Draft Further Education Bodies (Insolvency) Regulations 2018

Emma Reynolds Excerpts

Wednesday 31st October 2018 General Committees

[Emma Reynolds (Wolverhampton North East) (Lab)]

Is it not the case that many colleges that rightly focus on technical education have a lot of up-front capital costs because they have to invest in the specialist equipment that is needed for the courses they offer?

[Gordon Marsden]

My hon. Friend makes an extremely good point, which illustrates the weaknesses of many of the Government’s initiatives in this area. I will not stray into the institutes of technology, but it is the same principle: the Government think a lot about structures in terms of capital expenditure, but seem less ready to address the issues with equipment that she mentions and—this is, of course, a big bugbear with the sector—the funding of progression and salaries.

The explanatory memorandum states:

“There are currently 37 FE colleges that have a ‘published Notice to Improve for financial health’”.

However, the Department estimated last month that on “today’s assumptions”, over the first 10 years of the insolvency regime, an additional 63 could—I am not saying that they will—

“meet the current triggers for a notice”.

The Department’s document goes on to say that,

“as a central estimate, we believe 100 colleges will need to fully familiarise themselves with the insolvency procedures.”

Again, I stress that that does not mean that they are in imminent danger of insolvency; it is a precautionary measure.

In Government and in legislation, we have to plan and hope for the best, but have backstops for the worst. That is the purpose of the statutory instrument. The Department states that there could be a best case scenario of 80 colleges and a worst case scenario of 150 colleges being at risk. It is therefore slightly strange that paragraph 7.9 of the explanatory memorandum rather blandly states that

“in reality we expect that FE colleges entering insolvency would be a very rare event.”

That seems to be written more in hope than expectation.

This extremely worrying situation cannot come as a surprise because the Institute for Fiscal Studies found that spending on FE and skills fell by £3.3 billion in real terms between 2010 and 2017. Those cuts have been most severe in adult education. That is extremely relevant to the proposals because it is often forgotten that adult learners are an important part of the FE learner area. If that group no longer attends FE colleges in the numbers that it has historically, that puts additional pressures on courses and on the colleges’ financial structures. The Sixth Form Colleges Association has said similar things about the shortfall for its students.

As David Hughes, the chief executive of the Association of Colleges said, while

“the regime being introduced in itself is not a bad thing, the problem is that it is likely to come into effect at an historic low point in college funding.”

I also agree with the University and College Union, which said in its briefing for this debate that the Government’s focus on college insolvency, without considering some of the broader issues, sends the wrong message about the importance of FE. The focus on facilitating market exit in FE rather than strengthening the sector and investing in the necessary resources to help institutions thrive sends a negative message to the public about the importance that the Government ascribe to the sector.

I want to ask several specific questions and make a number of observations that arise from the explanatory memorandum. Paragraph 10 talks about the consultation outcome. The Minister has already referred to the 30 formal responses that the Government received. Paragraph 10.3 states that in response to a question whether

“any specific modification to normal insolvency legislation were needed to allow it to apply effectively to FE and sixth form corporations”

there was

“strong support for the FE insolvency regime mirroring standard insolvency procedures for companies, which is the approach that we have taken.”

There is then a reference to several respondents saying there should be an interim moratorium.

In cold grey terms, those are of course some of the necessary things that the insolvency regime must include, but the difference between the companies that the memorandum uses for comparison and further education is that at least three groups of people are affected. One is the staff and the second is the creditors. Some of those are likely to be small business suppliers and others in the local supply chain, of which FE colleges are often a significant part. It is likely that they would be negatively affected by the insolvency proceedings. The third group is students and lecturers.

I appreciate that it is not an easy thing to include in a statutory instrument, but I appeal to the Minister and to the Department for Education in general to take account, when they consider how to take the matter forward, of those broader audiences. I ask them not simply to look at the question with the narrow scope that a bank might apply.

Paragraph 11 of the explanatory memorandum deals with guidance. It states:

“The Department will publish two sets of guidance before this instrument comes into force.”

It does not tell us when they will be published, and it would be helpful if the Minister could tell us—if not today, then by a note to members of the Committee. That is important, because she has talked about the support that the Government want to give, so as to have more experienced governors and clerks. She gave some examples, and I am pleased to hear that the Further Education Trust for Leadership will be involved in the process.

I am bound to say—and I think that it is also an issue in school governance—that at the moment, although it may change in future, the support that Governments of all hues have given governors in piling on to them various responsibilities, including difficult responsibilities for finance and insolvency, has not been commensurate with the extra time and effort involved, and the extra knowledge they are supposed to possess. I do not think it would be out of place if I were to ask the Minister what amounts of money or, for that matter, practical support from the Education and Skills Funding Agency or the Department, are going to be forthcoming on this occasion. I say that because the issue is important.

I want to touch on the special administration procedures. Concerns were expressed during the passage of the Technical and Further Education Act 2017 about how long they would take. The Minister might be interested to know that her colleague who had responsibility for the Bill in the House of Lords showed, in Committee in March 2017, that he recognised that:

“Concerns have previously been expressed…about the time a special administration might take. I share these concerns. However speedily the special administration is concluded, it will be too long for those involved. Staff, students and creditors will want certainty about what will happen to them at the earliest opportunity.”—[Official Report, House of Lords, 1 March 2017; Vol. 779, c. GC215.]

Again, I ask the Minister whether such certainty, or those timescales, will appear in the sets of guidance. If they will not appear in the guidance, will she give the Committee some idea—perhaps through a note, after consulting her officials—of how long that period is likely to be?

These regulations have been deemed necessary. They would have been necessary under any circumstances, but they are particularly necessary because of the sector’s fragility, which has been caused by the cuts that it has faced. I am sorry to say to the Minister—I know she would like not to be challenged on this today—that that was not helped by the Chancellor’s complete failure on Monday to offer any sort of funding uplift to colleges or their staff. That is not to mention the disastrous advanced learner loans policy, for which more than 50% of the allocated funding has been unused and returned the Treasury. Not much of that has been distributed to the colleges that are in dire need of it.

I appreciate that the Minister feels strongly that FEs should have more funding. She has acknowledged that, and made that point again today. She may say, in attempting to erect an air-raid shelter over her Treasury colleagues, that some relief might come on the back of the Augar post-18 report, as a result of issues to do with the Office for National Statistics investigation on resource accounting and budgeting in higher education, which is expected in the new year. The reality, as the Minister just acknowledged, is that the comprehensive spending review will be the first opportunity to offer significant financial relief if the review recommends financial help to FE. That means, in the normal scheme of things, that none of that money will feed through to FE colleges until the academic year 2020-21.

In the meantime, it is fair to ask how many other colleges will slip into a fragile state that might—I stress the word “might”—produce the need for insolvency regulations. It is instructive, in that respect, to quote the FE commissioner, who has been called upon to look at a number of the country’s biggest colleges, which are facing significant challenges as a result of funding cuts and the loans policy. These are simply examples; they demonstrate by no means the full extent of the fragility that has been exposed over the last 12 to 18 months. According to an intervention report from the FE commissioner, Northumberland College has undergone a cashflow crisis. The report says:

“After several years of growth, the college faces a substantial shortfall in income for 2017-18, which is forecast to fall short of the budget target.”

It warns that income is set to decline even further in the college in 2018-19. In July, the Northumberland Chronicle reported that more than 40 staff had taken voluntary redundancy after the college reduced the number of courses on offer.

That is an inevitable consequence of the drip, drip, drip of funding cuts over recent years. To thrive and survive, most FE colleges rely on a diverse mixture of activities, and on money. Money comes from the adult education budget. If there is a shortfall, there are problems. It comes from apprenticeships. Similarly, if something does not take off, there are problems. There are trading activities, and colleges are increasingly reliant on the European social fund and other funding.

That brings us back to the statutory instruments we have debated over the past few weeks and the issue of replacing the European social fund. The Minister is very active in those areas, so perhaps she will say whether she has had more conversations with the Treasury about that since the Budget or before it.

Let me give another example of a college that is in dire straits. Birmingham Metropolitan College was rated in March last year as requiring improvement for the second time in March last year. It is one of the largest colleges in the country, with an income of £61.3 million, total debt for the year of £23.4 million and 16,000 learners. It has had a notice of concern for financial health since July 2015, when it received a visit from the further education commissioner. My third example has been raised on the Floor of the House and elsewhere by my hon. Friends who represent Hull constituencies. It is the dire financial straits in which Hull College has found itself since November 2016, when it was forced to request exceptional financial support from the Education and Skills Funding Agency after its bank withdrew support.

In the light of the things that I have described, the idea that this insolvency thing will be bedded in and called on fairly sparingly might need to be revisited. The Minister was very clear about the timescale for cutting off exceptional financial support for colleges once the insolvency regime is introduced. To be clear, is she saying that her Department will curtail that funding completely? Is she not concerned that, owing to the number of colleges at risk, withdrawing those funds so quickly could have a significant impact on a large number of colleges? What timescale does she envisage, if one has been envisaged, for a transition period between the implementation of the regime that the order will put into place—we all know that such changes do not take place overnight—and the cut-off of that last-resort funding?

The Minister will be pleased to know that I will not rehearse our long-standing criticisms and concerns about the area-based reviews that took place largely under her two predecessors. However, I was hoping that she might be able to tell us how those reviews had reduced the possibility of future financial failures. The statistics I have listed suggest a different picture. What assessment has she commissioned of the impact of the review or their contribution to reducing the possibility of insolvencies? If she has not commissioned an assessment, will she do so—preferably as an external examination, undertaken outside the Department?

I have talked about guidance. The order alludes to the position of students with special educational needs, about whom we have particular concerns. Given the Government’s keenness to be seen to be doing the right thing on disability and equality issues, how does the Minister intend to ensure that there is no disruption to the particular requirements of students with special educational needs in these circumstances, who often require tailored support?

It seems that, as always in these cases, the devil is in the detail. However, the detail is not always there in the memorandum. I raise with the Minister a fairly fundamental issue that we discussed to some degree during the passage of the Technical and Further Education Act 2017 but which does not, needless to say, find itself in these specifics terms today. A primary concern of the Opposition and other organisations, including the UCU, was that the Act basically allowed for the assets of an insolvent college to be handed over to private companies, as long as they were delivering education. Regulation 15, which deals with section 107—the distribution of a statutory corporation’s property—goes into the detail of that, but it does not specify that the college assets that are taken over by a private company should serve the same cohort as the insolvent provider. The regulation reads as if it might allow a college’s assets to be handed to a school or university, or to a much smaller and narrower education institution, possibly for significant profit, without placing any requirement on them to continue to deliver further education as opposed to initial or higher education.