Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, October 6, 2016

Official Report 581KB pdf

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Section 23 Reports

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“Audit of higher education in Scottish universities”

The next item is an evidence session on the Auditor General for Scotland’s report “Audit of higher education in Scottish universities”. I welcome Caroline Gardner, the Auditor General for Scotland, and, from Audit Scotland, Antony Clark, assistant director; Tricia Meldrum, senior manager; and Kirsty Whyte, audit manager.

I invite the Auditor General to make an opening statement before I open up the session for questions from members.

Thank you, convener. The report is our first look at the overall landscape of higher education in Scotland. I will outline the context that Scottish higher education operates in, as it is a bit different from the other sectors that we audit.

As you know, the Scottish higher education sector is successful and internationally renowned. Higher education is a devolved area except for funding and policy relating to the United Kingdom research councils and Innovate UK, the UK’s innovation agency. Other aspects of UK Government policy, such as UK immigration policy and English higher education policy, affect the higher education sector in Scotland. Scottish universities generate funding from a wide range of sources, both public and private.

Although universities are independent, they operate within an environment of multiple stakeholders, regulators and accountabilities. I do not appoint their auditors, as I do for the other bodies on which I report to the Parliament, but since 2010 I have had formal powers to undertake performance audits of bodies that are funded by the Scottish Further and Higher Education Funding Council, and that is the basis of the report.

In 2014-15, the Scottish Government provided £1.1 billion in funding for universities through the Scottish funding council and £623 million in fees, grants and loans for individual students. Scotland’s economic strategy is clear about the contribution that higher education makes in supporting Scotland’s economy, but we think that the Scottish funding council needs to do more to ensure that the funding that it allocates to universities makes the maximum contribution to those national policy aims.

Overall, the sector was in good financial health in 2014-15. Total income was £3.5 billion—up 38 per cent in real terms over the past decade—the sector made a surplus of £146 million and it had reserves of £2.5 billion. Those are all large sums that you will recognise. Universities increasingly use their surpluses and reserves to fund investments in their estate and to subsidise some of their activities, particularly research.

Despite the positive overall picture, however, there is wide variation across the sector and a number of underlying risks. Income is increasingly concentrated in the ancient universities, some universities rely heavily on Scottish funding council funding, which creates risks at a time of continued pressure on public finances, and the surpluses and reserves that I mentioned are heavily concentrated in a few universities, particularly the University of Edinburgh and the University of Glasgow.

The European Union referendum result has increased uncertainty for the sector, with the possible impact on the public finances generally adding to risks to EU funding for Scottish universities and the effect on EU students and staff. The challenges facing the sector include potential further reductions in Scottish Government funding; risks to its ability to continue increasing its income from fee-paying students from the rest of the UK and outwith the EU; the need to invest in the estate; and the challenging new national targets on widening access.

Turning from universities to students, I want to highlight just two points. First, it has in recent years become more difficult for Scottish undergraduate students to gain a place at a Scottish university. That is mainly because applications have risen faster than the number of funded places available for them; since 2010, applications have increased by 23 per cent, while offers have increased by 9 per cent. We have recommended that the Scottish Government and the funding council carry out research to assess the impact of the limits on funded places on access for Scottish students.

Secondly, recent changes to student financial support increased the amount of loan funding available to all Scottish students, while the amount of funding for bursaries and grants fell. As a result, levels of student debt are increasing. Scottish students from more deprived areas continue to have higher levels of debt than students from less deprived areas, and the gap is widening.

As I have highlighted, universities, the funding council and the Government face a number of significant challenges to this very successful sector, and we recommend that they work together to address them. It is essential that the Government ensures that its approach to funding higher education is sustainable in the medium to long term if its policy priorities are to be delivered.

My colleagues and I are, as always, happy to answer questions.

Thank you very much, Auditor General. I invite questions from members.

Good morning. On page 46 of the report, you point out that

“Scottish students from deprived areas have higher levels of student loan debt than students from less deprived areas”;

indeed, you said the same in your opening statement. Are the costs associated with going to university and the prospect of debt presenting a barrier to school leavers from deprived areas?

The straightforward answer is that, at the moment, we simply do not know. That is why we have recommended that the Government and the funding council carry out more research on the impact of the current approach to funding higher education to understand the effect of current policy decisions now and in the future.

I ask Tricia Meldrum to talk you through that in a bit more detail.

A 12-month review of the funding of student support has been going on and is due to report early next year, and we will see what the implications of that will be.

We have also had the report by the commission on widening access, which made a number of recommendations on opening up access to students from a wider range of backgrounds, particularly more deprived backgrounds. The first action in that respect will be the appointment of a commissioner for fair access, who will take forward that programme, working with the Scottish Government, the Scottish funding council and universities. Those are all issues that will be looked at in that programme of work.

I see that, in his response to the committee, Paul Johnston, the director general of learning and justice, suggests that progress on implementing the recommendations of the commission on widening access is contingent on the appointment of a commissioner for fair access. Do you agree with that assessment?

The appointment is obviously a very important symbol of the Government’s commitment to widening access and to taking forward the commission’s recommendations, but it is only one of the recommendations that the commission made. So far, there has been a delay in making the appointment—I think that an announcement on how it will be taken forward was made this week—but it is certainly not the only thing that is needed to answer the questions that we have set out about the number of places available for Scottish students and the effect of the student support system in Scotland on students from different backgrounds.

On the issue of student debt, you say on page 44 of the report:

“Scottish student debt has increased in recent years as financial support has shifted from non-repayable bursaries and grants to loans”.

Student debt levels rose by 14 per cent between 2013 and 2015 and are projected to average around £20,000 by 2019. What impact is that having on student retention rates?

Again, the issue is not well enough understood in terms of research. We can all speculate on what the effect is, but a matter of concern is that, as we set out in exhibit 18 on page 47, students from the most deprived backgrounds are ending up with the highest levels of debt. That particular exhibit shows levels of debt from the most deprived fifth all the way through to the least deprived fifth. Students from the most deprived backgrounds are ending up with more debt at the end of their studies. The more reliance there is on debt to fund studying, the more that picture is likely to become a problem. That is why we have recommended research to explore that further.

The information that we have on retention rates, which is from 2013-14, shows that, overall, 8 per cent of students did not stay beyond their first year, so 92 per cent stayed beyond that. However, again, there was wide variation between universities. The University of the Highlands and Islands had the highest number of students not staying beyond their first year, with a figure of 20 per cent.

It is an important theme in the report. On page 49, the report notes that

“It will ... be difficult to achieve the national targets for widening access to higher education for students from deprived backgrounds.”

You recommend that

“The Scottish Government, SFC and universities need to work together”,

as you said in your statement. Would more funding help to meet those widening access targets?

There is no doubt that more funding would help, because it would help to keep the number of funded places increasing at a similar rate to the increase in applications. That increase in applications seems to be the underlying cause of the growing gap. We know that the pressure on public finances is real, and that it is likely to continue, whatever we hear in the autumn statement in November and whatever the Scottish Government’s draft budget looks like after that.

As always, there are choices to be made. We are very conscious that the choices that are made about higher education sit within the Government’s wider programme for government and that there are always trade-offs—that is what government is about. That is why we think that it is so important to properly understand the impact of the policy choices that have been made and to tease out any tensions or inconsistencies that there might be.

I want to pick up on funding. On page 20, in paragraph 35, you say that the Scottish funding council

“allocated £1.1 billion to universities in 2014/15, a reduction of six per cent in real terms, since 2010/11”.

You say that that “reflects reduced funding received” by the funding council from the Scottish Government. Do you feel that that level of funding is sustainable?

That is a question for Government rather than for us. We recognise that there is pressure on the Scottish Government’s budget overall. From next year, there will be significant choices to make about the use of the new financial powers, but they will not be a magic wand that will massively increase the amount available for public services across the piece.

On higher education, we are concerned that the ambitious policy commitments around widening access and the funding of student support will butt up against some of the cost pressures that universities already face as a result of their difficulty in raising income from other sources, particularly tuition fees from students from the rest of the UK and from outside Europe. It is really important that the Government and the funding council, together with universities, understand how those pressures will be faced. The committee might decide to explore that further with the funding council and the Government to see how they are developing their thinking on the way in which those challenges will be balanced in the medium to long term.

I have one final question. On 7 September at the Education and Skills Committee, Professor Andrea Nolan from Universities Scotland said that your report

“indicated quite clearly that the sector’s sustainability is not being addressed. We need the funding for a sustainable sector that will recover the cost of our teaching and our research, while recognising that we are in difficult times.”—[Official Report, Education and Skills Committee, 7 September 2016; c 26.]

Do you agree with Professor Nolan’s assessment?

That is really the message of our report. As I said, the sector is internationally renowned and generally very successful, but it faces real pressures in relation to the funding available to it, the costs of continuing to deliver what it does and the Government’s policy priorities. We have identified ways in which those tensions can be managed, which are to do with universities continuing to seek efficiencies, investing in new ways of delivering research and teaching, and working together in doing some of that.

More generally, it is for the Government and the funding council to work with universities to really understand how Government funding can have the biggest contribution to the things that the Government wants to achieve and so support the sector, which is one of Scotland’s strengths.

Thank you.

09:15  

To pick up on Monica Lennon’s point about the debt levels of students from deprived areas versus those from less deprived areas, would you not expect that students from deprived areas would have a higher level of debt simply because they qualify for access to the funding to a greater extent than students from less deprived areas and because they have the need for it?

Intuitively, that makes sense; it is certainly a pattern that we see more widely than just in Scotland. The issue is the one that Ms Lennon asked about—whether we understand the impact of that on students applying to Scottish universities and taking up places. There is not good enough information about that part of the mix. In England, there is good evidence that higher levels of loan funding for higher education are not deterring students from applying. We simply do not know what the picture is in Scotland at the moment, and having that picture would help to make good policy decisions.

Will you follow up on that in due course?

We have recommended that the Government and the funding council should do that, and we will certainly follow up on our recommendation with them once the committee has finished its deliberations on the report.

Have your recommendations been accepted by the various parties?

The committee has written to the funding council’s director general and chief executive. You have submissions on the issues before you today. The Government’s response to that point is slightly ambiguous; it might be something that you want to follow up with the Government after the session.

You have talked about research and development. Various parts of the sector have concerns about that area. Will you keep an eye on the issue and follow up on it? Only in time to come will we understand the impact of Brexit.

Our concern is that the Scottish funding council’s strategy for research and funding research in universities is somewhat out of date. It has not been revised for a while, and that needs to happen in order for the funding council to be clear that its funding is having the effect that it needs to have. We know that there are challenges with the research funding that is available from other sources not covering the full costs of research.

I will ask Kirsty Whyte to talk you through the issue.

We know that the funding council is starting to review its approach to research. We identify in the report that Scottish universities’ performance on research is improving. Between 2008 and 2014, the annual exercises that assess how well universities do research, if you will, show that improvement. However, at the same time, the research funding has not got any bigger, which means that the research budget has been spread more thinly, and some of the very high-performing research universities saw a reduction in their research funding after the 2014 exercise. As we say in the report, that raises issues around sustainability.

As the Auditor General mentioned, research is traditionally an activity in universities that does not cover its costs. Last year, universities recovered about 80 per cent of the full economic cost. The amount that they recover depends on the source: some universities that win a lot of charity funding recover only about 65 per cent of the full economic cost of those activities, while the proportion increases to more than 80 per cent for the UK research council funding. As the Auditor General said, that places additional pressure on universities and raises sustainability issues.

A point that comes up all the way through the report concerns the SFC and how it handles funding and various other things. Is there a problem with how the SFC handles matters?

We have said in our report on universities and in our report on further education, which appears a bit later on the committee’s agenda, that the funding council’s role has changed significantly over the past few years—in both sectors, there have been major reforms to how funding is allocated and to the responsibilities that the funding council carries out. However, its role has not been reviewed for at least 10 years. In the light of that and of some of the problems, particularly in further education, that this committee has looked at, we have made a recommendation that the Government should look again at the funding council’s role and make sure that it is clear and that the council is properly equipped to carry it out. The Government is progressing that as part of the current review of the skills and enterprise agencies.

The commercial operations of the universities, which are fairly extensive and lucrative, are not gone into in any great detail—the report does not go into great depth on that issue. Have you looked at it to any great degree?

There is an exhibit in the report, which one of the team will point me to in just a moment, that shows the sources of income for different universities. You are right: they vary hugely.

Exhibit 11 on page 34 of the report shows income profile by university. Members will see that some of the 18 institutions that we looked at have a very heavy reliance on Scottish funding council grants—those institutions are at the bottom of the exhibit. More than 80 per cent of the income of the University of the Highlands and Islands comes from Scottish funding council grants. The figure goes right down to less than 20 per cent for the University of St Andrews. The other income that the universities receive is from a range of different sources.

Obviously, the more that universities rely on public funding, the greater the risk that puts them in at a time when public funding is under pressure, as it is across the UK and in Scotland currently in respect of funding council grants, tuition fees and UK research councils’ research funding. We have not looked directly at universities’ success in generating commercial income, but it is very clear that they have had very differing levels of success and differing approaches to generating income outwith what they get from the funding council and in student support. That highlights our concern that, although the sector as a whole is in reasonable financial health, some universities are much more at risk than others in the current climate.

On exhibit 11, given the value of the commercial element to the universities, would there be merit in taking a closer look at that?

There certainly would be. I think that the universities themselves pay a great deal of attention to that. They have different assets, sources of expertise and capacities to generate commercial income. That is one of the reasons why we have recommended that the funding council should take a closer and more transparent interest in the financial health of individual institutions. We think that that is not well enough understood outside the universities and that that approach could lead to better funding strategies by the funding council, or to better identification of opportunities for collaboration between universities or with other parts of the public sector and business, for example.

Does the success—or otherwise—in the commercial sector of the universities compare well with the success of universities south of the border or elsewhere?

It depends very much on which universities you are talking about. Kirsty Whyte might be able to give you some insight into that.

We have not looked at that in a lot of detail, but universities in Scotland and in the rest of UK, particularly in England, are focusing on the innovation agenda, the further commercialisation of research activities and company spin-offs. We know that Scotland overall is quite successful in spin-offs per head, if you will, in the higher education sector compared with the rest of the UK, but the funding council, the Government and the universities are working on that, and they could certainly look at it further.

Before I get to what I want to ask, I would like to follow up on that point. Are you aware of any studies in that respect? It seems to me that the sector delivers a much wider benefit to the economy than simply producing graduates. What, aside from putting students through university, is or appears to be the wider return on investment?

On page 11 of the report, we reference a study that was commissioned by Universities Scotland from the economic consultancy Biggar Economics. It estimated that the contribution was around £7.2 billion, which is obviously quite a favourable return compared with the £2 billion or so—£1.1 billion plus £600 million—of direct Scottish Government investment in universities. It is clear that there is always some judgment to be made in that respect, but that will give members a feel for the economic benefits. All of us who live in university cities recognise the wider benefits that come from the liveliness and openness that universities bring.

I enjoyed reading the report—I thought that it was very good, as usual. Although the sector is operating in what is clearly a very challenging environment, it continues to produce extraordinary results, and that should be acknowledged and commended. However, have you been able to draw any conclusion on the outcomes or long-term scenario if nothing were to change in relation to the funding? In order to meet challenges, the various institutions might, for example, sell off some of their estate, seek fee-paying students or use the reserves that you mentioned, but I would not have thought that that would have been sustainable for any length of time. At some point, an institution will have sold off all the estate that it can sell off. What would be the outcome if nothing were to change?

I will ask Antony Clark to respond in a moment, but our concern is that there are very different groupings within the 19 institutions referred to in the report. The four ancient universities are, for a range of reasons, more successful in bringing in a wider range of funding. As they tend to be the places that build up surpluses, they have reserves available for investment, and they are more likely to be able to get into a virtuous spiral of being able to invest and to build their success from there.

The universities that are much more reliant on Government funding, particularly at a time when that funding is constrained right across the Government’s budget, tend to be the ones that have fewer opportunities to generate income from other sources, so they run the risk of the kind of vicious circle that you have highlighted in your question. That is not by any means a foregone conclusion, but it indicates what the risks are unless the Government and the funding council, together with the universities, are able to understand the interplay between their various priorities and ensure that the public funding that goes in achieves the maximum contribution to both the Government’s policy aims and the sustainability of individual institutions.

Antony, do you want to comment?

Yes. The report highlights the fact that although we talk about “the sector”, it is, in a way, not a sector but a range of different institutions that serve different audiences, have different markets and provide different services that deliver different outcomes. We think of universities as being involved in higher education, but they do different things for different people.

The report highlights a series of risks that face the sector collectively, but it is clear that the institutions need to think through what market they want to be in and how they might grow or retrench in the face of the challenges from Brexit and the financial pressures on the public sector. We are very aware from our fieldwork that institutions are quite alert to that. For example, they have business planning processes in place as well as oversight boards for principals and boards. However, there is a role nationally for an overview of how the institutions work collectively to support their economic goals and the broader learning outcomes that are set out in the Scottish Government’s strategy.

I assume that, if a university sought to commercialise itself further by bringing in fee-paying students, it would have to provide courses that attracted those students, which would be to the detriment of courses that did not. Is there an issue in that regard?

It is not possible for me to answer that question, but it is clear that institutions that have a good reputation in the UK and internationally are likely to draw in fee-paying students. They clearly want to position themselves as bodies that have particular skills. There is probably something in what you have said, but I am not sure that the evidence that we have gathered confirms it one way or the other.

Sure.

Tricia Meldrum talked about the research on Scottish students. Concerns are frequently raised with me that very good Scottish students are unable to get a place at universities in Scotland because the cap has been hit. Do you have a comment on that? Have you found out anything about it?

We have laid out information and data on that in the report. As the Auditor General said in her opening remarks, we found that the number of applications from students has been increasing faster than the number of places that are funded. Working through the data, we managed to identify the number of people who did not get a place at all through the process.

We set that information out in paragraph 95 on page 41 of the report. In the most recent year for which the information is available, almost 9,000 applicants—potential students—did not receive any offers at all, which is about one in five of those who applied. There is no information available about what subsequently happened to those people, so we do not know whether they got a place at a college or whether they worked for a while and then reapplied to university. Therefore, we have recommended that there be more research to enable us to understand what is happening and how the limit on the number of funded places is impacting on different groups of applicants and applicants from different backgrounds.

09:30  

My question follows on from what Liam Kerr was asking about. If there is a differential between the increase in the number of places and the increase in the number of applications, what would be the order of magnitude of the additional cost of bringing the increase in the number of available places up to the same growth level as the increase in the number of applications?

That is a difficult question to answer. The commission on widening access looked at that and made some estimates, but it made some other recommendations about balancing demand and the available funding by, for example, making the Scottish degree programme shorter so that it cost less by comparison—in other words, getting more student funding for the same amount of money—and making articulation more straightforward so that students could do some of their studying in further education institutions and then carry on into higher education. It is for the Government and the funding council to think through both the impact of the number of funded places and the related issue of widening access to enable students from more deprived backgrounds to come through.

Tricia Meldrum might be able to give you some figures from the commission’s work. It is not simply a matter of the amount of funding per extra student that you include in funded places.

I am sorry, but I do not have those figures. I can say, though, that the commission makes the point that because this is a whole-system issue that starts in the early years and continues through school, college and university, you cannot fix it, as it were, just in universities. It is a matter of planning across the whole system.

That is true for some things. However, the capacity—the number of places—is not a whole-system issue; it is surely a decision based on the availability of resources. I accept that getting a higher percentage of kids from poorer backgrounds into universities will require a whole-system approach that probably needs to start even earlier than primary education, but funding capacity to keep pace with the increase in the number of applications has nothing to do with primary education. It is a resource issue. Everything else being equal, if we had to close the gap by providing additional money, what would be the order of magnitude of the cost of closing the gap?

I ask Kirsty Whyte to address that question.

I must apologise—we have not done that calculation, but we are happy to get back to the committee on the issue. The easy option would be to multiply the amount of grant funding by the additional demand; however, it is not quite so simple to work out the level of funding, because it depends on where demand is directed. Some courses such as medicine will be much more expensive than, say, social sciences courses. The calculation is complicated—it is not an easy one.

I am not suggesting that it is easy; I just wondered whether you knew the order of magnitude of the funding that it would take to close the gap. It would be useful if you were able to give us an indication of what the funding gap is.

Secondly, have you looked at productivity in the university sector? I think that the issue merits investigation.

Not in this audit. As you will recognise, the audit covers quite a lot of ground, and we were keen to keep it manageable.

The funding council requires universities to generate efficiency savings as part of their conditions of grant. In recent years, those savings have been at the 3 per cent level but, if we look further at the recommendation from the commission on widening access, there must be scope to reconsider the organisation and funding of teaching and research, the extent of collaboration across universities and the range of things that would come under productivity, efficiency and what we get for the money that we spend.

Do we have too many universities in Scotland?

That is not a question that I can answer.

That was a nice way out.

Brexit means that, at some point in the next five or so years, EU students will not get free education in Scotland; their doing so has been a consequence of the abolition of tuition fees. We want to maintain a cosmopolitan and internationalist approach to recruiting students to come to Scotland. At the moment, we fund EU students to come to Scottish universities. How much does that cost the Scottish Government?

One of my colleagues will in a moment be able to give me a figure for the number of EU students funded by the Scottish Government. Before that, though, I should flag up the point that it is not entirely a one-way bet; the universities are concerned that they get a significant and disproportionate share of EU research funding that comes into Scotland. Moreover, because of that, many research and teaching staff come from the EU, and there is a concern about losing them.

The Scottish Parliament information centre briefing on EU funding indicates that our money gets recycled in Europe and then comes back to us and that, when we take everything including the common agricultural policy into account, we still have a notional surplus of about £800 million a year. The funding for that is available if we repatriate the EU funding to the Scottish Parliament for our notional share, but that is not the case with the funding for EU students.

I do not want fewer students from Europe. The more students we have from Europe and the rest of the world, the better it is for the education system, our economy and our society. However, I am interested in the round figure of how much we spend on providing free higher education to EU students.

I think that Tricia Meldrum has tracked the figure down for you.

I have the numbers for students. In 2014-15, there were 20,805 EU students and 29,000 students from other countries outwith the EU.

What share of the budget is spent on EU students who get free higher education here?

I think that Kirsty Whyte has the answer to that.

In 2014-15, the Government spent just under £25 million on tuition fees for EU students.

I, too, enjoyed what I thought was a valuable report. I am delighted and proud that the Scottish higher education sector is doing so well and is internationally renowned, but your statement that the

“financial position masks underlying risks”

rings alarm bells for me. I understand that it is spread between the older universities and the new universities but if we do not address the situation now, we face a potential crisis in five or 10 years’ time. Do you have any more thoughts on that or do we need to take that back to the Government and the SFC?

We have tried to capture our thoughts in the recommendations. The sector has real strengths—it is one of the things of which Scotland can be most proud—and there are challenges that it to some extent faces as a whole but which are really focused on particular universities that do not have access to the same range of income as others.

Part of the challenge is to understand how the Government’s different policy priorities—free tuition for all Scottish students, widening access for students from more deprived backgrounds and continuing to fund world-class research—interplay in the sector as a whole and in individual institutions. That is important, as is understanding the impact of decisions about student support and tuition fees on the decisions that Scottish students and potential students make about where they want to apply to. We have tried to capture that in the recommendations. It is not an easy fix, but sitting down now, understanding how those things interact with each other and thinking through how the nearly £2 billion every year can be spent to the best effect seem exactly the right things to do.

And if we do not get it right, we face a potential disaster.

There are certainly risks to the sector and particularly to some institutions.

I have a couple of questions about capital funding. We know that students are attracted to universities for multiple reasons, one of which is obviously good facilities. Therefore, the reduction of 69 per cent in capital funding seems absolutely huge—although it is trumped by the 77 per cent reduction in capital funding for colleges, as mentioned in the report that we are about to look at. Are there any other parts of the public sector in Scotland in which there has been such a huge reduction in capital funding?

I will ask colleagues whether they have any comparative figures; if not, we might be able to come back to the committee with that information.

It is important to note that the capital funding element of the Scottish Government’s budget, which over the past few years has been very largely funded through the block grant, has taken a significant hit and, indeed, has been hit to a greater extent than revenue funding. Exhibit 12 in the report shows that the drop in funding body grants has been counteracted, to an extent, by an increase in universities’ use of internal funds—in other words, surpluses and reserves—and an increase in borrowing and loan funding, particularly over the past few years.

We absolutely recognise how important that is. Universities need to make sure that their estate continues to be fit for purpose with regard to not only teaching but research, which often brings with it particular needs, because it enables them to attract staff and students and therefore affects their long-term sustainability. It therefore seems to us that that is a key issue, which is why we focus on the importance of the Scottish Further and Higher Education Funding Council’s having a clear strategy for how it will allocate that capital funding to the universities over the medium term.

You mentioned surpluses, but I think that we know that there are certain universities that have healthy surpluses and universities that do not. The University of Dundee, for example, is currently running a deficit. From the point of view of equity across higher education, how does that affect the quality of different universities? Is there not an inequity there?

That is another illustration of the variability across the whole sector. We know that Edinburgh and Glasgow universities account for a large part of the reserves that are available across Scotland. I think that the overall figure is £2.5 billion, a large amount of which belongs to those two ancient universities.

As I said in response to Liam Kerr, there is a danger that, while the successful universities will be able to invest in and build on their success, those with a greater reliance on public funding will find it more difficult to invest in that way, so there is a risk that they will decline. The availability of funds is a key part of the long-term sustainability of individual institutions.

Sticking with sustainability, I want to go back to Liam Kerr’s important point about the economic impact of universities. As parliamentarians, we are all acutely aware of that; indeed, we and Government ministers often trumpet the fact that we have so many universities in the top 100 in the world. How will the reduction in research funding impact on our universities’ economic impact and their standing in the world?

Research success is key to both those things. I will ask Kirsty Whyte to talk through what is happening with the different streams of research funding, because it is not just the Scotland Government funding that is provided through the Scottish funding council that has an impact in that respect.

Indeed. As I mentioned earlier, universities have traditionally struggled to recover the full economic cost of research activity. Many funding streams are deliberately designed in such a way that they do not provide 100 per cent of the funding that is required for the activity in question. There is an in-built element of efficiency, in an effort to make universities deliver efficiencies, but a tight research budget and funding package place pressure on universities’ ability to generate surpluses elsewhere in their activities to cover those costs, as the Auditor General has said.

09:45  

The University of Dundee was mentioned earlier. It is successful in generating research income, but a lot of that comes from charity sources, which makes it difficult for it to continue to cover its costs. Similarly, the fact that research council and industry funding is not 100 per cent funding continues to place additional pressure on universities in generating surpluses and making efficiencies in order to be able to continue their research output.

If universities continue to attract good amounts of research funding but the Scottish funding council cannot cover the 20 per cent gap, is there a risk of some research going by the wayside, with an effect on the research standing of our universities?

It is really up to universities how they want to position themselves and what financial strategies they develop to address that. Universities will consider their own research profiles and identify where they can create surpluses and how they can attract alternative incomes, including, for example, recruiting more students from non-EU countries.

The SFC also has a role to play. In our report, we recommend that it look across the sector at the risks and the information available in order to identify the challenges.

As members have no further questions, I suspend the meeting in order to change witnesses. Thank you all very much.

09:46 Meeting suspended.  

09:47 On resuming—  

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“Scotland’s colleges 2016”

Item 3 on our agenda is an evidence-taking session on the Auditor General’s report entitled, “Scotland’s colleges 2016”. The Auditor General is joined by Mark MacPherson, the senior manager of Audit Scotland; and Stuart Nugent, the audit manager.

The Auditor General will make an opening statement.

Scotland’s colleges have been through a period of major change, which I have reported on previously. Today’s report provides an update on progress on implementing and managing those changes, including the impact on students and staff. It also comments on the sector’s financial position, and the role of the Scottish funding council.

Although the merger process is now complete, colleges are continuing to adjust to changes, including regionalisation, reclassification as public bodies, and new funding and monitoring arrangements. Against that backdrop, the sector continues to exceed national targets for the provision of learning.

However, the Scottish Government is still not able to fully measure the benefits and costs of its merger programme. Since some measures, such as student destinations and employer engagement, lack baseline information, it will now be very difficult for the Government to demonstrate whether its reforms have delivered all the expected benefits.

Scotland now operates with 13 college regions, three of which contain more than one college. Only one of the three regional bodies was able to perform the role that was expected of it in 2014-15 and 2015-16.

There is a mixed picture in terms of student participation. The number of people under the age of 25 in full-time college education has increased by 14 per cent over the past 10 years. Over the same period, the total number of students has fallen by 41 per cent, and the number of part-time students has fallen by 48 per cent. Most of the reductions have been among women and people aged over 25. It is not possible to determine whether those reductions reflect a fall in demand, as data is not collated at national level.

The overall percentage of full-time further education students successfully completing their course increased year-on-year between 2009-10 and 2013-14, but dropped slightly in 2014-15. Colleges told us that the amount of change in the sector, along with efforts to widen access to students from more deprived areas, contributed to the reduction.

Information on destinations for college students was published for the first time this year. That showed that, in 2013-14, at least 82 per cent of students went on to education, training or employment.

Staff numbers fell by 9 per cent between 2011-12 and 2013-14, before increasing by 5 per cent in 2014-15. Staff feedback on the impact of mergers is mixed. Some felt that mergers had been successful, and cited benefits from sharing best practice and offering more opportunities for development, while others had concerns about the impact on workloads of voluntary severance and the reduced number of support staff.

The sector’s financial position deteriorated in 2014-15. Although the overall financial health of the sector is relatively stable, we identified four colleges that face financial challenges. Colleges do not have long-term financial plans that would help them prepare for further financial pressures, such as national collective bargaining, estate maintenance and student support funding.

I have reported previously on significant governance failings in a small number of colleges. The college good governance task group has published its recommendations, which should mitigate the risk of significant governance failures in future.

As you would expect, the SFC undertakes regular monitoring of colleges. That has improved over time, but it has not always resulted in timely and effective resolution of problems. We found that the Scottish Government had not undertaken a comprehensive review of the SFC’s role in the past 10 years, and we recommend that one take place.

My colleagues and I are happy to answer the committee’s questions.

I am contrasting the responses that we have received from the SFC and from the Scottish Government. The SFC’s response seems very clear—it indicates straightforwardly whether the SFC agrees with the various recommendations. However, I am less clear about the response from the Scottish Government.

I had the same reaction when I read the response from the Scottish Government. I think that you would need to direct that question to the Government.

It is possibly something that the committee will want to take up.

Page 26 of your report lists some key messages about college finances and says that the Scottish Government’s approach to funding colleges for depreciation is complex. Could you explain what is complex about that issue?

I knew that you would want to drill into that issue.

Depreciation is not complex to accountants and people who understand it—I acknowledge that that does not cover many people in the world. It is a straightforward way of recognising the fact that fixed assets deteriorate in value over time and that there is a cost to that.

The way in which depreciation has been funded in colleges in the past has been unusual, and the change to colleges being classified as public bodies has added to the complexity. Stuart Nugent will talk you through that.

Prior to being reclassified, colleges were provided with cash funding to cover all elements of cost, including depreciation. As depreciation was not a cash spend, colleges were free to save that money and put it towards the reserves, or spend it. If they spent it, that would result in a deficit.

Following reclassification, colleges can no longer apply that money to their reserves. They can still spend that money but, if they do, it will result in a deficit, as before. However, the Scottish Government has approved certain items of expenditure that that money can be spent on, such as student support payments, repayment of loans and issues around specific regional pressures. If the cash that was set aside for depreciation was spent on those items, that would result in a technical deficit, which the Government would understand and accept as such and would not view as a normal operating deficit. That is the difference between the situation before and after reclassification.

That makes things a bit odd. What is the total value of the money that we are talking about?

The total value in 2014-15, including the repayments of loan debt, was £17 million.

That is not a small sum for the colleges.

I want to ask about an issue that we have discussed before: arm’s-length foundations, or ALFs. What are colleges doing with them now? I know that when they were set up, colleges moved initial funding into the ALFs to avoid losing it. Are they still putting money into them? Have you looked at ALFs at all?

Yes, we looked at them as part of our review of the 2014-15 accounts. Mark MacPherson will talk you through the changes that we have seen this year.

Colleges are still transferring money into ALFs—I think that the figure for 2014-15 was £7 million. As far as we can determine, ALFs are operating as intended; colleges are paying in money, making applications and, in most cases, getting the money back. Colleges might have their applications refused—indeed, that has happened with a few colleges—and other bodies can apply to the ALFs for money, provided that it is for the intended purposes of further education. That, too, has happened in a few cases.

Where did the £7 million come from?

Colleges can still generate surpluses and, at a certain point in the year, they will make an estimate of how much they think they might be able to transfer into the ALF for, I guess you could say, safe keeping—if it can be guaranteed that they will get it back.

So they are putting public funds into the ALFs.

Colleges can generate their own income, of course, so—

But it is still public money, even if it comes from commercial operations.

I think that it depends on how the colleges have generated it. Presumably, if they can fund whatever it is they have been paid to deliver from commercial income, that is within their—

I think that that is more than just a grey area. As they are public institutions, any income that they generate becomes public income.

As we discussed with the committee in the previous session in relation to Coatbridge College, colleges generally are not able to account for their funding as being public or private. There is a good deal of allocation of costs between different headings, and colleges are accountable for the funding that they receive from the funding council. I think that the overall management of their budgets is a matter of proper public interest and interest to this committee.

Is the amount of funds in the ALFs increasing?

I think that it decreased over the period since last year. Colleges made a large transfer in the first year that they existed, because they had reserves that they were able to transfer. Now that they are operating on a year-to-year basis, the amounts that they are able to transfer are smaller. As we say in the report with regard to capital funding, it is clear that they have to rely on some of the money sitting in the ALFs to pay for some of the changes that they want to implement. I expect that, over time, the funds in ALFs will reduce.

But Audit Scotland will keep an eye on the matter.

Absolutely.

The other issue that keeps coming up in these reports is the Scottish funding council. For example, on page 35, you say:

“The SFC’s role in regulating college governance is not clear and”

as we have seen

“it has not been effective in ... some issues”.

Are there any indications that it is getting better?

As we say in the report and as I said in my opening statement, we think that the funding council has got more effective at monitoring what is happening in colleges. It is not always clear that its monitoring has led to the resolution of problems instead of simply identifying them; indeed, we saw a good example of that in Coatbridge College. However, it is also true that the funding council’s role has expanded markedly over the past few years, with big changes in both the council itself and the further and higher education sectors for which it is responsible. That is why I have recommended that the Government review its role and how well equipped it is to carry it out.

Might there be a conflict of interest with the SFC increasingly becoming a regulator as well as the organisation that dispenses funding?

I do not think so. Colleges and indeed higher education institutions are accountable to the funding council for the money that it distributes on behalf of the Government. It does not seem to me to be a conflict of interest that the funding council is monitoring their financial health and how well they are fulfilling the funding conditions. However, as I have said in the report on colleges and the report on higher education, I think that there is room for the funding council to do that in a more strategic way.

Last year, you recommended that the Government and the funding council publish financial information on the costs of and savings achieved through the merger process. On page 12 of your report, you say that many of the costs of the merger, such as the costs of harmonising pay, were not included in the SFC’s assessments. What other factors have been omitted from those calculations?

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The funding council has now published its summary of the costs and benefits of the merger programme. We think that there are two broad areas for which it does not provide the full information that we would expect to see. The first of those areas, as you have identified, is the full cost of the mergers, particularly the cost of harmonising terms and conditions across the colleges that have merged, which is potentially quite significant.

The second area is the benefits that the mergers were intended to achieve. There is some good information and examples of colleges working better after merger, but there is no baseline information on some important questions. My team will keep me straight, but I think that, for students, there are the questions of their destinations and their satisfaction with their studies and, for employers, there are the measures of employer engagement. The evaluation says that there are improvements in employer engagement but there is no baseline to compare that with. Without that full picture, it is hard to be clear what the full costs were and whether the intended benefits have been achieved.

In the absence of that baseline, it is not possible to establish whether the estimated £50 million of savings has been achieved.

It is difficult to be clear about whether the full benefits have been achieved and the full costs have not been captured. The evaluation takes account of the amount of money that the funding council provided directly to colleges to support mergers, but we know that colleges incurred costs in significant areas such as harmonising the terms and conditions of their staff. That information has not been captured and played into the evaluation.

Will it be possible to fully capture all that information or is it too late to go back and get that baseline?

That is a good question, and why we have been recommending it for the past couple of years. In some ways, it should be possible to go back and calculate the cost information although the further out we get, the more difficult that becomes. At this point, it would be difficult to go back and generate baseline information that was not collected in the first place.

We have been reporting on reform programmes across the public sector for a while and we have been clear from the start about the need to have good baselines so that we can see what has changed as a result. That did not happen in this case and it will be difficult to go back and generate that baseline information.

Does that mean that it will be difficult to provide evidence that the original aims of the process have been fully achieved?

The further that we get from the point of merger, the more difficult it gets.

Thank you. You report big falls in certain subject areas as a result of cuts in part-time places. Exhibit 4 on page 19 illustrates that very well. We see that courses such as computing and health have fallen by almost half, which is quite significant, and in your statement, you talked about the reduction in the number of part-time students and the gender dimension whereby 53 per cent of the decrease is women.

Looking at the courses in exhibit 4, what is the impact of the cuts on those subjects? Is there a vocational aspect to the courses? Do we know what students are doing now to acquire the skills that they would perhaps have obtained through those courses?

Stuart Nugent will come in on that in a moment. It is worth saying initially that, to a great extent, the changes reflect the Government’s policy decision to focus funding on full-time courses that were likely to lead to a qualification that would lead to employment, therefore directly vocational courses are likely to be gaining.

One of our concerns was that a full assessment was not done of that change and the funding council’s later funding change and what they meant for students. We do not have enough of an overall picture of demand for further education to know what is happening to the students who were displaced by the process.

One of our recommendations is that the funding council should look to assess the demand for college places, which would allow us to answer the question of what has happened to the students who no longer attend college. Are they still applying? There is currently no national picture of demand for college places across the country. Individual colleges have their own information systems but there is not a national picture, so we made our recommendation in light of that.

I have a quick follow-up to Monica Lennon’s question. You talk about student numbers decreasing, particularly among women and people aged over 25, but you said in your statement that the data is not collated at national level. Are you able to say categorically why those reductions have happened?

From paragraph 28 onwards, we talk about the policy changes that led to those reductions. In 2009, the Scottish Government asked the funding council to focus its funding on the courses that were most likely to lead to employment, which led to less funding for courses that did not lead to a recognised qualification or which were less than 10 hours in duration. That is an entirely appropriate policy choice for a Government to make—it is what Governments are for. Further, a shift in the way in which the funding is allocated through into the funding policy has had an impact on the way in which students are counted. We think that that is what is behind the reductions.

Our concern is that the Government did not carry out an impact assessment, in advance, of what was likely to happen to the people who were not able to gain places in further education as a result of the changes. As Stuart Nugent said, information on demand for FE courses is not collected across Scotland. Although individual colleges have their own information, they do not know whether a student who they turned down for a place went to a college elsewhere, so we do not have the overall picture. It is not clear whether people simply moved somewhere else or were unable to access further education that they would have been able to access before the policy change was introduced.

Turning to the recommendations in the report, you have said that the Scottish Government and the Scottish funding council should work with colleges to determine the current condition of the college estate and prepare a plan to ensure that it is fit for purpose. Is there a concern that the college estate across Scotland is not fit for purpose?

We just do not have the data. In the report, we talk about some work that the Scottish funding council has undertaken to try to assess the areas in which there has been less investment but, as our recommendation suggests, we need to make a proper analysis across the piece. I am sure that, at individual college level, many colleges will have made an assessment of their own estate, but that needs to be brought together to allow any funding decisions to be made on the basis of solid evidence.

Was your concern about the college estate driven by the 77 per cent reduction in capital funding for colleges?

We do not necessarily have a specific concern about the college estate. Our concern was that, when limited capital investment is available, you need to make best use of it. If no one has a clear picture of the overall state of the estate throughout the country, it might be difficult to allocate funding that becomes available.

In response to my question in the previous agenda item, you explained why there has been a reduction in capital spending. Have any other public sector bodies in Scotland experienced such a huge reduction—77 per cent—in capital spend?

As we said earlier, we will come back to the committee with any detailed comparisons that we can provide. However, we know that the Scottish Government’s overall capital departmental expenditure limits budget reduced more significantly than its revenue budget did over the period since 2010. Different public bodies have different ways of compensating for that. At the moment, councils are really the only bodies that can borrow, and they have used that to continue investing in their capital assets over the last period. Other bodies have not had the same ability to do that.

There has been some investment in the college estate through things such as public-private partnerships. However, as Mark MacPherson said, we do not have a clear picture, as we have for the national health service, for example, where there is a regular condition survey that gives the assurance that the estate is fit for purpose or estimates how much investment will be needed to bring it up to an acceptable condition.

I notice on page 26 that the Scottish Government is now looking to PPP to mitigate some of those capital funding cuts in future. Do you think that its plan of £300 million will be sufficient or is it hard to say?

At the moment, we just do not know. Without that regular condition survey, it is difficult to be clear what is needed. At the moment, the plans are centred on public-private partnerships because that is the only way that the Government has had to complement its capital allocation through the block grant. From next year, there will be new borrowing powers for the Scottish Government under the Scotland Act 2016, but all of that has long-term revenue consequences, so the Government and the funding council need to be clear across the budget of where the priorities are for investment and what the long-term effect is of “paying that back.”

I am interested in that, because the Government always tells us that it has moved away completely from PPP but, from the report, that is clearly not the case.

You talked about the 41 per cent reduction in overall student numbers and, from the graph in exhibit 9, it is clear that overall funding to the college sector has reduced—it seems to have reduced to the tune of £150 million since 2009-10. Given that reduction in spending and the reduction in the number of students, is it fair to say that the college sector has taken a huge cut?

The reduction in funding to the college sector has been very significant. Obviously, it is more significant than the reductions in the health service and local government. The Government has had to respond to a very significant reduction in the budget that it has had available since 2010 because of the direct relationship between the UK Government’s budget and the block grant that funds Scottish Government services. Choices have to be made on that. There is a question for Government, looking backwards, about how it has made the decisions on allocation and, looking forward to future budget discussions, how it will make those decisions.

It is also important to note that the reduction in funding has reflected a shift in policy, which Mr Kerr asked about earlier. There has been a reduction in the number of students but a significant increase in the number of full-time students coming through of 14 per cent over the same period.

You said earlier that, although there has been a reduction of 41 per cent in the number of students, you do not have the data to show a reduction in demand. Locally, over the years, I have seen information on numbers of applications. Why is that not collected? Surely, in relation to funding places at college, it would be a priority for Government to have a clear idea of how many young people, or just people, want to go to college? Why is that information not collected?

We think that it is really important that it is collected. As you say, individual colleges know how many applications they receive, how many offers they make and how many students accept those offers. However, if they do not make an offer or a person does not accept an offer, they do not know whether that person is doing nothing or is moving to another college to take the same course or a different course. We have that information for higher education in Scotland and we think that it is important that we have it for further education, because of the shift in policy and because of the increasing recognition that the link between school, college and higher education is important in allowing people to fulfil their potential, however well they do in the early years.

Is it one of your recommendations that the Government needs to collect information on applications?

Yes, it is.

So it is quite possible that hundreds if not thousands of students want to go to college but cannot, but we just do not know.

It is possible, but we do not know. It is equally possible that those students have accessed further education in a different college, perhaps doing the course that they wanted or a second preference. It is possible that they have gone into employment of some sort. Without collecting that information across Scotland, we do not know. That seems to us the key thing that the funding council should resolve with colleges as a matter of urgency.

If the higher education sector has collected that data for so long, why has the further education sector not done so?

There is a system to do it across Scotland for higher education, but there has not been a system for colleges. In the past, colleges have been seen much more as local institutions and the way in which the funding has worked for students has meant that the issue has not had the same priority. However, it now clearly has that priority, for all the reasons that we have discussed this morning.

Do members have any further questions?

I have a couple of questions. Obviously, the thrust of the policy change was to get a closer alignment between college courses and employment. The latest available figure shows that 82 per cent of leavers from college had a positive destination. How does that compare to the same figure in 2009, when the new policy was introduced?

The information was published for the first time for 2013-14. I think that we saw a very slight reduction between 2013-14 and 2014-15. It is not clear what the reasons for that reduction were, but that is obviously an early warning that colleges and the funding council should pay attention to ensure that the policy is having the desired effect.

So we do not know what the destination figure was before the policy was changed.

The first time that the information was published was for 2013-14.

Okay. The other figure that strikes me is the drop-out rate. The figure for those staying on improved from 59 to 64 per cent, although it slipped back a wee bit last year. However, even in the best year, there was still a 36 per cent drop-out rate, which is very wasteful, is it not? Why is the drop-out rate so high and what can we do to reduce it?

We have not had the chance to look at that in detail yet. We have heard from colleges that the changes that were going on in the system and the attempts to widen access for students might both be contributing to that. That is one reason why having the data is so important and why colleges and the funding council should be exploring what is happening across Scotland and in individual colleges so that we can reverse the trend. As you say, it is not good for students and it is not a good use of the public money that Government is spending in the area. Addressing that has to be a priority.

I would have thought so.

I thank our witnesses very much for their evidence.

I suspend the meeting briefly before we take the next item.

10:16 Meeting suspended.  

10:20 On resuming—