2-5 Stedham Place, London WC1A 1HUT: 020 7034 9900 E: enquiries@aoc.co.uk www.aoc.co.uk @AoC_info Association-of-Colleges

Autumn Budget 2017 Association of Colleges proposalsSeptember 2017

IntroductionColleges are transformational – they help people make the most of their talents and ambitions and drive social mobility; they help businesses improve productivity and drive economic growth; they are rooted in and committed to their communities and drive tolerance and well-being. They are an essential part of England’s education system.

Colleges provide academic, technical and professional education for young people, adults and employers. Among other things, the 288 colleges provide education and training to:

712,000 young people aged 16 to 18 1.4 million adults including 150,000 taking higher education courses 313,000 apprentices

Despite these enormous contributions, public investment in colleges has been hit harder than any other part of the education system in the last decade. Between 2009 and 2015 colleges dealt with a 27% real terms cut in funding. The impact of this has been a drastic drop in learning opportunities for adults, fewer hours of teaching and support for young people, teacher pay in colleges lagging behind schools and college financial viability under great stress. As always, colleges have faced up to these challenges and continued to provide high-quality education and training to 2.2 million people. The sad fact is that there are many more people who would benefit from what colleges offer, but the funding falls short.

After a decade of cuts it is clear that there are severe skills challenges which require greater investment. The decision to leave the European Union (EU) casts a sharper light on these challenges – social mobility, productivity, skills shortages, regional economic growth all require more college investment.

For a long time, the UK economy has relied on large numbers of skilled and semi-skilled people from the EU and beyond. There are already signs that migration is falling, skills shortages are increasing and productivity is still stagnant. The UK needs to remain outward-looking and will inevitably continue to have significant levels of immigration and emigration but a sensible long term objective is for the UK to be self-sufficient in skills.

In order to achieve this, the Government will need to spend more on 16 to 18-year-olds to give them the start in life they deserve and to match the academic and technical training of our OECD competitors. The Department for Education (DfE) also needs to build a system for adults that encourages lifelong learning and tackles basic skills. DfE should also ensure money is used efficiently, to tackle the waste that arises in small sixth forms and to review its approach to GCSE resits. The strong emphasis on skills in the Industrial Strategy now needs investment so that

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colleges can deliver and there needs to be some refinements of policy towards apprenticeships and higher education. We have 15 overall recommendations which we explain in more detail in the rest of this paper.

The Association of Colleges (AoC) represents nearly 95% of the 288 colleges in England incorporated under the Further and Higher Education Act 19921. Those colleges are ready and keen to step up to meet the challenges our country faces; our proposals will help them do that for the benefit of young people and adults, employers and communities.

Association of Colleges22 September 2017

1 There are 189 further education colleges (FE), 16 specialist colleges, 73 sixth form colleges and 10 special designated institutions.

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Autumn Budget 2017 recommendationsWe have 15 recommendations which will support the national goals of sustaining inclusive economic growth and developing a fair and effective education system:

Increased investment in skills to support the Government’s Industrial Strategy1. HM Treasury should set a target to increase public spending on

education to 5% of GDP by 2025.

2. Skills should be a major part of the national Industrial Strategy with a plan that covers the Shared Productivity Fund, devolution, the national retraining scheme and a citizen’s skill entitlement 

A fair funding formula for schools, colleges and universities 3. DfE should introduce an immediate £200 per student uplift in funding

in 2018-19 to improve the education and support offered to 16-19 students.  

4. DfE should conduct a review of 16-19 funding to ensure it is linked to the realistic costs of delivering a rounded, high-quality curriculum.

5. In the implementation of the technical education reforms, DfE should ensure there is adequate funding for the transition year and for three years of study for those who need it.

6. DfE should invest in proven methods to achieve the goal of English and maths standards by age 19 and review funding levels to ensure they are sufficient for the task. 

7. DfE should simplify the overly complex high needs funding system to provide more clarity and certainty for young people with learning difficulties and disabilities and their families. 

8. DfE’s scheduled review of higher, further and technical education funding should ensure that the student loan system provides good incentives and support for young people and adults while distributing public money efficiently.

A period of stability to build quality apprenticeships

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9. DfE should earmark up to 25% of apprenticeship levy funds to ensure access, quality and progression. In the short-term, any underspend in the 2017-18 financial year should be used for these purposes.

10. DfE should develop a long-term supply strategy to ensure there are strong organisations able to confidently invest in their apprenticeship training and technical education.  

Building strong colleges and institutions11. The restructuring fund should be available to colleges after March

2019, include grants as well as loans and involve a shorter application process.

12. DfE should allocate capital funding to improve the college estate to support the technical education reforms and to create the additional education places that will be needed after 2020.

13. DfE’s Schools Commissioner group should carry out targeted reviews of school sixth forms and university technical colleges to ensure financial sustainability and offer quality and breadth. 

 Support for people to access education and training14. The Department for Work and Pensions (DWP) should extend child

benefit and other social security payments to young people taking apprenticeships, in line with those who stay in other forms of education up to the age of 18.

15. The Department for Transport (DfT) should support local authorities to invest in support for transport up to age 18 as part of the contribution to the Industrial Strategy 

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The financial position of colleges1. The financial position of colleges is a continuing concern. Colleges

face five challenges:

Income reductions at a time when core costs are rising.

Severe financial weakness in a small number of colleges which has affected confidence in the sector and prompted both intervention and college-to-college mergers.

Reluctance of banks to sustain existing lending levels and lack of alternative sources of investment.

Growing costs and liabilities associated with public sector pension schemes which are controlled by national and local government.

Introduction of a college insolvency regime without sufficient action to stabilise the finances of the sector.

2. The English college sector has faced and overcome financial challenges in the past. For example, in 1998 when 96 colleges (22%) were judged to be financially weak2 or in 2009 when 80 colleges were forced to abandon capital projects3. The position this time is more serious because there are no easy options for improvement. There are several signs of financial strain:

55% of colleges reported deficits in 2015-164 with the sector as a whole reporting a deficit for the third year in a row5. Government set a benchmark in the area review programme that colleges should aim for surpluses at 3% of income.

68 (21%) of colleges reported earnings before depreciation interest and amortisation (EBITDA) of less than 3% of income which is the threshold in the Education and Skills Funding Agency’s (ESFA’s) calculation at which financial health is deemed inadequate.

2 Public Accounts Committee “Management of Growth in the Further Education Sector” 19983 DIUS Select Committee “Spend Spend Spend” 19994 AoC calculations from college accounts spreadsheet for 2015-165 The surplus and deficit figures in colleges need to be treated with some caution because of the impact of volatile and unpredictable pension valuations and also transactions relating to land valuation and sale. Nevertheless Government set a benchmark that total surplus should be 3% of income in the area review programme in March 2016. Only 49 (15%) of colleges met the 3% target in 2015-16

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As at 31 August 2017, ESFA has issued financial notices to improve to 36 further education (FE) colleges (22% of the total) and three sixth form colleges (4%)6. More than half of the colleges with notices (19) have had them for more than two years.

17 FE colleges had exceptional financial support loans as at 31 July 2016 worth £43 million which they needed to manage cash flow. The payment profiles used by the ESFA, Student Loans Company and new apprenticeship system leave many colleges in a situation where they need to borrow. As we explain later, bank credit is now restricted.

3. The context for the current situation is an eight year austerity

programme which started in 2009 in the wake of the financial crisis. The position of colleges at that time was historically strong because they had expanded their income between 1996 and 2009, had become a destination of choice for young people, had modernised working practices and had become effective vehicles to spread education, raise skills and improve productivity. In recent years though, the contribution that colleges can make has been limited by the resources available to them. Overall college income has fallen from £7.8 billion in 2009-10 to less than £7 billion in 2016-17. This is mainly because of public spending cuts. FE colleges started the decade with 81% of their income coming from public sources. Sixth form colleges obtained 94% from public sources. Even with strenuous efforts to maintain or increase private funding, government is the majority funder because of the important role that colleges have in the education of 16 to 18-year-olds.

4. The experience of funding reductions in recent years has been a cumulative series of small reductions applied to a system in which college income is already quite volatile because it follows student numbers. The combined impact of these decisions has been a 27% real terms reduction in total government funding to colleges between 2009 and 2015 made up of a cash cut of 10% in the funding for 16 to 18-year-olds and cash cut of 35% in spending on adult education and skills7. Although colleges now have an opportunity to expand apprenticeship income, this will not be straightforward for reasons we explain later in this paper. Given known public spending plans, overall funding from central government is likely to decline in real-terms between now and 2020. Unlike some public services (for example transport or many council services), there is no option to make up cuts in spending by increasing fees to under 19 year olds. Public spending cuts lead directly to course and capacity cuts – the amount of teaching and support has dropped for young people to

6 Five financially weak colleges merged with financially stronger counterparts on 1 August so this number is lower than normal. ESFA will issue new notices to improve to some colleges following the review of financial plans returned in July 2017 7 AoC calculations from government spending figures. Full Fact website has more detail

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around 15 hours, compared with 26 to 30 hours in many OECD countries.

5. For some colleges reductions in funding have contributed to a situation where they have become financially weak. College leadership teams make mistakes and there have been other causes of financial problems in some cases, for example failure to control costs or mistaken investment plans. Financially weak colleges find themselves implementing bank or FE Commissioner mandated recovery plans. These invariably prescribe cost cuts to return the organisation to financial stability. In recent years colleges have collectively spent around £100 million a year on redundancy and rationalisation costs.

6. A wider consequence of the funding reductions has been a squeeze in pay. Government policy has protected the incomes of schools and universities more effectively than colleges. This has had an effect on pay. Colleges are self-governing and have responsibility for their own decisions on pay and staffing. AoC meets education trade unions nationally to discuss national recommendations. Over the last seven years, national pay recommendations and the increases actually given to staff have fallen below inflation. Higher National Insurance and teacher pension contributions were a particular issue in 2015-16 because it added 5% to total costs. AoC’s latest workforce survey suggests that average lecturer pay in colleges is £30,100 which is significantly less than average school teacher pay (£35,000) and average university academic pay (£43,000)8. Staff turnover rates in colleges have increased and there are recruitment difficulties in certain areas, particularly maths, engineering and construction.

7. Another step taken by colleges is to cut investment and capital spending. Although they have developed good financial credentials in the last 20 years, colleges face a home grown credit crunch. Total borrowing has fallen from a peak at £1.6 billion in 2014 to £1.3 billion at 31 July 2017 with clear signs that it is falling further. Barclays and Lloyds accounted for around 90% of loans by value at the peak but are both taking steps to reduce their exposure. Santander is offering new lending but the market is very limited. This has resulted in higher interest margins and tougher covenants. The government’s legislation to introduce a college insolvency law in 2019 has also affected the banks. They now take every opportunity available to secure their loans to protect their position. One symptom of the shortage of cash is the growth of alternative lending (“cashflow loans”). The shortage of private finance has wider consequences because it means less investment now just a few years before the post-16 population is due to rise.

8 College figures taken from AoC Workforce Survey which was completed by 140 colleges. The school figures come from the pay review body’s latest report. The university figures come from the University and Colleges Employers Association (UCEA)

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Recommendation 1HM Treasury should set a target to increase public spending on education to 5% of GDP by 2025.8. Public spending on education is 4.5% of GDP in 2016-179 and is

forecast by the Office of Budget Responsibility (OBR) to fall to 3.9% by 2021-2210. OBR predicts spending will stay below 4% of GDP for the long-term During the early years of the 2000s, spending was 5% of GDP and rose during the financial crisis to a peak at 5.8%. Some of the difference is explained by the increase in higher education (HE) tuition fees and the introduction of the student loan scheme11 but a significant explanation of the change has been the squeeze in spending on schools and colleges. The Treasury and DfE are holding down funding at a time when the total number of pupils and students is rising12. The squeeze in spending involves reduction and restraint in cash allocations to state funded schools and colleges combined with policies to replace public spending with private contributions. The student loan scheme means that there is substantial private spending on degree level learning for young people.

9. There is a positive economic case for greater spending on education and training both for individuals and employers13. Exit from the EU makes this issue even more critical because skills are identified by many businesses as their major concern. If there are reductions in immigration, employer behaviour will need to change. In some sectors, the non-UK EU workforce is in excess of 15% of the total14. Government action is needed to ensure that the young population is properly prepared for the future but also to help train adults to fill future vacancies. Regardless of what happens in other countries, the UK should be spending more on education and training than less. A longer target to raise the public education spending to 5% of GDP by 2025 would be a rational objective.

9 Public Spending Statistics 2017, Table 4.4.10 Office for Budget Responsibility, Fiscal Sustainability Report, 2017, Page 56. 11 Total UK education spending in the UK as a share of GDP is relatively high. In a recent report OECD describes the UK as “spending the highest proportion of its wealth on primary to tertiary education institutions” with total spending recorded at 6.6% of GDP compared to an OECD average of 5.2%. This comparison should not induce complacency and should be treated with caution because the data relates to 2014 and takes no account of population age structure. The UK has an unusually high level of private (household) spending on education because of fees paid for university tuition, private schools and international students. 12 DfE National Pupil Number Projections July 2016 forecast a rise in the 5 to 15 age group in schools from 6.5 million to 7.0 million.13 “Estimation of the labour market returns to qualifications gained in English Further Education, December 2014” Department for Business, Innovation and Skills (BIS), Research Paper 195).14 Keohane, Broughton and Ketola “Working together: European Workers in the UK”, SMF, June 2016.

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Recommendation 2Skills should be a major part of the national Industrial Strategy with a plan that covers the Shared Productivity Fund, devolution, the national retraining scheme and a citizen’s skill entitlement

10. The economic success of our country in the coming years depends on maximising the talents and developing the ability of all of our people. This requires long-term investment as well as a culture change at all age levels. Young people of school age must be well prepared for a very different world but the education and training system needs to help adults to fill gaps in their basic skills, retrain or upskill. Two-thirds of the workforce of 2030 has already left full-time education15. If there is substantial change in the economy and the jobs people do – for example as a result of automation or Brexit – then retraining will need to be focused on adults.

11. As with most areas of life, adults and their families have the main responsibility for keeping their own knowledge and skills up to date. There are clear individual benefits from learning for many people, particularly younger adults, in terms of better jobs, higher pay and personal improvement. However education and training markets will fail if left entirely to individual and employer decisions. Outside a narrow range of courses (for example MBAs), individuals cannot borrow from banks to cover fees. Few people are prepared to pay fees up front if their returns are uncertain. Apart from a few big companies, employers will only generally help with courses directly connected to work. The levy is bringing a new focus to workforce training but apprenticeships are focused on an individual’s current role and are for full-time workers only. If the system just relied on apprenticeships, then career changers, part-timers and the self-employed would be excluded.

12. In recent years the Treasury has cut public spending on adult learning. Between 2009 and 2015, cash spending was cut by 35%: a real term’s cut of 50%. The area has not been seen as a priority compared to apprenticeships and the introduction of FE loans seemed to offer an alternative. The numbers of adult apprentices have grown from 200,000 in 2006 to 700,000 in 2016. The 112,00016 people who have taken out advanced level learning loans is a fraction of those studying at that level before loans were introduced. At the same time, over the last decade a million adult learning places have been lost. At a time when the population in England has risen by 8%, the number of adult students has fallen from 2.7 million to 1.4 million.

15 Dromey and McNeil “Skills 2030” IPPR, 201716 AoC calculations from DfE statistical first releases

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13. In the 2015 Spending Review the Treasury decided to halt the slide by fixing the adult participation budget at £1.5 million. This was an improvement on past policy but it does not protect the budget from inflation. The decision to leave the EU puts a significant source of funds for skills – the European Social Fund – in doubt. The main source of funding for skills – the Adult Education Budget – should continue to be protected but in real terms rather than just in cash. The Government should also protect the skills element of the European Social Fund in the design for the Shared Prosperity Fund. The £200 million a year allocated in the 2014-20 European Social Fund17 for skills used for this purpose: to support skills in disadvantaged areas to help people deal with economic change. This could form the basis for the planned National Retraining Scheme.

14. The way that the Adult Education Budget works also makes it hard for the funds to be used effectively. The funding rates have not increased for several years. This makes it harder to cover the costs of running courses. The restrictions on which courses and which people are eligible for funding is also a problem because there is a limited and changing list of eligible qualifications. ESFA needs to consider ways to make the funding more flexible.

15. A further issue is the uncertainty about Government plans for skills devolution. The former Chancellor announced nine devolution deals covering skills between October 2015 and March 2016 but some have fallen by the wayside and there has been limited progress in the last 12 months in sorting out operational details. ESFA has shared data with combined authorities and drafted rules of engagement but bigger policy issues are unresolved, for example responsibility for intervention. There are discussions about finding ways to meet the timetable to devolve budgets to the six mayoral combined authorities for 2018-1918.

16. The funding and organisation of FE in England is already quite complicated. Complexity creates an obstacle to businesses and individuals. Skills devolution creates new rules because mayors will be focused on the residents in their areas and funded on that basis whereas the apprenticeship funding system is organised around workplaces. There will be issues around boundaries and in cases where colleges and providers are located outside a devolved area but offer courses to those inside them. All of these issues are resolvable but only if they are properly identified and discussed. This means consultation with not only the 60 or so colleges in the devolution areas, but also those outside. Solutions need to be

17 ESF Operational Programme 2014 to 202018 Combined authorities in West Midlands, Greater Manchester, Liverpool City Region, Tees Valley, West of England and Cambridgeshire and Peterborough. The Government has also promised skills devolution to Greater London though there is no deal. Other combined authorities exist but they do not yet have mayors or skills devolution deals

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devised that avoid creating new bureaucracy where it is not needed. One important principle should be to ensure that courses are planned in response to actual demand from students. This is essential to put together viable groups. Given the time it takes to agree contracts, change courses and recruit specialist staff, it is already late to meet the 2018 deadline. It may make more sense to schedule the change for 2019 but to start planning properly now.

17. The Government’s forthcoming Industrial Strategy is a chance to restate the importance of skills to the country’s future and to set out policy with renewed vigour. This should restate the purpose the Adult Education Budget as being to help individuals acquire basic and intermediate skills to get them into work or change career. A further step could be to convert the current set of statutory entitlements built around qualifications into a Citizen’s Skills Entitlement covering six core capabilities needed for life and work: literacy, numeracy, digital, financial, citizenship and health19. Even with this shift, there will be a significant challenge to encourage people to invest in higher levels of learning – particularly at Levels 3, 4 and 5 where many of the skills shortages are becoming more and more worrying.

18. To address this, DfE should also develop learning accounts to test approaches that could encourage more adults to invest in learning and training. Control over funds could energise people to invest in their own learning which is why Governments in France and Singapore have developed these systems. There are now many more controls in the English system than there were when accounts were last tried. An English trial should give individuals a single budget at age 18 with flexibility over courses, levels, modes (e.g. part-time and distance learning) and length of learning, with more choice about the qualifications they can achieve and better advice and information to help them decide.

Recommendation 3DfE should introduce an immediate £200 per student uplift in funding in 2018-19 to improve the education and support offered to 16-19 students.  

19. There is a growing gap between the funding made available to educate the 16 to 18-year-old age group and the actual cost of delivering a high quality curriculum. This has had a significant impact on students as the current funding levels mean that most young people only receive around 15 hours of teaching and support per

19 Learning and Work Institute’s report for JRF estimates that an investment of £200 million a year could double the number of people accessing similar provision. The return would be an additional 280,000 people into work by 2030 compared to current approaches.

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week. This is considerably less than in other high performing education systems in other countries20 where young people benefit from 26 to 30 hours. This disparity with our OECD competitors was recognised in the Spring Budget by the new funding to support T Levels, but this will only impact on around 20 – 25% of the cohort. The funding shortfalls make it harder to ensure that those from disadvantaged backgrounds get the support they deserve and need.  

20. If there is no action on funding rates, the position will worsen each year that passes. Inflation will erode the value of the rate by 2% a year and further reduce the value of funding that has fallen significantly this decade21. Funding rates seem now to be calculated on the assumption that students need only take 3 A Levels rather than 4 AS Levels and there is a risk that subject choice will narrow to cheaper and more popular subjects. In the past, schools and colleges have cross-subsidised smaller groups with funds released from more popular subjects but this becomes harder as funding contracts. There is evidence that colleges have cut A Level subjects in modern foreign languages and the sciences, because they can no longer afford to offer them22. Wider support for students has also been cut back which makes it difficult for institutions to address the concerns expressed by employers about the education system focusing too much on grades and league tables rather than personal development23. Mental health issues seem to be increasing as support from NHS services has also declined. Declining income for 16 to 18 education has pushed some colleges into financial inadequacy with some schools raiding their pre 16 budgets to prop up sixth forms that are uneconomic at existing funding levels.

21. The positive case for higher funding rates are that they will support key Government objectives including raising the entry rate of disadvantaged young people into higher education and reducing the numbers who reach age 18 without English or maths at Level 2. DfE should carry out a review to consider longer term 16 to 19 funding, as outlined below, but as a first step towards this, DfE should increase the 16 to 18 rate by £200 in 2018-19.

20 SFCA Costing the Sixth Form Curriculum, March 2015, Part 2 for international comparisons.21 16 to 18 funding rates have not risen since 2009 apart from a £100 (2.5%) rise in 2013.Over the same period (2009 to 2016), the Consumer Price Index rose by 14%. On top of this, national insurance and pension changes increased education costs by about 5% in 2015-1622 http://www.bbc.co.uk/news/education-33847860.23 CBI Pearson Skills Survey 2016

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Recommendation 4DfE should conduct a review of 16-19 funding to ensure it is linked to the realistic costs of delivering a rounded, high-quality curriculum.

22. DfE should initiate a review of 16-19 funding to ensure that rates are sufficient to deliver a rounded, high quality curriculum and the support that young people need to succeed. Modelling on the costs of a broad and balanced curriculum by the Association of School and College Leaders24 and Sixth Form College Association25 shows that the national base rate should be close to £5,000 to support a broad and balanced curriculum. The rate is currently stuck at £4,000. DfE is acting to secure higher minimum levels for secondary pupils aged 11 to 16 but has, so far, left post 16 education untouched.

23. The drop in funding at 16 is a peculiar feature of the English education system. The gap continues to widen due to the school funding announcement, which provides a 3% increase in the Dedicated School Grant in 2018-19 and an increase in the minimum secondary funding rate to £4,600. There will be a further rise to £4,800 in 2019-20. When the student moves into Key Stage 5, the national base rate drops to £4,000. The pre 16 funding formula also offers pupils with multiple disadvantages as much as £5,000 extra26 where the comparative figures post 16 add up to £2,000 extra27. There is no justification for this dip and some unfortunate consequences. Schools with sixth forms tend to divert money allocated for pre 16 education towards older pupils who are often taught in small classes. Meanwhile colleges have to strike a different balance. Many sixth form and some tertiary colleges run larger classes as a way to ensure they can afford higher salaries. In cases where this is not possible, there is a squeeze in pay levels, contributing to the issues described at the start of this paper.

Recommendation 5In the implementation of the technical education reforms, DfE should ensure there is adequate funding for the transition year and for three years of study for those who need it.

24. The Treasury decision in the 2017 Spring Budget to provide more funding for technical education will help support a significant overhaul and improvement of the system. The new technical

24 ASCL paper on education funding, 2015.25 SFCA Costing the Sixth Form Curriculum, 201526 Funding assigned for pupil premium, disadvantage based on postcode, low prior attainment and English as an additional language.27 Funding assigned for disadvantage based on postcode and low prior attainment

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education routes will not be available until 2021-22 and the budgets rise each year from 2018-19 towards £500 million in the mid-2020s. Work is already underway to develop the new T Levels and to use the first tranche of funds in 2018 to develop work experience in colleges and other providers. Government is right in recognising that T Levels should involve 900 hours per year learning, substantial work placements and a strong focus on future occupational needs.

25. There are other measures that would help make a success of the technical education reforms. DfE’s Post-16 Skills Plan set out a possible design for the new T Levels but there has been a year’s work since then and it would be helpful if DfE and the Institute for Apprenticeships provided a public update. The current expectation is that the standard T Level model will be a two year full time course with some school leavers taking a transition year beforehand. DfE could usefully set out the current planning assumptions for the transition year and consult practitioners on the details. In terms of funding, this should review whether it is right to cut rates by 17.5% when students reach 18. A sensible step therefore would be to maintain the full rate for three years for those students taking the transition year.

26. Two goals of the reform are to increase the numbers being taught on technical programmes and to secure a shift towards science, technology and engineering routes. These will only be achieved with the right people in place which implies a workforce development programme to retrain existing staff and to recruit new ones. Colleges also need to continue to have industry-standard facilities so that they can provide high-quality education for young people, apprentices learning off the job and adults. One option for DfE will be to design new programmes to address these issues and to carve out specific funds to support them. An alternative approach to addressing staff and capital equipment needs will be to raise overall funding rates and extending formula based capital funding to colleges.

Recommendation 6DfE should invest in proven methods to achieve the goal that young people attain necessary English and maths standards by age 19 and should review funding levels to ensure they are sufficient for the task. 

27. DfE has set a target that every single 18-year-old should reach grade 4 GCSE standard in English and maths. The main vehicles for achieving this are schools and colleges. In summer 2017, 71% of 16-year-olds reached this level in maths while 70% did so in English Language28. This means that 155,000 missed the maths target and 159,000 missed the English target. Since 2013, English and maths

28 Ofqual summary of GCSE results, August 2017

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courses have been compulsory for 16 to 18-year-olds who do not reach this standard. The condition of funding requires the young person to continue to re-sit the exam until they are successful. If a student is not enrolled on a qualifying course, ESFA removes all their funding. This penalty is applied even if the student started midway through the year or has health problems which make attendance difficult. The average FE college has more than a thousand resit students. In some colleges, more than 90% of the students they recruit did not achieve English or maths to the acceptable standard by age 16.

28. DfE introduced the condition of funding policy in 2014 without prior research into what worked29. The policy has been in place for several years and is not working well. In this summer’s GCSE maths results, just 26% of those aged 17 achieved grade 4 standard. The English results were only slightly better at 33%. Colleges have no choice but to keep putting students through resit courses to achieve what they did not manage to achieve in five years of secondary schooling. The summer 2017 results left 93,000 young people still missing the English target and 124,000 below the maths target. Effectively £109 million30 was spent in 2016-17 on GCSE resit courses which did not secure the desired qualification. Colleges want to help develop a better approach than this because it is not working.

29. There is widespread support for the objective of improving English and maths skills and ensuring everyone starts adult life at the right standard. The current policy is not working despite enormous efforts from colleges. As Sir Adrian Smith’s review explained, it is also acting as an obstacle to the longer term aim of getting all young people to Level 3 standard31. A more effective approach would be to research what works, perhaps by testing alternative approaches. In the meantime, DfE should widen the list of eligible courses, trust professionals to make decisions in the interests of their students and to use performance tables and inspection to encourage improvement. In the short term ESFA should apply the same 5% tolerance on the condition of funding as it did last year.

29 The 2011 Wolf review of vocational education said that DfE should require students under 19 who do not have GCSE English or maths to take courses to get them there but did not mention a funding penalty. DfE’s 16 to 19 funding statement published July 2012 introduced the proposal for a penalty without explaining why this was necessary 30 AoC estimate of money spent on the GCSE courses for students who did not achieve the desired goal31 “In view of the low GCSE success rates and new GCSE requirements, DfE should review its 16-18 resit policy” extract from recommendation 5 of Sir Adrian Smith’s Review of Post-16 Mathematics, DfE, 2017

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Recommendation 7DfE should simplify the overly complex high needs funding system to provide more clarity and certainty for young people with learning difficulties and disabilities and their families. 

30. DfE spends £5 billion a year within the Dedicated Schools Grant (DSG) to support 300,000 children and young people with high needs. Around £600 million of this budget is spent on post-16 special education needs. There was disruptive change in 2013 to the way in which this budget is spent. DfE merged three different budgets, introduced a new national formula and devolved responsibility to 152 local authorities. It is the latter change that is most problematic. Local authority led funding has involved a considerable amount of paper chasing because each council organises its own administration. Colleges educate an average of around 70 students with high needs each year who travel from as many as 10 local authority areas32.

31. The school funding reforms will remove local authorities from a role in school funding but will leave them in charge of the high needs budget. We are concerned that there will be fewer staff available to carry out this important role and that this will make the administration issues even worse than they are now. There is therefore a case for introducing a parallel administration reform at the same time as the introduction of a new distribution formula. DfE should foster national or regional assessment of needs and contract administration. The aim should be higher standards of education, lower costs for placements and more predictability and certainty for young people and their parents.

Recommendation 8DfE’s scheduled review of higher, further and technical education funding should ensure that the student loan system provides good incentives and support for young people and adults while distributing public money efficiently.

32. There is a great deal of political and media interest in university fees. There have been suggestions that the full-time fee cap should be reduced to £7,500 and that teaching grants should be reintroduced. Any decision on HE teaching will have consequences for colleges. There are around 200 colleges delivering HE though in some cases this only involves very small numbers. 75 colleges have access agreements in 2017-18 which means that they charge fees above the £6,000 threshold. 48 colleges have approval to charge the full £9,250

32 AoC estimates based on ESFA 16 to 18 funding allocation data and survey of colleges

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fee for some or all of their courses. Colleges have taken a variety of strategies towards fees with some finding that it helps to differentiate foundation degree or higher national courses by charging less while others find price makes no difference to demand. And although fees are important, there are wider issues concerning the impact on the choices available to people in all communities.

33. The HE student fees and loan system in England supports high-quality teaching but it is expensive and offers unhelpful incentives. The average full-time student graduates with a loan debt of £50,000 which only 30% are expected to repay in full within 30 years33. Student loans have protected HE at a time of public spending cuts but the system lacks mechanisms to keeps costs down. The fact that repayments start after graduation and are income contingent creates an obvious incentive for institutions to increase fees towards the fee cap (£9,250), particularly as many people equate higher tuition fees with higher quality. Meanwhile the fact that 48% of young people enter HE contributes to a widespread view that a degree maximises their chances in the professional labour market. This, in turn, may result in an oversupply of graduates given that automation and Brexit may bring economic change. The strong cultural bias towards full-time residential HE adds more costs because relatively few students live at home.

34. The alternatives to full-time residential HE are underdeveloped. Young adults who opt for courses at Level 4 or 5 have no access to maintenance support. There has been a serious decline in the number of mid-career adults taking HE courses and there are low numbers taking HE courses below degree level. This may be holding back both the prospects for individuals but also the skills available to employers and public services.

35. The task of rebalancing the HE system is not a simple one and will take time because of the long application cycle. Possible measures could include a reintroduction of number controls targeted on certain subjects, accelerated degrees and reform of maintenance loans to support home based study and Level 4 and 5 courses.

Recommendation 9 DfE should earmark up to 25% of apprenticeship levy funds to ensure access, quality and progression. In the short-term, any underspend in the 2017-18 financial year should be used for these purposes.

36. The apprenticeship levy creates a new independent funding stream for apprenticeships worth an estimated £2.6 billion a year from 2017-

33 Figures derived from IFS “Higher Education Funding in England” 2017, Pages 10 and 11

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1834. The official case for introducing the levy35 noted financial benefits for both individuals36 and employers37. A compulsory system is seen as a means to reverse a 20-year decline in employer spending on training, to narrow the 20% productivity gap with other G7 countries, to improve social mobility and to increase the number of apprentices. A key principle of the levy is that it is a hypothecated tax with the funds being under the control of employers. The rules allow levy paying employers to bank their funds for up to 24 months before spending them.

37. Every part of the apprenticeship system is being reformed in 2017 and this creates a risk that numbers in training will fall and perverse outcomes will ensue. Although the levy and public sector targets have generated new interest in apprenticeships, many large employers appear to be waiting until they are confident that the new standards work and until they have sufficient funds in their levy account. It will take some time for the full impact of the changes to be clear but no-one should underestimate the change and the potential for the overall impact of the programme to be diverted. In just one financial year, exchequer funding which used to provide almost 100% of the apprenticeship budget has been replaced by levy funding. The 20,000 employers who pay the levy are able to direct training spending equivalent to 110% of the tax they pay though budgets are built on the assumption that they won’t. The money they don’t spend has been redistributed in 2017-18 to fund training in small companies and for apprentices who started before 1 May 2017.

38. The budgeting for apprenticeships is opaque but should be watched closely. There is likely to be an overall underspend in 2017-18 because this has been the pattern for several years and because this is the first year of the new system. Larger levy paying employers are likely to be cautious while smaller employers may have been put off by new co-funding requirements. Meanwhile colleges and providers have had to struggle with new ESFA procurement and allocation systems which have made it harder to access funds.

39. HM Treasury normally takes back underspends to plug fiscal gaps elsewhere in the budget but it would be a mistake to recover and keep any 2017-18 apprenticeship underspend because this would harm the training supply side and because demand is likely to increase in 2018-19. New education and training schemes typically

34 HM Government “Apprenticeship spending and expected levy payments” August 2016 estimates that 19,000 employers will pay the levy.35 HM Government, English apprenticeships: Our 2020 Vision.https://www.gov.uk/government/publications/apprenticeships - in - england - vision - for - 2020 ,.36 Completing an apprenticeship brings a return of between £48,000 and £74,000 extra over a working life for a Level 2 apprenticeship and between £77,000 and £117,000 for Level 3.37 70% of surveyed employers reported that apprenticeships had improved the quality of their product or service.

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run on a boom then bust cycle but there is an extra twist with apprenticeships because larger employers are likely to act toward the end of 2018 at the 18 month point where their funds start being cancelled.

40. There should also be a review of the rules that grant levy paying employers control of 110% of their funds. This gives larger employers the first call on training funds and squeezes smaller employers into second place. In summer 2017, these arrangements forced ESFA to cut non-levy allocations in comparison to existing activity. Penalties on the agency if it overspends make it very difficult to manage the uncertainty associated with possible decisions by levy paying employers. The new system also transfers control over a large part of the training budget to large employers headquartered in the South East. Putting employers in control of spending has many benefits but the economy and jobs are changing. Today’s employers are getting a larger share of training funds but may be in sectors that will get smaller in future. They may perpetuate English training patterns which are currently biased towards Level 2 skills in low value service roles. To guard against this, it would make sense for the Treasury and DfE to scale down the 110% offer to 75% to release funds to address failures in the training market. Money should be used to widen access by tackling both gender and ethnic disparities in key sectors. There are longstanding issues about segregation by gender38 and ethnic origin39. Funding should also support and incentivise progression to Level 3 and 4 programmes and to bolster training in regions or sectors where numbers are lower.

Recommendation 10DfE should develop a long-term supply strategy to ensure there are strong organisations able to confidently invest in their apprenticeship training and technical education.

41. Although employers have substantial control over apprenticeship spending, DfE has measures to guarantee minimum training quality and to ensure that training only happens in approved providers. These controls are necessary to develop strong training organisations and a cadre of trainers able to deliver on-the-job supervision and off-the-job training. However the way in which ESFA has managed the procurement for the register and for non-levy allocations has drawbacks. Successive tender invitations have covered the entire country and the entire activity. This has put every college at risk of losing all of their non-levy business irrespective of the quality of their

38 Fuller and Unwin “The challenges facing young women in apprenticeships” 2015 available via www.educationandemployers.org.39 Newton and Williams “Underrepresentation by gender and race in apprenticeships: A research summary” Unionlearn 2013.

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provision, the on-going relationships they have with employers or their pipeline of prospective apprentices. The apprenticeship programme requires strong engagement with small and medium sized enterprises (SMEs) and with potential apprentices. Both will only be secured if colleges and independent providers have long-term confidence that they will secure funding if they continue to deliver to the quality standards and priorities of the programme. New entrants will always take time to build up to the scale and quality required, so should always be a small part of the supply side. ESFA should take a long-term strategic approach to build the supply though managing procurements in more manageable packages, giving existing providers more credit for their track record and allocating smaller parts of the budget for new entrants.

42. The priority should be better quality apprenticeships built around strong employer involvement and proper off-the-job training. There should also be more apprentices at Level 3 and above and in science, technology, engineering and maths (STEM) sectors. This implies high cost facilities and dual-professional staff. Getting to this point requires more stability and confidence for colleges and training organisations to encourage them to invest. This, in turn, requires ESFA to develop a clearer supply-side strategy to develop the market over the long run for high quality economically relevant apprenticeship provision.

Recommendation 11The restructuring fund should be available to colleges after March 2019, include grants as well as loans and involve a shorter application process.

43. The Government’s post-16 area review programme started in September 2015, finished in March 2017 and involved all colleges in 37 projects. Since the reviews started, there have been 33 college-to-college mergers and seven sixth form college academy conversions. Another 18 mergers and 18 conversions are scheduled to take place in the next 12 months, though they may not all happen. There has been a major reshaping of the English college system between 2016 and 2018. It will take some time for institutions to secure the benefits from these structural changes.

44. Financial support from Government for these reforms has been limited compared to previous exercises in England40 or other parts of the UK41. Aside from the costs of the reviews themselves and the VAT commitment to newly converted academies, ESFA has spent about £8

40 The Further Education Funding Council’s Rationalisation Fund provided a total of £20 million in grants over 3 years at a time when funding levels and student numbers were also rising. During that time 25 mergers took place. 41 The Scottish Funding Council provided £52 million in grants to support college reorganisation in 2014. 14 mergers took place

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million in transition grants. ESFA’s Transaction Unit has assessed many applications several of which are not yet completed but, by our estimates, it has only completed nine deals relating to mergers with loan support of perhaps £125 million. The amount and terms of these loans is confidential but they are all repayable within 10 years. ESFA’s Transaction Unit will agree more loans in the next 12 months but, without policy changes, only part of the £500 million in loan funding set aside for this purpose between 2016 and 2019 will be spent. The new loans from government provide support where banks are unwilling to lend. For reasons explained earlier total bank lending to colleges is now in decline.

45. Apart from the £100,000 transition grant, most college mergers are self-funded. College mergers typically involve six or seven figure sums being spent up front on redundancies, IT systems and building work to secure long term efficiencies. Banks are not much interested in this sort of lending. College self-funding involves selling sites or using available cash reserves. Once used, they cannot be used again. Inevitably some of the mergers will not work as planned. There is a risk that in some cases the end result will be financially weakened colleges lacking the ability to invest in technical education. Given that there will be spare money in the restructuring facility, this is an avoidable situation.

46. The process of restructuring colleges has proved to be more complicated than was anticipated when area reviews started in 2015 because of the demands of a variety of stakeholders. Colleges have found it takes more time than expected to satisfy their banks, resolve pension issues and navigate rules devised by Ofsted, the Home Office and ESFA. Applications to the Restructuring Fund take more time and money than necessary because of the complexity of the documentation and the fact that there are several layers of sign-off. The Treasury and DfE has an interest in helping colleges implement area review recommendations and should therefore tackle these obstacles by simplifying the restructuring facility process.

Recommendation 12DfE should allocate capital funding to improve the college estate to support the technical education reforms and to create the additional education places that will be needed after 2020.

47. Colleges spend considerable sums on advanced machinery, laboratory equipment, workshops and vehicles but are under financial pressure to improve their operating surpluses and conserve cash. Total capital investment has more than halved from £1.5 billion in 2009-10 to £0.7 million in 2015-16 and continues to fall. This is

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directly attributable to the reductions in direct capital funding for colleges but is also a result of the withdrawal of private finance. An increasing number cannot persuade banks to lend more, do not have property to sell and do not generate sufficient cash.

48. The distribution of government capital funding in education is fairly haphazard. The National Infrastructure Plan records DfE plans to spend £23 billion between 2016 and 2021 on school places42. New schools and extra places have understandably been the first priority. There are no comparable post-16 education plans perhaps because falling student numbers means there are currently spare places. However, by the early 2020s the numbers of 16-to-18 olds will rise and government expects an increase in the number on technical courses. The current generation of school sixth form buildings will be little help because they have not been designed for this purpose.

49. Capital funding for further education is currently very limited. Local enterprise partnerships (LEPs) have a remit for skills capital funding but it is a postcode lottery with significant differences in what they spend and for what purpose43. A capital fund of around £80 million was made available for new national colleges but was not fully used. There will be £170 million on offer for Institutes of Technology over three years from 2018-19 to 2020-21 but some of these funds may well end up with universities. As has already been explained, there is no capital funding for new projects via the restructuring funding. Even equipment and maintenance funds are in short supply. Capital grants originating in DfE and allocated by formula are distributed to schools, sixth form colleges and universities but not FE colleges. The capital funding gap will become more serious as the post-16 population starts to rise. There is the case for a capital budget to unlock this issue and to provide suitable equipment and purpose-built facilities that maximise efficiency, support larger class sizes and support specialist facilities. Efficient use of space in new buildings allows other space to be released or re-used.

Recommendation 13 DfE’s Schools Commissioner group should carry out targeted reviews of school sixth forms and university technical colleges to ensure they are financial sustainability and offer quality and breadth. 

50. DfE provides funding for 16 to 18 education to 3,600 organisations, 2,100 of which are schools. Between 2015 and 2018, restructuring

42 HM Treasury National Infrastructure Delivery Plan 2016-21, Page 76.43 The indicative skills capital budget within this LEP-controlled fund is a total of £0.5 billion over a four-year period and this is unlikely to be used because of pressure from other priorities and the difficulties that colleges have in raising private investment. Some LEPs have made no skills capital grants to colleges since 2015.

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associated with area reviews means there will be 20% fewer colleges with the institutions that remain educating slightly larger cohorts of 16 to 18-year-olds. The number of 16 to 18-year-olds in the English population and in education has been falling by 1-2% since 2015 so some rationalisation should be expected to maintain adequate group sizes.

51. There has been no rationalisation of school sixth forms for more than 20 years as a product of ideology and DfE neglect44. 169 new academy and maintained sixth forms were opened between 2010 and 201545 – an increase of 8% – but the total numbers of students was static. In March 2016, Ministers introduced five new tests to ensure that new sixth forms are viable46. There have been few new sixth forms in the last two years but the number of sixth form pupils is now falling so this means more problems with viability. There is a long tail of small institutions, with 1,180 school sixth forms enrolling fewer than 100 students47. There is emerging evidence that some of their performance is sub-standard48. Meanwhile University Technical Colleges (UTCs) have struggled to achieve viability in a system currently built around exams and transfer at age 16 and, as a result, six have closed while one did not open as planned49.

52. In the light of this evidence, a sensible DfE policy would be to apply the tests it has set for new sixth forms to those that are already open. It may not be appropriate to re-run the post-16 area review process for schools, but it would be sensible for Regional Schools Commissioners and councils to be asked to review sixth forms which are particularly small and/or underperforming. There will clearly be cases in very rural areas where an 11-18 school with a small sixth form is the best option and there may be tightly focused specialist sixth forms which achieve high standards with small cohorts. In many cases, partnerships with other schools and colleges will be preferable to simple closure. Nevertheless, it is time for a fresh look at this

44 DfE introduced a policy in 2004 to open new sixth forms but has never researched the effect and did not publish any advice to schools on how to run them successfully until 201745 DfE answer to written question 220526 sixth form education 16 January 2015.46 DfE guidance “Making changes to an existing academy” says that schools wishing to open a new sixth forms have a good or outstanding Ofsted grade; that it should be realistic for the new sixth form to offer 15 subjects and enrol more than 200 students in normal operation; that there should no detrimental financial impact on the rest of the school and that there should not be a negative impact on high quality schools and college nearby.47 Statistics on numbers of schools with sixth forms of fewer than 100 pupils supplied by DfE.48 According to DfE data, the percentage of schools adding more value than expected consistently decreases with the size of institution, below 400 students. Small sixth forms clearly work successfully in private schools but on funding levels more than 200% greater than in the state funded system. Research by the Association of School and College Leaders (ASCL) suggests that 250 students is the minimum efficient number to offer high quality education at current funding levels.49 House of Commons Library briefing on UTCs, September 2016

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issue. One option would be for DfE to embark on a parallel area review process for school sixth forms which judges them against the similar tests to those used in post-16 college area reviews: financial sustainability, local need and educational quality.

Recommendation 14The Department for Work and Pensions (DWP) should extend child benefit and other social security payments to young people taking apprenticeships, in line with those who stay in other forms of education up to the age of 18.

53. In recent years, successive government departments have taken a number of steps to encourage employers to recruit young apprentices. These include a lower apprenticeship minimum wage, an apprenticeship grant of up to £1,500 for smaller employers and the abolition of employer’s National Insurance for apprentices under the age of 25. These fiscal measures are helpful but they have not been matched by any incentives for parents or the apprentices themselves. Child benefit stops in the final academic year of a child turning 16 but parents can apply again to claim it for up to four years if a child is in approved education and training. Apprenticeships do not count and therefore a parent loses £1,000 when their child starts an apprenticeship. There are knock-on effects for housing benefit while the apprentice themselves lose access to free prescriptions and dental care. The law requires apprentices to be paid the minimum wage which guarantees a full-time income worth more than £6,000 a year50. Nevertheless it is odd that policy puts so much weight on rewarding employers to improve apprenticeship take-up while penalising families when a young person takes this step.

54. A decision to extend child benefit to the families of apprentices would be relatively straightforward to enact in law and administratively because it would apply to parents and young people already known to DWP. Ministers estimate the annual cost to be £200 million which is less than the £300 million51 currently spent to incentivise employers via grants and national insurance waivers.

Recommendation 15The Department for Transport (DfT) should support local authorities to invest in support for transport up to age 18 as part of the contribution to the Industrial Strategy 

50 The apprenticeship minimum wage is £3.50 per hour51 SFA spending on apprenticeship grants for employers in 2016-17 was £150 million. HM Treasury’s costing for removal of employer’s national insurance estimated the cost at £125 million for 2017-18 in 2014 Autumn Statement documents

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55. There is now less money to support students with the incidental costs of accessing education than there was in the past. Education Maintenance Allowances were abolished in 2011 and replaced by bursaries, but with a budget that was less than one third of previous spending52. A recent survey suggests that many travel costs range from £10 to £20 a week which adds up to significant cost for those on limited budgets53. Transport is a major factor that influences young people’s access to education or training. Young people often travel further at 16 to access specialist courses or training. The fact that they do helps make such courses economic. In some rural constituencies, the average travel distance for 16-18 students exceeds 25 miles.54

56. The legislation governing the transport support that should be available to 16 to 18-year-olds in full-time education dates back to the early 2000s and has not been properly updated since the education and training participation age rose to 18. Local authority budget cuts have raided this area because of the lack of statutory protection. Transport support and bus services have been significantly reduced or cut altogether in 80% of authorities. A total of £74 million cut from support bus services in England, a reduction of 25%.55 Outside London, 50,000 young people have lost their transport support to sixth form or college since 2008.56 Research shows that 40% of students spend £5 or more a day travelling to their college or place of training and 49% of students cannot always afford to travel to attend college or their place of training.57 The withdrawal of bus services has a detrimental effect on transport in other ways in prompting perhaps 100 million extra car journeys each year.

57. Students should be able to access the education or training that is best for them and should not be forced to choose a course as a result of transport restrictions. Taking a course that interests and engages a young person is the best way to keep them in education and therefore maximise their chances of securing sustainable employment or a place in higher education.

Other issues58. There are several other issues that matter greatly to colleges where

Government action could make a difference. AoC has summarised these points in previous budget submissions and has made

52 DfE spent £560 million on EMAs in 2011-12 (excluding administration costs) and spent £180 million on bursaries in 2016-1753 NUS Pound in your Pocket survey 2012.54 Average travel distance for 16 to 18-year-old in Berwick-upon-Tweed is 25.5 miles (Campaign for Better Transport)55 Campaign for Better Transport – Buses in Crisis 2015 Report56 http://www.bettertransport.org.uk/tell-your-council-save-our-school-and-college-buses57 7AoC and NUS Survey of 2,107 students https://www.aoc.co.uk/news/students-are-struggling-afford-travel-costs

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suggestions for helpful action. We have prioritised the recommendations in the paper but we would not want anyone to think these are the only issues that matter. The issues below all matter and we are happy to supply more information on request:

Variable application of VAT to different types of providers Teacher Pension Scheme Local Government Pension Scheme The Intervention regime in further education Student mental health and the impact on NHS The operation of the Tier 4 licence system and the impact of UK

FE exports

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