In the News
Have you ever woken up with an extra £1.1 billion in debt? Then spare a thought for Chancellor Jeremy Hunt.
The Office for National Statistics has reclassified colleges as part of the public sector, meaning the college sector’s ten-digit debts will be added to the government’s balance sheet.
It is one of a number of far-reaching consequences from the ONS’ decision to move colleges out of the private sector, which it has been classified as being part of since after the passing of the 2011 Education Act.
Reclassification will affect mergers, staff pay, borrowing and much more
As leading FE lawyers Eversheds Sutherland wrote after the ONS’ decision was announced last month: “The effect will be to limit the ability of colleges to merge, diversify or acquire assets or other entities.”
Many colleges have become sprawling organisations over the past few years, having acquired other institutions through mergers – with the government’s permission and often its financial backing.
College leaders’ key concerns about reclassification revolve around a loss of autonomy and even greater red tape and regulation. Association of Colleges chief executive David Hughes has said reclassification “risks making colleges less fleet of foot in meeting the needs of their students, employers and communities”.
Providers will now need government approval for salaries over £150,000 and bonuses over £17,500. They will also need Whitehall’s permission for any new private sector borrowing.
The Department for Education has said colleges will still be unable to recover VAT, which was considered one of the upsides of reclassification. This is despite academies being able to reclaim VAT on costs and expenses linked to non-business activities.
Sixth Form Colleges Association chief executive Bill Watkin has called the imposition of VAT on his members one of the “indefensible inequalities that exist between colleges and other providers of 16-19 education,” and believes reclassification will push more sixth forms to consider academising.
Bill Watkin previously wrote for The Mark on how the ONS’ decision could affect the post-16 sector – see here.
The DfE has put forward cash to help colleges transition into the public sector, including:
£150 million to make up for the inability of colleges to borrow commercially
£300 million on college cashflow this financial year to “smooth out” payments to colleges by March 2023, though this will lower monthly payments from April to July 2023
The department is itself yet to reckon with the full scope of the ONS’ decision. But what do we know so far and how can colleges get on the best footing to handle his momentous change?
Interview
This month, we spoke with Eversheds Sutherland partner and FE law specialist Mark Taylor about the legal ramifications of the ONS reclassification.
How significant is this change to colleges?
The ONS decision itself is not that significant – it's an accounting change. But the DfE’s policy response to it is really quite significant. Some of that policy response was inevitable, as colleges should now comply with Managing Public Money. Other parts of the response go further than was strictly necessary to comply with Managing Public Money.
Other changes do not go as far as many would like (such as not extending some funding advantages to colleges which academies currently enjoy).
The significance of the change will vary from college to college. For some colleges which do not have senior staff paid over the threshold, which do not have significant desire to borrow, and which do not carry out many non-core activities, then there should not be a lot of change. But for those larger, more complicated college groups, there will need to be a significant shift in behaviour.
Following the decision, what are the immediate changes that colleges will need to make?
This will again vary depending on the circumstances of the college. If I were a college principal (and it is probably good news for the sector that I am not) then I would be thinking about the following:
Make sure that the corporation is well briefed.
Consider the college’s existing and future borrowing requirements and how that will now look.
Understand the range of commercial and financial issues which now require DfE consent.
Make sure that the HR team is familiar with new pay and settlement requirements.
Think about the college’s future estates needs. The ability to sell land without permission may go in 2025, so now is the time to analyse estates needs.
Keep an eye out for the DfE’s approach to insurance – there may be savings to be had.
Start to think about medium-term strategy. For some colleges, it might be sensible to consider alternative legal forms to mitigate some of these changes.
How will this limit the ability of colleges to merge, diversify or acquire assets or other entities?
We cannot be certain until we can see whether the DfE would consider these things to be: “Novel, contentious and repercussive transactions.” In the interim, I would advise erring on the side of caution and approaching the DfE for consent if there is any doubt.
For larger, more complicated college groups, there will need to be a significant shift in behaviour
Do you agree with the Sixth Form Colleges Association that reclassification, and the Department for Education's remarks on whether colleges will now be able to reclaim VAT, could push more SFCs to consider academisation?
Broadly, yes. But I would not say that it will “push” sixth form colleges, because the new restrictions on colleges are very similar indeed to the restrictions on academies. So, there is not really a push.
Instead, I would say that there is less of a “pull” to stay as a sixth form college, because some of the advantages which there were over being an academy have gone.
What is your view on the reclassification decision?
The ONS does not make policy decisions and simply categorises bodies as it sees fit. I would trust the ONS to come to the right decision, if only because I admit to being very confused by all of the analysis!
It is the DfE’s decisions which I think are more interesting, as some of them are driven by policy considerations. Even then it is not my role to judge the merits of the policy – my job is to help colleges to navigate them as well as possible.
On the whole, I would say that those people who favour more central government control of the sector will welcome these changes. Those who would prefer for colleges to be autonomous will like the changes less.
These changes have to be viewed in light of the other significant policy changes, such as to funding, Local Skills Improvement Plans, skills devolution, and funding and accountability agreements. There is a lot going on and colleges (in particular governors) will struggle to keep up with the pace of change.
Of course, if the net result of these changes is an increase in funding for the sector, then that is certainly something to celebrate. If colleges are given some more of the benefits which are enjoyed by academies, then that would also be welcome.
Opinion
Fiona Chalk, experienced board member and chief executive of education consultancy Governance4FE, looks at how the Skills and Post-16 Education Act led the ONS decision and what we can learn from the example of academy trusts.
It was clear from the Skills for Jobs white paper that oversight of colleges was only going one way on the department’s agenda, and that was up. This focus is likely to only increase post the ONS review, with excellent governance being viewed as an essential facilitator for the aspirations of education and skills development.
Externally facilitated reviews of governance are likely to continue, with a requirement for more transparent reporting on how governing bodies plan to address recommendations and gaps in capability through recruitment, training, and development.
Whilst corporations remain as self-governing exempt charities, the Skills & Post-16 Education Act saw greater powers awarded to the state to intervene when governing bodies are not perceived to be sufficiently delivering on meeting local skills requirements. Could we also see more Notices to Improve being issued for more general governance missteps such as weak oversight and poor internal scrutiny? How far down this road government goes will be interesting to observe and to what extent such intervention may link with recent speculation on the development of larger college groups and the introduction of a top tier of ‘governors’ to oversee such.
Yet the case must be for less regulation not more, in order that FE colleges remain agile and do not become hamstrung
Looking at the structure of multi academy trusts (MATs), it begs the question of who would fulfil the role of ‘members’ in a similar FE college structure – externally appointed governors or government appointed members? Together with a tightening up on governor terms of office, an increase in focus on structures and composition seems inevitable. This is somewhat frustrating as research clearly shows that what a board does and how it behaves has a far greater impact on organisational performance than how it's structured or the competencies of the individuals around the table.
After more than a decade of MATs trialling models such as sharing local governing bodies, clusters and hubs, regional tiers, and other innovative structures, through experience most have returned to the ‘one school one committee’ model, and there is much to be heeded from this journey if a move to consolidation is to be considered.
Compliance will increase in order to meet new requirements such as managing public money. Whilst boards have always been mindful of the public money aspect, there will be further hoops to jump through and permission requirements to be sought – senior pay being one such item.
Yet the case must be for less regulation not more, in order that FE colleges remain agile and do not become hamstrung – this is essential as they must innovate to survive.
The recent Institute of Directors’ Centre for Corporate Governance public inquiry into governance and innovation found that the cumulative effect of regulation on boards in highly regulated sectors has indirect adverse impacts on innovation – something I’ve witnessed as a board reviewer.
The first adverse impact is that many boards spend a disproportionate amount of their time dealing with compliance issues at the expense of strategy, innovation, and other matters crucial to the current and future performance of the organisation.
The second is that the focus of compliance has tended to make boards more risk-averse, a trend that becomes self-reinforcing as it informs the selection of new board members whose mindset and skill sets may not enable them to contribute to cultivating an innovative culture.
Compliance is a reasonable process to protect value created, but strategy and innovation are about growing value. If boards cannot spend most of their time on forward-looking analysis, the value to students protected by regulation and compliance will simply erode. Such a result will be more a failing of government than a failing of governance.