Review of further education governance in Scotland

H. The Funding of the FE Sector

As is stated above in this report everyone we have spoken to, including SFC, agrees that the current model of funding does not lead to good governance. Board members generally cannot understand on their own the impact that changes in the WSUM regime have on their College. The WSUM methodology, like many other things at the time, was put into place quickly in 1992 as the move to the new system of incorporated colleges was done at speed. It was then only a pilot in Fife but was deemed to be an appropriate system to fund the entire sector. At its heart is an assumption that the cost of teaching courses of different type varies and therefore there needed to be a model that reflected that. However it has grown now into a multi layered beast that does not operate well for anyone. Indeed some Principals are even questioning the basis for it in terms of its capacity to reflect the differing cost of courses, saying that this can be accommodated without resorting to this complex structure.

Associated with the funding methodology are the demands that SFC impose on the sector in terms of data gathering to feed the funding organisation. This data collection takes significant time and resource across the sector and we have been unable to see that it yields value which matches that imposition, or contributes to the day to day running of the individual Colleges.

It has also been said to us that SFC apply much more scrutiny to colleges than they do to universities through the funding methodology which applies to that sector.

Therefore, again, no one we have spoken to disagrees that we need a new and simpler method of funding for the sector.

While it is not within our direct remit to recommend what any future funding system should be, we do have a view that there is a fundamental relationship between the funding system and the quality of governance in the sector and it is for that reason that we comment on this.

Having looked at what the options might be our recommendation is that

The FE sector moves to an outcomes based funding model where each College is given a small number of outcomes which will fulfil Government policy and aspirations and is then allocated a sum of money to deliver those.

However this is achieved there must also be a way of measuring and comparing past with future outcomes or we will be taking away the ability to make comparisons over time which would not be useful or desirable.

We believe funding should be in terms of a block sum which the College would then use to deliver the outcomes, and to deliver anything else it judges appropriate to support its strategy and benefit the region. The Northern Ireland FLU funding system has gone partially towards this, recognising that there is a base cost of running a College which all else relies on.

While outcomes should be challenging but simple, they need both to protect the need for real qualifications to be part of the learner achievement and also protect the need to widen access all the time.

Whether the College had achieved its outcomes could be part of the overall audit process that the more general outcome driven approach would entail. So all could be caught in one and would produce a much more focussed and holistic audit process. This would also save valuable resource which is taken up currently by the multitude of audits and compliance demands placed on Colleges.

We believe that a new funding system based on a few simple but challenging outcomes would be the most appropriate to put in place in terms of supporting good governance. It would fit smoothly into our overall view that the sector in all its parts should be outcome driven and evolving.

Also while it may not have been within our direct remit to formally comment on the wider effects of this review, it is clear that both a moving of some of SFC's policy remit back to Scottish Government directly, plus a simpler and less intrusive funding regime, would mean that SFC needed to be restructured and reformed into an entity that reflected this new approach and into a role which would in effect be smaller than today.

Finally, in terms of funding we would like to comment on the way Colleges currently account for themselves and how this affects governance, and tied to this on the way that major capital projects are funded.

As is stated elsewhere in this report there is a feeling across the FE Sector that producing a surplus is key and that not doing so frightens, in a literal sense, many Boards. Our understanding is that this was driven some time ago by the SFC wanting Colleges to improve their financial health, which Colleges took as meaning the need to produce surpluses, building reserves which could be used to re-build ageing estate. At that time the sector was in need of major refurbishment but much of that has now taken place. The emphasis on surpluses has remained.

It is important to say that we are not at all advocating that Colleges or indeed the sector as a whole should be managed or governed in a financially inappropriate way. Indeed we advocate the opposite, in that the sector should be run in a way that is financially sustainable over a long period of time. Our issue is that to achieve that position does not necessarily mean that a surplus has to be achieved every year. There are situations which we can foresee where initial investment may be needed to achieve a longer term goal. This may initially cause the College not to be in surplus but would ultimately benefit from such an approach, as would the learner over time, with the College thereafter returning to surplus.

Focussing on surpluses on their own is also incorrect as they sometime do not mean what they appear to show. Since the sector reports accounts in a standard manner then depreciation and other non-cash items can play a key role in determining whether a College is in surplus or not, as they have no or little bearing on the cash position of the organisation. This is especially true of the many Colleges who in recent years have spent large capital sums on their infrastructure. This as a result can substantially increase their depreciation charge and therefore notionally reduce their surpluses. This is compounded by the fact the Government and its agencies do use surpluses as comparators and in themselves as indicators.

We therefore recommend that

Colleges should not be judged on yearly surpluses but on a longer term sustainable financial model.

There is an argument that cash accounting may be a better form of management for Colleges. Given that they have to produce statutory accounts anyway we believe that this may not be possible or desirable. However we do believe that Audit Scotland working with the sector needs to produce a new way in which Colleges will be financially judged and, importantly, compared. This new model should form the basis for the new financial guidelines to be issued to the new regional College Boards.

In doing that we believe that the issue of major capital funding needs to be settled in terms of whose responsibility it is. While the SFC has always retained the ability to approve major rebuilding or renovation proposals by Colleges, decisions have taken account of the ability of individual Colleges to generate reserves to fund those. This is one of the inequalities set out earlier in this report. Therefore our recommendation is that

Government takes total responsibility for funding major capital projects in the FE Sector.

Given that we also recommend above that surpluses over a certain limit are returned to the 'centre' for the use of the overall sector, then this does not necessarily mean that Government has to find all new money each time. This would also mean the development of physical learning access points ( LAPs) would be prioritised on a Scottish wide basis, which has not been done previously to our understanding. We have not had the time to investigate whether the decision making on this process should be delegated to the new Strategic Forum, as there may be accounting and authority issues involved in that. However what is definite is that the Forum could advise Government on where the priorities should be, and that this should be part of the 'judgement process' on capital requests.

This would mean that Government would allocate no real capital funding to individual Colleges beyond what they need to keep existing LAPs, physical or electronic, maintained to a standard that is fit for purpose for the learner yet allows movement with technological advancements.

We also believe that due to their nature these capital projects need careful and specialist management which sometimes individual Colleges do not have. This is illustrated by the inconsistency in the success of new College builds in recent years where some have been built on time and within budget but where others have not, providing challenges for the College concerned. To avoid that and to allow College Boards to focus on what they should be, it is recommended that

A central resource is established within Scottish Government that works with Colleges to deliver major capital projects for the FE sector.