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  AU/S2/05/R7

7th Report, 2005 (Session 2)

Further Education Colleges

CONTENTS

REMIT AND MEMBERSHIP

THE REPORT

ANNEXE A – EXTRACT FROM THE MINUTES

Extract from the Minutes – 10th Meeting 2005 (Session 2)
Extract from the Minutes – 11th Meeting 2005 (Session 2)
Extract from the Minutes – 12th Meeting 2005 (Session 2)
Extract from the Minutes – 13th Meeting 2005 (Session 2)
Extract from the Minutes – 14th Meeting 2005 (Session 2)

ANNEXE B – ORAL EVIDENCE AND ASSOCIATED WRITTEN EVIDENCE

WRITTEN EVIDENCE

Submission from West Lothian College
Submission from Inverness College
Submission from Lews Castle College
Submission from Scottish Further Education Funding Council

12th Meeting 2005 (Session 2), 28 June 2005

ORAL EVIDENCE

Mrs Sue Pinder, Principal and Chief Executive and Dr Tony Kinder,
Chair of the Board of Management, West Lothian College

Professor J Little, Principal and Chief Executive, and Mr Ken Mackie,
Chair of the Board of Management, Inverness College

Mr David R Green, Principal, Lews Castle College

Mr Roger McClure, Chief Executive, Brian Baverstock, Deputy Director, Governance and Management: Appraisal and Policy, and Riona Bell, Director of Funding, Scottish Further Education Funding Council

Eddie Frizzell CB, Head of Enterprise, Transport & Lifelong Learning Department, and Aileen McKechnie, Head of Further and Adult Education Division, Scottish Executive

SUPPLEMENTARY WRITTEN EVIDENCE

Letter from Roger McClure, Chief Executive Scottish Further Education Funding Council to the Clerk

Submission from Scottish Further Education Funding Council

ANNEXE C – OTHER WRITTEN EVIDENCE

Evidence received by the Committee but not reproduced in this report.

West Lothian College Auditors’ Annual Report for the year end 31 July 2004
Inverness College Auditors’ Annual Report for the year end 31 July 2004
Lews Castle College Auditors’ Annual Report for the year end 31 July 2004
Inverness College Strategic Development Plan 2005- 2008
West Lothian College Outline Business Case for Change in PFI Strategy

Remit and membership

Remit:

1. The remit of the Audit Committee is to consider and report on-

(a) any accounts laid before the Parliament;

(b) any report laid before or made to the Parliament by the Auditor General for Scotland; and

(c) any other document laid before the Parliament concerning financial control, accounting and auditing in relation to public expenditure.

2. No member of the Scottish Executive or junior Scottish Minister may be a member of the Committee and no member who represents a political party which is represented in the Scottish Executive may be convener of the Committee.

(Standing Orders of the Scottish Parliament, Rule 6.7)

Membership:

Mr Brian Monteith (Convener)
Susan Deacon
Margaret Jamieson
Mrs Mary Mulligan
Eleanor Scott
Margaret Smith
Mr Andrew Welsh (Deputy Convener)

Committee Clerking Team:

Clerk to the Committee
Shelagh McKinlay

Senior Assistant Clerk
Joanna Hardy

Assistant Clerk
Clare O'Neill

Further Education Colleges

The Committee reports to the Parliament as follows—

INTRODUCTION

  1. This report sets out the Committee’s findings in relation to the Section 22 reports by the Auditor General for Scotland (AGS) on the following colleges:
  • West Lothian College;
  • Inverness College; and
  • Lews Castle College.
  1. The Committee held one oral evidence session on 28 June 2005. The following witnesses gave oral evidence to the inquiry: Mrs Sue Pinder, Principal and Chief Executive and Dr Tony Kinder, Chair of the Board of Management, West Lothian College; Professor J Little, Principal and Chief Executive, and Mr Ken Mackie, Chair of the Board of Management, Inverness College; Mr David R Green, Principal, Lews Castle College; Mr Roger McClure, Chief Executive, Brian Baverstock, Deputy Director, Governance and Management: Appraisal and Policy, and Riona Bell, Director of Funding, Scottish Further Education Funding Council; Eddie Frizzell CB, Head of Enterprise, Transport & Lifelong Learning Department, and Aileen McKechnie, Head of Further and Adult Education Division, Scottish Executive.

  2. The Committee’s main findings and recommendations are set out in appendix A. The section 22 reports are attached at appendix B. Written evidence received by the Committee can be found at annexe B.

  3. In taking evidence, the Committee sought to examine:
  • The financial implications of the PFI contract at West Lothian College;
  • The threats to the financial recovery plan at Inverness College;
  • The additional costs of providing further education facilities at a remote college such as Lews Castle;
  • Actions being taken by SFEFC and the Scottish Executive to support the individual colleges.

WEST LOTHIAN COLLEGE

Background

  1. West Lothian College recorded a surplus of £496,000 in its Income and Expenditure account for the period ended 31 July 2004. However, the college recorded a deficit of £102,000 when the cost of certain exceptional items was added. The accumulated deficit on the college’s Income and Expenditure Reserve was £4,303,000 at 31 July 2004.

  2. The college agreed a PFI contract to provide its main campus facilities in Livingston in 1999. The contract was negotiated before the Scottish Further Education Funding Council (SFEFC) was established. The Scottish Office, which was responsible for the provision of further education at that time, approved the contract. The financial case for the PFI deal was based on assumptions about funded growth in student activity. However, in 2002, the Scottish Executive revised its further education policy to replace competitiveness and growth in the sector with greater collaboration and consolidation of activity levels.

  3. This policy change has meant that the college is not funded to support the increased number of students assumed as part of the PFI contract. SFEFC is committed to providing a total of £42 million over 25 years to support the college’s contributions to the PFI contract payments. However, the annual level of support from SFEFC will reduce significantly from 2007.  This will result in an £11 million funding gap over the next 20 years.

Financial implications of the PFI contract at West Lothian College

  1. The Committee was concerned that the college will be reliant on continuing ongoing funding from SFEFC in order to meet its contractual commitments, as described in the Auditor’s report1. Mr McClure gave reassurances that SFEFC would continue to provide funding support to the college until a satisfactory resolution is agreed.2

  2. The Committee has been reassured of the continuing financial support to the college from SFEFC. However, the Committee notes that any future settlement may have a financial impact on the sector as a whole.

  3. The college stated that currently they are funded for 43,000 Weighted Units of Measurement (WSUMs) and, to be able to afford the contract, the college was to receive funded growth in student activity over the 25 year lease from 39,000 WSUMs in 2001/02 to 55,000 WSUMs at the end of the lease.3

  4. In describing the impact of the change of policy from growth in the further education sector to consolidation of activity levels, Mrs Pinder said that “The college was built for growth; it was meant to be full and it is not. There are two sides to the debate: how the college can resource the payment profile of the PFI contract and how the college can be a thriving educational provider for West Lothian, which it should be”. (Col 1202)

  5. Mrs Pinder also stated in evidence that the “PFI procurement route has given West Lothian a first rate college” (Col 1202). Mr McClure confirmed that the PFI for West Lothian was one of the first of its kind and that, since that time, a great deal had been learned about the type of project which was suitable for PFI. It was unlikely that a similar project would be procured via a PFI route today. Mr McClure went on to state that while PFI should not be ruled out at any stage, it was unlikely that a development of £20m - £30m would be suitable for PFI. (Col 1226) SFEFC are to produce guidance on capital funding in the sector.4 (Col 1126)

  6. The Committee recognises the PFI contract was based on agreed assumptions about funded growth in student activity. The Committee notes the financial impact of a change in policy in 2002 to replace competitiveness and growth with greater collaboration and consolidation of activity levels.

  7. The Committee notes that lessons have been learned on the types of project which are appropriate for development via PFI. The Funding Council’s new guidance will recognise the range of options now available for capital funding. This wider range of options should better meet the needs of individual colleges in improving their estate.

  8. The Committee acknowledges the importance of ongoing negotiations with Partnerships UK in arriving at a settlement which will meet the strategic and financial requirements of the college. The Committee will continue to review developments in this area and requests that the college and SFEFC keep them informed of any agreed settlement.

INVERNESS COLLEGE

Background

  1. Inverness College incurred a deficit of £526,000 in its Income and Expenditure account for the period ended 31 July. The accumulated deficit on the college’s Income and Expenditure reserve was £3,317,079 at 31 July 2004.

  2. The College agreed a recovery plan with SFEFC which originally forecast that its accumulated deficit would be cleared by 20115. Having received additional funds in 2002/03, the College forecast surpluses on its Income and Expenditure Accounts in 2004/05 and 2005/06 and estimated that it could clear its accumulated deficit by 31 July 2009.

    Threats to the financial recovery plan at Inverness College

  3. The college produced financial results in line with expectations in 2001/02 and 2002/03. However, in 2003/04, despite forecasting a surplus of £94,000, it recorded a significant deficit of £526,000. The College now estimates that it will be unable to clear the deficit on its Income and Expenditure reserve by 31 July 2009.

  4. The Committee is very concerned by the college’s failure to keep to the financial recovery plan. In this regard the College’s Strategic Development Plan and financial forecasts do not of themselves provide great reassurance since similar plans have been produced previously but the College’s financial difficulties have persisted. The Committee now seeks assurance that proper cost controls are in place to ensure the financial recovery plan will be achieved.

  5. Professor Little explained that the main reasons for the deficit of £526,000 for 2003/04 were unanticipated demand for construction and care and “low levels of efficiency in the deployment of staff.” (Col 1206)

  6. The Committee is extremely concerned that this level of demand was not predicted and is also concerned by the way in which the college dealt with the situation. The Committee seeks reassurance from the college and SFEFC that procedures have been developed to better predict demand and to deal more effectively with significant changes in demand.

  7. The Committee notes the low levels of efficiency in the deployment of staff at the college and the introduction of the staff resource allocation model in improving controls in staff numbers and reducing staff costs. The Committee is concerned that it is not clear from the evidence how the college will reconcile its commitment to improve service and to control staff costs.

LEWS CASTLE COLLEGE

Background

  1. Lews Castle College incurred a deficit in its Income and Expenditure account of £358,000 for the year ended 31 July 2004. The accumulated deficit on the college’s General reserve was £1,438,000 at July 2004.

  2. SFEFC provided a repayable cash advance of £556,600 in the period August 2003 to March 2004. A repayment schedule has not yet been agreed but, subject to its cash position, the college plans to make an initial repayment of £20,000 in August 2005.

  3. SFEFC has allocated additional annual grant funding of £250,000 to the college for 2003/04 and 2004/05. On that basis the college has predicted surpluses on its continuing operations in financial years 2004/05 to 2006/07.

Additional costs of providing further education facilities at a remote college such as Lews Castle

  1. The college has stated that it will achieve a break-even position for year 2004/05 as a result of additional funding from SFEFC and the staff cost savings resulting from redundancies.6

  2. The Committee notes the assurances from the college that their financial recovery is on track and has forecast a break–even position on operating costs for 2004/05.

  3. The remoteness funding review has resulted in the college receiving a significant increase in the further education main grant for 2005/06.7

  4. The Committee welcomes the additional funding provided for further education colleges who operate in remote environments as a result of the remoteness review carried out by SFEFC. However, the Committee notes that the funding councils definition of remoteness differs from that used in other areas of the public sector and will monitor developments. The Committee also notes the potential impact on non-remote colleges through the re-distribution of the funds available for further education.

ACTIONS BEING TAKEN BY SFEFC AND THE SCOTTISH EXECUTIVE TO SUPPORT INDIVIDUAL COLLEGES

Financial Performance and Demand and Supply

  1. As a result of the financial security strategy, agreed in 2002, the financial health of colleges has improved significantly over the last 3 years.8

  2. The Committee welcomes the improvements in colleges’ financial health across the further education sector. However, the Committee considers that it is currently unclear to what extent the improvements in financial health are attributable to additional funding rather than improved financial management at college level.

  3. In its 4th report 2004, the Committee expressed its concern that tangible results had not been produced from the funding council’s work on demand and supply. During evidence Mr McClure stated that SFEFC had just completed a second version of the demand-and-supply survey as the first survey was not wide enough.9

  4. The Committee continues to believe that the work on financial security and demand and supply is extremely important and will continue to monitor the progress being made in these areas. The Committee notes that a future overview report on SFEFC by the Auditor General for Scotland is planned for autumn 2005 and expects to return to these issues at that time.

Financial Impact of Policy Change

  1. The policy decision to consolidate student numbers was taken at sector level. Mr MClure stated that “…it was then up to the council to determine how we would monitor and engage with individual institutions on any particular issues.”10

  2. The Committee notes the financial impact of a change in policy in 2002 to replace competitiveness and growth in the sector with greater collaboration and consolidation of activity levels. The Committee wishes to stress the importance of fully assessing the financial impact of policy change, in particular at college level.

THE DEVELOPMENT OF THE UNIVERSITY OF THE HIGHLANDS AND ISLANDS (UHI)

  1. Evidence submitted to the Committee identified significant cost increases as a result of the development of UHI.11 Mr Green explained that 35% of teaching at Lews Castle College is in higher education which does not receive remoteness funding12.

  2. The Committee acknowledges that the development and provision of higher education through UHI will result in increased costs for Inverness College and Lews Castle College. The Committee is concerned about the lack of clarity and transparency in relation to increased college costs arising from the UHI work and seeks assurances from the colleges and SFEFC on how they plan to address this.

  3. The Committee notes the financial demands placed on Colleges charged with delivering higher education courses in a remote location as part of UHI and recommends that SFEFC actively monitor the situation.

APPENDIX A

KEY CONCLUSIONS AND RECOMMENDATIONS

The Committee’s key findings and recommendations are set out below:

Key Findings and Recommendations

WEST LOTHIAN COLLEGE

Financial implications of the PFI contract at West Lothian College

  • The Committee has been reassured of the continuing financial support to the college from SFEFC. However, the Committee notes that any future settlement may have a financial impact on the sector as a whole. (para 9)

  • The Committee notes that lessons have been learned on the types of project which are appropriate for development via PFI. The Funding Council’s new guidance will recognise the range of options now available for capital funding. This wider range of options should better meet the needs of individual colleges in improving their estate. (para 14)

  • The Committee acknowledges the importance of ongoing negotiations with Partnerships UK in arriving at a settlement which will meet the strategic and financial requirements of the college. The Committee will continue to review developments in this area and requests that the college and SFEFC keep them informed of any agreed settlement. (para 15)

INVERNESS COLLEGE

Threats to the financial recovery plan at Inverness College

  • The Committee is very concerned by the college’s failure to keep to the financial recovery plan. In this regard the College’s Strategic Development Plan and financial forecasts do not of themselves provide great reassurance since similar plans have been produced previously but the College’s financial difficulties have persisted. The Committee now seeks assurance that proper cost controls are in place to ensure the financial recovery plan will be achieved. (para 19)

  • The Committee is extremely concerned that this level of demand was not predicted and is also concerned by the way in which the college dealt with the situation. The Committee seeks reassurance from the college and SFEFC that procedures have been developed to better predict demand and to deal more effectively with significant changes in demand. (para 21)

  • The Committee notes the low levels of efficiency in the deployment of staff at the college and the introduction of the staff resource allocation model in improving controls in staff numbers and reducing staff costs. The Committee is concerned that it is not clear from the evidence how the college will reconcile its commitment to improve service and to control staff costs. (para 22)

LEWS CASTLE COLLEGE

Additional costs of providing further education facilities at a remote college such as Lews Castle

  • The Committee welcomes the additional funding provided for further education colleges who operate in remote environments as a result of the remoteness review carried out by SFEFC. However, the Committee notes that the funding councils definition of remoteness differs from that used in other areas of the public sector and will monitor developments. The Committee also notes the potential impact on non-remote colleges through the re-distribution of the funds available for further education. (para 29)

Financial Performance and Demand and Supply

  • The Committee welcomes the improvements in colleges’ financial health across the further education sector. However, the Committee considers that it is currently unclear to what extent the improvements in financial health are attributable to additional funding rather than improved financial management at college level. (para 31)

  • The Committee continues to believe that the work on financial security and demand and supply is extremely important and will continue to monitor the progress being made in these areas. The Committee notes that a future overview report on SFEFC by the Auditor General for Scotland is planned for autumn 2005 and expects to return to these issues at that time. (para 33)

Financial Impact of Policy Change

  • The Committee notes the financial impact of a change in policy in 2002 to replace competitiveness and growth in the sector with greater collaboration and consolidation of activity levels. The Committee wishes to stress the importance of fully assessing the financial impact of policy change, in particular at college level.  (para 35)

THE DEVELOPMENT OF THE UNIVERSITY OF THE HIGHLANDS AND ISLANDS (UHI)

  • The Committee acknowledges that the development and provision of higher education through UHI will result in increased costs for Inverness College and Lews Castle College. The Committee is concerned about the lack of clarity and transparency in relation to increased college costs arising from the UHI work and seeks assurances from the colleges and SFEFC on how they plan to address this. (para 37)

  • The Committee notes the financial demands placed on Colleges charged with delivering higher education courses in a remote location as part of UHI and recommends that SFEFC actively monitor the situation. (para 38)

APPENDIX B

A REPORT BY THE AUDITOR GENERAL FOR SCOTLAND UNDER SECTION 22(3) OF THE PUBLIC FINANCE AND ACCOUNTABILITY (SCOTLAND) ACT 2000

THE 2003/04 AUDIT OF WEST LOTHIAN COLLEGE

  1. I have received the audited accounts of West Lothian College for the year ended 31 July 2004.
    The auditors’ report on the accounts is not qualified but contains a paragraph drawing attention to
    the College’s position as a going concern. I prepared a similar report on the College’s position as a going concern in respect of the 2002/03.

  2. I submit these accounts and the auditors’ report in terms of section 22(4) of the Public Finance and Accountability (Scotland) Act 2000, together with this report which I have prepared under section 22(3) of the Act outlining the College’s position as a going concern.

  3. West Lothian College recorded a surplus of £496,000 in its Income and Expenditure account for the period ended 31 July 2004 but a deficit of £102,000 when the cost of certain exceptional items were added.. At 31 July 2004 the accumulated deficit on the College’s Income and Expenditure Reserve was £4,303,000.

  4. The auditors’ report, at pages 8 to 9 of the accounts, refers to the College’s financial position in
    the following terms:

“Going Concern

As disclosed in the balance sheet as at 31 July 2004 the College has total net liabilities. In forming our opinion, we have considered the likelihood of ongoing support from the Scottish Further Education Funding Council. The accounts have been prepared on a going concern basis, the validity of which depends on this support continuing. The accounts do not include any adjustments which would result from the lack of this support. In view of the significance of this uncertainty, we consider that it should be drawn to The Board Management’s attention but our opinion is not qualified in this respect. We draw your attention to the paragraph included in the Statement of Accounting Policies at the Basis of Accounting section.”

  1. In 1999 the college agreed a PFI contract to provide its main campus facilities in Livingston. The contract was negotiated before SFEFC was established and was approved by the, then, Scottish Office, which was responsible for the provision of further education at that time. The financial case made in favour of the PFI deal was based on agreed assumptions about funded growth in student activity in line with a prevailing policy for growth in further education numbers. However, in 2002 the Scottish Executive revised its further education policy to replace competitiveness and growth in the sector with greater collaboration and consolidation of activity levels.

  2. As a result of the policy changes, the level of activity related grant funding available to the college is lower than that assumed in the model underpinning the PFI contract. SFEFC is committed to provide £42 million over 25 years to support the college’s contributions to the PFI contract payments. In 2003/04 this support amounted to £2,851,000 but the annual level of support will reduce significantly from 2007 and, without a significant increase in other funding the college will be unable to meet its contractual commitments.

  3. In the light of these difficulties, SFEFC has commissioned an appraisal of the options available to the college to identify a way forward which provides value for money and secures the college’s
    long-term financial position.

ROBERT W BLACK
Auditor General for Scotland
19 April 2005

A REPORT BY THE AUDITOR GENERAL FOR SCOTLAND UNDER SECTION 22(3) OF THE PUBLIC FINANCE AND ACCOUNTABILITY (SCOTLAND) ACT 2000

THE 2003/04 AUDIT OF INVERNESS COLLEGE

  1. I have received the audited accounts of Inverness College for the year ended 31 July 2004. The auditor’s report on the accounts is not qualified but contains a paragraph drawing attention to the College’s position as a going concern. I prepared a similar report on the College’s position as a going concern in respect of the 2002/03 financial year.

  2. I submit these accounts and the auditor’s report in terms of section 22(4) of the Public Finance and Accountability (Scotland) Act 2000, together with this report which I have prepared under section 22(3) of the Act.

  3. Inverness College incurred a deficit of £525,407 in its Income and Expenditure account, for the period ended 31 July 2004. At 31 July 2004, the accumulated deficit on the College’s Income and Expenditure Reserve was £3,317,079, a reduction of £38,284 from the deficit of £3,355,363 recorded at 31 July 2003.

  4. The auditor’s report, at pages 13 to 14 of the accounts, refers to the College’s financial position in the following terms:

“Going Concern

In forming my opinion, I have considered the adequacy of the disclosures made in the Statement of Accounting Policies at pages 15 and 21 of the financial statements concerning the continuation of support by the College’s bankers and the Scottish Further Education Funding Council in terms of overdraft facilities and continuing recurrent funding. In view of the significance of these issues in the context of the College’s accumulated deficit of £3.317 million as at 31 July 2004, I consider that they should be drawn to your attention. My opinion is not qualified in this respect. ”

  1. Inverness College is one of a number of colleges required by the Scottish Further Education Council (SFEFC) to prepare a recovery plan to address their accumulated deficits. As a result of additional funding received by the college in 2002/03 it prepared financial forecasts indicating that it could achieve surpluses on its Income and Expenditure Accounts in 2004/2005 and 2005/2006, thus achieving SFEFC targets for financial security within the sector. On these projections, the college anticipated that it would eliminate the £3,355,363 deficit on the income and expenditure reserve by 31 July 2009.

  2. During 2003/04 the College repaid £329,000 of advances from SFEFC but at the same time its trading results were significantly poorer than expected The College had forecast a surplus of £94,000 for the year but incurred a deficit of £526,000. The College now estimates that it will be unable to clear the deficit on its income and expenditure reserve by 31 July 2009. To address this position, the College is currently examining ways to reduce its costs and to return its operational performance to surplus and SFEFC is working closely with the College to support that exercise.

Robert W Black
Auditor General for Scotland
19 April 2005

A REPORT BY THE AUDITOR GENERAL FOR SCOTLAND UNDER SECTION 22(3) OF THE PUBLIC FINANCE AND ACCOUNTABILITY (SCOTLAND) ACT 2000

THE 2003/04 AUDIT OF LEWS CASTLE COLLEGE

  1. I have received the audited accounts of Lews Castle College for the year ended 31 July 2004. The auditors’ report on the accounts is not qualified but draws attention to the College’s position as a going concern. I prepared a similar report on the college’s position as a going concern in respect of the 2002/03 financial year.

  2. I submit these accounts and the auditors’ report in terms of section 22(4) of the Public Finance and Accountability (Scotland) Act 2000, together with this report which I have prepared under section 22(3) of the Act.

  3. Lews Castle College incurred a deficit on its Income and Expenditure account, of £358,000 for the year ended 31 July 2004. At 31 July 2004, the accumulated deficit on the College’s General Reserve was £1,438,000.

  4. The auditors’ report, at pages 27 to 28 of the accounts, refers to this matter in the following terms:

“Basis of Audit Opinions

In forming our opinion, we have considered the adequacy of the disclosures made in note 1 of the financial statements concerning the uncertainty surrounding cash flow forecasts, including the uncertainty of future funding streams from the Funding Council, and therefore the College’s ability to continue in existence. In view of the significance of this uncertainty we consider it should be drawn to your attention but our opinion is not qualified in this respect. ”

  1. Following a deterioration in the college’s cash position during 2002-03, its bankers withdrew the college’s overdraft facilities in December 2003. As a result, the college introduced extensive monitoring procedures to ensure that cash outflow did not exceed cash inflow. To assist the college, the Scottish Further Education Funding Council (SFEFC) provided a repayable cash advance of £556,600 in the period August 2003 to March 2004. The college and SFEFC have not yet agreed a repayment schedule for the advance, although the college has proposed to make an initial repayment of £20,000 in August 2005, subject to its cash position at 31 July and that a payment does not cause liquidity problems.

  2. The college has continued discussions with SFEFC over plans to achieve financial security and has already implemented recurring annual savings of £255,000, primarily as a result of redundancies. The College is looking for opportunities for further cost reductions and SFEFC continues to support the College in that exercise.

  3. SFEFC is reviewing the funding of colleges, such as Lews Castle, that operate in remote and sparsely populated areas. The results of the review will not be available before summer 2005 but SFEFC has already allocated additional annual grant funding of £250,000 to Lews Castle College for 2003-04 and 2004-05. On that basis the College has produced financial forecasts predicting surpluses on its continuing operations in financial years 2004/05 to 2006/07.

Robert W Black
Auditor General for Scotland
19 April 2005

ANNEXE A

AUDIT COMMITTEE
EXTRACT FROM THE MINUTES
10th Meeting, 2005 (Session 2)
Tuesday 17 May 2005

Members Present:

Susan Deacon    Robin Harper
Margaret Jamieson George Lyon
Mr Brian Monteith (Convener)  Mary Mulligan
Mr Andrew Welsh  

AGS Section 22 Reports:The Committee received a briefing from the Auditor General for Scotland on the section 22 reports by the Auditor General for Scotland entitled-

The 2003-04 Audit of West Lothian College

The 2003-04 Audit of Inverness College

The 2003-04 Audit of Lews Castle College

AGS Section 22 Reports (In private):The Committee considered its approach to the section 22 reports by the Auditor General for Scotland entitled-

The 2003-04 Audit of West Lothian College

The 2003-04 Audit of Inverness College

The 2003-04 Audit of Lews Castle College

The Committee agreed to hold an inquiry on the section 22 reports and take evidence from Accountable Officers at a future meeting.


AUDIT COMMITTEE
EXTRACT FROM THE MINUTES
11th Meeting, 2005 (Session 2)
Tuesday 31 May 2005

Members Present:

Susan Deacon    Robin Harper
Margaret Jamieson George Lyon
Mr Brian Monteith (Convener)  Mary Mulligan
Mr Andrew Welsh  

AGS Section 22 Reports (in private): The Committee considered arrangements for its inquiry into the section 22 reports by the Auditor General for Scotland entitled-

The 2003-04 Audit of West Lothian College

The 2003-04 Audit of Inverness College

The 2003-04 Audit of Lews Castle College

The Committee agreed to invite Accountable Officers from each college, the Scottish Executive Enterprise, Transport and Lifelong Learning Department, and the Scottish Further Education Funding Council to give evidence at a future meeting.

AUDIT COMMITTEE
EXTRACT FROM THE MINUTES
12th Meeting, 2005 (Session 2)
Tuesday 28 June 2005

Members Present:

Susan Deacon    Margaret Jamieson
Mr Brian Monteith (Convener)  Mary Mulligan
Eleanor Scott   Mr Andrew Welsh

Also present: Fergus Ewing MSP and Mary Scanlon MSP

Apologies were received from George Lyon

AGS Section 22 Reports:The Committee took evidence on its inquiry into the section 22 reports by the Auditor General for Scotland entitled-

The 2003-04 Audit of West Lothian College

The 2003-04 Audit of Inverness College

The 2003-04 Audit of Lews Castle College

from-

Mrs Sue Pinder, Principal and Chief Executive and Dr Tony Kinder, Chair of the Board of Management, West Lothian College; Mr David R Green, Principal, Lews Castle College; Professor J Little, Principal and Chief Executive, and Mr Ken Mackie, Chair of the Board of Management, Inverness College; Mr Roger McClure, Chief Executive, Brian Baverstock, Deputy Director, Governance and Management : Appraisal and Policy, and Riona Bell, Director of Funding, Scottish Funding Councils for Further & Higher Education; Eddie Frizzell CB, Head of Enterprise, Transport & Lifelong Learning Department, and Aileen McKechnie, Head of Further and Adult Education Division, Scottish Executive.

AGS Section 22 Reports (in private): The Committeee considered the evidence taken. The Committee agreed to seek clarification on a number of issues raised during discussion.

AUDIT COMMITTEE
EXTRACT FROM THE MINUTES
13th Meeting, 2005 (Session 2)
Tuesday 13 September 2005

Members Present:

Susan Deacon    Margaret Jamieson
Mr Brian Monteith (Convener)  Mary Mulligan
Eleanor Scott   Margaret Smith

Apologies were received from Andrew Welsh

AGS Section 22 Reports (in private):The Committee considered an issues paper on its inquiry into the section 22 reports by the Auditor General for Scotland entitled-

The 2003-04 Audit of West Lothian College
The 2003-04 Audit of Inverness College
The 2003-04 Audit of Lews Castle College

The Committee agreed to consider a draft report at its meeting on 20 September.

AUDIT COMMITTEE
EXTRACT FROM THE MINUTES
14th Meeting, 2005 (Session 2)
Tuesday 20 September 2005

Members Present:

Susan Deacon    Mr Brian Monteith (Convener)
Mary Mulligan    Margaret Smith
Andrew Welsh  

Apologies were received from Margaret Jamieson and Eleanor Scott

AGS Section 22 Reports (in private):The Committee considered a draft report on its inquiry into the section 22 reports by the Auditor General for Scotland entitled-

The 2003-04 Audit of West Lothian College
The 2003-04 Audit of Inverness College
The 2003-04 Audit of Lews Castle College

The report was agreed to.

ANNEXE B

WRITTEN EVIDENCE

SUBMISSION FROM WEST LOTHIAN COLLEGE 22 JUNE 2005

Background

  • First new college of further education in Scotland in over 30 years.
  • Only college of further education build in Scotland to be fully funded through PFI procurement.
  • Deficit on Income and Expenditure Reserve at 31 July 2004 - £4.3million.
  • Of this £3.3 million relates to pension provisions under SSAP 24.
  • Trading deficit since moving to Livingston £(0.7) million of which £500,000 relates to the PFI.
  • The majority of trading deficit was incurred in the first year of activity as the college undertook activity in response to the demand generated by the move to Livingston. Unfortunately, the Funding Council did not fund this activity.
  • The college is operating at a surplus for this year and will outturn a trading surplus in excess of £100,000.
  • The Board of Management is committed to financial security and the college is currently meeting the Funding Council’s definition of financial security.
  • The largest problem facing the college in the future is the lack of affordability surrounding the PFI contract.

PFI Contract

  • PFI contract signed in December 1999.
  • College moved to Livingston in July 2001.
  • College retains ownership of its land in Livingston (approximately 23 acres).
  • College leases all its land to PFI provider for 99 years.
  • PFI provider leases college campus to West Lothian College (approximately 16 acres) for a 25-year period, after which time ownership of the buildings reverts back to the PFI provider.
  • PFI provider controls surplus land (approximately 7 acres).
  • Total cost of college build £21 million including VAT (£18 million net of VAT).
  • The PFI provider also provides the facilities management services to the college for the period of occupation by the college (i.e. 25 years).
  • The total charges that the college will pay over the life of the contract is £97 million comprising two elements: -
  • Availability Charge (i.e. rent) - £54 million (over 25 years)
  • Facilities Management  - £43 million (over 25 years)

Affordability

  • The Scottish Further Education Funding Council (SFEFC) does not pay the facilities management charge, nor fully fund the availability charge.
  • SFEFC fund £43 million in respect of the availability charge fully funding the college until April 2007, thereafter the gap between the funding and charge is £11 million (£54m - £43m).
  • The college receives funded support of nearly £1 million for the VAT on the facilities management charge until April 2007.  Thereafter, it receives no support for the VAT.
  • The total support from SFEFC to the college over the life of the PFI project in respect of the PFI contract is £44 million (£43m plus £1m).
  • To be able to afford the contract, in the financial model supporting the PFI project, the college was to receive funded growth in student activity over the length of the lease from 39,000 Weighted Units of Measurement (WSUMs) in 2001/02 to 55,000 WSUMs at the end of the lease.
  • The college currently is funded for 43,000 WSUMs with no prospect of obtaining the funded growth originally envisaged at the time of the signing of the contract.

Key Points

  • The college cannot fund the PFI based on current activity.
  • Under present arrangements the college would not have been PFI funded because of its low capital cost.
  • The college buildings are not fully utilised as the college was built for projected growth.  This is mainly manifested by surplus time being available.
  • The concept of funded growth central to the affordability of the PFI, no longer exists.
  • The college is now engaged with Partnerships UK, who are the acknowledged leaders in the public sector PPP contracting, and who are part owned by the Treasury and Scottish Executive. They have been retained by SFEFC, to discuss strategies for the renegotiation of the PFI.
  • A Project Board has been established, comprising the College, Funding Council, Scottish Executive, Partnerships UK, and the PFI provider. Discussions are underway with a view to have a mutually agreed settlement by the end of September 2005.

SUBMISSION FROM INVERNESS COLLEGE 22 JUNE 2005

Whilst the 2003-04 audited accounts show a disappointing year financially for Inverness College in delivering only a small historic surplus, nevertheless the College managed to achieve both further education (SFEFC) and higher education (SHEFC) activity and enrolment targets and continued very actively to participate in the ongoing development of UHI Millennium Institute (UHI). The College is the largest of the 13 Academic Partners of UHI, with approximately 1000 full-time equivalent higher education students from a UHI total of 3800. Higher education represents approximately 30% of the College’s funded activity.

Historic cost surpluses (income over expenditure) have been produced by Inverness College in each year since 2000:  £81,000 in 2000-01, £1,467,000 in 2001-02, and £353,000 in 2002-03. The likelihood is that for 2004-05 an historic cost surplus of £200,000 will be achieved. The June 2005 Financial Forecast to SFEFC indicates an historic cost surplus of £500,000 in 2005-06 (equivalent to an operational surplus of £70,000).

For the financial year 2003-04, the College made an historic cost surplus on its income and expenditure account of £38,000. Unfortunately this level of surplus was not sufficient to cover the charge to its income and expenditure account for depreciation of assets at current market value (£607,955). The audited accounts for 2003-04 therefore show a deficit of £525,407 on continuing operations after depreciation of assets. As the College had budgeted to cover the depreciation charge in full, the shortfall in the budget was £509,000. Naturally, this was a disappointing result.

It will be recalled that Inverness College had, by 2000, accumulated a debt of £5.26m. Furthermore, in 2000 it took receipt of an advance of grant-in-aid of £1.5m from the Scottish Further Education Funding Council (SFEFC). The total debt of the College in 2000 was therefore £6.76m, on a turnover of £12m.

In 2000 the College had agreed a Financial Recovery Plan (FRP) with SFEFC to enable its historic debt to be eliminated over an appropriate timescale. The FRP requires the generation of annual operational surpluses sufficient to eliminate the deficit in the income and expenditure reserve by 2009-10. The FRP is structured in such a way that operational surpluses are ‘end-loaded’, that is to say the level of operational surplus increases significantly towards the end of the FRP. 

The current Principal was appointed in 2002 – the fourth Principal/ Acting Principal in post at the College since 1999. By July 2004 the deficit in the income and expenditure reserve had been reduced to £3.3m – a recovery of almost £2m in 3 years. This was greatly facilitated by financial security funding of £1m from SFEFC in 2002.

Over the same period, repayments of the £1.5m loan to SFEFC have proceeded satisfactorily. By 2003-04 a total of £523,000 had been repaid on this account; a further £300,000 will be re-paid in August 2005. The College shall endeavour to repay the balance of £672,000 by 2006-07. Therefore, by August 2005, the College’s 2000 level of debt will have been reduced by £2.72m, approximately a half of the total. On average this represents £545,000 of debt repayment annually.

However, as stated, for the financial year 2003-04 the historic cost surplus of £38,000 was disappointing and was below the target budget of £547,000. There were two reasons for the reduction in this surplus:

  • Un-anticipated strong in-year demand for its non-advanced craft programmes, particularly in construction, which resulted in the College exceeding its funding cap of 40,000 WSUMs by 2000 WSUMs in this area. Historically, no additional funding is provided for activity undertaken above the cap. This alone represented an opportunity cost of £300,000 to the College in 2003-04, as the additional specialist temporary staffing costs associated with servicing the extra provision could not be met from within the funding envelope provided. The College has subsequently taken steps to ensure that this situation does not re-occur. In practice this will mean that it shall not be able to be as responsive to the training needs of employers and employers’ organisations. For the future it would be helpful if there were more flexibility in terms of funding activity above the cap.

  • Historically the College has experienced relatively low efficiencies in the deployment of its academic staffing compared with the majority of the further and higher education colleges in Scotland. Over the years this has produced a rising level of staffing costs which are no longer sustainable. The annual staffing bill is now almost £10m. Steps have therefore been taken to ensure that staffing levels are adjusted in stages so as to provide a level of staffing deployment consistent with that of the sector by 2006-07, and without detriment to degree awarding powers/university title.  With a combination of year-on-year cost savings and improvements in efficiency, financial forecasts for the College to 2007-08 indicate that the SFEFC criterion for Financial Security will be attained in 2005-06. The deficit in the accumulated income and expenditure reserve will be £1.11m in 2007-08. This being the case, the total of the £6.76m debt will have been re-paid within the timescale of the FRP, that is to say, by 2009-10.

Despite a current difficult financial situation, the College and its Board of Management remain optimistic for the future. Following almost two years of planning and preparation the College has recently submitted a strategy and a business case to the Joint Funding Council for a re-location of the College’s disparate estate to a new purpose-built campus in 2009. Replacing old buildings with a university-style campus development will provide much needed improvements in teaching accommodation and should also lead to significant savings in running and maintenance costs.

In the meantime Inverness College will persevere in its intention of achieving full debt recovery and financial security at the earliest possible opportunity, shall continue to serve the broad needs of its communities of learners and employers and, together with its other Academic Partners, aspire to succeed in securing UHI degree awarding powers (in 2006) and in achieving university title (in 2007).  

J. A. Little
Principal
Inverness College
June 2005

SUBMISSION FROM LEWS CASTLE COLLEGE 22 JUNE 2005

The college’s situation

  1. Lews Castle College is the only one of the three islands colleges to have been incorporated in 1993 under the terms of the 1992 Further and Higher Education (Scotland) Act. It shares with Shetland and Orkney Colleges (who are non-incorporated and funded via the local authority) all the challenges of providing essential public services to very small and often very scattered communities, and of extreme remoteness compared with the rest of Scotland.  In addition the Western Isles has additional problems related to the unique economic and social climate and continued population loss.

  2. The college’s Board of Management, in a position supported by external consultants and acknowledged by SFEFC, has regarded the long-term viability of the college as being dependent on a minimum level of activity, measured principally in terms of student numbers.  The Board has been unwilling to make dramatic reductions in its cost base through wholesale compulsory redundancies, because of the impact this would have had on delivery of the college’s long-term business plan and the ongoing provision of further and higher education in the Western Isles. The Board has argued consistently for a review of the remoteness element of funding for further education.

  3. As an Academic Partner of the UHI Millennium Institute, the college has benefited significantly from capital funding, the removal of  the cap imposed on Scottish Further Education colleges for higher education student numbers, and significant development funding. However, there are, of course, also significant additional and unavoidable costs to providing university level education in the Highlands and Islands. In particular these relate to estates, library and learning resource provision and staff costs.

History

  1. Lews Castle College began to alert the Scottish Office to future funding      problems in 1997. The combined effect of reducing European Structural Funds (c£500,000 in the mid-90s, projected to be £15,000 in 2005/06) and the removal over time of other funds (Institutional element, paid to all colleges, regardless of size; transitional relief; strategic development funding; UHI development funding) contributed to the financial problems that were at their worst in 2002/03 and 2003/04. Since 2000, the college has been in dialogue with SFEFC over its continuing and worsening problems and several unsuccessful attempts were made to produce realistic recovery plans based on the levels of funding pertaining in 2001.

  2. Since 2002, the college has worked with SFEFC, directly through officers, and with the Further Education Development Directorate, to reduce its cost base while retaining its viability as a business.  The college had reduced its staffing, and its cost base, by some 10% by July 2004. Together with additional SFEFC funding in both 2003/04 and 2004/05 (£250,000 in each year) and advance of main grant of £556,000 by the end of the 2003/04 financial year (July 31st), this has allowed the college to forecast a break-even position for the financial year 2004/05.

2003/04 Financial Position

  1. The college operating deficit for the year to which the Auditor General’s Section 22 report relates included pensions provision and other one-off re-structuring costs (£272,000).  The full impact of cost reductions was not achieved till after the end of this financial year.  During this year, the college received an additional £250,000 from SFEFC, pending the review of remoteness funding that was completed in March 2005, and which has resulted in a significant increase in further education main grant for 2005/06.

2004/05 Financial Position

  1. The college forecast a break-even position on operating costs for the current year in its June 2004 Financial Forecast Return to SFEFC. It will achieve this. Additional funding from SFEFC (£250,000) and the reduction in the college’s cost base achieved by redundancies and non-replacement of vacant posts are the main reasons for this.

  2. The college is currently in dialogue with SFEFC to deal with the grant advance of £556k, and has tabled a proposal in which it is asking for £400,000 to be waived by SFEFC, with the college paying the balance over future years.  Early repayment in full of the advance in grant from the college’s own current or future resources is not a viable option given the tight margins under which the college is presently operating.

2005/06 and beyond

  1. The college is currently forecasting break-even positions on operating costs for future years, based on continuing monitoring of costs and the additional remoteness funding for further education in Islands Colleges, confirmed by SFEFC in its April 2005 grant allocations.

  2. In order to move beyond the mere break-even position that militates against development and sustainability, the college, with the UHI Millennium Institute, looks forward to greater recognition that higher education in the most remote areas of Scotland should attract a premium in the same way as further education now does.  Higher education (HNC and above) is approximately 35% of our business.  Remoteness funding currently only applies to the 65% of our business that is further education. This is a significant and inhibiting factor that could usefully be reviewed for the benefit of the college and its learners.

David Green
Principal
Lews Castle College
June 2005

SUBMISSION FROM Scottish Further Education Funding Council 23 JUNE 2005

Introduction

The following notes describe how SFEFC monitors the financial health of colleges, outline its strategy for financial security and summarise the financial positions of and our engagements with Inverness, Lews Castle and West Lothian colleges.

Monitoring financial health

Monitoring returns

SFEFC, through its Governance and Management: Appraisal and Policy Directorate (GMAP), monitors the financial health of colleges throughout the year.  This is done, in the main, through GMAPs review of three financial returns from colleges:

  1. The Financial Forecast Return (FFR) – by 30 June
  2. The Financial Statements – by 30 December
  3. The Financial Forecast Update (FFU) – 31 March

The FFR provides a forecast for the current year to 31 July (Y1) plus forecasts for the following three years (Y2, 3 and 4).  The financial statements then provide an outturn for Y1.  The FFU in turn provides an updated forecast for Y2.  This process provides rolling financial monitoring, enabling comparisons between forecasts and outturn.  Colleges are required to explain significant changes between these three returns.

In addition to this ‘routine’ monitoring, colleges in weak financial health may be required to provide more frequent returns, usually quarterly, and prepare a financial recovery plan.  Both were required in the case of Inverness College.

Depending on the severity of the circumstances, the Council will arrange a meeting, or meetings, between the Council’s Chief Executive and the principal of the college concerned.  There may be further meetings involving the Chair of the Council and the chair of the college’s board of management.  

Financial recovery plans

Financial recovery plans generally set out the background to the financial difficulties, the issues facing the college and the actions necessary to deliver improvement.  They include a set of financial forecasts which reflect implementation of the recovery plan and which are used by GMAP to monitor financial improvement.  In the case of Inverness, a financial recovery plan was agreed in June 2000 which forecast, in terms of accumulated deficit, breakeven being achieved around 2008-09.

Accumulated deficits

In the early years of SFEFC’s existence, recovery plans were generally framed around colleges eliminating their total accumulated deficits on their income and expenditure account.  However, with experience, the Council’s view of this requirement now more clearly recognises that for many colleges a significant proportion of their accumulated deficit relates to pensions provisions. For some colleges the pensions element accounts for the whole accumulated deficit. To illustrate this, the following figures reflect the composition of the accumulated deficits reported at 31 July 2004 for the three section 22 colleges.

College

Accumulated
deficit

£’000

Pensions provision
element

£’000

Accumulated deficit
net of pensions

£’000

Inverness 3317 1516 1801
Lews Castle 1438 814 624
West Lothian 4303 2386 1917

While still a real liability, the pension provision will be met over a longer period of years, often ranging between 15-25.  The pensions have to be paid each year as they fall due.  Provided a college is making operating surpluses, taking one year with another, and is thereby meeting its pension liabilities, the pension provision is not of major concern when considering the viability of the college.  This is an important issue when looking at financial recovery plans prepared some years ago.

Financial security

Recognising the importance of improving the financial health of the sector, the Council agreed jointly with the sector by the end of 2002 a strategy to achieve financial security for all colleges.  In this strategy, the definition of financial security is:

“a college that is financially secure is one that, on a continuing basis, is able to generate operating surpluses reliably and as planned, and through that accumulate a reasonable level of financial reserve.  The college must also generate sufficient cash to finance its operations and meet its liabilities.”

The principal measure of financial security, year on year, is a college’s underlying operating result, that is, the reported surplus or deficit adjusted for significant one-off items.  The target date for colleges being financially secure is 31 July 2006.

Additional funding and, where necessary, other support, in particular through the Council’s Further Education Development Directorate, has been provided to colleges to assist them in their journey towards financial security.  For those colleges not previously forecasting to be financially secure, this additional funding was conditional on the money being invested in recurrent efficiencies or income generating activities.   As a direct result, colleges’ financial health
has shown significant improvement since the start of the financial security campaign.  This is illustrated in the following table which summarises the underlying operating results for the last three years.

  2001-02 2002-03 2003-04
Number of colleges with underlying operating surplus 25 28 33
Number of colleges with underlying operating deficit 17 14 9
  42 42 42

The latest set of forecasts from the sector show that the number of colleges forecasting an underlying operating deficit in 2005-06 in reduced further to five. The Council is working closely with these colleges to support them to achieve the financial security target.

Background and financial position of the three colleges

Inverness

At the time of hand-over to SFEFC in 1999, Inverness was one of thirteen colleges identified as being in particularly weak financial health.  Staff from GMAP worked with the college in these early months and a financial recovery plan was agreed before the end of that year.  As part of the recovery plan, the college received a long-term advance of £1.495 million which is being repaid over a five-year period which commenced in 2002-03.  That plan was based on the elimination of the total accumulated deficit, then £5 million, over 10 years.  Progress towards this objective was monitored on a quarterly basis.

The college’s financial results for the first two years (2000-01 and 2001-02) were in line with the recovery plan.   During 2001-02, the college received additional funding of £1 million to clear an inherited local authority loan and reduce its overdraft.  However, the college began to miss its targets in year three (2002-03) showing the first signs of difficulties and triggering the further involvement of staff from GMAP. 

As reported in the section 22 report, the college’s outturn for 2003-04 was significantly worse than originally forecast.  The college identified control of staff costs and a fall in productivity as the main causes of the worse than forecast position.  Better control and new monitoring systems were to be introduced for 2004-05.  The college’s staff costs as a proportion of its total costs in 2003-04 were 71% against a sector average of 66%.  Over the period 2001-02 to 2003-04, teaching and teaching support staff FTEs increased from 230 to 257, while the total student FTE count increased by 2% over this period.

Over the period 2001 to 2004, the college received almost £750,000 of additional funding towards financial security and SENDA/DDA compliance.  Returns from the college indicate that around £344,000 of this money remains unspent.  The college will receive a further tranche of one-off investment funding of £160,000, during 2005-06.

The Council has had frequent discussions with the college about actions to put its financial recovery back on track.  The college has recently provided revised financial forecasts which show a return to operating surpluses being achieved over 2005-06, the total accumulated deficit eliminated in 2008-09 and accumulated deficit excluding pensions provision a year earlier. 

Lews Castle

Like Inverness, Lews Castle was one of the 13 colleges identified at a very early stage as in weak financial health.  As part of its initial support to the college, the Council provided transitional funding in 2000-01 (£292,000) and 2001-02 (£146,000).

Looking to a longer-term solution, the Council’s Further Education Development Directorate (employing a team of experienced practitioners from the sector) undertook a two stage review of the college’s activities in 2002-03.  The first stage, November 2002, focused on trying to stabilise the college’s financial position to allow development of longer-term strategies and business planning.  Stage two, May 2003, looked at trying to improve the college’s medium to long-term strategy and business planning. 

From this review, a report was produced which recommended actions for the college to take to reduce costs and improve operational practices.  The college has been working to implement the report’s recommendations.  The report also recommended that the Council consider a case for additional remoteness funding.  In response, the college received additional funding of £250,000 in 2003-04 and 2004-05 and the Council initiated a review of its remoteness funding.  The outcome of this review has lead to the college receiving an additional £270,000 of remoteness funding in 2005-06.

In addition, an advance of £556,000 was made to the college at the end of 2003-04 to alleviate cash-flow difficulties.  Repayment of the advance is being discussed with the college. 

The college has made key personnel changes, including the appointment of a new Director of Finance.  Financial forecasts from the college indicate that the cost reduction measures are working through and the college expects to breakeven in 2004-05.  Thereafter, the Council expects the college to move into surplus.

West Lothian

In 1999, SFEFC inherited a commitment from The Scottish Office to make payments totalling around £43 million to the college over the 25 years of the PFI contract.  These payments to the college reflect a combination of the PFI availability charge and the VAT payable on the facilities management.

The section 22 report states that the PFI contract was based on agreed assumptions about funded growth in student activity in line with the prevailing policy for growth in further education numbers.  It goes on to say that in 2002 the Scottish Executive made a change in policy, replacing competitiveness with consolidation and this resulted in funding available to the college being lower than that assumed in the PFI model.

While this policy change was introduced in 2002, the Council recognised the potential funding impact on the college and increased the college’s target for WSUMs by over 8,700 in 2001-02.  The increase in WSUMs and their value is compared to the equivalent figures assumed in the PFI model in the table below.  As this clearly shows, the college received funding above the levels assumed in the PFI model over the period since 2000-01.

Year PFI model Funded WSUMs Difference
WSUMs £’000** WSUMs £’000 WSUMs £,000
2000-01 32,210 3,963 33,204 3,991 994 28
2001-02 38,652 4,449 43,181 5,979 4,529 1,530
2002-03 41,472 4,950 43,202 5,228 1,730 278
2003-04 43,325 5,226 43,202 5,282 -123 56
2004-05 44,360 5,458 43,202 5,572 -1,158 114
2005-06 44,961 5,622 42,394* 6,009 -2,567 387
            2,393

*Note: using the previous funding methodology produces a target figure of 43,202 and a difference of -1759 WSUMs.  ** For direct comparison these figures exclude fee waiver which is now paid on actual basis.

Recognising that a longer-term solution was needed, the Council commissioned Shepperd and Wedderburn to undertake a legal review of the PFI contract.  This exercise concluded that there were no fundamental flaws in the contract, however, there were a number of aspects to the contract which they did not consider to be in line with current PFI good practice.

In light of this outcome, the Council commissioned Partnership UK, experts in this field and partly owned by HM Treasury and the Scottish Executive, to develop options to help secure the long-term sustainability of the college.  This process is ongoing and Partnership UK is scheduled to produce a final report in September 2005.   Until this time, these discussions are commercial in confidence and therefore the provision of more detailed information is limited at this stage.

ORAL EVIDENCE - 12th Meeting 2005 (Session 2), 28 June 2005

SUPPLEMENTARY WRITTEN EVIDENCE

LETTER FROM ROGER MCCLURE TO THE CLERK 29 JULY 2005

AGS section 22 reports: request for follow-up evidence

Thank you for your letter of 15 July 2005 requesting follow-up evidence. 

West Lothian College (column 1226)

The (PFI) guidance to which I referred will be issued in September 2005.  The key findings from our Private Finance Initiative/Public Private Partnership review have been approved by the Funding Councils.  However, we are still in the process of agreeing the detail of the guidance with the Scottish Executive.  I will provide the Committee with a copy of the guidance as soon as it is finalised.

Inverness College

In written evidence we indicated that Inverness College began to miss its targets in 2002-03.  I have therefore attached a chronology of our main meetings with the College between December 2003 and May 2005.  Of course, during this period we have had numerous other contacts with senior staff at the college.  For your information, we have carried out a further visit to the College on 21 July 2005.

Performance Indicators

I attach financial performance indicators for the three colleges (PDF). These are taken from our annual publication of financial performance indicators for all colleges: Financial Performance Indicators for Further Education Colleges in Scotland 2003-04, published May 2005.

I hope the detail of this additional information is adequate, but if the Committee requires anything further please let me know.

Chronology of meetings between SFEFC and Inverness College: December 2003 to May 2005

17 December 2003

Attended

D. Cameron (Assistant Principal, Resources, Inverness College), A. Millar (Senior Financial Analyst, SFEFC), D. Carson (Financial Analyst, SFEFC)

Purpose of meeting

To discuss issues related to the College’s declining financial position including the draft 2002-03 financial statements, 2003-04 forecast and financial security proposals, and strategic planning arrangements. 

Agreed actions/outcomes

The College undertook to notify the Council immediately of any further deterioration in its financial position.  The 2002-03 financial statements to be received by 31 December 2004.

12 May 2004

Attended

D. Cameron (Assistant Principal, Resources, Inverness College), A. Millar (Senior Financial Analyst, SFEFC), D. Carson (Financial Analyst, SFEFC)

Purpose of meeting

To discuss the reasons underlying the deterioration in the 2003-04 projected outturn per the 2004 Financial Forecast Update (FFU), and the actions being taken to improve the operating position.

Agreed actions/outcomes

College confirmed that it was in the process of tightening controls on staffing and intended to introduce new budgeting and monitoring systems for 2004-05.

At this point, the college provided assurances that it was committed to achieving the financial security target of producing underlying operating surpluses by 31 July 2006.  An update on the College’s financial projections Financial Forecast Return (FFR) 2004 to be provided to SFEFC by 30 June 2004.

25 August 2004

Attended

D. Cameron (Assistant Principal, Resources, Inverness College), A. Millar (Senior Financial Analyst, SFEFC), D. Carson (Financial Analyst, SFEFC),   S. McAllister (Senior Technical Advisor, Property & Capital Funding, SFEFC)

Purpose of meeting

To supplement SFEFC’s desk-based analysis of the college’s 2004 FFR and strategic plan and provide an update on the college’s estates strategy.  These latest forecasts showed a slight improvement on the earlier forecasts (2004 FFU) discussed at the 12 May 2004 meeting.

Agreed actions/outcomes

SFEFC highlighted concerns about the college’s ability to achieve financial security given its optimistic assumptions about future income and higher than expected staff costs for 2003-04.  College provided assurances that it was continuing to seek to control staffing costs and implement other efficiencies and agreed to provide quarterly management accounts to SFEFC (the first quarter to be provided in December 2004) as well as provide further detail on utilisation of financial security monies. 

College to develop a longer-term estates strategy with a view to submitting a business case to SFEFC for capital grant later in 2004.  It was agreed that the Director of Governance and Management: Appraisal and Policy, SFEFC would contact the College Principal and that a further meeting would be arranged for October 2004, in time to report to the Councils’ Audit Committee on 13 October 2004.  

1 October 2004

Attended

Professor J. Little (Principal, Inverness College), D. Cameron (Assistant Principal, Resources, Inverness College), M. Fairbairn (Director of Governance and Management: Appraisal and Policy, SFEFC)

Purpose of meeting

Building on the meeting of 25 August 2004, to discuss the College’s progress towards achieving financial security and look at specific issues facing the College including the development of staff resource management skills for heads of school, and the financial challenges of the UHI project.

Agreed actions/outcomes

College confirmed the key strategic importance placed on achieving financial security and provided assurances that there were robust strategies and systems now in place, or being put in place, to achieve financial security.  College intended to draw on experience of one or more sister colleges in relation to the specific issues identified above.

31 May 2005

Attended

Professor J. Little (Principal, Inverness College), N. McArthur (Director of Finance & Commercialisation, Inverness College, J. Dunthorne (Chair of Finance & General Purposes Committee, Inverness College), M. Shepherd (Vice-Chair, Inverness College), M. Fairbairn (Director of Governance and Management: Appraisal and Policy, SFEFC) D. Carson (Financial Analyst, SFEFC).

Purpose of meeting

To discuss reasons for the deteriorating financial position highlighted in the College’s 2005 FFU.  Specific issues discussed included: to establish what measures were being taken to align the staffing establishment with activity levels; use of financial security monies; management of cash flow; issues arising on HE activity; and the College’s estates strategy.

Agreed actions/outcomes

Revised forecasts to be provided to demonstrate how the College expects to achieve underlying operating surpluses from 2005-06 onwards.  This to be achieved mainly as a result of savings arising from a staff restructuring programme, funded by financial security monies.  College also undertook to progress its human resources strategy to bring HE teaching staff terms and conditions into line with their counterparts in other HE institutions.  College to liaise with SFEFC concerning the development of the College’s estates strategy and availability of capital funding. College confirmed that it had now made arrangements with some sister colleges to draw on their experiences of specific management issues.

SUBMISSION FROM SFEFC 27 JULY 2005

Rural and remoteness funding for colleges

‘Remote’ colleges (Angus, Banff & Buchan, Borders, Dumfries & Galloway, Inverness, Moray, and Perth)

Rural and remoteness funding is awarded to those colleges who are classified as ‘remote’.  SFEFC’s definition of remote is those colleges which are outwith the four cities of Edinburgh, Glasgow, Aberdeen and Dundee and whose main sites are located at least 25 km away from the nearest non-agricultural college. Agricultural colleges with over 25% of their provision in DPG 1 (Agriculture, Horticulture and Animal Care) also qualify for the rural and remoteness element (see paragraph 6 below).

Each qualifying ‘remote’ college receives an institutional element (£208,502 per college in 2005-06) and a student based element (£33.45 per head count in 2005-06) according to the number of students the college has whose home addresses are in sparsely populated areas.  The student based element is allocated to colleges based on the classification of students under the Scottish Executive’s Urban Rural Classification.  Categories 3 to 6 are used for a student to qualify as remote.

Colleges will not be eligible to receive the student-based funding of remoteness unless the college has been classified as ‘remote’.

‘Very remote’ colleges (North Highland College: Thurso campus)

Very’ or ‘extremely remote’ colleges are defined as those where the main campus is more than 100 kilometres from its nearest mainland neighbour and more than 250 kilometres from the nearest of Edinburgh or Glasgow.  They are funded in the same way as standard remote colleges but also receive an uplift of 15% which is applied to both the institutional and student based elements of remoteness funding (as described in paragraph 2). 

‘Island’ colleges (Orkney, Shetland, Lews Castle, and Argyll provision of North Highland College)

Island colleges are funded in the same way as standard remote colleges (paragraph 2 above) but also receive an uplift of 30% which is applied to their net recurrent grant based on WSUMs targets.

‘Landbased’ colleges (Elmwood, Barony and Oatridge)

Landbased (or agricultural) colleges are funded in the same way as standard remote colleges.

ANNEXE C

OTHER WRITTEN EVIDENCE

The following evidence was received by the Committee but is not reproduced in this report:

West Lothian College Auditors’ Annual Report for the year end 31 July 2004
Inverness College Auditors’ Annual Report for the year end 31 July 2004
Lews Castle College Auditors’ Annual Report for the year end 31 July 2004
Inverness College Strategic Development Plan 2005 - 2008

The following private submission was received but is not reproduced in this report:

West Lothian College Outline Business Case for Change in PFI Strategy.


Footnotes:

1 West Lothian College Auditors’ Annual Report, Appendix B, page 8

2 Col 1225

3 Submission from West Lothian College, 22 June 2005, page 2

4 Letter from Roger McClure, 29 July 2005

5 The Audit Committee took evidence from the college in 2002 and expressed concerns at the length of the financial recovery plan and its ability to achieve sustainable financial balance as a result. 7th Report 2002, “Report on Overview of Further Education Colleges in Scotland 2000/2001”, SP Paper 657

6 Submission from Lews Castle College, 22 June 2005, page 2

7 Submission from Lews Castle College, 22 June 2005, page 2

8 Submission from SFEFC, 23 June 2005, page 3

9 Col 1231

10 Col 1236

11 Inverness College Auditors’ Annual Report, Executive summary, page 1. Submission from Lews Castle College, 22 June 2005, page 1

12 Col 1220