, based on the group’s de~erations. It

put forward approaches to determining the rate of funding andvolume of activity to be funded, and options for tbe fundingmetbodolo~ resulting from combinations of these approaches.Many of the approaches and options broke new ground. TheFunding Council received responses from 235 co~eges to theconsultative document. The methodology which attracted thegreatest support (92 per cent) involved the fo~owing

. expressing a college’s learning activities in terms of fundingunits, and

● aUocating funding according to the number of units proposed andsubsequently detivered.

The Funding Councfl decided to introduce a methodology on this

basis. The methodology is described more fully in Box 3 opposite.

2.4 Mter these decisions had been made, a committee of sectorrepresentatives, the Tariff Advisory Committee, recommended theweighting to be given to different programme elements and thevalue in terms of units to be attached to learning programmed (thetarifO. Progrmmes in subjects with a higher cost base, such asconstruction, were given higher weighings. The comtittee’s initialrecommendations were based on resewch into the costs of each

stage of the learning process at the colleges represented on thecommittee, and analysis of data collected from a sample of coUeges.The committee are reqtied to crmstit aU providers funded by theFunding Councfl on the values they are proposing for the tariffbefore making their final recommendations to the Fundiug Councfl.The committee have reviewed the tariff each year and the Funding

Councithavecommittedthemselvesto a fundamentalreviewoftheirmethodology so that any changes would begin to take effect from1998-99,

2.5 Having determined the initial tariff, the committee have monitoredthe weighings to ensure that they continue to he appropriate. Someamendments, such as an increase in the weighting of aWictitnrecourses, were introduced for 1995-96 foflowing a study

commissioned by the Funding Council from Coopers & Lybrand ofcosts at 42 colleges.

Experience of the 2.6 The National Audit O~ce conducted a survey of 100 coUeges and

methodolo~ to date asked principals about their experience of the fnndtig methodologyto date. 93 colleges responded. 70 per cent considered the new

16


BOX3 The fmfher education funding methodology

1. Each colteoe’s funding allocation is made up of a comMnation of core and marginal funting. The core allocation has, to date, represented 90 per cent of acollege’s previous yeats gross allocation. The Funding Council allocate additional funds, the marginal allocation, based on the college’s proposals for grotih.

2. Students’ education and tmining programmed are expressed in stindard funding uni~, and relate to an individual studenrs learning activities broken down intothree separate elemen~ (seethe examples below for illustrative valuesp

. enby (a small percentage of the tobl units refleting all tbe activities including initial guidance and counseling, to recruit students and ensure that they areon appropriate learning programmes~

● on pmommme (the majotiv of the tobl units coveting the time spent by the student on his or her progmmme of study); and

. acMevement (a small percentage of the total unib awarded where studenk have successfully acheved their primav learning goal, generally a recognisedqualification).

3. Colleges can also claim units fox

.

.

.

.

ree remission as required by tbe Secrehv of State for 16-18 year old full time student%

fee remission if they have waived the tuition fee, charged to students enrolhng on courses, for specified groups of people, incluting those in receipt ofUnemployment 8enefit (or Job Seekem Allowance from October 1996) or means-tested state benefib, and their dependant%

cKldcare cos~ for cetin group% and

[he costs of providing additional learning suppoti to studenb.

8elow is an illustration of how the methodology applies in practice to MO studenw

bmples of units available fora college to claim per student

UNITS

Ent~ On-programme Acfrfeuement Other Total

STffOENTA

Full-time GCEA level

student over i 8 years old (3 A levels) 8 168 20.1 196.1

(Units available over wo years)

STUOENTE 8 42.3 2.9 12 85.2

Pati-time construction

student, 300 hou~lyear

with fee remission

(Units available over a one-year programme)

In 1995-96 the amount paid per unit (avenge level of funding) vatied from ff3.04 to f35.90,and avenged f18.01

4. A college’s core funding is at the same rate of funting per unit as the previous year’s allocation. Mstoflcal levels or funding per unit vaw widely according to thedifferent levels at which colleges were funded by their former local education authorities. Marginal funding is allocated at a sQndard mte of funting determinedeach year by the Funding Council (f15.70in 1995-98). If colleges exceed the number of units they are altomted, additional, demand-led, funds are available at alower rate agreed by the Depaflment and the TreasuW for each additional unit. In the three yea~ 1994-95 to 1996-97 the rate has been f6.50 per unit. Theaverage amount paid to a college per unit is known as the average level of fundfng.

17

The Further EducationFunding Councif for England

funding methodology to be an improvement over previous fundingmodels. Many considered that it was fairer. It was sdso seen asstudent-centred. A minority criticised the methodolo~, in particularciting its complexity. They indicated that it created time-consuminginformation demands and heaW audit requirements. Theimphcations of the methodology’s data requirements are discussedat paraWaphs 2.44-2.53 below.

2.7 Colleges were asked about the itiuence of the methodology inpractice. Figure 5 shows that 80 to 90 per cent of respondents sawthe funding methodology as having a positive tiuence in achievingthe central Government objectives, in pmtictim, achieving growth(the strongest positive influence), provitig an incentive to coUegesto expand participation, and in securing greater efficiency.

Rgure 5 Influence of funding methodology on key aims of funding

‘“’e’””’’”’’p’”d~

Maintaining diversityOf~i~~i~n~ _ -

‘!::::!:$:;~k..00/0 20% 40% 60% 80%

Responses ass percentage

❑ Positi”einfl”ence ❑ titile or no influence ❑ Negative lnfl”ence

Souze: National Audit Office survey of colleges

Colleges considered that the funding methodology was having a strong positiveinfluanca on tha kay o~actives of achiaving gromh, encouraging colleges to expandpa~cipation and securing greater e~ciency, and a less strong influence in relationto other Government o~ectives.

18

The key aims offunding


2.8 Many co~eges also referred to operational benefits such as: stabifity,as an aid to planning freedom to pursue business opportunities,

such as franchising (para~aphs 2.13 to 2.18); and theencouragement to develop stronger financial controls, managementinformation systems and marketing strate@es.

2.9 The foUotig sections examine other etidence on the impact of thefunding methodology to date as regards:

. the key aims of funding as set out in the letter of guidance fromthe Secretary of State in Jtiy 1992 (Box 2);

. promoting higher levels of retention and achievement and

. the information requirements of the funding methodology.

It shoufd be borne in tid that outturn data are onfy avaifable forthe fist year of operation of the methodology.

Achievement of ~owth

In generaI

2.10 The Depmtment express their projections of student numbers interms of fti-time equivalent students. Mocations to the Funding

Councif are made on this basis. The Funding Councif fund coUegesto defiver their strategic plans expressed in terms of a minimumnumber of funding units. Funding units measure more aspects of

actiti~ than numbers of students attending, for instance theqna~lcations they obtain and the additional support they receive(Box 3, paragraphs 2 and 3). The Funding Council identify the totalnumber of funding units they til fund based on cdcufations of thenumber required to achieve the grotih in student numbersprojected by the Department.

2.11 In 1994-95, coUeges collectively achieved the targets, in terms of

funding tits, set for them by the Funding Councif through thefunding methodology. This represented gro~h in fuff-time

equivalents of about sti per cent. CoUeges’ funding applications andstrategic plans for 1995-96 indicated that they planned to grow bysome 10 per cent in 1995-96 and five per cent in 1996-97. Interimreturns of student data for 1995.96 suggest that coffeges have ftiyachieved their plans. It appears Wely that the sector Mu by1996-97 achieve the grotih of 25 per cent ori~ally expected(Figure 6 overleafl.

19


~gure & Full-time equivalent (HE) students from 1992-93 target and actual

_ Actual= College Forecast- Government Projection

1200

1000~—~ 800~5 600:

E 400

200

01992-93 1993-94 1994-95 1995-96 1996-97 1997-98

Est Plans Plans

Source: Depaflment for Education and Employment projections of student numbers, collegestatistical returns and strategic plans

Colleges have grown at the rate expected by the Government, and plan to exceed theprelections for the period by 1996-97.

2.12 There has heen significant growth in each of the Funding CouncWsnine regions, although significantly more than average in GreaterLondon and less than average in the other southern regions. Theresponses to the National Audit Office survey indicate that the

funding methodology is hating more effect in encouraQng growththan on any other factor (Figure 6),

2,13Franchising

One means by whch some co~eges have achieved ~otih is tiough

collaboration with employers, private training protiders, schools,community and voluntmy organisations and other institutions todeliver further education protision on a franchised basis.Franchising is a contractual mrangement between the coUege andanother organisation for the dehvery of specified programmed, with

the training genera~y protided away from the co~ege. Studentsfollowing these programmed are enrolled by the co~ege. The coUegeearns funding utits for the programmed and may pass on aproportion of this funding to the franchisee for the dehvery of the

programme. Similar arrangements have etisted for some time forfurther education coUeges to deliver higher education on afranchised basis from higher education institutions.

20

The Further EducationFunding Cmmcfl for England

2.14 Some co~eges have entered into franchising arrangements withemployers as a means of reversing the recent downward trend in‘day release’ programmed whereby employers release their

employees for, say, a day a week at co~ege. Under franchisingarrangements, the provision is made at the employer’s premises.This has a number of potential advantages:

. students are trained in their workplace: colleges do not have toreplicate reahstic working environments;

. there are savings to the college on premises and equipment costs;

● colleges are able to help employers to devise training plans andto negotiate the National Vocational Quahficatirm framework; and

● potentially large numbers of employees cotid achievequahfications towards the National Targets for Education andTraining (para~aph 1.5).

2.15 CoUaboration tith local authority institutions and voluntaryorganisations has enabled colleges to embrace such bodies withintheir strategic planning and thereby ensure more coherent strategicprovision in an area.

2.16 In 1994-95, franchising activity represented about two per cent ofthe total units of provision funded by the Funding Council. This roseto between five and six per cent in 1995-96, costing the FundingCouncil some E60 mfllion to S70 mfion. Because it was maidyfunded at the lower, demand-led rate (Box 3), this represented abouttwo per cent of their total funting. At the time of the National Audit

Office survey, three quarters of the respondents were planning toincrease their involvement in franchising, and others were planningto enter into franchising for the f~st time, although the

developments described below may have prompted some colleges tochange their plans.

2.17 In 1994-95 some of the coUeges with the highest growth were alsolarge franchisers. Some of these coUeges had secured franchises

covering a geographical area weU beyond that previously cateredfor by the co~ege, including agreements to support training in largecompanies on a national basis. Tbe largest franchses involvedcommercial fwms or voluntary organisations. Franchises withschools accounted for less than 10 per cent of total franchising.

21


2,18 In addition to achieting grotih, the mak benefits of franchisingidentified by colleges in their responses to the National Audit Office

sumey were to improve Hnks tith employers, schools or communityorganisations, or to provide education which was complementary tothat offered at the college. Franchising is also seen as a way oftidening pmticipation by offering accessible teaching to studentswho wodd not typicaUy participate in further education.

2.19 However, the derivery of education by a separate organisationoutside the college increases the risks associated tith protision in anumber of areas:

● Loss of control over course quarity the Funding COUUCWSInspectorate have identified a pwtictiw difficulty in actietighigh quality in franchised protision which is remote from thecollege.

. There is a risk that organisations may attempt to use FundingCouncil funds as a substitute for their existing expenditure ontraining. GroWh achieved in this way wmdd mean thatadditional pubric money was spent tithout increasing the

opportunities for inditiduds to obtain education and trting.However, the dehneation betieen what shotid be funded by

employers and what by the pubhc purse is unclear.

. There is an increased risk of funding trtig which does not infact take place or which is inerigihle for Funding Councfl fuding.It may he difficdt to prevent more than one protider fuuding thesame training.

2.20 The Funding Council became alert tothesignificant use offranchising to achieve high growth early in 1995. They estab~shed a

workinggroupinJune 1995and examinedthe arrangementsat asample of franc.hising colleges. They gave guidance on franchising intheir instructions on apphcations for funding in 1995-96 and1996-97. The guidance recognised the above risks and made it clearthat colleges were responsible for ensuring the quahty of protisionand making arrangements to verify the existence and ehgibnity ofprotision. They were also expected to ascertafi that franchises toemployers were additional to existing trtining not funded by theFunding Council. Colleges were expected to have a contractualagreement tith franchisees covering these matters.

2.21 The Funding Councfi issued further guidsmce on francbisinginApril 1996 based on legal advice that they were legaUy onSy able tofund protision which was dehvered by colleges or w~ch was under

22


their control, The new guidance includes a model contract for

co~eges and a series of tests which the Funding COUOCWSso~citorhassuggested woddberelevant in determining whetbercoUeges

were in control of the franchised provision, and the protisimr wastherefore ehgible for funding. The Funding Counci~s legal adticehas also indicated that some ftil-time protisiorr by colleges inschools maybe ineh@ble for Fnnrfing Council funding. Reco@singthat existing franchising agreements were diverse and wotid notnecessarily meet these new tests, the Funding Council stated that

they woufd continue to fund banctised protision where collegesimplemented thenewgnidance bytheend of the 1995 -96 academicyear,

2.22 Theimplementation of the Fnnding Counci~s guidance shotid

ensure that coUeges maintain sufficient docnruentation to

demonstrate the work they have done to monitor the occurrenceand quahty of protision. However, tbe National Audit Office considerthat there are a number of issues of concern

. There isnorobust mechanism forverifflng that fundtigisotiyprotided for trtining which is additional to existing protision.The model contract requires the franchisee to protide a

certificate that the franchise does not replace their own existingtraining, but this is not verified. The National Audit O~ce accept,however, that proting what a franchisee’s training provisionwotid have been without the franchise is not feasible.

. Tbereis notique identier foreach student ineducation. TMs

makes it difficrdt, if not impossible, for coUeges to ensure thatfranchisees are not in receipt of duphcate funding from other

somces such as Training and Enterprise Councfls for the samestudents. The Funding Counc~s student record, however, is ableto identify individual students enrolled at institutions funded bythe Funding Council. The Funding Council are already assistingco~eges with exercises to compare records to identify any

overlaps.

. Because theretised guidance isutiIkely tohavebeenfdyimplemented before the end of 1995-96 academic year, it ispossible that protision made before that date cotid have beenconsidered nottobe under coUegee’ control andwoufd thereforefafl the legal test of efigibifity for funding. The Funding CouncifnormaUy dieaflows funding for any protision found to beiRegitimate.

23


2.23 Ifcontrols toprevent duphcation orsubstitution ofotberfmtig arefound not to be effective, the Funding Councfi shotid take furtheraction to reduce tbe risks. They coufd strengthen advice toinstitutions and auditors, make adaptations to the fnnding process,

require discussion of funding betieen coUeges and Naining andEnterprise Councfls, or consider whether they tish to continue

funding such provision in future funding avocations. The risk ofpotential weaknesses in controls dl have to be weighed against thepotential benefits of franchising described in paragraphs2.14 and 2.15.

Securing greater efficiency

Efficiency implications of funting

2.24 Oneoftie keyaims of funting wastosecue Weater efficiency asstudent numbers increased, and efficiency increases are imphed in

the Government’s affocations of funds to the sector (Figure 7). In thethree years since 1993-94 these have asked co~eges to expandnumbers by some 17percent with anincrease in funding offive per cent. The implied planned efficiency gain is overfour per cent a year.

2.25

Hgure 7 Planned grotih in funting and numbers to 199b97

1994-95 1995-96 1996-97 Total

Increase in recurrent funding (real terms) 3.4% l.o”h 0.5”A 4.9%

Increase in ~E numben expected in Government 7.0% 5.6°h 3.5”A 16.9%spending plans

Soune: Governmerrt expenditure plans

Note: 1993-94 figures have not been included in this&b/e because it is not possible to make a directcomparison bemeen 1993-94 and previous yean, but the funds allocated tothe sector in1993-94 represented a reduction in funding per FTEstudent of about three per cent in rsal

terms. In addition, colleges may earn funding for exceeding their inditidualgmtih bgetsagreed with the Funding Council. This is excluded fmm the tsble.

Since 1993.94 Government expenddure plans have asked colleges to expand numbers by some17 percent with an increase in funting of five per cent,

The unik now used to determine co~ege titig measure more aspectsof actitity than nnmbers of stodents (paragraph 2.10 and Box 3). They

therefore come closer to being a fair measure of output than ti-tiee@vdent students, and the Funding Councfl have adopted the averagelevel of funding per unit as a performance measure in relation toefficiency. Using this measure, the reduction in coUege funding per unit,adjusted for tiation and changes in the tarfi be~een years, is

si~cant funding fe~ by 8.6 per cent to 1994-95, and k expected tohave fden a further eight per cent in 1995-96.

24

The Further EducationFnntig Council for England

2.26 The funding methodology’s mechanisms to encourage growth andefficiency are inter-related: growth is funded at a standard rate lowerthan the average level of tiding for the sector. Most coUeges Wreceive lower funding per tit as they grow (Box 3,paragraph 4). This mechanism *O leads to convergence of levels of

tiding.

Convergence

2.27 men they detertied the new funding mechafim to be introducedhorn 1994-95, the Funding Comcfl set a target for the average levels

offending for coUeges to converge to a range of+ 10 per cent of themetian by 1996-97. This was to address the wide vtiation in leveb of

funding with which coUeges entered the sector. In 1992-93, theFunding Cowcif cdctiated that costs varied from 40 per cent below to

over twice the sector median. The relative size of the core andmar~al Wocations, and the volmne of activity actua~y achieved by

coffeges, detertie the extent to which co~eges’ funding levels zconverge: the smaller the size of the core and the higher growthcoUeges achieve, the faster average levels of funding will converge(Box 4 overleafl.

Hgure t College average levels of funding 1993-94 to 1995-96

100

90

so -

70 -

60

50

40

30

20 ‘(

10

0 ,,,,1,,, ~,,,,

— 1993-94— 1994-95— 1995-96 ~‘

-lo~6 11 16 21 26 31 36 41

Average level of funding (2)

Source: College funding allocations 1993-94 to 1995-96 and outturn units of funding

College average levels of funding have moved closer together over the first three years ofFunding Council funding.

25


Box 4 Example of convergence mechanism

1. College position in 1994-95

StudenN 2,500 HE

Funting units 320,000

Funting f6,000,000

Average level of funding f18.75

2, Funting allocation 1995-96

College apples for 336,000 units 5°h gmmh

If fdd is accepted college receives f

Core allocation 90”hof199445 = 5,400,000= 288,000units

Marginal allocation 336,000-288,000=48,000 units atstandard rate off15.70 ~

Total allocation ~

Average funding per unit is now

3. Actual gmtih acbiavad 1995-96 (2 scenatios)

Scenatio A

College acfdeves 350,000 units.

UnitS above tbe allocation (14,000) funded at thedemand led element mte of f6.501u nit.

Total funting for year: s

Funting allocation 6,153,600

Units above allocation

14,000 X 26,50= ~

6,244,600

Average funding parunit is now ~

350,000

=f17.84

Funting per unit has tilfen by five per cent in theyear’.

~336,000 =f18.31

Scenario B

College ac~eves 325,000 units,

Units below allocation (11,009) clawed back at thestandard rate of f15.70/unit.

Total funding for yea~ f

Funding allocation 6,153,600

Units below allocation

t 1,000 x f15.70= ~

5,960,900

Averagefunfing perunit is now ~

325,000

=!18.40

Funding per unit has fallen by~o percent in theyem

‘ The Funding CoUntil do not include funding at the demand-led element mte or c[awback of the mainallocation when calculating the average level of funding for the purpose of makng the funtirrg allocations.On tMs basis, the avewge levels of funding per unit become f17.58andf16.93 respectively. Ttismeasure of tbe average level of funding is a key ctiterion in the operation of the methodology andconsequently benefits colleges wMch exceed thair targets and penabses those whfch fall shoa

26


2.28 The Funding Councfl set and monitor their convergence objective on

the basis of the distribution of the average levels of funding of80 per cent of co~eges, that is after discounting the outlying valuesat either end of the normal range of average levels of funding(see Figure 8). In 1993-94, 189 colleges were within the targetrange, and this increased to 212 in 1994-95. If colleges’ curent

projections for 1995-96 are acMeved, 248 colleges (69 per cent ofthe target range) ti be within 10 per cent of the sector median.

Figure 8 shows how the funding levels of most colleges have movedmuch closer to the median over the three years. Using thesemeasures, colleges with higher levels of funding are very close to thetarget. At the lower end of the range, some colleges tith lowerlevels of funding have conttiued to achieve significant Wowth and

efficiency improvements and, consequently, their average levels offunding have not increased. It is not part of the Funding CouncNsobjective to hinder these coUeges’ achievements. Faster convergencecould be achieved, but wmdd have adverse effects on colleges’financial stabfity. The Funding Council intend to review their

convergence objective at the end of its first three-year period in theautumn of 1996.

COUeges’ response

2.29 Ml but 14 per cent of survey respondents told the National AuditOffice that the funding methodology had heen a positive influence onsecuring greater efficiency. As weU as encowaging colleges toexpand, three ~arters had made efficiency gains as a restit of themethodology. Nearly all these colleges told the National Audit Officethat they had reduced their staff costs, for example throughintroducing more flefible staff contracts, reducing direct teacher

contact hours, and increasing class sizes. In this context the averagenumber of students enroUed in each class is between 15 and 16. Theaverage class attendance observed by the Funding Counci~sInspectorate in 1994-95 and 1995-96 was 76 per cent of those

students registered for each class.

2,30 The appointment of new wades of staff to carry out, at lower rates,tasks formerly undertaken by teachers was sigtilcant in manycolleges. So was the introduction of more resource-based learning,where teaching sessions were replaced by learning in resourcecentres, sometimes ustig interactive computer tec~lqnes. Manyco~eges had also reduced other running costs, and more than halfhad reduced management costs.

27

The Further EducationFuuding Council for England

Financial stabtiity

2.31 The Funding Councfl reco~ised the need to protect co~eges from an

over-abrupt reduction in their funding by ticlutig a guaranteedcore element in funding allocations. This means that coUeges areguaranteed 90 per cent of their pretious year’s titig each year(Box 3, Paragraph 1). The mechanism for convergence reducesfunding levels most quickly at colleges with high growth and high

existing levels of funding, while coUeges with lower growth Wexperience less severe changes in fmdlng unless their studentnumbers decline.

2.32 Part 5 describes the financial position of coUeges h the further

education sector. The number of colleges in fin~cial ticdty hasrisen. However, the financial problems experienced by coUeges h1994-95 did not in general result from their levels of finding or theway in which the finding methodology changed these. The coUegeswith the best financial results had a higher than average reductioniu their funding level (Figure 9). The figure dso shows that levels offunding were fahly evenly spread between coUeges with differentfinancial results, with the poorest performers hafig relatively Mghlevels of funding.

figure 9 Hnancial performanceandfunding changes 1994.g5

Operating margin 1994-95 Avemga level of funding Reducfion in average level of1994-95 funding

f 1994-95

+2.5Y0or greater 17.64 12.O”A

Oto +2.5% 17.85 5.2°h

-2.5% to O 18,01 8.4%

-5%to-2,5% 17.48 8.8%

less than -5°A 18.64 9.1%

SOuze: National Audit Office anaysis of college accounts, funding allocation a“d student dafa returnsfor f994-95

There is no systematic relatiomtip bemeen levels of funting and flnancia petiormance. In 1994-95 thacolleges ac~eving the best financial rasuls tid so in the conteti of above-average reductions in their levalof funtinu,

28


Diversity amongst institutions

2.33 The Secretary of State asked the Funding Council to maintain thediversity of missions which existed amongst institutions. Diversity isnot easily measured. However, the Funding Council’s work to satisfy

themselves on the sufficiency and adequacy of provision (Part 3)indicates that colleges have chosen not to reduce the range ofprovision they offer except in a very small number of cases.

Moreover, the performance of different types of college since theyhave heen funded by the Funding Council (Figure 10) indicates that

specialist colleges have grown at least as much as the sector as awhole. The ody part of the sector in which colleges have ftiled toachieve targets is among art and design coUeges, but theymaintained a level of growth sfightly above the sector average.

2.34

Figure 10 Performance by type of college 1993-95

1993.94 and 1994-95

GroMh Performance against

Type of college (F7Es) target

Agriculture 16.1% +18.3%

Ati and detign 11.2% -9.7oh

GeneraVtefla~ 10.4% +4.OY.

Mnh Form 15.2% +3.1 Y.

All Colleges ii .Ooh +4.1v.

SOuZe: Natiorra/Audit OffiCeanalysis of college funding allocations a“d student data ,et”ms

Note: 86% of F7E$tudenta are in general fuflher education and tertia~ colleges

All types of colleges have grown significantly in 1993-94 and 1994-95, and all but one pafl of the sector(afl and desion) have met their omtih Uroets.

However, ody 20 per cent of respondents to the National AuditOffice survey considered that the funding methodology had apositive effect on maintaining diversi~ amongst institutions, leasthan for any of the other key aims of funding, and over 30 per centof responses stated that the funding methodology had a negativeeffect. In partictiar, some respondents to the National Autit Officesurvey commented that the funding environment was more difficultfor sixth form colleges, although this has not prevented them fromachieving above average growth (Figure 10).

29

2.35


The tariff is intended to be neutral in its effect, tith the relativeweighings reflecting actual average resourcing levels. The evidencein relation to the provision which colleges have chosen to stop

offering does not point to a reduction in the diversity of provisionnationally. Nor does the extent of gro~h among ~erent types ofcollege. However, this evidence does not identify whether chwges ata local level have affected diversity, although coUege strategic plansinclude a needs analysis to ensure they are responsive to local needs.

Private sources of funding

2.36 The funding methodology is designed to operate without regard tothe extent to which the coUege is funded from other sources. Thisprovides an incentive for co~eges to earn additional income. BeforecoUeges became independent, local authorities normdy retainedincome earned by colleges above their budgeted levels. In principle,reducing the average unit of resource annua~y might be expected to

encourage colleges to seek other sources of funds. The majority ofrespondents to the National Audit Office survey reported that thefunding methodology had httle or no influence on encouraginginstitutions to seek private funding. This response may reflect thatthere is no specific factor tithin the funding mechanism relating toprivate funding.

2.37 College accounts and financial forecasts show that funding fromsources other than the Funding Councfl, including other pnbhcsources, dechned from 30.5 per cent to 29.3 per cent of total incomebetween 1993-94 and 1994-95. This was maitiy because of adecline in income from local authorities and from tuition fees, wtieFunding Councfl income grew. Colleges often reduced or waived

their fees to encourage tider participation, and the fundingmethodology encourages this. Non-pubhc sources other than feeincome accounted for about seven per cent of coUege income in both

years, when colleges may have been concentrating on implementingthe funding methodology and new management systems.

2.38 Forecasts for the next three years indicate that co~eges expectfunding from Training and Enterprise Councfls and from Europeanfunds to diminish while other sources remain stable. The fundingmethodology does not pensdise coHeges that seek other sources ofincome, and indirectly encourages them to do so. Despite pressures

on pubhc funding, colleges have not yet succeeded in increasingtheir funding from non-puhhc sources.

30


Encouraging flefile and part-time learning

2.39 69 per cent of the respondents to the National Audit Office surveyindicated that the funting methodology had a positive itiuence onfurthcriug the development of flexible approaches to the teaching

process. Furthermore, 73 per cent of students at colleges in1994-95 were part-time, an increase of about 1.5 per cent since1993-94, and coffeges expect part-time student numbers to riseconsiderably faster than full-time students between 1994-95 and1997-98. The survey responses on strate~es to increase efficiency

also indicate that colleges have moved towards more flexiblemethods of defivery such as resource-based learning (paragraph2.30) and off-site provision.

Maintaining quatity

2.40 Colleges are not entitied to claim funding units in respect ofexpansion in curricufmu areas where they have been poorly graded.Mthough over 40 per cent of survey respondents acbowledged apositive influence of the funding methodology on quahty, a similarnumber considered that it had had no influence, and 13 per cent anegative influence. However, the Funding Council have not yet made

quafity assessments part of the process of a~ocating the generahtyof funds to coffeges. They have made proposals to do this, but it wiUbe difficuft for them to do so before the 1998-99 funding round, bywhich time the Fnuding Councif’s Inspectorate wiU have completedtheir first round of four-yearly inspections. Part 4 examines in moredetail the links between funding and the outcomes of the quafityassessment process.

Retention and 2.41 For the first time, the funding methodology recognises and rewards

achievements colleges for securing student retention and achievements. Becausemany factors are involved in student achievement and retention,college performance in these areas cannot he directly attributed tothe funding methodology. However, about three quarters of thesurveyed coHeges told the National Audit Office that themethodology had positively influenced retention, although a lowerproportion - just over haM - made the same response about

achievement rates.

2.42 1994-95 is the first year for which reasonably comprehensive data

on retention or achievements are avaifable for most colleges. Thedata for 1994-95 show that overaff, 84 per cent of full-time and86 per cent of part-time students completed or were continuing

courses of at least one year and 65 per cent of quahfication aimscompleted in 1994-95 were achieved. It is not possible to makedirect comparisons with pretious years in order to draw conclusions

31

Key points


about changes in levels of performance because stuties conductedbefore 1994-95 used different bases of measurement and covered asmall range of institutions or specific qualifications. But the new,more comprehensive performance information provides a usefti

benchmark for future years, botb for the Funding Councif to monitorthe sector’s progress and for individual colleges to set morechallen~ng targets for themselves.

2.43 The Funding Council involved the sector in the developmerit of the’”

funding methodology, and btit a consensus for the introduction ofa methodology which broke new ground and was higMy flexible.The National Audit Office’s conclusions on its main impact to dateare:

● The funding methodolo~ has been successfti in encoura~gcolleges to achieve the levels of growth expected of the sectorand to make si~lcant increases in efficiency.

. The Funding Councti have taken effective steps to secure thefinancial stabflity of the sector while making progress towards

convergence of funding levels, which varied greatly whencolleges entered the sector in 1993. Progress on securing

convergence is close to the Funding CouncYs three-year

objective. Faster progress coufd affect fmanciaf stabtity whenthe number of colleges in financial ~ctity is rising.

. As regards diversity of mission within the further educationsector, the Funding Connc~s work to satisfy themselves on thesufficiency and adequacy of provision does not indicate thatcolleges have chosen to reduce the range of protision they offer.

. CoUeges have not yet succeeded iu increasing their level of

fwds from private sources.

. The evidence suggests that the methodology is having a positiveeffect on increasing flexibihty in teaching and learning methods.

. The link between quahty assessment ud the fnnding’a~ocationprocess means that coUeges which are assessed as having poorquafity provision in particnfar curricufmn areas cannot expwdin those mess until the qutity has improved.

continued...

32


● The finding methodolo~” iS seen in the sector as an incentiveto improve retention arid achievement, but it is too early to saywhat fipact this has had on college performance.

. Colleges have used &mchising to generate a growingproportion of their funds. Thie type of provision carries anmnber of partictiar risks, which the Funding Councfl haverecognised in new guidance. They ti consider disavowing

funding found to be Legitimate under this @dance.

The information 2.44 Some 40 per cent of survey respondents commented that the

requirements of the information and audit requirements of the funding methodology

funding methodolo~were very time-consuming and expensive to implement, The

, administrative burden was the main unexpected impact of themethodology on colleges, raised by 20 colleges.

2.45 The National Audit Office Report Managing to be Independenthig~ghted the need for colleges, as independent institutions, tohave reliable and accurate management information systems to

track and manage student activity. At the time of independencemany colleges had inadequate management information systemswtich did not, for example, provide accurate data on student

attendance. retention or achievements.

2.46 In developing the funding methodology, the Funding Council

identified the need for co~eges to improve their managementinformation systems. As well as enabling colleges to manage theiractivities more effectively, the systems need to provide the auditevidence required to support coUeges’ funding claims. Before themethodology was introduced, a high proportion of colleges

confwmed in response to a Funding Council survey that they couldprovide the items of data that were Ested as being required to

support the methodology.

2.47 The Funding Councfl worked with the sector to develop a new data

coUection strategy in order to meet tbe requirements of colleges andthe Funding Councfl, and the Department’s requirement forstatistical information. They agreed with the sector a specificationfor a new return, the Individuahsed Student Record, to heintroduced from the 1994-95 academic year to meet theserequirements. This includes basic data on students enroUed, their

quahfication aime, programme defivery and outcomes. Theyrecognised the widely differing capabilities of co~eges and set an

33


ambitious timetable to provide a spur to development, acceptingthat not all colleges wonfd be Ale to develop adequate systemsMthln tbe same time frame.

2.48 178institutions pwticipated inthefwstphase of the IntitidutisedStudent Record, which involved producing a return on studentnumbers as at November 1994. kound 60 per cent of theparticipants were able to produce this return in February 1995,two months after the due date. AU coffeges were then required tosend initial Indlviduahsed Student Record data for the 1994-95academic year to the Funding CouncH for vahdation inSeptember 1995. This was to be foUowed by a fmd 1994-95 return,verified by the college’s external auditors, in February 1996. We72 colleges met the September deafllne, 60 per cent of coUegesmade a return by the end of October 1995. Many co~eges found the

timetable more dlfflcuft, but 90 per cent had made a return by theend of December 1995.

2.49 Thelength oftimetaken formany coUeges todehvertheititialreturn made it difficdt for those colleges to meet the deadUne for

submitting the audited claim for funding units in February 1996. Bythe 14 November 1996, 409 colleges, 89 per cent of the retmnsexpected, had made an audited claim in respect of 1994-95. Of theoutstanding 50 claims, 10werein respect ofspeciafist desi~atedinstitutions, whlcb had special arrangements for making audited

claims in 1994-95. Of the 409 claims, 89 (19 per cent) were qnatiledandseven percent had data amendments. 700 ftbe89quaUUedaudit reports have been cleared for final payment of the claimfolloting further investigations by the colleges and their auditors.Action on the remaining 29 is in hand. The percentage ofqualifications is lower than for the simpler data retwns reqtied in1993-94, but the number of outstanding claims indicates that

concernsrematnabouttbe quatttyofdata for 1994-95at thecolleges concerned.

2.50 Thedelay inreceiting au&ted retmnshas delayed final settlementof 1994-95 funding for coUeges which fafled to achieve the numberof units for which they were funded. S26.7 mmion of funds paid tocoUeges wasawaiting recovery asat31 March 1996, compared tithf 12.9 milhon at 31 March 1995. But the Funding Cmmcfl took steps

to ensure that such coUeges did not receive an undue cash flowadvantage. mere the Funding Councif had evidence that a coffegewas under performing agtinst its funding agreement they tithbeldthe corresponding cash amount pending settlement of the Rnd

claim. They have also taken steps to tithhold cash from coUegeswhose returns are excessively overdue.

34

Key points


2.51 A stiar timetable has been set for 1995-96 returns. 346 colleges

(77 per cent) had made an iutividuahsed student record return by4 November 1996, a substantial improvement on the previous yew.

2.52 The funding process depends titimately on audited data on

student activity in co~eges, and cofleges in any case needed, onindependence, to improve their management information systems.The Funding Councfl have worked with the sector to develop anew data coUection strategy. They set an ambitious timetable forthe implementation of the strategy and many co~eges had

diffictity in developing the systems to meet the Funding CouncWstimetables for mahg data returns on 199495.

2.53 As a restit, about 11 per cent of audited returns on student datafor 199+95 are outstanding, wMch delays the final eettiement of

funding claims from these co~eges. The Funding Councfl havetaken steps to ensure that coHeges w~ch have fafled to meet thetitargets do not receive an undue cash flow advantage. Cash hasalso been withheld from co~eges whose returns are excessivelyoverdue. As at 4 November 1996, more coueges had been able tomeet the 1995-96 timetable.

35

3.1

3.2

The Funding 3.3

CouncWsmechanisms forsecuring sufficientand adequatefacilities


3. Securing sufficientand adequate facilitiesfor further education

The Act re@es the Funding Councfl “to secure the protilon... ofsticient factities for education” suittile to persons in fnR-tieeducation aged 16-18. The Funding Councfl we &o required to secure

adequate facfities for education as detied in Schedde 2 of the Act’ forthose over 16 in pwt tie education and those over 18 in ti-timeeducation. In c-g out these duties the Funtig Cmmcfl must t~einto account the facfities protided by other bodies such as schools andhigher education institutions. The Funding Cmmcfl must have regard tothe requirements of people with learning ~ctities.

The Act does not explti what is meant by the terms “sticient” and“adequate”, nor have they been clarfied by the courts. The wording ofthe Act reproduces that of the 1944 Education Act which apphed (andsti does in respect of further education protision f~g outside thescope of the Act) to local education authorities. The Funding Cmmc~s

approach to securing sticient and adequate protilon assumes that,tiess there is etidence to the contrwy, the protision is sficient adadequate. The Funding Councfl are developing for the fist tie asystematic approach to assembtig, assessing and improving theetidence on sticiency and adequacy. This Pwt of tie Report examineswhether the Funding Councti have been effective in securing sticientand adequate facfities for further education.

The Funding CouncWs 1995 corporate plan identiled the foUowingstrategies to ensure sufficiency and adequacy. In partictiar:

. the funding methodolo~ students’ learting agreements, the Nbetween funding and recruitment, retention and achievements,and the protision of funds for addltionsd supporL and specficprovision for students with learning dlfflctities anWor disabtitieswhere appropriate;

Schedtie 2 provision kcludes cowses to prepare students to ohttin ~ approved vocational qutication, GCSEor GCEA levels,other approved cowses to prepare for entry into higher education, courses ti basic bteracy and nmeracy md Engkh % a secondlan~age, couses preparhg for entry to the shove couses and cowses for students with leznhg d~ctities antior dkahtities.

36


. thestrate@c planning framework forcolleges inthesectoC

. fiaison tithother bodies, forexample Training and EnterpriseCouncfis, especiaffy under the new arrangements estabhshed bythe 1994 Competitiveness White Paper (paragraph 3.1 1);

. procedures forconsidering proposals formergers andreorganisations; and

● the Charter for Further Education*.

3.4 The Funding Cotmcif also have specific arrangements to secureprotision for students tith learning difficulties antior disabilities.The National Audit Office didnotexatine these arrangements, but

protision for these students has been reviewed by a Funding Council

committee which reported in September 1996.

3.5 The fundlngmethodolo~ supports theprotision ofsuficient andadequate faciUties by encoura~ng colleges to expand protision ingeneral, and make their provision relevant to students. It has beensuccessful in promoting growth to date across the sector in total, asdiscussed in Part 2. Within this context, the Funding Councti need toconsider whether facilities are sufficient and adequate at a locallevel and in each different programme area.

3.6 Theprime somcesofinformation forassessing thesu~ciency andadequacy of further education protision vary between national,regional andlocal levels as ateachlevel different organisations are

best placed to make these assessments. The Department and theFunding Council have carried out joint work on the national supplyof, and demand for, skills. In 1995 their work was supplemented byarrangements putinplace asaresdt of the 1994 White Paper onCompetitiveness (paragraph 3.1 1). The Act established an adtisorycommittee ineachofthe Fundfig Councfl's tiere~ons (Figure 11overleafl Theterms ofreference agreed bythe Fnnding Council forthese committees include keeping under retiew the sufficiency and

adequacy of protision in the region. The committees includemembers of tbe local business community and people from Trainingand Enterprise Cmmcils. Atalocal level individual colleges areexpected to base their plans on an analysis of the need for educationandtraining inthearea they serve, From 1995 each co~ege plan is

approved by the local Training and Enterprise Council as tahng into

“ The Charter for Fmther Education wasptitished hythe Department in1994and sets outthestandards which students andemployees have a right to expect from the further education sector, incl”dtig complaints procedures.

37


Figure 11: Funding Council Regional Map

Tha map shows the Funding Council regions, the numbar of colleges in each region as atFabruaw i 996 and the location of regional offices.

Total sector colleoes at Julv 1996,452

Source: Futiher Education Funding Council

account local labour market information. The Funding Cormctihavealso examined protision in specific Ioctities, particdarly as part ofthe consideration of reorganisation propoads.

3.7 The following paragraphs evaluate hturn:

. thenational study carried out bythe Department and theFunding Councfi;

. theconsideration ofstilciency andadeWacy atare~ond level;

. theetidence atlocal level fromcollege strate@cplms; and

. the Funding Counc~s consideration ofsufficiency ad adequacyin a locahty, as a restit of a proposal for new provision.

The remaining sections of this Pmt of the report cover the FundingCmrnci~s consideration of reorgatisations and mergers and other

etidence on sufficiency and adequacy.

38

The Further EducationFunding Cormcfl for England

National analysis

3.8 In 1995 a joint Funding CouncWepartment working groupcompared national trends in demand for SWS with plamedprotision of further education. There is some etidence from this

study to cotimm that colleges are planning to expand in the areaswhere future employment needs wi~ be greatest. It also suggests

that the numbers receiting vocational training iu colleges maybroadly match the demand for trained employees in the workforceover the period to 1998. This conclusion is sensitive to assumptions

about the degree to wMch companies til wish to improve tbe SMSof their employees, about the input of private sector providers andhigher education, and the level of training that coUeges are planning

to offer in each vocations area. The study also indicates that theremay be a mismatch between the volume of training and demand forSWS in some areas, Nevertheless, tbe Funding Council consider thatthe study and the matching exercises carried out for somesubregional groupings represent a significant step forward in

attempting to assess whether the training offered by collegesreflects the anticipated needs of the economy.

Re@onal committees’ consideration of sufficiency andadequacy in 1994

3.9 The Funding Counc~s regional committees consider each year thesufficiency and adequacy of plamed further education protision intheir region, using analyses by the Funding Counci~s regional oficesof coUege strategic plans. In 1994 the regional committees adtisedthe Funding Council that there was no etidence of inadequacies orinsufficiencies in protision. The National Audit Office retiewed this

process at two regional offices and retiewed all the regional

analyses of strate@c plans. They found that the regional analyseswere thorough and regional offices brought to bear good knowledgeof the local situation.

3.10 The 1994 analyses reported for the first time on colleges’ plans forfd and part-time provision in each region in ten programme areas.The plans showed growth h aU programme areas. However, it wasnot possible for regional committees to obtain external etidence of

the demand for further education of a comparable nature fromavaifable labonr market information.

39


The re~onal assessment in 1995

3,11 Following the 1994 Competitiveness Mite Paper, the FundingCouncil and Training and Enterprise Councfls estabEshed14 regional and subregional ~rmpings bringing together membersof the regional committees, representatives of the Training andEnterprise Councils in the region or subregion and representativesof Government regional offices. Each autumn the groupings considerlocal analyses of labour mmket information and co~ege Jdyplanning information. This analysis forms the advice to the regionalcommittees on the sufficiency and adequacy of provision foreducation and training which has the potential to ifiuence theFunding Counci~s funding arrangements for the fo~owing year. Theanalysis also provides the priorities and criteria for the tiocatimr ofa Competitiveness Fund of some E20 m~lon to fmd college capitalprojects to meet partictiarly critical labour market needs.

3.12 The first such exercises were completed in 1995, and the regionalcommittees again advised the Funding Councfl that there were nogaps in provisiom but in some regions, their advice identiedspecific curriculum or skills areas where there might be concerns orwhere research was needed to ensure thek views were we~ founded.

3.13 The Funding Councfl and members of regional committees whorepresented Training and Enterprise Councils told the NationalAudit Office that the exercise had been usefti in encowa~g

Training and Enterprise Councils to provide regional informationand in improving the comparabfity of labour market and co~ege

data. However, labrmr market information needed to be treatedwith caution as it was diffictit for indushy to make even short-termforecasts of demand for labour.

3.14 The Woupings adopted several different approaches to the process.

Groupings in three regions received papers which compared thelabour market information produced by the Trtining and EnterpriseCouncils and the strate@c plan summaries produced by the FundingCouncil’s regional offices, and considered whether Wowth in fmthereducation provision matched ~owth in labour market demand.Most of the other Wrmpings had labour market informationavaflable to tiem either from individual fititig and EnterpriseCouncils or on a subregional or regional level. The variations in

approach. and comments by committee members, suggest thatWoupings would benefit from being given a clearer deftitimr of howto interpret sufficiency and adequacy of provision.

40


3.15 The information the groupings used was also very variable. Eight of

the groupings identified a need to improve the process. Partictiarproblems encountered were:

. In three cases groupings received up to date Iabour marketinformation too late to assist in giving advice to the Funding

Council.

. Groupings needed more information on tbe levels of trainingoffered in colleges, closer matching of provision tithoccupational categories, and information on student destinations.

. It was not possible to arrive at a total picture of training

provision because the groupings dld not have information aboutschool, higher education and private provision.

There is also evidence that employers place more importance onthe need for core SMIS levels to be raised than on the need foremployees to be quaWled h specific subject areas. It is mdikely tobe possible to estimate whether provision meets labour marketneeds until more is bowo about the levels of skill students attain ontheir courses.

3.16 The new mrangements introduced in the Competitiveness WtePaper have focused attention on the fink between further educationprovision and labour market demand. The national study referred to

above (paragraph 3.8) estimated that 43 per cent of further

education provision cotid not be directly related to labour marketdemand, and that many of these students were aiming to progressinto higher education or other further education, rather than

entering the labour market directly. The Funding CouncWsassessment of sufficiency and adequacy is primarily based on theadtice of regional committees which take into account the totalprovision planned by institutions, alongside the morenarrowly-based advice from regional groupings. The Departmentand the Funding Councfl reviewed the workings of the regionalgroupings after their fust year, and are undertaking a programme ofwork to improve the evidence to support the matching of skill supply

and demand in future. On the supply side the work dl include thelevel of quahfication tires, retention and achievement rates,destinations and post-16 provision outside the sector. On thedemand side the intention is to take account of those whosequalification aims cannot be currently finked to availableinformation about labour market demand, and to produce standardregional breakdowns of the national data to supplement Trainingand Enterprise Councfl assessments.

41


The strategic planning framework

3.17 The Funding Councfl have developed a strategic planningframework in consukation with colleges. CoUeges were asked toproduce a three-year strategic plan by Jdy 1994, and to update it ineach of the next two years. They are asked to share their plans withthe Funding Council. For the period 1994-95 to 1996-97, co~egeswere asked to include in their plans an assessment of local

demographic data and lahrmr market information, as part of theiranalysis of local education and training needs. They were not askedto repeat this exercise in 1995, however, when ordy simp~ed andupdating information was requested. CoUeges are asked to submitnotification of significant planned changes in provision with theirfunding apphcatirms in February of each year, and again tith theirstrategic plans in July.

3.18 The prime purpose of the February returns is to assist the FundingCouncfl to understand and assess coUeges’ funding apphcations. Theprime purpose of the July returns is to help the Funding Couucfl tocome to a view on the sufficiency and adequacy of further educationfacilities. This is done by

● analysis of the planned changes in provisiom and

. consideration by the Funding CouncWs regional committees ofregional analyses (paraWaphs 3.9 to 3.12).

3.19 The Funding CouncXs analyses of changes in provision have to dateindicated that there have been no si@lcant withdrawals ofprovision at a regional level. The 1994 and 1995 analyses found thatin nearly W the 102 cases where co~eges planned to discontinue

specific courses, replacement or equivalent provision appeared to beavaflable within a reasonable travelhng distance. Five instances

were identified where provision was being withdraw md there wasno replacement or alternative provision avaifable. Four of thesecourses were being withdrawn, three in the Eastern region and onein the North West, because of lack of demand from students. In the

other case, the regional committee decided there was adequateprovision elsewhere in the region,

3.20 Individual colleges are expected to conclude in their strategic plans

what facihties shotid be provided at a local level. But the NationalAudit Oftice found that some strate~c plans were inadequate in this

respect. For example, in 1994 about a quarter of needs analysesunderpinning the strategic plans dld not take into account

demographic information, and a similar proportion, often the samecolleges, did not include labour market information. In areas served

42

The Further EducationFunding Councfi for England

by ody one co~ege, this cotid mean that no adequate assessment oflocal needs had been carried out. For instance, the National Audit

Office found four examples in the south west region of generalfurther education or tertiary coueges which failed to take into

account either or both of these sources, and were the sole localprovider. The regional committee tid not identify any significantgaps in protision in the region.

3.21 To support the new wrangements for Training and EnterpriseCouncfl approval of coHege strategic plans (paragraph 3.6), theDepartment pubhshed in December 1995 a guide to labour marketinformation for further education colleges, intended to increase

understanding of how to use this information.

3.22 In Jtiy 1995 colleges were asked to update tbe fnR three year plansthey had protided 12 months earher. In order to put themselves in

a position to help cofleges to improve their planning processes, theFunding Conncfi carried out a more detafled retiew of colleges’1995 plans, including tisits to one third of coUeges during theautumn term of 1995. These tisits were intended to clarify theFunding Counctis understanding of plans, including theirconsistency and credibtity, and planning and retiew processes. Thefactors they considered included tbe basis of colleges’ needs

analyses and the finks between these analyses, the colleges’objectives and planned protision.

3.23 Further assurance that colleges’ strategic plans are in he with localneeds cotid be gained from the involvement of Traitig andEnterprise Councfls in the plans. Prior to the Competitiveness WhitePaper pubhshed in May 1994, Training and Enterprise Councils

allocated Work Related Further Education funding to further

education and tertiary colleges and retiewed these cofleges’strate~c plans as part of that process. Subsequently, tbeGovermnent stated that au co~eges shodd work more closely withTraining and Enterprise Councfls in the preparation of theirstrategic plans to ensure that they were more closely adapted tolabonr market needs, and that these plans shoufd be stiject toTraining and Enterprise Councfl approval. Ml colleges securedTraining and Enterprise Conncfl approval for their 1995-98 plans.

&sessment of sufficient and adequate facfities in alocatity

3.24 The Funding Councfl have developed a working model of bow toassess sufficient and adequate facfities for apphcation to specificcircumstances. For instance, in June 1995 they produced a report

43

Key points


on further education facilities in the Swale district of Kent in orderto assess an application for funding from an external institution notpreviously funded by the Funding Councfl (Box 5).

Box 5 Review of provision in Swalm a model for aaaesaing sufficient and adequate

facififies

This review of provision sought etidwrce of demand for fuflher education in the area, by comideting thepopulation, its socioeconomic characteristics, destinations of year 11 pupils, participation rates, and anassessment of the Iabour market Thfs was compared with the pattern of fufiher education prnvisionincluting its geographical location, ease of access, the type of protision offered and is suitabiti~ forctient groups.

The review concluded that adequate faci[ties were available in most of the disttict, but there was ona areawfdch had lower participation in post-1 6 education and poorer access to further edumtion than the rest ofthe d[strlcr. The Funding Council dacided that it would support an application from an exisnng provider toexpand pmvition there.

The National Audit Office consider that this model has potential for

aPPllcatlon tO other areas where there are concerns about thesufficiency and adequacy of factlties,

3.z5 The Funding Counctis approach to securing sufficient andadequate provision assumes that, tiess there is evidence to thecontrary, the provision is sufficient and adequate. The FundingCouncil are developing for the fist time a systematic approach toassembling, assessing and improving the etidence on sufficiencyand adequacy. The Funding Councfl are satisfied that evidence hasnot emerged from work at local, regional or national level tojustify them using the funding methodology or other means toprovide premium levels of support to ensure sufficiency and

adequacy of facfities. The matching of supply and demand iscurrentiy limited, partictiarly at a regional level, by lack ofcomparable information about post- 16 provision outside the sector

andin relationto demandforprotisionwhichis notdirectlywork-related,

. Atanational level, the Funding Council andthe Departmenthave made prowess in matching Iabour market needs with

work-related further education provision, mdaremdertakinga joint programme of work to improve information about boththe demand and supply of post-16 provision nationa~y andregiOnaUy.

continued ....

44


. Theregional andsubre@onal groupings estabHshedinthewake of the 1994 Competitiveness Wte Paper have madeprogress in most areas, but the groupings need more guidance

on the scope of their task and more data on the provisionoffered and student destinations.

. There were weaknesses tithe needs analysis section of somecolleges’ 1994 -97strategic plans, butthe Funding Cmmcflhave

taken steps to encourage improvements in coHege practice andthe Department have acted to improve local Iabonr marketintelligence.

. Inmost cases where colleges have withdrawn provision,

alternative provision has been avaflable within reasonabletraveMng distance, indicating that co~eges are able to meetexisting needs.

. The Fnnding Conncfl have developed aworkingmodel of how

to assess sufficient and adequate facfities in a specfic locahtyand this may have a wider potential.

Reorganisations 3.26 The Funding Councfi’s regionfl committees have a responsibility totake into account issues of sufficiency and adequacy in theirconsideration of proposals for reorgatisations and mergers in thefurther education sector and the estabhshment of new sixth forms inthe secondary school sector. % at 31 March 1996 they hadconsidered 12 proposals for college reorganisations and118 proposals from schools to estabhsh sixth forms. They offer

advice to the Funding Counci~s Reorganisations Committee who,under delegated authority, determine the Fuudlng Counci~sresponse to proposals. Final decisions on these matters are for theSecretary of State.

3.27 In the case of co~ege merger proposals, the Funding Council haveest~fished criteria for assessing proposals whch include “benefitsto educational provision in the area” and where a merger with ahigher education college is concerned c-the importance of

preserving further education facihties”, In their consideration ofschools’ reorgatisation proposals, the Funding Council’s criteriainclude whether there are insufficiencies which wotid be remedied

by the proposal.

3.28 Merger proposals are norma~y on the basis that the coUeges willcontinue to make the existing provision, or wiR enhance provision.The Funding Councti continue to fund the existing protision at thereorgafised college. The viabihty of the merged college, rather than

45

Other etidence andfuture developments


the proposed provision, then becomes the key issue. Ethereorganised college is viable, this contributes to the maintenance ofsufficient and adequate factlties by preventing the closure offacihties as a result of financial difficulties in cOUeges (Part 5).

3.29 On the few occasions when a co~ege has left the sector, the FundingCouncil have sought guarantees that further education protision Wbe preserved. One merger proposal, betieen a further educationcollege and a college in the higher education sector, has beenrejected by the Funding Councif, partly because the proposedcurriculum did not meet local needs and there were doubts aboutwhether the existing protision would he preserved. The FundingCouncil then assisted the college in drawing up a specification of theminimum provision which wmdd be needed to preserve sticientand adequate facilities and inviting proposals from other coUeges tomeet that specification.

3,30 As at 31 Jtiy 1996, this was the otiy merger proposal which theFunding Council had not supported, though in other cases thecoUeges involved needed to provide additional information or dofurther work before Funding Councfl approval cmdd be obtained.But the procedure may offer a model of how the Funding Conncflwould seek to secure provision in the case of coUege closme or othercases where gaps in provision were created.

3.31 The National Audit Office examined proposaJs for the estabhshmentof 26 new sixth forms in tio regions, In none of these cases did theregional committee consider that there was an insufficiency ofprovision.

Widening Participation

3.32 TheFuntingCouncflhavereco~sed that there are poptiationgroups tith low participation in further education. In December1994 they set up tbe Widening Participation Committee in order tomeet their commitment to promoting access to fmther education forpeople who do not participate in education and trtitig but whowotid benefit from it.

3.33 The Committee aim to identify those who do not participate infurther education or who have low retention and achievement rates,

and how their participation can be increased. They are exatigthe impact on participation of tbe Funding Cmmctis funtig

arrangements, national arrangements for student financial support,quality and performance and the framework titbin which futhereducation operates. They are sdso using the Funding Counctis new

46


student data coUectimr to map participation by geographical area,

and, in conjunction tith information from the Inspectorate, toidentify best practice by colleges. These studies may protideetidence of areas where efisting further education facilities havenot met the needs of groups in the popdation who wotid benefitfrom them. The Committee expect to report in the early summer

of 1997 and may recommend changes to the funding methodology toencourage wider participation as part of the fundamental retiew.

Charter complaints

3.34 The Charter for Further Education (footnote to paragraph 3.3)adtises that complaints may be made to the Funding Council andthe Secretary of State on certain matters, including the availahfity

of courses. The Funding Cmmcfl have not received any complaintsabout lack of protision or facfities, although they have received twocomplaints where courses had been withdrawn during the academic

yew. In each case the Funding Councfl recommended that tbecolleges concerned shotid retiew their procedures for cancelhngcourses.

3.35 However, the etidence from Charter complaints cannot beconsidered strong, as the Funding CouncWs Inspectorate have notedthat they frequently found “low, or a variable level, of studentawareness and understanding” of the National Charter and coUeges’own charters during co~ege inspections. ‘Ihe Funding Councfl haverecently pubhshed a leaflet designed to increase awareness of theavaflable complatits procedures.

Inspections

3.36 The Funding CouncWs Inspectorate assess colleges for range andresponsiveness of protision, which includes consideration of their

arrangements for identifying local needs and of whether the rangeof programes meets the needs of potential chents. & at31 Jtiy 1996 ofly one coUege had been assessed as hating moreweaknesses than strengths in this area, and this college is in an areawhere alternative protisimr is available.

47

Key points


3,37 The Funding Councfi have estahhshed a number of processes” .which provide evidence about the sufficiency wd ade~acy offacfities, and provide mechanisms which may address issues ofsufficiency and adeWacy which emerge:

.

.

They have developed a framework for assessing sufficiency andadeWacy in relation to proposals for reorgatisations andpossible college closure. .

Procedures used to identify the effects of a coUege closme coddbe used to address gaps in provision shotid they emerge.

48

Introduction

The inspection ofcoUeges


4. Promotingimprovements in thequality of furthereducation

4.1 Under the Act, the Funding Cmmcfl were charged with mtingarrangements for assessing the Wahty of education provided ininstitutions within the further education sector. The National AuditOffice examined how the Funding Council have responded to thisresponsibihty, focusing in particular on the work of the Funding

Council’s Inspectorate.

The Inspectorate

4.2 The Funding Council estahhshed an Inspectorate to carry outexternal assessment of colleges by means of a systematic round ofinspection visits, The Funding Council agreed terms of reference for

the Inspectorate and these are shown in Box 6.

Box6 Inspectmate termsof reference

. To assess standards and trends across the further education sector and advise the FundingCouncil, their committees and working groups on the pefiormance of the sector ovamll.

. To prapare and pubfish repods on individual institutions

. To identiti and make more widely known good practice and promising developments in furthereducation and draw anention to weaknesses that require attention.

. To provide advice and assismnce to those with responsitil ities for, or in institutions in the sector,through its day-to-day contacti, is contributions to training and ih publications.

. To keep abreast of international developments in post-school education and training

4,3 The Inspectorate comprise full-time and part-time inspectors. Theywork in regional teams and are managed by senior inspectors basedin tbe Funding Council’s regional offices.

49

The Fmther EducationFunding Council for England

4.4

4.5

4.6

4.7

The inspection framework

The inspection framework was developed cluing 1993 by a workinggroup, under the chairmanship of the chief inspector, whichincluded coUege senior managers and others with an interest infwtber education. The Funding Cooncfl issued a constitativecirctiar on the proposed framework based on the group’srecommendations. The proposals received widespread support from

the sector. Following modifications in the fight of constipation, therevised inspection framework was issued in September 1993 in theform of a circular to all institutions in receipt of finding from theFunding CouncU. & appendm to the circtiar provides inspectiongoidehnes giving more detail about the aspects of coUeges’ work

which inspectors address during their inspections. The gnidekesare expressed as a set of strengths which inspectors might expect tofind in a good college.

The inspection process

Within the current inspection framework, the inspection cycle foreach college in the fmther education sector covers a fou-yearperiod. Within the fou-year cycle, there are three main types ofinspection:

.

.

.

the four-yearly inspection (described in Box 7 opposite) wfichleads to a puhhshed report;

three visits a year to a college by the ~-time inspector assignedto that college in order to btid up an in-depth knowledge of thecollege, to estabhsh an inspection programme and to monitor thecollege’s response to the issues raised in. assessment reports andoffer advice as appropriate; and

specialist inspections which focus on partictiar areas of thecnrricdum or specific cross-college issues and contribute tofour-yearly college inspections or national smeys.

The Inspectorate plan to have completed their frost cycle of

four-yearly inspections by the summer of 1997. By the s~mer of1996, 329 colleges had been inspected. Tbe remaining 124 coUegesare schedded to be inspected during the 1996-97 academic year.The Inspectorate are on target to complete the cycle of fore-yearlyinspections as planned.

In addition to the cycle of four-yearly inspections of co~eges in the

further education sector, a futher 82 inspections have been carried

out since 1993 at independent institutions which provide for

50

The Fmther EducationFunding Councfl for England

students with learning diffictities antior disahfities and which aresupported hy the Funding Councfl. Over the same period, theFunding Councfl inspected tither education provision in20 external institutions and thee higher education institutions,

Box ? The four-yearly inspection

Foreachfour-yearly inspection of a college, a team of full-time and pafi-fime registered inSpeCfOE iS

assembled wtich reflects the size of the college and the nature of ik provision. The college is invited tonominate a senior member of sbff (the college nominee) to participate in all aspem of the inspetionother than contributing to detitions on quafity grades for the areas covered by the inspection.

[n advance of the inspection, the college is asked to produce a brief self-assessment repoti based on thefintings of is own quahv assurance procedures and coveting the aspeck on which the inspectors repot

. responsiveness and range of provisio~

. governance and management

. studenti recruitment, guidance and SUPPOR

. teaching and the promotion of learning

● studenti achievement

. qualv assu Rnce; and

. resoumes (stiff equipment and accommodation).

During the inspection, inspectors obsewe teaching, training and other activities designed to promtielearning. They inspect students’ work. They hold discussions with, for example, students, shff, governors,parents, employers, represen~tives of local Training and Enterprise Councils and communityrepresentatives. They examine documents evidence provided by the college.

Inspectors assess the strengths and weaknesses of each %pect of college work they inspect Theirassessmen~ are set out in the teti of the repofl produced on the inspection and are summatised using afive-point scale where grade one represenb the highest quati~. Gmdes are assigned to the curriculumareas inspetied and to the cross-college aspects of provision.

A four-yearly inspection can etiend over seve~l months, with curriculum areas being inspected on astaggered basis. in the first three years, each inspetion took an average of 6S inspector days, The teaminspection, coveting cross-college aspects, is normally the culmination of the inspection visit.

At the end of the inspection, a repoti is written for pub~cation. Following the pubflcaflon of the report, thecollege has four months to provide a wdften response outkning plans for addressing any weaknessesidentified in the repoti. The college inspector monitors implementation of the action plan, and, whereappropriate, ofle~ advice,

Inspection reports

4.8 The Inspectorate had a target for 1994-95 of ptihshing 70 per centof inspection reports within 10 working weeks of the end of theinspection, for 1995-96 the target was 80 per cenfi and for1996-97 it is 85 per cent. In 1994-95, the Inspectorate exceededtheir target, acMetig 72 per cent of reports published tittin10 working weeks of the end of the inspection. In 1995-96, theInspectorate achieved the pub~cation of 83 per cent of reportswithin 10 working weeks of the end of the inspection, against their

target of 80 per cent.


4.9 As well as the reports on college inspections, the Inspectorate havesince 1993 pubhshed a number of reports on national surveys ofspecific issues or currictinm areas. The Inspectorate have alsoreported on visits to Denmark, Sweden, France, Germany, theUnited States, Canada and Italy to examine developments inpost-school education and training. The national and titernationdreports provide a usefti summary of the Inspectorate’s findings. The

national reports offer conclusions and generaUy identify pointers foraction while the international reports ticlude usefti lessons to helearned in England. Both types of report cotid be enhanced bysystematically bigtilghting good practice from wtich the sectorcould learn and, in the case of national reports, by identifying areasfor improvement identified during visits to institutions.

Survey findings on the inspection process

4.10 In the survey of 100 colleges carried out hy the National Audit Office(paragraph 1.10), one of the areas covered was coUeges’ experienceof inspection. Of the colleges surveyed, 59 had been inspected orwere in the process of being inspected. A si@cant majority ofrespondents reported positively on their inspection experience,

including those with relatively poor grade pro~es. on average, 88

per centoftherespondentswhichhadbeensubjecttotispectiondescribed the various aspects of the inspection process as adequateor more than adequate. Of the 47 colleges which expressed a viewabout their inspection report, 41 (87 per cent) commented that ithad been fair.

4.11 There were a few negative comments, however, and not just fromthe colleges which had scored grades 4 and 5, the two lowest

grades. Those cited by more than one co~ege included:

. concerns about the quatity of part-time inspectors;

. discrepancies between oral and written feefiack frominspectors; and

. the lack of an appeals procedure where institution did not agreewith inspectors’ findings.

4.12 As regards the first of these issues, the Inspectorate titroduced an

annual review of the register of part-time tispectors in1994-95. Re~onal setior inspectors review the work of individualinspectors annua~y, taking into account their writing, the hspection

grades they award, and any comments made by coUeges on theirwork. In 1994-95, tbe Funding Councfl declined to renew contractsfor 31 part-time inspectors, The second issue is being addressed

52

Key points

Outcomes ofinspection

‘.


through staff development for inspectors. The third issue suggeststhat some principals were unaware of the complaints procedureincluded in the Funding Connci~s code of conduct pubtished in theirannual report for 1994-95.

4.13 The Funding Conncfl gahed the consensus of co~eges in putting inplace their arrangements for assessing the quahty of furthereducation provision. The fo~otig points shotid be noted inpartictiar:

. Inspection arrangements are now well established and havebeen weU received by the further education sector.

. The Inspectorate are on target to complete the four year cycleof inspection within the planned timescale.

. The national and international reports produced by theInspectorate cotid be taken further by Mghhghtimg moresystematically lessons to be learned.

Inspection ~ades awarded since 1993

4.14 The chief inspector prepares an annual report on Quality and

Standards in Further Education in England. Three have beenpubfished to date. Each includes a complete breakdown ofinspection grades awarded to the colleges visited during the year.The table (Figure 12 overleafl shows in summary the gradesawarded for the fwst three years. The Funding Councti haveclassified the curriculum into 10 separate areas, and also givegrades for seven cross-college areas.”

4.15 The sample inspected was not the same in each year although areasonable sample of each type of coUege is included in each annualinspection programme. Notwithstanding the gro~h and efficiencygains achieved by colleges, the majority of areas inspected in eachyear - both cnrrictium and cross-college - were awarded

Grades 1 and 2 indicating that strengths outweighed weaknesses.A significant percentage of co~ege provision in each year was

* The cmrictim areas are sciences (ticlutig mathematics md computhg): apiculture; construction; entieertig (ticludingmmtiactuhg technologies); bustiess [including admtiistration and management); betel and catering (hcluding leiswe andtowism); health md commity care (ticlutig bairdressingh art and desi@ [includhg perfortig artsk humanities (includtigeducation and social studies); and basic education (and provkion for studenti tith leartig dif5culties antior disabfities). Thecross-college ares are: responsiveness and rmge of protisio% governance and management student recruitment. Pidance andsupport; qutity assurance; resources (sttifing); resources [equipmenfflearning resources); resources [accommodation].

53

4.16

4.17

\

The Further EducationFunding Councfi for England

Figure 12 College grade profiles for the 10 curriculum areas and seven cros>college

sreas 1993-94 to 1995-96

Year No of sollege Curriculum grsdes ~/0) Cross-college grsdes ~A)inspections

12345123 45

1993.W 79 9 56 33 2 ‘ 13 53 29 5 ,

1994-95 129 9 62 26 3 ‘ 14 49 31 6 ,

1995.96 121 10 59 29 2 ‘ 15 51 29 5 ,

1993.96 329 9 59 29 3 ‘ 14 50 31 5 ,

Grade1- many cfrsngths, few weaknesses

Grade5- many weaknesses, few strengths

“ Less thsn 0.5percent

SOune: Funding Council repofl, OuaIi@ and Sandards in Further Education in Fngland,1996

The tsble shows that, over the three years 1993-94 to 1995-96,66 per cent of curdculum areasinspected and 64 percent of cross-college aspects inspected had strenoths w~ch oweighed theweaknesses (gmdes 1 and 2).

awarded Grade 3 indicating a balance of strengths wd weaknesses,while a smd percentage scored Grade 4 indicating that weaknessesoutweighed strengths.

Further analysis of inspection pades

In awarding grades to aspects of co~eges’ work, inspectorsmoderate their judgments through discussion tith coUeaguesduring the course of an inspection. The regional senior inspector isnormally present at the meeting of inspectors which determines

grades for cross-college areas. The Inspectorate have compfled adatabase of inspection grades which they subject to considerablescrutiny. The Funding Council intend tounderpti the robustness ofinspectors’ judgements with the performance indicators for aU

co~eges which till be available in early 1997.

The National Audit O~ce compared inspection grades awarded upto April 1996 at a sample of 253 colleges against a number of thoseindicators to see how the Inspectorate’s judgments shout individualcolleges related to those indicators. They examined the pro~e of aUcurriculum area grades and cross-college grades in relation to:

. different t~esofcoUege (general fmthereducatiotitertiary ;s&tiform; art and design; agricukure and hortictiture); and

54


. each qnartie of co~eges according to:

average levels of funding

growth achieved to 1994-95

financial position in 1994-95 and

performance against funding targets.

The National Audit Office carried out two further sets of analyses bycomparing

. the profde of grades in cross-coUege areas against tbe sameindicators as above; and

. the profle of grades in cross-co~ege areas against the profile ofcurrictium area grades.

4.18 The National Audt Office fomdthatthe s~ject~ades were closelycorrelated with the grades given for the individual lessons observedat the co~ege. Tbecnrricuhnua reagradess howednosystematicvariation against other indicators of the circumstances of theco~ege, including average level of fnnting. But there was somerelationship between the cross-college grades, especiauy forgovernance and management, and the indicators of growth andfinancial performance.

4.19 The National Audit Office conclude from tMs analysis that

. The consistency of the wades awarded and the grades forindividual lessons support the conclusion that the~ades areawarded objectively.

. There are no substantial differences h quahty between types ofcollege.

55

. There isnoetidence that thequahty ofprotisionbas beenaffected byco~eges’ average level of funding. The~adesawarded also suggest that teacMng and learning and students’achievements are of sitiar quafity throughout the range ofcoUege grotih and financial performance.


. Colleges assessed bythe Inspectorate ashatig poor governanceand management have also performed less weU on average interms of achieving growth and meeting funding targets, and havea worse financial position.

4.20 The Inspectorate have be~tocarry outsitiw analyses aspartoftheir internal quafity assurance arrangements. In the National AuditOffice’s view additional emphasis on such analysis wotid:

. actasamechatism formotitoring anyimpacts on~ahty arisingfrom other factors;

. actasameans ofchecbg therohustness of inspectors’judgments; and

. enable the Inspectorate totarget tispections on areas ofidentified weakness, leadlngto abetter use ofinspectorid effort.

The links between funding and the outcomes ofinspection

4.21 There isanexpEcit H& between thepoorer outcomes oftispectionand the process of allocating funds to co~eges by the FundingCouncfl. A college which has received Grade 4 or Grade 5 (thetwo lowest grades) for a particdar currictimn area cannot apply forgrowth in that area until it has been reinspected and its curricdumprotision deemed to be of at least Grade 3 standard. TheInspectorate undertake to carry out the reinspection before acollege’s application for groti is restricted in a second fundinground.

4.22 The position in Jdy 1996 as regards the 43 reinspectkms carriedout on weak currictium areas was that 28 improved their grade by

at least one grade and 14 improved by two grades. The remainingcurricuhun area was again awarded a grade 4 on reinspection andwas offered a further reinspection. The improvement in 42 out of43 cases indicates that the link between poor inspection outcomesand the funding allocation process appears to have acted as aneffective incentive to colleges,

4.23 If colleges receive grades of 4 or 5 for more than 20 per cent of theircurricuhnn protision, the Funding Councfl consider, when mtigfunding allocations, whether to limit the number of additionalfunding units above the core, In this situation, the Funding CouncHalso ,have regard to the effect on sufficiency wd adequacy of

56


protision (Pint 3) of any proposed hmit. To date, no coflege has beenin the position of having its overd growth restricted because of thissanction.

4.24 The previous paragraphs describe the ways in which poorinspection outcomes may hmit a co~ege’s growth - either in aparticular curriculum area or overall - and hence its fundingallocation. So far, there is no Hnk between very good inspectionoutcomes and the process of a~ocating funds to colleges. TheFunding Council have not introduced such a liti as the firstinspection cycle is not yet complete (paragraph 2,40), but wiUconsider it again during their review of the funding methodolo~which started in the autumn of 1996.

Other indicators of quatity

4.25 In November each year, the Department pubhsh comparativeperformance tables of examination performance for students aged16 to 18 in schools and colleges. The Inspectorate include areference to a coUege’s performance in these tables in the inspectionreport on the college.

4.26 For many coUeges in the further education sector, theti performancein the comparative performance tables teUs o~y a smaU part of thestory. The performance tables do not cover students over 18 nor themajority of vocational programmed offered by colleges. Furthermore,they provide no information about the relative starting points of thestudents involved.

4.27 As part of the constipation with the sector on the adoption ofperformance indicators (para~aph 1.9), the Funding Council madea commitment to undertake further development of value addedmeasures of performance, wor~g through the Further EducationDevelopment Agency. The Agency are due to pnbhsh a report onvalue-added measures in the near future. The Funding COUUCWSQuafity Assessment Committee (paragraph 4.30) drew attention tothe need to encourage the sector to develop more understandablevalue added measures of student achievements. In doing this, theCommittee said the Funding Councfl wotid also need to encouragethe further education awarding bodies to display studentachievements in a more easfly understandable and pub~c-friendlyway.

57


Evaluation of the Inspectorate’s work

Framework for 4.28 The Inspectorate are conscious that tbe work they undertake rehes

ensuring the quality heavily on the judgments of inspectors. For this reason, the

and consistency of Inspectorate have sought to estdtish procedures to ensure that

the Inspectorate’s inspectors operate with a high degree of consistency. TheInspcctorate undertake and pubhsh an annual evaluation of their

work work. The two evaluation reports pubhshed to date indicate that theInspectorate have addressed areas of concern in relation to theirperformance, for example, setting up an annual review of theregister of part-time inspectors (para~aph 4.12).

4.29 The Inspectorate invite colleges to submit an evaluation of theirinspection after pubhcation of the inspection report. The findingsfrom college evsduations for 1993-94 and 1994-95 are that theinspection process is generaUy weU received by co~eges. This isconsistent tith the findings from the National Audit Office’ssurvey(paragraph 4.10).

Quality Assessment Committee

4.30 Under the Act, the Funding Council had a duty to esttihsb a QmdityAssessment Committee to advise on how they might carry out theirresponsibilities in relation to assessment. The QuaH@AssessmentCommittee was estabhshed in 1993, taking into account theguidance on membership from the Secretwy of State in 1992. TheCommittee meet regularly. Their annual reports serve to drawissues to the Funding Councti’s attention and to help set prioritiesfor the chief inspector’s future work.

Retiew of theinspectionframework

4.31 The Funding Councif are currentiy revietig the inspectionframework so that any revisions may take effect for the secondround of inspection visits due to start in September 1997. They

convened a consdtative group and have issued a constitativecirctiar to colleges. In the review, the consultative group had regardto the Governments commitment, as outfined in the 1996Competitiveness White Paper, to achieve some convergence in thequality assessment and inspection arrangements for post-16education and trtining. The Funding Councfl aim to agree therevised framework early in 1997.

58

,

Key points


4.32 Notwithstanding the Wowth and efficiency gains acfieved bycolleges, the majori@ of areas inspected in each year wereawarded Grades 1 and 2 indicating that strengths outweighedweaknesses. However, the National Audit Office note that someinspections continue to iden~ low quafity despite thearrangements in place to promote good qutity in furthereducation.

4.33 Inspection arrangements have been we~ received by the furthereducation sector. The Inspectorate have put in place mechanismsto achieve a greater consistency of operation by au inspectors. TheInspectorate evaluate their work re@arly and address concerusidentified in the process. In tahiug forward the retiew of theinspection framework, the Fmdiug Couucfl shodd have regard tothe following points:

● The additional analysis of inspection outcomes carried out bythe National Audit Office (paragraph 4.16 to 4.19) is somet~gwhich the Inspectorate codd develop as a means of monitoringany impacts on ~ahty arising from other factors, checking therobustness of inspectors’ judgments and targeting inspectionon areas of identified weakness.

. The outcomes of the reinspection of coUeges which wereawarded low grades in currictium areas indicate that the Wbetween poor grades and restrictions on applying for growthappears to act as an effective incentive to co~eges to improvetheir grades.

. There is currently no incentive btit into the funding aDocationprocess for co~eges which have achieved the highestassessment grade for a currictimn area. This issue ti beconsidered by the Funding Councfl during their retiew of thefunding methodology.

59

Introduction

.


5. The financial health ‘of the sector and themonitoringarrangements of theFunding Council

5.1 The National Audit Ofice examined the financial position of thesector, the Funding CounciUs financial monitoring arrangements andthe effectiveness of their action in identifying and resoltigconcerns. They took into account evidence from their own inspectionvisits to colleges and from the work of the Funding Counci~s AuditService.

The overall financial 5.2 Colleges ptilish annual accrual accounts which record a charge for

health of the sector depreciation as part of their expenditure. Using the pubhshedannual accounts and college forecasts the National Audit Officecompiled an overall sector account for the five year period to1998-99 (Figure 13 overleao. The National Audit Office assessed thefinancial health of the sector against two mtin benchmarks: theability to mainttin an adequate level of hqnidity smd the ah~lty togenerate a surplus. Serious financial problems will titirnatelymanifest themselves as cash flow dlfficukies or an accmntiateddeficit.

5.3 Colleges collectively almost broke even on continuing operations in1993-94 but incurred operating deficits amounting to about threeper cent of sector income in 1994-95 and 1995-96. Their forecastsimply the sector will run at a small deficit for the remainder of thedecade. The accumtiation of operating deficits is potentially seriousfor the sector, since, under the new arrangements for capitalfunding in the sector and in partictiar the private finance initiative,colleges will have to maintain and renew their capital assets out oftheir recurrent income. They can no longer rely as in the past oncapital grants for the whole or a large proportion of the cost ofrenewing or developing assets. Udess the sector is able to make netoperating surpluses in the long run, its capital assets til inevitablydecline.

60


Figure 11 Further Education Colleges financial summary 1993-94 to 1998-99 (f milhon)

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99Actual Actusl Estimate ForecastTFmecastl Forecastl

Operating Account

Income 3,508 3,737 3,a90 3,944 3,956 3,976

Expenditure 3,515 3,838 4,012 3,967 3,981 4,035

Surplus (Oefidt) on

Continuing Operations (7) (101) (122) (23) (25) (59)

Balance SheetfixedAssets 4,265 4,307 4,371 4,467 4,443 4,384NetCurrentAssets 299 312 294 333 404 431Long Term Uatilties (38) (66) (94) (191) (242) (264)

Provisions (240) (392) (537) (599) (621) (625)Total assets less 4,286 4,161 4,034 4,010 3,9s4 3,926tiatitities

Soumes: 1993-94: annualised aflustment of 452 college accounk.1994-95: based on 444 college final accounb.1995-96 onwards: estimated from 410 college financial forecasts a@usted to representthe sector as a whole.Since !994-95 the C01189efirrancialyearhas run from 1August to 31 Ju~ in line wth theacademic yea[

Note 1: At the time ofpublicatiorr, the Department were in consultation with the sector on proposedchanges to the funding of teachem’pensfons. 7he financial effects of these changes are notincluded in college forecasts.

Colleges expect collectively to accumulate deficits in each year until the end of the decade.

5.4 Sector hquidity is projected to improve in 1996-97: current Eabfitieswere covered almost twice by current assets in the fwst two yearsand projections show coverage increasing to almost two and a halftimes liabfities by 1997-98. Long term debt, although slowlyincreasing, is st~ comparatively low at less than five per cent ofasset values. Ulquidity is projected to improve because colleges’income is forecast to exceed expenditure before depreciationcharges. The sector’s small deficit after depreciation chargesexplains the gradual dechne in the total value of sector assets.

5.5 The National Audit Office used two years of outturn data and fomyears of estimated or forecast data to appraise the financial healthof the sector independently of the Funding CouncWs retiew. Theoutturn figures show overaU financial health deteriorating followed

61

The Further EducationFunding Councti for England

by a reduction in the value of deficits over the forecast period. Thispicture depends on the accuracy of forecasts, but the forecastreduction in deficits is supported by the foUowing evidence:

.

.

Comparison of forecast and outturn finmcial performanceindicates that college forecasts are genertiy accmate (Fi~e 19). .

The pattern of financial performance is consistent with therestructuring costs occurring as a restit of staff losses in thesector. The large deficits incurred by many coUeges in 1994-95and 1995-96 we partiy explained by restructuring andredundancy costs, Colleges are estimated to have incurredf 109 million of restructming costs in 1995-96. The significantstaff losses as a resdt of restructuring are expected to lead to animproved financial position at many colleges in 1996-97and 1997-98.

Operating 5.6 Within the sector, there exists a wide variation in the operating

performance of performance of individual co~eges. Figure 14 analyses the

coUeges in the sector percentage of colleges in deficit over the period of six years.

Figure 14 Summa~ of surpluses/deficits at colleges 1993-94 to 1998-99 (E mi[tion)

1993-94 1994-95 1995-96 1996-971 1997-981’ 1998-99’Actual Aslual Estimate Fmesast Forecast Forecast

Total SU[plUS 83 44 31 43 47 41

Total deficit (90) (145) (153) (66) (72) (loo)

Sector overall (7) (101) (122) (23) (25) (59)

Colleges running 46”h 61Qh 62% 4770 56”/. 58”La deficit

Souze: College accounfsandfinanciai foncask

Note 1: At the dme of publication, the Depatiment were in consultation with the sector on proposedChanges tothefunding ofteachers’pensions. The financial effects of these changes ara”otincluded in college forecasts.

Tha percenfaoe of colleges with deficits has increased, but is forecast to fall in 1996-97 and then rise again,

5.7 Thesector-tide operating position shows asmaUdeficit thoughoutthe period. The analysis in Figure 14 shows how this is made up ofthe surplus and deficits of individual coUeges. In the fistpost-incorporation financial period a sma~ majority of co~eges werein surplus. Subsequently, in 1994-95 and1995-96, the number ofcolleges with deficits increased. tiost two thirds of W coUeges areexpected to report a loss for 1995-96.

62


5.8 Thetotal value ofoperattig deficits is Mghestin 1995-96. Inthatperiod 280 coUeges experienced deficits totalling El 53 mifhon,compared with 214 colleges io 1993-94 incwring deficits totaWngE90 million. This gives an average reduction in the net assets of thecolleges iovolved equal to E540,000 or six per cent of tmnover.

5.9 CoUegeforecasts showthe nuberand value ofcoUege deficitsffllng after 1995-96, and rising again in 1998-99. At that time overhalf of the colleges expect sti to be in deficit, avera~ng E380,000or fom per cent of turnover in 1998-99.

5.10 The National Autit Office compared theoperating position of eachtype of college for the fust two periods after incorporation(FiWre 15).

Figure 15 Comparative operaffng petiormance of coflegea

General At& Design Sffih Form Agricrdtore ~Allcoti}g6s,:

1993.94‘, :,...:; !?.~ ,, ..:.:’:,::,

Avaraoa level of fie.97 f24.96 f21.07 S26.09 ~~~‘.,:: fi9.3z jfuntino per unit

Averaoe operating (o.3yA 2.0% 1.3°h 0.970 ~ O:>A: ~surplusldeficit

1994-95

Average Ieval of f17.70 224.39 f18.69 f21.62funding per unit

f18.02””

Average operatino (3.f )% 0.7% (o.2yA (1.0)% (z,ly&surplusldeficit

Deterioration in 2.s% 1.3”h 1,5Qh 1.9% 2.3%avamge operatingsurplusldeficit

Soume: College annual accounts and financial forecasts

All types of college hava experienced a dec~ne in financial petiormance. Specialist colleges, whichMstorically have had Mgher average levels of funting, have lower average deflcita than general colfeoes.

5.11 The above fiWres show that the dec~me h financial position in1994-95 affected all types of coUege. Over the period, sixth form andspeciahst co~eges, which are generaUy smaller, generated higherswpluses, or lower deficits, than the general fmther educationco~eges. This may be related to the higher funding levels theyinherited and the effect is reducing as finding levels converge

63

●


(para~aph 2.27). Overall there appears to be no statisticalrelationship between average level of funding and fiancidperformance.

5.12 The National Audit Office compared the financial performance ofcolleges by region (Figure 16). This table shows comparableoperating performance in each year between regions and a broadyeven decline in the second period of account, Yorkshire andHumberside re~on, however, shows a particdar dechne in 1994-95.The region is otiy shghtiy below average in terms of funding levelsand growth, but currently it has the Klghest proportion of co~eges inserious financial difficulty. The most common causes of seriousfinancial problems relate to the management and governance of theindividual college (Figure 21).

Rgure 16: Comparative regional performance of sector colleges

Operating margin

Source: College annual accounts

financial peflormance has declined in all regions, but particularly in Yorkshire and H“mberside,

Levels of liquidity in 5.13 Adequate fiquidity is paramount if a college is to avoid short term

the sector financial vulnerabihty, Current liab~lty coverage is a commody

applied measure Ofhquidity, particdarly in the commercial sector.However, being unable to cover current Eabitities with currentassets does not automatically place any organisation in anirretrievable position.

5.14 Colleges genersdly are better placed than commercial organisationsto manage lower liquidlty for several reasons: creditors reco~sethe reliability of funded income; funding is in predictable

64


installments; 90 per cent of the fofloting year’s Funding Councfiincome is guaranteed by the funding methodolo~, and most currentassets are in the form of cash rather than debtors. However, collegeswhich do not plan to cover current Eabtlties tith current assets atleast once til be particularly exposed to the adverse effects ofunforeseen events.

5.15 The Funting Councfl monitor coUege Equidity on a regular basis.The National Audit Office independently analysed the liquidity ofcolleges in the sector over a five yew period (Figure 17),

Figure 17 Summa~ liquidi~ of colleges 1993-94 to 1998-99

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Actual Actual Eaffmated Fmecaad Foreca~l Forecast

Current ratio of 2,0 1.8 1.7 2.1 2.3 2,4matian collage

Number of colleges 59 63 83 65 56 68with a current ratioless than 1

Source: College accoun& and financial forecasts

Note 1: At the time of publication, the Depaflment were in consultation with the sector on proposedchanges to the funding of teachem’ pensions. The financial effeck of these changes are notincluded in college foncasts.

Uquitiw is defined as current assetalcurrent HaMKties.

Dqui~~ is srdffcient at most colleges, but the number in a vulnerable position has increased

5.16 Tating the period as a whole, current Habihties are covered bycurrent assets at between 80 and 90 per cent of colleges. Mquiditydecfined for the median coUege in 1994-95, but colleges expect it toimprove agtin towards the end of the period. However, coUegeshave so far been poor at forecasting hqnidity, and in 1994-95overestimated their hquidity position.

5.17 The amount of risk and exposure suffered by these coUeges tildiffer according to their individual circumstances. However, thecoUeges which cannot cover current habilities would benefit from animprovement in Hquidity as a safeguard against short termtinerability.

5.18 The National Audit Office conclude that over 80 per cent of collegeshave sufficient liquidity, but tbe number of colleges in a vdnerableposition has increased.

65

Key points


I .

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5.19 Colleges co~ectively are incurring deficits and their fiancialposition has worsened since incorporation 280 colleges were indeficit in 1995-96 compared with 214 in 1993-94. The largedeficits incurred by many co~eges are partly explained hyrestructuring costs including redundancy costs. CoUeges forecastthat their financial position wiU improve from 1996-97 as the

.

resdts of their staff losses are felt. However, coUege forecasts donot include the financial effects of proposed chwges to the fundingof teachers’ pensions. In relation to specific aspects of co~eges’financial health:

● Long term debt in the sector is sti comparatively low but isincreasing.

. In 1995-96, 83 colleges cotid not cover current Uahtities andneed to knprove their position in the coming period.

● Speciahst co~eges and sixth form coUeges have to dateachieved a better financial performance than general furthereducation co~eges. This maybe related to the higher findinglevels they inherited and the effect is reducing as funding levelsconverge. OveraU, there appears to be no statisticalrelationship between average level of funding wd financialperformance. In 1994-95 general further education co~egesmoved on average from a 0.3 per cent to a 3.1 per cent defici~

sixth form coUeges moved from surplus into deficit.

. Of all the nine Enghsh regions, co~eges in Yorkshire andHmnberside have the weakest financial performance andexperienced a very significant deterioration between 1993-94and 1994-95.

* Poorfinancialhedtb at a collegeappearsto be the restit ofthecircumstances appl~ng to individud coneges md theirmanagement, rather than sector-wide factors. Managementand governance appear to be key factors in financial health.

66

.

The monitoring of.

co~eges by the 5.20Funding Council

5.21

5.22

5.23


Financial monitoring

The coUeges in the sector, as independent bodies, are responsiblefor their ow financial weU being. It is not the role of the FundingCouncfi to guarantee the financial position of colleges. The FundingCouncfl monitor the financial health of colleges:

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to meet the reqtiement to do so imposed by the Department intheir financial memorandum tith the Funding Councfl;

to contribute to Funding Cmmcti input to the pubhc expendituresurvey where the Funding Council pay partictiar regard to thesector’s abfity to keep income and expenditure in balance;

to help avoid the risks to sufficiency and adequacy of provisionand to pubhc funds shotid a college become insolvent; and

to provide opporttities for the college and the Funding Councflto take early corrective action when necessary.

Under the new funding methodology coUeges operate in acompetitive environment in which colleges might not aU performsuccessfully. In protecting pubhc assets and ensuring sufficient andadequate provision for students, the Funding Councfl are notrequired to maintain a partictiar number of colleges. Shmdd acollege cease to be viable, the Funding Council may recommend tothe Secretary of State that the college should be dissolved. Its assetsand Eabihties could be transferred to another coflege, tith thelatter’s agreement, which wotid retain the assets of both colleges.

Mternatively, the Funding Councfi may also recommend to theSecretary of State that she merges coUeges, and there are a numberof mechanisms for achieting this. None of these occurrences isnecessarily inconsistent tith good value for money. A merger orclosure planned and managed tith regard to preserving provisionfor students need not put value for money or pubhc assets at risk.The Funding Councfl make financial viabfity a key feature of

approval of mergere. Of the five post-incorporation mergersexamined by the National Audit Office, WO showed an improvementin financial health in the fwst year folloting reorganisation(paragraphs 5.33 and 5.34).

In respect of tbe financial health of a coUege, the main risk to valuefor money and sufficiency and adequacy of provision would arise if acollege were forced to close. Ultimately coUege assets might be sold

67


off to pay a coUege’s creditors. This worst case scenario is one of therisks that the Funding Councfl’s financial monitoring seeks toaddress.

5.24 The Funding Conncfl assess the financial health of coUeges usingthree HnanciaJ returns: a thee-year financial forecast provided bycolleges tith their strategic plans in Jdy; a mid-year update of theforecast in February; and the audited year-end accounts due inDecember. Funding Council accountants also aim to tisit aU co~egesin financial health categories B and C (Fi~e 18) every year, andcolleges’ internal controls are subject to audit. Colleges’ tiancidsituation tends to evolve relatively slowly. However, in order toprotide early warning of potenthd dangers, the monitoring processplaces particular emphasis on the forecasts accompanying thestiategic plan.

5.25 Wenthe Fun&ng Council apprtise acoUege's fiancialhedti theyconsider whether a college can deEver the forecasts, md reviewfinancial indicators derived from them. The Fuuding Councfl assessthe reliability of forecasts by ensuring key planning assumptions arerealistic and consistent tith the forecasts. They assess financial

health by deriving key operational and Eqnidity ratios horn theforecast figures. The Funding Council’s knowledge of the individualcircumstances of each college also informs the over~ assessment.

The Funding CounciYs assessment of financial health

5.26 The Funding Councfl place each college in one of thee categories offinancial health tith the aim of targeting coUeges most in need ofguidance and assistance. In Jtiy 1996 the Funding Conncfl andysedcolleges as summarised below (Figure 18 opposite).

Theaccuracyof informationusedbythe FundingCouncil

5.27 As the Funding Council rely on forecasts to monitor coUege fiances,the National Audit Office compared co~eges’ fiancid forecasts toactual outturn (Fi~e 19 opposite). In 1993-94 forecasts tended tobe cautious and the majority of colleges exceeded their forecastfinancial performance. In 1994-95 coUeges’ forecasts were morerealistic, and the average college deficit was tithin 0.5 per cent of

its forecast. The range of individual coffege forecasts remained widein 1994-95, but there was no systematic over or underestknate ofperformance. The Funding Council have supp~ed sofiare tocolleges to assist them in producing rehable financial forecasts, andhave held workshops for co~eges seeking advice on how to completetheir forecasts.

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Hgure 1S Hrrmrcial health categorisation of collegas

Calego~ Dafhrifimr Dec1994Number

A Colleges that appaar to have sufficiently robust finances to 309implemant their strateoic plan and to daal with the cixumstanceswhch are most likely to occur durino the planning period.

B Colleoes that show signs of financial weakness wMch might Umit 106their afdhv to implement their strateoic plan if they encounteradverse circumstances duflng the planning period.

c Colleges that are financially weak and wMch are dependent on the 25goodwill of others or Iika[y to become so.

Dec 1995“/. Number

70% 267

24% 117

6% 53

JUIY1996“f. Number

61°A 211

Z?”h 153

120/, 85

\

“/.

47%

34%

19%

Source: Funding Council register of at risk colleges

The number of colleges considered by the Funting Council to be at risk is increasing.

5.28

Figure 19: Comparison of forecast surplus/deffcifs against Outturm lgg3.g4 and lgg4.g5

80

60 –

40 –

20 –

o–

-20 –

-40

-60 –

= Above fo recast

- Below forecast

* Average (%)

10

6

6

-8

-80 -..

Source: National Audit Office analysis of college accounts and financial forecasts

In f 993-94 the majotity of colleges exceeded thair foracast financial performance, havingtended to make cautious forecasts. In 1994-95 forecasts were more accurate, with equalnumbers of colleges achieving results above and below forecasts,

The timeliness of information used by the FundingCouncil

Given that potential problems shoufd be identKled early enough toallow for corrective action, the promptness of the receipt of financialinformation is important. The National Audit Office analysed thedate of receipt of each of the three main financial returns for all

69

IThe Further Education

5.29


colleges in the sector over tio years (Figure 20). Over thethree years since incorporation co~eges’ timetiess in retnrfigHnancisd forecasts and mid-year updates was ody moderate. From1995 onward, the audit of final accounts cotid not be completeduntil after the coUege had compfled its Individutised StudentRecord or provided eqnivdent student data to its auditors(para~aphs 2.47 to 2.51). The diffictities encountered at coffeges hcompiling their 1994-95 IndlviduaHsed Student Record led to delaysin submitting their final accounts in 1995. The submission of fidaccounts improved somewhat in 1996.

RgUre 20 Timeliness of college refurns received by the Funding Council

1994 1995 ,“1996 ‘:Rnancial Forecast andStrstegic P[an

on time 43% 45% 49%

up to a week late 72°1, 73% 71%

post deadlne days for 900/,returned 31 days 25 days 47 days

Wd Year u~dates

on time 53Qh 5Qh 39%

up to a week late sa% 20% 72%

post deadtine days for 90%returned 13 days 40 days 35 days

Final Accounts

on time 53% 36% 50%up to a week late a2010 44Qh 61”A

post deadkne days for 900/,returned 23 days 136days (not yet known)

Souze: Funding Council log of receipt of returns

The tible shows that the timeliness of forecasts and mid year up-dates is modemte. Receipt of collegefinal aCCOuntSdetetiomted in the second year,

Financial forecasts and mid-year updates are the most beqnentmeans by which the Funding Councfi identify at risk coUeges(Figure 21). Final accounts are less important in tMs regard but atrisk colleges tend to he among the slowest co~eges to return fidaccounts: 40 per cent of at risk colleges had not returned tialaccounts twomonthsaftertbe 1995 deatie. The Fundiog Comcflare aware of the lti betieen delays and financial Wctities andhave we~-developed procedure for foUowing up late returns. InSeptetier 1996 the Funding Councfl took the additional step ofwiting to the chairman of each governing body which had notshared its three year forecast. The National Audit Office recommendthat:

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70

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Problems faced bycolleges

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The Further EducationFunding Comcfi for England

Figure 21: Significant problems facing catego~ C colleges

UnreUablebudget setffnglpoor cost control 18

Underrecmitment of students

Large inheflted fleflcit

LarOeprotision necessaV

Cash flow problams associated with European Social Fund

Year end accounts quabfied

Student statistics quabfied

Governance difficulties

Loss of non Funding Council income

Doubtful debtor

14

9

7

5

2

2

2

1

1

Source: Funding Council files on at tisk colleges

Mom than one problem is recorded for some colleges. The most frequant problems at colleges resultfrom unrehable budget seting, poor cost control and underrecmitment of students.

. the Funding Council consider formaUy adopting, aspartofthetisystematic procedures, the approach of notifying the governingbody when returns are a number of days late, as determined bythe Funding Councif. This woufd provide a regdating mechanismand reitiorce the accountabfity of governors.

5.30 The National Audit Office appraised thesituation ateach of the atrisk, orcategory C,coffeges. Figure21 shows allthesi@ficantproblems faced by the at risk co~eges which led to their category Cstatus.

5.31 ThemostfreWent problems @tigrise to financial dtificdty relatedto weaknesses in budgeting and budgetary control. At 18 co~egesfinancial difficdties arose fo~owing inaccurate forecasting or failureto control budgeted costs. CoUeges fatied to forecast their futureposition and lost the opportunity to take corrective action. Asidentified above, the accuracy of forecasts is fundamental to anassessment of a coUege’s financial health. At present, the FundingCouncfl ask colleges’ external auditors to vafidate some forecastswhere they form part of the college’s plan to recover its financialposition. The National Audit Office recommend that the Funding


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ICouncil consider whether marginal colleges, where donbts overaccuracy exist, should have their forecasts vtidated by externalaudit.

5.32 Thesecond most frequent problem @tigrise to financid~ctitieswasthe underrecruitment ofstudents. The subsequent faffinincome led to financial diffictities at 13 co~eges. This demonstratesthe importance of achieving targets and the significance of theexisting funding safety net in that Funding Council income to acollege cannot fa~ below the core of 90 per cent of theti previousyear’s aUOcatiOn.

Mergers

5.33 Subsequent toonereorgafisation at ficorporation, seven patisofcolleges merged over the following three years. Finances are asignificant factor in college reorganisations: in six out of seven casesat least one party to the merger was considered financidy weak.In five of these cases the weak partner was in the bottom12 per cent in terms of operating margin, The National Audit Office

appraised the effects of five of the earher reorganisations on co~egefinances.

5.34 Inthesector's fwstperiod ofaccomt theaverage operating deficit ofthe five pairs of colleges subsequently involved in mergers was1.1 per cent of turnover. Subsequent to reorganisation the averagedeficit of colleges involved was 2.3 per cent of tmnover. This changemust be seen in the context of the sector genera~y suffer~g adecline in its financial position in the second period (Figure 15). Themerged colleges made costly provisions for restructuring andredundancy (paraWaph 5.5). Despite this, in two out of five casesthe reorganisation resufted in an improved position in the first year.The National Audit Office conclude that mergers can have a

beneficial effect in terms of improving financial health

Means of identifying difficulties

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5.35 Thedlfficulties in Figure 22cameto theattention of the FundingCouncil from a variety of sources:

72

Action taken by the 5.36

Funding Council

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● 5.37

The Further EducationFunding Councif for England

Hgrrre22 Earlywarning systems The financial health of colleges

Analysis of college strategic platinancial forecast 14

Analysis of midyear update 12

Concerns volunteered by college 9

Identified during routine visit 6

Final accounts 3

Special investigation into governance i

SouKe: Funding Councd files on at risk colleges examined by National Audit Office

Financial difficulties are usually identified from colleges’ financial forecasts or the mid-year updates offorecasts.

The three-year financial forecast and mid-year update are the mostfrequent means of identifying co~eges in financial difficuky overhalf the potential difficulties are identfled in this way. The tineinstances of coUeges volunteering their difficdties is an indicationthat the colleges view Funding Council accountants as a source ofadvice rather than a policing mechanism. Furthermore, almost allco~eges in the National Audit Office survey (paraWaph 1.12) werecontent with the Funding Council’s financial monitoring and thoughtany action required had been reasonable.

The Funding Councfi can re@e coUeges to take action if they arein danger of breaching their financial memorandum. Thememorandum sets Emits regarding borrowing and deficits in thatwithout the prior permission of the Funding Councfl, colleges:

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may not borrow more than five per cent of income;

may not incur a deficit for more than two years unless it iscovered by reserves; and

muet clear any accumtiated deficit by the end of the thirdfinancial year after it began to accurnufate.

After a potential problem has been identified the Funding Couocfioffer advice and guidance to the college in an attempt to recover thesituation. In some cases a waiver of one of the above conditions ofthe memorandum may be granted. & of June 1996, six colleges had

73r,


Appraisal of theeffectiveness ofFunting Councilmonitoring

5,38

5.39

5.40

5.41

been wanted a waiver of the operating requirement to maintainpositive reserves, and 17 coUeges had been Wowed to borrow overfive per cent of income, One co~ege feUinto both categories.

In these circumstances, before a wtiver or permission to borrow isWanted, the Funding Councti require the coUege to prepare arecovery plan addressing the particdar problems faced by thecollege and setting out

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the specific actions necessary for successfti dehvery of the plandescribed in such detail as to demonstrate its feasibfi~

each action timetable and a~ocated to a named individualpotholder; and

the assumptions underlying each financial projection.

The National Audit O~ce reviewed the situation of 45 co~egesconsidered at risk by the Funding Councfl and examined themonitoring of, and liaison with, these colleges hy the FundingCouncil. They examined Funding Councfl monitoring forpromptness of recognition; promptness of follow up actiom andspeed of response by the college. To appraise whether the FundingCouncfl had identified all at risk coUeges, they also examined theposition of 24 coUeges which were not on the at fisk register butwhich had high overspends, high average levels of funding, hadexperienced sudden cash flow problems or seriousunderrecruitment.

Of these 69 colleges, the National Audit Office found that

. In two cases, the Funding Councti might have identiled horn

information available to them that cofleges were at risk betweentwo and seven months earher than they did. However, in neitherof these cases was action to remedy problems delayedsignificantly as a resdt.

. In two cases, the Funding Council identified concerns but wereslow to begin consultation with the coUege to remedy thesituation. Both colleges have since taken corrective action.

In addition, at nine of the at risk colleges, it took over a year afteridentifying the problem for’a recovery plan to be a~eed. Five ofthese cases have now been resolved, but in fou cases a plan orother action is stfll outstanding.

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5.42

National Audit 5.43

Office tisits toco~eges

5.44

5.45

The Further EducationFunding Council for Englmd

The National Audit Office did not find any instances among the69 colleges where the Funding Council were unaware of the positionat a college in difflcdties. The instances where problems were notidentified or promptly are not etidence of a systematic weakness inmonitoring. The main challenge facing tbe Funding Council is inencoura@ng a suitable response from the college concerned.Colleges are independent institutions and the Funding Council havefew direct mechanisms avaflable to them (paras 5.20-5.22). TheNational Audit Office recognise that achieving recovery may requireco~eges to change their management cdture, which is necessarily aslow process. It is important for the Funding Council to gain theearly support of governing hodles for action at colleges in financialdiffictity.

The National Audit Office examined governance and financialcontrol at 17 colleges between November 1995 and May 1996. TheNational Audit Office retiewed the extent to which colleges’ financialcontrol and governance arrangements had improved, and whethercolleges had implemented the action points in the earlier NationalAudit Office Report, Managing to be Independent, pubhshed inFebruary 1995.

Tbe National Audit Office’stisits to co~eges included two current atrisk coUeges and two wMch had preciously been on the register. Ineach of these cases, the problems which led to the Funding CouncWsassessment had been or were being addressed. At two other collegeswhich had been assessed as tinerable to adverse changes in theircircumstances, financial forecasts were based on overestimates ofstudent recruitment. This emphasises the need for the FundingCouncfl to pay partictiar attention to the accuracy of financialforecasts.

The retiew of the main financial controls at institutions focused onthe areas in which the pretimss report identified that co~egesneeded to take action the security of assets, budget management,cas~ow forecasting, banking and investment, controls overpurchasing and contracting, and financial regulations. The NationalAudit Office found that very good systems of financial control werein operation at the majori~ of colleges they tisited. In addition totbe inadequacies in financial forecasting referred to above, therewere weaknesses in some aspects of financial control at somecolleges:

● nine colleges had inadequate controls over assets: five bad noasset register, three were fa~lng to mark assets for securi~purposes and one was doing neither;

75

KeyPoints


. four colleges were not carrying out re@ar cash flow forecasts;

. three colleges had not estabhshed accounting systems whichrecorded commitments: and

. the National Audit Office examined capital projects of overf100,0OO at six of the coUeges. They found control of projects tohe satisfactory, but two colleges had not carried out option

appraisals considering the costs and benefits alternative meansof dehvering and funding the projects.

5.46 Tbe National Audit O~ce found that there had been si@cantimprovements in college governance and found examples of goodpractice, particdarly in the recruitment and trtining of governorsand the establishment of codes of conduct for governance. However,there was still scope to improve arrangements for governance in thefollowing areas:

● registers of interest had not been estabhshed ia four co~eges. Atthree more, some governors had not responded to reWests toregister and four other registers codd be extended to includesenior staff in the college with significant financialresponsibilities;

. four colleges had not developed procedures for recruiting newgovernors; and

. although some colleges were providing excellent financial andother briefing information for governors, there was scope forimprovement in Hnancid reporting at four coUeges where reportsdid not show a forecast of the outturn position for the yea.

5.47 CoUeges’financialforecastsare reasonablyre~able,andtheiraccuracy is improving. But poor forecasting or control of budgetsis a common feature of many colleges in difficdty. The FundingCouncfl have assisted colleges in maMng fiancid forecasts, butmany co~eges have been slow to provide forecasts and otherfinancial returns to the Funding Councfl, including a si@c~tproportion of co~eges in difictity.

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5.48 The Funding Council’s financial monitorhg procedure is based on

relevant criteria, is consistently applied and has gener~ysucceeded in identif~ng potential and actual problems early,although in a few cases they cotid have reacted more @cMy. Themain financial monitoring challege facing the Fwding Couucfi is

continued...

76

5.49

Monitoring by the 5.50

Audit Service

5.51


not identifying the potential problems but encouraging an

appropriate response from colleges. The National Audit Officerecommend that the Funding Council consider:

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whether marginal colleges, where doubts over accuracy exist,shotid have their forecasts vahdated by external audifi

contacting the Chair of the Governing Body when tiancialreturns are a given number of days late; and

ta~ng early action to gain support from governing bodies foraction at cOUegesin financial dtificdty.

The National Audit Office found during their visits to coUeges thatarrangements for goverance and financial control had improvedsi@ficantly since their previous examination of these issues incolleges in 1994. But some co~eges sti needed to improve theirprocedures for

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asset recording and secnri~,

cash flow forecasting

commitment accounting

capital project appraisal;

registering financial interests of governors and senior staff;

recruitment of new governors; and

financial reporting to governors.

The Funding Council’s Audit Service are responsible for conductingan independent appraisal of all the Funding Council’s activities, andfor giving assurance to the Funding Council’s accounting officer oncontrol arrangements, includlng control arrangements at colleges. Asatisfactory opinion on controls in colleges allows the ChiefExecutive to satisfy Klmself as to his own responsibihties for theproper, effective, efficient and economic use by colleges of the publicfunds provided to them.

In order to provide this assurance the Audit Service visited allcolleges over a two and a half year cycle ending on 31 July 1996.The Au&t Service review management arrangements at coUegesand evaluate college internal audit arrangements with a view to

77

IThe Further Education

5.52

5.53

5,54


placing reliance on them. They have powers substantively toexamine financial controls at cofleges, but have not done so exceptin circumstances where an independent investigation of the coUegewas considered necessary.

The Audit Service concluded that they could not place re~ance oncolleges’ internal audit at 53 of the 142 colleges they visited ti1994-95 and, at a further three, the college titernal auditors hadcarried out insufficient work for the Audit Service to draw aconclusion. This means that in 40 per cent of colleges, the FmtigCounc~s Chief Executive was mable to obtti the requiredassurance. However, it does not necessarily imply that themderl~g systems of control in tbe co~eges were poor. The AuditService had carried out follow-up visits to 33 coUeges, and furthervisits were outstmding at co~eges where control arrangementswere unsatisfactory, problems existed or changed arrangements Cmmanagement or audit) meant that no conclusion cotid be reached.

At 20 colleges, management arrangements were considered to be“inappropriate”. The National Audit Office’s examination of theAudit Service’s work indicated that there were serious mderlyingcontrol weaknesses at five cotieges (Box 8), w~e at 23 coUeges,ody hmited assurwce could be gained because of the hmited extentof audit work to date or because the college had recenfly appotited

new auditors. Inaddition,theAuditSerticeidentified59collegeswith inadequacies in the timing, content or distribution of financialreports to governors.

BOX & Se[iOUS COnlrOl weaknesses at fiue colleoes visited bV Audit Semite

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UnENaMtity of accounting system.

No repotiing of financial petition to management or governors.

Failure to exemise control ovar budgek.

Lack of finance staff and reflance on autitors to car~ out finance function.

In 1995-96 the Audit Service visited 246 coUeges. They cmdd notgain assurance from internal audit at 30 per cent of these (23 percent because of weaknesses in internal audit, and seven per centbecause insufficient work had been carried out). 25 co~eges hadinappropriate management arrangements. These figures representan improvement on 1994-95.

78

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r Key points

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The Further EducationFinding Conncfl for England

5.55 The Audit Sertice had tisited 53 of the colleges in the National AuditOffice survey. A majority of coUeges considered the notification ofthe audit, its conduct and feedback on it to have been at leastadeqnate and the report to have been fair. Ratings on the feedbackon the audit were lower and respondents’ comments citedsi@cant delays between the carrying out of audits and the receiptof the audit sertice’s formal report as a particdar problem.

5.56 The Audit Sertice origina~y entisaged that their initial reportswotid be made one month after the audit. The National Audit Officefound that there had been a gap of some three to four monthsbetween the earhest tisits and reports. This gap worsened in late1994 and early 1995, and most final reports took between six and12 months to be issued. This gap was caused by lack of staffing andthe decision of the Finding Council’s audit committee that thegreatest priority shmdd be @ven to completing the scheduled tisits,in order to acqnire fwst hand knowledge of governance andfinancial control arrangements in each college.

5.57 In recognition of the problem of delays in producing reports, theAudit Sertice adopted a new format for tisits and reports fromMay 1995 onwards, whereby written feedback is protided tocolleges at the end of the tisits. CoUeges are expected to respondmore promptly to a streatined exception-based reporting process.They also increased their staff complement from 30 to 33. Moresignificantly, whereas they had been 25 to 30 per cent belowstrength in 1993-94 and 1994-95, this has since been largelyresolved. Most reports are now being issued Within one month of thetisit, and final reports within three to four months, or within amonth on average of the receipt of an acceptable response frum lhecollege, By 1 August 1996 all bar 16 co~eges had received at least adraft report on their tisit containing detailed recommendations.312 colleges have received final reports including an action plansetting out the college’s response to the recommendations.

5.58 The Funding Counc~s Audit Sertice identfied major weaknessesin governance and management at 10 per cent of the coUeges theytisited in 1995-96. Moreover, the Fmdmg Cmmcil were nnable toobtain any asswance on the fiancial controls in some 30 per centof co~eges, as a resdt of weaknesses in the work of the coUegeinternal auditors on whom the Audit Sertice place re~ance.

5.59 Diffictities with the timely defivery of Audit Sertice reports haveexisted, with most fial reports tatig between six and 12 monthsto be issued. These delays were associated tith nnder-staffmg,and have largely been overcome.

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hnex

National Audit Office survey of coUeges

1 The National Audit Office conducted a smvey of co~eges in thefurther education sector in England as part of their examination ofthe Further Education Funding Council. The pupose of the smveywas to collect information on colleges’ experiences of a range of theFunding Counci~s activities which directly dfected them. TheNational Audit Office undertook to keep the responses fromindividual colleges confidential.

Survey methodology

2 The National Audit O~ce designed the smvey instrument andagreed it with the Funding Councti before sending it to coUeges. TheFunding Councfl made a number of suggestions for ways in whichthe survey instrument codd be improved and these wereincorporated,

3 The survey was conducted by a postal questionntie sent to100 colleges in November 1995. The sample of colleges to wtich thesurvey was sent was selected randomly.

Analysis

4 In evaluating the responses to the survey, the National Audit Office

had regwd to other sources of data about the responding co~eges,includlng their levels of funding, their accounts for 1994-95, thekfinancial health and inspection gades,

Scope of the survey and college responses

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5 The National Audit Office received 93 responses to the smvey by thedeadhne and a further two responses after the deatie.93 responses were analysed. Not au respondents answered eve~question; the population of coUeges responding to each question isindicated in each case.

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6 The survey covered the foUowing areas:

Funding methodolo~

. whether co~eges understood the methodoloW [of 93 coUeges,96Y. said completely or mostly];

. whether it represented an improvement over previous fundingmodels [of 90 colleges, 717. said substantial or moderateimprovement];

. whether it was successfti in addressing the key aims of fundingas specified by the previous Secretary of State [see Part 2,paragraphs 2.6 to 2.8];

● whether it had any influence on improving rates of achievementor retention [of 92 co~eges, 567. said significant or moderatepositive influence on achievement rates and 76% said significantor moderate positive influence on retention rates];

. whether it had led to cost reductions [of 93 colleges, 837. saidyes]; and

. whether it had any unexpected impacts [of 90 colleges, 687. saidyes].

Franchising

. whether the coUege was involved in franchising to other bodies[of 92 colleges, 56% said yes]; and

. what the college’s future strategy was in relation to franchising[of 73 colleges, 53% said increase; 22% said maintain currentlevel; and 47. said decrease].

Contact tith the Funding Council

. whether the level of support provided hy the Funding Councilwas adequate in relation to co~eges’ contact with them on arange of issues [responses varied according to the issue within arange of 607. saying yes in relation to merger/reorganisationissues and 9070 saying yes in relation to students with learningdiffictities antior disabfitiesl.

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Consultation processes

. whether the Finding ComcNs constipation processes wereadequate [of 93 colleges, 78Y. stid adequate or more thsmadequate].

Financial monitoring

. whether the Funding Comci~s level of finaciaf monitorhg wasadequate [of 93 colleges, 967. said adequate or more thanadequate].

The Funding Councfl’s audit sertice

Of the respondents, 53 co~eges had been visited by the Audit Service.

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whether various aspects of the visit by the Audit Service had beencarried out adequately [for the three aspects considered - visitnottilcation, conduct of the visit and feedback on the tisit - 75%(of 53 colleges), 86% (of 51 colleges) and 63% (of 52 coUeges)respectively stid adequate or more than adequate]; and

whether the respondent considered that the report by the AuditService had been fair [of 49 colleges, 7570 said fak].

Inspection

Of the respondents, 57 colleges had been inspected, one co~ege wash the process of being inspected, and two coUeges were in the

processofagreeingtheir inspectionprogrammed. .

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whether various aspects of the inspection had been carried outadequately; [for the fow aspects considered - visit notication,process of a~eeing cmrictium areas to be tispected andreported on, conduct of the inspection and feedback on theinspection - 93% (of 60 colleges), 87Y. (of 60 co~eges), 81Y.(of 58 colleges) and 88Y. (of 57 coUeges) respectively saidadequate or more than adequate]; and

whether the respondent considered that the report by theinspectorate had been fair [of 47 coUeges, 87Y. said ftil.

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General comments on how the efficiencyand effectiveness of Funding Councti coddbe improved

79 colleges responded to this section. The foUotig were the mostcommon points made by respondents.

. the Funding Comcfl were efficient and effective and had madegood efforts to be open and fair in theti detilngs with colleges[six cOUeges];

. there was a need for the Funding Councfl to reduce the level ofdetailed information they required and to be more realistic aboutthe timeecales for coUeges to respond to information requests[19 co~egesl;

. there was a need to reduce the level of audit [nine colleges]; and

● the Funding Councfl needed to improve Eaison between theircentral office in Coventry and the regions [nine co~eges] andbetween the different divisions of the Funding Council [ninecolleges].

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Documents

The Further Education Funding Council for England...(para~aph 4,19), e) In evaluating their work, there is scope for the Inspectorate to extend their analyses comparing their judgments