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Further education colleges face financial meltdown, NAO warns

Ministers have been warned that the further education sector faces "financial meltdown" with scores of colleges in serious difficulty.

A report from the government spending watchdog highlighted a "rapid decline" in the positions of the 244 institutions across England.

The number of colleges running a deficit more than doubled between 2010-11 and 2013-14, from 52 to 110, according to the National Audit Office (NAO).

Some 29 were assessed as "financially inadequate" by the Skills Funding Agency (SFA) - meaning they were at "signficant risk" of failing to meet contractual duties.

That figure could rise to 70 by the end of this year.

The NAO report said in September 2013 colleges were in receipt of £49 million of emergency funding. By last autumn the SFA had converted £40 million of the advances to grants.

However, there was still an outstanding balance of £45 million to 13 colleges as of this February.

The auditors said the Business Department and the SFA had been relying on "unrealistic" financial forecasts produced by institutions - which receive a total of £7 billion a year in public funding.

It also argued that the oversight bodies needed to analyse risks better and intervene earlier to prevent problems gathering pace.

NAO head Amyas Morse said: "The further education college sector is experiencing rapidly declining financial health, and lacks a clear process to inform decisions about local provision.

"The Department for Business, Innovation & Skills and the Skills Funding Agency have taken steps to improve their analysis of risk in the sector, and to intervene more effectively in the colleges in most difficulty.

"But there needs to be more than a college-by-college approach. Until then, the oversight and intervention arrangements cannot be regarded as value for money."

Meg Hillier, chair of the cross-party Public Accounts Committee (PAC), said the report was "deeply alarming".

"I do not believe it is any exaggeration to say the future sustainability of the Further Education sector is at risk of financial meltdown," she said.

"Further education could play an important role in meeting the UK's skills shortage and help kickstart productivity growth in the UK.

"But, at a time when the government has set out its stall to create a high-skilled economy, the financial stability of the FE sector is worryingly uncertain.

"I worry that many colleges are taking tough decisions to avoid financial difficulty, and trying to maintain educational standards, without having the right financial management skills in place.

"Although BIS and the SFA have improved their analysis of risk in the sector, they must support colleges in spotting financial difficulties sooner so that colleges can get back on track before needing formal intervention."

"The independence of FE colleges doesn't mean the Department and the SFA can abdicate their responsibility to get best value for the taxpayer from the public funding to colleges."

A BIS spokesman said: "We are committed to developing a further education system which creates a productive, innovative and competitive workforce for the 21st century.

"The NAO report correctly highlights where we have already taken action to provide young people with the skills they need and to deliver greater value for money within the sector.

"Furthermore, we are already implementing many of the report's recommendations and will be going even further to strengthen the system by giving local areas a greater say over how and what young people are taught.

"These ongoing reforms are focused on achieving the best return on investment and we will provide an additional £25 million this financial year to help support the creation of three million apprenticeships by 2020.

"Only by providing businesses with the skilled workforce they need can we boost economic growth and drive productivity and prosperity for the whole country."

The NAO also announced that it had qualified the accounts of the SFA over the £49.9 million of advance funding to FE colleges.

" The Agency did not seek prior approval from HM Treasury for the payments in advance of need, as required by the Treasury's Managing Public Money," the auditors said. "The Agency then sought retrospective approval from the Treasury for making the payments which the latter refused on the grounds that the Agency had not sufficiently demonstrated the benefit or value for money from making these payments."

The Agency has now asked the Government's Internal Audit Service to review financial management and controls of the College Capital Investment Fund (CCIF).

There will also be a review of whether colleges have complied with the programme management rules of the CCIF.

"If this review identifies that colleges claimed funds in advance inappropriately, the Agency will seek to recover those funds," an NAO spokesman said.

A statement released by the SFA said: "During our year-end audit of expenditure performed by the National Audit Office (NAO), it was found that 16 colleges (one with 2 capital schemes) had secured payments in advance of need for capital projects funded by profile through the CCIF, which finished at the end of March 2015. This resulted in a qualification of the Skills Funding Agency (SFA) accounts for the 2014 to 2015 financial year.

"The NAO has said that our accounts have been properly prepared and show a true and fair view, and that except for the capital grant payments, in all material respects the expenditure and income of our accounts has been used for the purposes intended. There is no suggestion that these payments were not for agreed capital programmes.

"We will be commissioning reviews of our internal financial management and control arrangements and the compliance by colleges with the financial programme management arrangements for the CCIF. If this review identifies that colleges secured funds in advance inappropriately the SFA will, as is our normal process, seek to recover those funds."


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