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The College restructuring fund, what happened (16 July 2020)

16 July 2020

Between 2017 and 2019. the Department for Education spent £432 million to help dozens of colleges in England stabilise their finances. HM Treasury made the money available to DfE to support the implementation of the Post-16 Area review programme which ran from 2015 to 2017. Area reviews and the restructuring fund are now history but there are occassionally stories about colleges having had bailouts, there is new interest in the sustainability of the sector moving forward and there are echoes of these FE programmes in DfE plans to assist universities. The purpose of this note is to provide a simple and not-too-long explanation of what happened with the English college restructuring fund. The origins and budget the Restructuring fund The restructuring fund for colleges was introduced in spring 2016 after the national programme of post-16 areas had started because it had become clear that private lending, asset sales and college reserves could not, on their own, support the mergers proposed by the reviews. DfE officials reported that HM Treasury has allocated a loan facility of £700 million for restructuring spread over 3 financial years (from April 2016 to March 2019) but there was never a published budget. After the fund closed DFE reported spending of £432 million, only £79 million were new government loans. £353 million was spent as grant, a large chunk of which was used to pay down bank debt. DFE reallocated underspend money from activity-based funding streams (apprenticeship, adult education) and also wrote off exceptional financial support loans. Confidentiality and traceability The exact use of the money is difficult to trace in full. DfE published a very helpful end of programme report which contains lots of figures but it would be time consuming to reconcile the figures to the numbers reported by colleges in their financial statements or by DfE itself when it reports exceptional financial support write-offs in its own financial statements. There is nothing particularly new about this - college finances are complex and don't get a lot of attention - but, in the case of the restructuring fund, college leaders were required to sign up to confidentiality clauses so that individual negotiations could not be prejudiced before the process was complete. College restructuring was a tightly controlled process so no-one should read anything into the fact that it's hard to work out what went on. If anything, the lack of information has fuelled damaging stories about colleges which has obscured the facts. Where the money went (1) Major restructuring grants and loans Most of the restructuring fund was spent on few large packages to support 37 transactions: 25 college-to-college mergers 1 de-merger 2 university-college mergers 9 standalone debt restructures Main uses of the money were: repayment of private debt (either by government debt or grant) to put colleges on a sustainable footing write-off of Exceptional Financial Support loans which had been awarded by ESFA to cover bills or which represented clawback of funds following audits. redundancy costs associated with mergers (which, in some cases, had been delayed until the transaction was completed). estate rationalisation costs (only on a limited basis) payments to Local Government Pension Scheme funds to facilitate the transfer of staff professional fees associated with the application and merger implementation costs (for example new systems). There were no up-front rules on what could be claimed for which item. Each of the 37 cases was individually negotiated during thr 3 years by the 15 people in the Transaction Unit. Where the money went (2) Transition grants Some of the funding was used to pay small transition grants (up to £100,000) to single or groups of colleges so that they could take forward area review recommendations. The FE commissioner and his team organised 37 area review reports between 2015 and 2017. These resulted in 376 recommendations and the award of 157 transition grants. Over the period from 2016 to 2019, there were 62 college mergers (mainly FE college to FE college but some involving sixth form colleges and 2 involving universities). In addition 23 sixth form colleges converted to become academies. The cost of mergers has risen in recent years because governors, funders and other stakeholders have become more cautious. There are more professional reports to ensure that there has been due diligence in transactions. Aside from the transition grants, the colleges who did not apply for major restructuring support shouldered many of these costs themselves. The Transaction Unit A new Transaction Unit managed the Restructuring Fund between 2016 and 2019. It was set up because HM Treasury had confidence in the existing people and processes. An (unpublished) review from Ernst and Young shaped the plan which started with the secondment of staff from various accountancy firms and transfer of a few officials to support them. Matt Atkinson (a corporate recovery professional from BDO) was appointed Director of the Transaction Unit following an advertised recruitment in 2017 The Transaction Unit brought in a new approach in the management of the restructuring fund - some of which was mandated by HM Treasury and ministers A five stage approval process including an internal committee, an external committee, the ESFA chief executive, a DfE minister and the Chief Secretary to the Treasury An emphasis on bringing in external expertise. Colleges were asked to employ project directors and turnaround specialists to manage mergers More financial detail from colleges, including monthly cashflow forecasts covering five years (past, current, three years into the future) analysed into more than 50 income and spending lines Requirements for third party verification of college data, for example professional valuation of land and buildings Contracts to confirm agreements. The desire to avoid paying bank debt down to zero (“no bailout”) meant that every transaction involved a 3-way deal (“intercreditor agreement”). In only one case (Bradford College) did DFE manage to force a loss on the bank (because the colleges's 2011 loan from Lloyds bank was unsecured. The addition ot interest to loan repayments. Some use of conditional grant agreements to ensure that ESFA gets some of the benefit if things turn out better than expecte A more precise and complex process resulted in an extended application timeline. The first five applications were submitted in summer 2016 and were not completed until between March and July 2017. Other bids fell by the wayside because the colleges refused to accept the terms on offer. Some transactions were completed faster but 9-12 months remained fairly standard, One consequence was that colleges had to keep and pay retainers to professionals, driving up total costs. The reluctance to spend more than necessary meant involvement of finance and property consultants to verify plans and assets. Delays in getting the process going meant that spending was less than expected in the first two years (2016-7, 2017-8). There was a bit of a rush to complete deals in 2018-9 before the fund closed. Some college leaders who completed earlier deals feel that those with later deals had much better terms. After the restructuring fund closed The staff in the Transaction Unit now work in a larger Provider Management Oversight team which was created in summer 2019 and is now responsible not just for specialist financial work on colleges but also audit, assurance and covering academies. Since the closure of restructuring fund applications in 2018, 8 colleges have run out of cash and credit, 2 of whom (Hadlow and West Kent) were put into a new college insolvency process in summer 2019. Special administrators from BDO have been running Hadlow since May 2019 and West Kent since August 2019. They are coming to the end of a lengthy administration in which they have transferred 7 campuses in Kent and London to 3 different colleges - a process of demerger, merger and closure of subsidiary companies. College finances now - and what should be done The restructuring of colleges in the late 2010s reduced the number of heavily indebted colleges via merger and by reducing the debt but other factors prevented the whole sector achieving financial sustainability. These incclude: Funding levels: The decisions by government to fix funding rates in cash terms for more than 7 years Rising costs: The need for colleges to increase pay to aid recruitment and retention, combined with higher pension contributions and a rising minimum wage Funding reform: Recent government policy has also had a financial impact. Colleges have faced increasing competition for public funding from new entrants to the apprenticeship training market and from universities. At the same time the devolution of the adult education budgets in some areas to mayors has restricted funding for some college. In its autumn 2019 assessment of college finances, ESFA judged that 69 colleges (28 percent) had finances that were inadequate or that requires improvement The March 2020 shutdown has added to problems just as many colleges were consolidating improvements to their budgets. Colleges shut down most of their buildings in March 2020, maintaining in-person courses for vulnerable students and shifting to remote learning for the rest. Ministers made quick decisions on college funding but the income protection was limited to about 65% on average in 2019-20 and 50% in 2020-1. Colleges face a number of issues: A significant current year impact: a £150 million loss for colleges in the 2019-20 academic year (2 percent of income). Budget gaps in 2020-1: as much as £2 billion (40 percent) at risk in 2020-1 including apprenticeship, adult education, tuition fees for adult and higher education, commercial contracts with employers, catering and commercial income. The government increased funding levels for 16 to 18 education in 2020-1 but colleges face significantly larger costs. Social distancing will make education less efficient because it requires more space, smaller class sizes and fewer people on transport to college. Colleges need to provide more IT, spend more on cleaning and help young people catch up for months of lost learning time. Individual colleges in trouble: A severe impact on commercially focused colleges. This will increase the numbers in financial trouble with a particular pinch point in March 2021 because that is the month where cumulative government payments to colleges reach a low point compared to spending. A particular risk for apprenticeships: The number of new apprentices is falling by as much as 50%. Construction, engineering and manufacturing make up half of this projected decline with very steep falls in sectors like hospitality and catering. The total income loss could be £250 million. AoC will be gathering together data from the July 2020 returns sent by colleges to ESFA so that we can provide an updated picture. In the meantime, AoC has set out some proposals for possible action by ESFA including: Considering ways to retain skilled people in the system at the least cost to the public purse (eg by avoiding a situation in which individuals pick up a redundancy payment from one college and are then signed on at another – the preventative action is to reduce the redundancy flow). Bringing forward payments in the 2020-21 academic year. Setting up a short-term loan scheme. Removing rules which currently disqualify colleges with weak finances from accessing bids. Considering action or statements that might assist colleges to fulfill bank loan covenants and to avoid ‘going concern’ qualifications on their 2019-20 financial statements.