“NHS financial performance 2012/13”
Item 2 is consideration of a section 23 report, “NHS financial performance 2012/13”, which has been circulated to members. I invite the Auditor General for Scotland to brief the committee.
Thank you, convener.
Thank you. If Angela Canning, Tricia Meldrum or Gemma Diamond wishes to contribute, they should just let me know.
You are right that the figures in exhibit 15 demonstrate signs of pressure in the health system. That is one of the messages of the report as a whole. The backdrop to that is a great deal of activity to manage the finances, the health improvement, efficiency and governance, access and treatment targets, and the other things against which the performance of the health service is monitored.
I understand what you say about financial planning. Better, more effective financial planning can make a contribution, but if the issue is rising demand, which is a result of the demographic changes that you mentioned, linked to a greater squeeze on budgets, the boards—regardless of how good their financial planning is—will not be able to meet the targets if the money is not there to allow them to deliver. Does that mean that, in future, we will continue to see targets not being met, because of the squeeze on finances, or does it mean that, given the pressures and demands to which you referred, the targets might have to be revised because, frankly, they are not achievable?
The long-term financial planning that we are talking about is not just forecasting how much money is likely to be available but, within that, carrying out detailed scenario planning for different ways of providing services. For example, in relation to the A and E target, you might look at ways of managing unscheduled care in the round, ensuring that people who do not need to go to A and E do not arrive at the front door of the hospital, keeping more people safely at home or, where appropriate, treating them at home. That kind of financial planning is not just about understanding the money and the pressures on it, but about ways of delivering services. Stepping back and thinking more radically about new ways of doing something and—critically—following up more widely the examples of good practice that we have seen in parts of Scotland are absolutely central to what we mean by better long-term financial planning and financial management.
From what you know and what you have seen, are you confident that we will see positive statistics in these areas or will the problems continue because of the financial circumstances in which many boards are operating?
We know that the pressures are real and that the changes that need to be made will have to be made over a certain period. I suspect, therefore, that there will continue to be real pressure on the targets for the next year or two, which is why we have focused on our very strong recommendation to Government and health boards that they act now to redesign and deliver services in new ways to help reverse that trend.
Is there not an inherent contradiction between the targets beloved of politicians, and the short-term financial pressures that boards operate under and have to deal with?
My view is that any targets on their own run the risk of diverting people’s attention to one particular part of the system instead of their thinking about the system as a whole. In the report, we pull out a selection of targets that matter to people and which are central to the Government’s NHS policy but, both in the report and in our work more widely, we have made it clear that the answer to the A and E target is to look not just at A and E departments but at the whole question of unscheduled care, care for older people and so on. Although the Government’s healthcare strategy does that well, we would like to see more of that being underpinned with detailed service and financial planning for how those changes will happen in practice against the backdrop of serious financial and demand-led pressures.
I agree, but when you were carrying out this analysis and these investigations did you not find that most territorial health boards simply do not have the capacity or time to do that work because they are under such pressure from the centre to deliver on the targets that you have outlined in the report?
As the report makes clear, we certainly think that the focus on annual targets makes things harder. Having spoken to my auditors in all the health boards, particularly the 14 territorial health boards, I know that a lot of effort in the finance department and the Scottish Government’s health directorates goes into ensuring that health boards hit their annual financial targets. Indeed, you can see that in the overall underspend of 0.16 per cent against a budget of nearly £12 billion, and there is a danger that that kind of very precise financial management gets in the way of longer-term financial planning and the detailed modelling that needs to happen. That is why we made our recommendation.
That is fine, but do you not accept that irrespective of which Government is in power it is unlikely that targets will be dropped and that, right or wrong, they are now part of the NHS? What recommendations have you made with regard to easing the pressure on health boards and allowing them to create the time and capacity to carry out the long-term financial planning that you have rightly highlighted this morning?
Our main recommendation is about stepping back from that very intense focus on the annual targets and giving health boards more flexibility to manage things over a longer period, underpinned by strong, rigorous, longer-term financial plans. None of that should be about releasing control of the finances—obviously they have to be properly managed—but it is about focusing less on landing on a particular number on 31 March and more on shifting money and services over a longer period to meet the pressures that we have highlighted in the report.
I suppose what I am driving at is whether Audit Scotland thinks that territorial health boards can achieve that, given the pressures that they are under.
As the detail in the report shows, there are different pressures in different parts of the country but we have no reason to believe that health boards cannot achieve that, especially if support from the Government shifts from the brokerage of and planning for annual financial targets towards a longer-term focus on the changes that are needed in a particular part of Scotland.
Is the Government likely to accept your final recommendation about
The indications are that the Government is taking that recommendation very seriously. Some technical accounting challenges and control issues need to be managed as part of that, but I believe that in his recent evidence to the Health and Sport Committee the cabinet secretary indicated that the issue is the subject of serious internal discussion. That is certainly the impression that my team has had from its discussions with the Scottish Government officials.
On page 32 of the report, you say:
I will ask colleagues to respond in a moment, but it is worth reminding the committee that we are due to publish an update on our report on the management of waiting times next month so we are viewing the issue closely against the wider picture.
Case study 4 highlights the situation in Lothian, where a lot of money has been invested in trying to increase capacity and pick things up after the backlog of patients that had to be dealt with as a result of the waiting list problem in the board.
Paragraph 73 gives the bald and clear statistic that 565 patients
I think that that is a question for the Scottish Government. As far as we know, they were treated but after the 12-week waiting time implied in the guarantee. That raises a question not only about how the situation was managed for those patients; if the pressures increase and the NHS continues to be unable to meet the guarantee, we need to be clear how that situation will be managed and what the consequences will be for patients and the health service.
My question is whether a figure has been discovered for the additional cost of meeting whatever happened to those 565 patients after the 12-week period and, if so, whether it has been audited and analysed.
At this stage, we have not seen a figure for any additional cost. However, the situation will matter to the patients themselves and the trend will be important.
And will continue to be monitored.
Very much so.
Before I bring in Bob Doris, I have a question of clarification about the points raised by Tavish Scott. I note that spending on private sector healthcare has increased by 23 per cent to £80 million a year. Is that trend likely to continue?
It is very hard to be definite about that. Obviously it is a relatively small sum in the context of the overall health service budget and a lot of it relates to specific circumstances in Lothian with regard to the board’s problems with managing waiting times.
Lothian was one of the main areas in which we saw this increase, which obviously was to deal with the backlog of patients who were not being seen within the treatment time guarantee period and the waiting list targets. That was a particular pressure and, indeed, Lothian has recognised that it will continue to be a pressure this year and is working to increase its local capacity. We will continue to monitor the situation to see what impact that is having, but we are also aware of other boards that are experiencing capacity pressures and which are making use of the private sector. We will continue to keep a close watch on the matter.
That last response was quite helpful in demonstrating that the use of private health provision is not part of the Scottish Government’s direction of travel but is about meeting very specific needs. A very small local example that I can cite is the problem with assisted conception at Glasgow royal infirmary, where those who did not get the service they should have received were given private sector healthcare without delay in a specific one-off intervention. It is important to put on record that this is not about any direction of travel but about one-off circumstances in which such intervention is the right thing to do.
I think that there is an element of both. We are very clear that there are rising pressures on the NHS because of an ageing population, healthcare innovations that cost more and factors such as increasing obesity, which gives rise to long-term conditions that affect the health service as well as individuals.
That is really helpful. It gives a more nuanced view of the NHS’s financial position, although when you mention—
Sorry, but this is important for Bob Doris, given that he made a very significant comment. Can you make sure, Auditor General, that that is stated clearly on the record?
Certainly.
Did you say that it was a bit of both and that there were financial and tightening pressures as well as the other pressures?
Convener, I think that we heard that, and if you would let me continue with my question—
No, no, I am—
Convener, do you want a supplementary to my question?
Excuse me—I am chairing the meeting, Mr Doris. I just need to get the Auditor General’s point on the record, and then we shall proceed.
For the record, convener, our report is very clear that the revenue budget is forecast to increase by 0.6 per cent over the next three years in real terms, so there is a small real-terms increase. The report contains more detail about the breakdown between territorial boards and other health boards, and between the revenue and capital budgets.
You mentioned that the capital budget was decreasing, and you have accepted that there are squeezes on budgets because of the inflationary pressures on the NHS. Is that correct?
Our report aims to be as clear as it can be about the facts surrounding the budget.
Okay.
I can run through all of that if it would help, but there are both real-terms pressures from demand and a commitment from the Government, which is borne out in the revenue budget, with a small real-terms increase over the next three years.
Right. Thank you.
That was already on the record, convener. I will now try to develop a line of questioning, with your permission.
We picked the 31 March quarter because the report covers the NHS finances for 2012-13, with the year end at 31 March. Winter generally has an impact on all NHS targets. We will provide an update on that to you next month when we produce our report on the management of NHS waiting times.
That is very helpful. What if we were to show the figures from a different quarter—one that did not include winter? We clearly need better management of winter resilience—I would say that that is perhaps what the figures show—and I hope that the Government is taking steps to achieve that. Could the figures in this particular quarter be skewed by the winter months?
I do not want to speculate on that. As I say, we chose the period specifically because it coincided with the end of the financial year to which the report refers. More information will be available to the committee next month in our waiting times updates.
Okay. We have heard talk of targets and how helpful they are—or are not. Do you believe that the NHS and the Government are wed to targets? I ask because some of my colleagues raised the matter during yesterday’s health debate in the chamber. Already today, one colleague has said that it is terrible that targets have not been met, whereas another has said that the problem is the targets themselves. The Scottish Government said that it was reviewing the target on patients seeing a general practitioner within 48 hours because of the unintended consequences that that target may be having for patient access to GPs. Did you come across examples of other targets that are well intentioned but which are having unintended consequences for forward planning in the NHS?
I do not think that it would be helpful for me to focus in on individual targets in that way. However, I can say that having information about the performance of the health service is very helpful. It lets those running health boards, us as auditors and the people who rely on and pay for the NHS to understand how performance is changing and where there may be problems that need to be tackled.
Page 31 of the report includes information on consultant, nursing and midwifery numbers. There are modest increases in relation to those posts, but there are increases in the vacancy rates, too. Will you provide more detail on that situation?
You are absolutely right about the complexity that lies under the figures—they are headline figures that are aimed at giving an indication of travel in the NHS. Questions about the application of the new workforce planning tool would be better directed towards the Government and NHS boards. We hope that the tool will have a long-term impact by matching staffing needs to the changing ways in which healthcare will be delivered in the future. I do not think that we see the evidence of that just from those figures at this stage.
You quite rightly mentioned long-term planning. I am very conscious that, to date, £300 million has been spent through the change fund for older people in the NHS. I think that the spend will reach around £500 million before the fund is replaced and, I hope, mainstreamed into NHS board services. The other day we found out that there is a £100 million integration fund, and you have mentioned the integration of health and social care. In scrutinising such significant amounts of money, an issue for us is the ability to track the pound, see how it is used and consider whether that is the best way to meet the desired outcome. I am incredibly supportive of the initiatives, but I wonder whether your office has looked into whether the resources are being used in a way that provides best value, or whether that is something that you are likely to do in the future.
Yes. We currently have a significant piece of work under way, which Angela Canning is managing, to look at the way in which the priority of reshaping care for older people is being progressed. As part of that work, we will look at the change fund. We are due to publish that work in March—
At the end of January.
Sorry—at the end of January next year; I think that the work will come to the committee after recess. There will be more information in there to allow you to investigate that issue.
I look forward to that report, because I am hopeful that the change funds will deliver real difference in long-term planning. Until that is analysed and scrutinised, we just do not know.
I will continue on the same theme, Auditor General. Bob Doris referred to the diagram in exhibit 13. In the heading for paragraph 68, you state that
We think that they are all early indications of the pressures in the system that we have been discussing and which are there for a range of reasons to do with increasing need, changing patterns of care and so on.
I highlighted that
You are quite right, Mrs Scanlon—I am not trying to suggest that your question is wrong; I just wanted to put the figures in context.
I felt that it was important to be accurate.
I will ask Gemma Diamond to pick up on what we know about trends in those areas.
Those are the key figures that we look for in the annual accounts so that we can see what is happening with the trend. This year, we saw a reverse in the trend that we had seen previously—certainly for agency staff—of decreasing numbers, as there was a large increase this year.
So, you will be looking in future at those three areas—vacancies, agency staff and the five-fold increase in private sector treatment—in order to manage information on trends.
That is an area that we look at closely each year, for exactly the reason suggested by your question. It is important to say that we are talking about underfunding against the formula allocation, rather than in absolute terms. However, in principle, if the allocation formula is there, we would expect to see movement towards it over a period of time.
You say that there is a
It is entirely appropriate for the committee to explore with the Government what its plans are for movement towards the formula. The point that we tried to make is that such things add uncertainty to boards’ overall financial planning. That fits within the context of our recommendation to strengthen that area.
First, we should note the good performance of the NHS and the Scottish Government in managing the NHS’s finances in such a tight way at a very difficult time. There are undoubtedly challenges for the future, but every organisation faces those.
There is something in the report about pension liabilities for the NHS as a whole, which I will ask Tricia Meldrum to point me towards in a moment.
Paragraph 64 on page 30 and the bullet points above that reiterate the points in last year’s report about NHS pension funds.
The challenge is that there has been a delay in the pension fund revaluation over the past couple of years. Since the publication of the report, that may now be closer to being resolved, but we made the point last year and again this year that having up-to-date valuations of the liabilities is important if we are to manage the pension scheme, the contribution levels in the future and the associated risks.
Recent revaluations under the new accounting rules in other areas of the public sector, which take into account the reduced bond yields, have resulted in almost 100 per cent deficits right across the country. I presume that we can expect the same for the NHS.
I think that we discussed this a few weeks ago in relation to college pension schemes. You are correct that, in revaluations, very small movements in the discount rates and the new accounting rules can have significant impacts on the liabilities. That is why it is important that a revaluation should be carried out for the NHS pension scheme and the other schemes that are affected by the Treasury’s moratorium on revaluing over recent years.
I apologise if this goes over some of the ground that has been covered, but I ask for clarification at the risk of inviting Bob Doris to intervene again. Am I right in thinking that the main conclusion is that demand is increasing but it is forecast that the overall health budget will fall in real terms?
It is true that demand is increasing for a range of reasons. In the first part of the report—on pages 5 to 8—we tried to put on the record what is happening with NHS funding, which is complex. Against a backdrop of very tight financial resources for the Scottish block as a whole, which are the result of decisions that have been made elsewhere, the Government has made a commitment to protect the budgets of the territorial NHS boards in real terms. We expect that to be the case over the next three years, with a small real-terms increase of 0.6 per cent over that period.
That is helpful. Clearly, there are pressures and priorities in the health service spend. Is overall health spending forecast to decline in real terms over the next three years?
We say as clearly as we can in paragraph 2:
That means that health spending, whether you divide it into capital or revenue, is going to fall in real terms while demand is going to increase. Is that correct?
I do not think that it is helpful for me to simplify it in quite those terms. The headline figure for the overall health budget is clearly an overall decrease of 1.6 per cent. However, when those figures are broken down there are very real differences between the territorial health boards and the special health boards. Within the special health boards, there is a distinction between those that provide patient services, such as NHS 24, and those that provide support services, and there is a real difference between revenue and capital. People will have different interpretations of the most important feature of that. All that I can do is replay the detail in a way that is as independently based as we can make it.
I want you to clarify something that was commented on earlier. Exhibit 14 on page 31 is striking, as it shows that there has been an increase in spending on bank and agency staff and quite a dramatic increase in spending on private sector healthcare. Does that really represent good value for money?
The increase in both those areas is significant, but it is against a very small base and we are talking about an NHS budget of about £12 billion. For example, the increase last year for private healthcare provision was £14.8 million, which is a very small proportion of the overall budget. The Government has made it clear that its approach is not to prioritise spending on private healthcare provision, but to use that provision where there are problems such as Tricia Meldrum has highlighted, in places such as Lothian, in meeting wider healthcare delivery targets. The question of how that is being managed is better directed towards the health boards concerned and the Scottish Government.
Thank you. I turn to another issue entirely that has been brought to my attention—I could not see it in the report, but you might be aware of it. It is a particular example from NHS Tayside. I am not sure whether it was called a revaluation, but it involved the handover of the assets of non-profit distributing organisations to the health service in 2012. There was a project for the Susan Carnegie centre at Stracathro hospital that had contract costs of £18.4 million and there was a project at the Murray royal hospital site in Perth that had costs of £77.1 million. The facilities cost £95.5 million, but when they were handed over to NHS Tayside they were revalued at £83.4 million. In other words, they lost more than £10 million in value because they were revalued at £10 million less than they cost to build. Would that emerge somewhere in the NHS accounts? Would you audit that?
From paragraph 26 of our report onwards, we talk about the accounting adjustments that are required for public-private partnership projects of various types. I think that the Murray royal hospital is referred to within that, but the Stracathro treatment centre is not. Gemma Diamond is our expert on that, so I ask her to talk you through the position in broad terms. We can provide any other information that is necessary afterwards.
The figures will appear in NHS Tayside’s accounts. The auditors at NHS Tayside raised the issue of the impairment on the valuation in their annual audit report to the board and to the Auditor General. The auditors recommended that the health board work with the Scottish Government to discover why that had happened, and they will follow that up as part of their audit this year. We will look at it next year to see what action has been taken and whether any wider issues arise beyond the issue for NHS Tayside.
Were you surprised to see such a big project lose more than 10 per cent of its value like that? Would you expect to see that? Is that normal practice in the NHS?
We do not have the details to know how the evaluation was arrived at. The auditors assessed the evaluation with the board and have asked the board to look into it and see whether any wider implications for other NHS boards arise from the valuation. We will have to follow that up over the next year, and the auditors themselves will follow it up.
Have any other NPD projects or other construction or capital projects been similarly revalued or asset impaired?
There are a number of PPP projects in the NHS and some new ones are coming on stream. It is something that the auditors routinely keep under review as part of their annual audit work. As Gemma Diamond said, the auditors will report both to the health board and to me, as the Auditor General. If significant issues or a trend were identified, I would certainly consider reporting that to the committee, but that has not been the case so far.
If the NHS Tayside situation was more than a one-off and developed into a trend, you would expect us to be alerted to it.
I would alert the committee to any significant financial issues that came out of my areas of responsibility in the NHS and the wider public sector. However, so far, that has not been the case.
What would be the next course of action in the NHS Tayside situation? It has been reported by the board. Would we expect the Government to intervene in some way and to report to Parliament? Would we expect Audit Scotland to be involved? How would the situation be accountable in a parliamentary manner, or would it not be?
As I said, if an issue is significant enough to bring to the attention of the committee, I have the reporting powers to do so either through the section 22 powers to report on a board’s annual accounts or through a section 23 report like the one that is before you today.
I would have thought that, in these times of tight budgets, the loss of £12 million on a building project is the sort of thing that the committee would want to know about.
I am not sure that it is accurate to characterise the situation as the loss of £12 million on a building project; it is about the valuation of the asset and the accounting adjustments that follow from that. However, I will look at what we heard from the auditors in relation to the previous financial year and will consider whether there is an issue that would merit further reporting.
Can you clarify what it means? If a project is built at a cost to the public of £95 million and then appears in our books at a cost of £83 million, is that not a loss of £12 million?
No.
What is it then?
Accounting adjustments are required, and without knowing the reasons for the variation—which, as Gemma Diamond said, are being explored between the health board and the Scottish Government and will be reported on further by the auditors—I do not want to speculate on what the underlying cause is.
If there are any further issues of clarification on that, either the member or the committee can write to the Auditor General. I intend to finish this session at half past 10, so I will cut questioning on that issue now. Is there anything to add on it?
No.
I would like you to clarify something, Auditor General. You referred to PPP projects being mentioned in paragraph 26 of the report. Are such projects still being developed?
The acronym PPP is used to refer to a range of privately funded projects, including the non-profit distributing model, the private finance initiative and so on.
Okay. The impression is sometimes given that PPP was abolished, but such projects still exist.
I will leave the obvious discussion about the financial pluses and minuses because I think that we have had enough of that.
I ask Gemma Diamond to come in if she wants to add anything to this. NHS Lothian’s financial statements have been audited every year, as all health boards’ financial statements are. There have been some recommendations for improvements in financial management in NHS Lothian, but nothing significant or out of the ordinary run of things across the NHS. We saw particular problems in the management of waiting times, which were reported on extensively last year, and we will provide an update on that issue right across the NHS. However, the recommendation for NHS Lothian in particular to improve longer-term financial planning, underpinning it with strong forecasts and strong scenario planning, is all the more important because of the pressures that it has faced in the past. There are no differences in its accounts or financial management, but there is a difference in the underlying pressures that it is having to manage.
Have you found any other weaknesses in NHS Lothian’s reporting mechanisms that have not been addressed? I feel as though I am picking on my local health service but, given the problems that NHS Lothian has had, it is important that we all feel confident in the new management regime’s ability not only to address the problems with waiting times in the past, but to produce comprehensive and, frankly, trustworthy reports in the future.
In NHS Lothian, there has been a real focus on earning back the public’s trust and confidence. Its annual accounts received a clean audit certificate this year, as did those of all other health boards. I know that you are interested in more than waiting times, but the work that we are finalising now on progress against our waiting times recommendation shows that NHS Lothian has made a really strong effort to improve the information that is going to the board to enable it to monitor that. We can take that as an indication that NHS Lothian is responding positively to the challenges that it has faced over the past few years.
Thank you. I am going to finish this session at 10.35. James Dornan is next to ask a question.
Auditor General, I share your frustration about some of the blatant politicking going on at this meeting.
First, I am sorry if any of my words or my body language has indicated frustration with members. Clearly, I am here to respond to questions that members might have on the work that we produce.
Nobody welcomes any increase in agency staff but, again, I know that nursing staff are being asked about their bank staff availability, so there seems to be a push in the health service to try to use bank staff again. Do you have any indication that we will see a decrease in the use of agency staff and, as I hope, an increase in the use of bank staff?
I have been resisting all morning the temptation to use that famous quotation from Niels Bohr, the physicist, that prediction is always hard, especially about the future. We simply do not know the position yet. Our strong view as an organisation is that bank staff are better than agency staff as a way of responding to short-term fluctuations but that that is what they should be used for, not filling gaps for the longer term. We are seeing significant work going into workforce planning, but it is early days yet to see the results of that. However, it is something that we will keep under close review. The committee might want to explore that further with health boards or the Government.
Thank you.
I will start by picking up on the point about accident and emergency targets, which are described on pages 36 and 37 of the report. In his opening remarks, the convener talked about significant failures, but my understanding of the information is that there have been significant successes. The accident and emergency target column in exhibit 15 shows that most health boards met or were within 5 per cent of meeting their target. That is a different message from the message of “significant failure” that the convener opened with. For two of the health boards in particular—Ayrshire and Arran, and Lanarkshire—I shudder to think what would have happened and what figures we might have got in this report had Ayr and Monklands hospitals shut.
There are at the moment, as you said, very rigorous annual targets, and health boards and the Government take very seriously the need to meet those. That is good in terms of financial discipline, but we think that it can get in the way of the longer-term financial planning that is needed to find more sustainable solutions to the pressures that the health service is under. At the moment, brokerage and other short-term flexibility are the way in which those targets are hit. To come within 0.16 per cent of the targets across the NHS as a whole is not done by chance; it is done by very close monitoring month by month and moving money to where it is needed. Again, that is entirely understandable within the framework that we are working in.
I am very encouraged by that. Thank you.
I will ask Tricia Meldrum to come in on the detail on that, but you are right that drugs have made a significant contribution to savings. The important point that we highlight that boards need to be aware of is that that is very much affected by specific drugs coming off patent and being available in generic forms that are much cheaper. That tends to happen in chunks, so there is a significant saving in one year from a drug coming off patent, but we cannot rely on the same thing happening on a regular basis. Tricia Meldrum will add a bit of context to that.
In 2012-13, atorvastatin, which is one of the most popular statins, came off patent. It is widely prescribed and used by a lot of people, so that is one of the drugs that have had a significant impact on savings. There will not be quite the same level of potential savings from other drugs coming off patent in the near future, but we are aware that the Government and the boards are carrying out a lot of work on this and are continuing to look at improving the quality and cost effectiveness of prescribing. For example, a national workstream is examining national therapeutic indicators and seeking to identify a small number of drugs and types of drug on which attention can be focused. However, we do not expect to see the same level of recurring savings as we saw in 2012-13, as much of that was down to atorvastatin.
As a very brief—and, I hope, final—point, surely the system must know which drugs are coming off patent in the next one, two, three, four, five or even 10 years. Is the NHS able to build that into its financial planning forecasts? Previously, good progress was made in using generic rather than brand drugs and I think that that trend should be welcomed. Do we, as I think the Auditor General mentioned earlier, build that into our forecasts?
Yes, and you are right to say that it has been a significant success for the NHS. However, our point is that atorvastatin is a real one-off because of the extent to which it is used in the health service, and it is hard to spot another drug that will have as significant an impact on the budget when it comes off patent.
Before I close this evidence session, I want to come back to Willie Coffey’s point about my comments on accident and emergency. I hope that I have not misinterpreted anything, so I ask the Auditor General to state for the record the health boards that met their A and E targets.
We have tried to make the exhibit in question as clear as we can, convener. The four board marked with a green tick all achieved four-hour waiting times for A and E and the boards with two yellow arrows came within 5 per cent—
I am sorry, but could you just list for the record the names of the boards that met their targets?
It is on the record.
I am reluctant to interpret this complex exhibit on the record because of the focus that is being placed on this particular number. It might be useful if I write to you to place that on the record. As you can see, a number of indicators in the column in the exhibit have quite specific meanings and I want to ensure that we do not mislead the committee about what they mean. I am certainly very happy to follow that up.
That would be helpful because, as presented, the exhibit indicates that Orkney, Shetland, Tayside and Western Isles met their target. It would help if you could clarify what the overall statistics mean to ensure that we are not under any misapprehension about their significance.
Convener, I said that most—
I am sorry, but I must thank the Auditor General and her staff for their evidence. No doubt we will follow up the issue at some point.
“Scotland’s colleges 2013”
Item 3 on the agenda is an evidence session on a section 23 report, “Scotland’s colleges 2013”, on which we have previously taken evidence from the Auditor General and Audit Scotland.
It is very simple. The emphasis in incorporation was on colleges operating in a businesslike fashion: principals who previously were responsible only for an institution’s academic element changed their role and, as a result, their title was changed.
That was an interesting response; indeed, it raises a number of other questions.
There has absolutely been an impact, but there is a difference between the level and amount of activity vis-à-vis the quality.
So there are fewer students attending, but for those students the quality has not been affected.
Yes.
I want to ask about one thing that I am not quite sure about, which is why particular colleges were brought together and what the significance of that is. However, before I ask that, does anyone else wish to comment? Does Audrey Cumberford’s answer apply to you, too?
Yes, it probably applies across most of the sector, although geographical differences must be taken into account.
Right—that is 14,700 in comparison with the number of enrolments in the colleges that amalgamated.
Yes—the colleges that amalgamated to form Glasgow Clyde College.
I want to explore that, because the 25-plus age group is quite significant.
Some of the issues relate to whether there is demand or need. Some of the reduction in numbers is down to people choosing not to come to college, probably because our sector has not had particularly positive public relations in recent times. Some of it is down to the focus on 16 to 19-year-olds. We welcome that focus and understand that young people need an opportunity, and that the earlier we can provide education for people, the more a positive benefit comes back to their families and to the economy.
You mentioned people improving their qualifications while they are working. In a previous experience, I was a teacher, and while I was teaching I was also a lecturer at one of the Glasgow colleges in the evenings. The people who attended those classes were all people in full-time employment who wanted to add to their skills and qualifications. Are those types of classes affected?
I can speak only for my college, but we have certainly seen a reduction in the number of classes that are offered in the evenings. At one point, a local FE college might have been open for four or five evenings a week. As part of our response to our budget cuts, we have looked at trying to concentrate facility use, and that has led to a reduction in access in the evenings. That makes it harder for people who are in full-time employment to go and upskill.
The profile of the portfolio of colleges has shifted in response to both the cuts and Scottish Government priorities. Colleges are good at responding to the priorities of the Scottish Government of the day, but there has been a shift to full-time education at the expense of part-time education.
Thank you. We will now have questions from Mary Scanlon.
Like the convener, I am a relic—if you like—of further education, as I lectured there before coming here. I am delighted to see three female principals here today.
The strong answer to that is yes: we can respond, and colleges have to play a key role in responding to the Wood report. However, there is a “but”, which is that the resources that we have are for our current activities.
We also see that we can do a very effective job in replacing some of the existing provision that we already deliver. For example, we want to strengthen the senior phase curriculum under the school-college partnership. We want to enhance what the increased number of school pupils are doing, particularly in their sixth year, by enhancing the range of provision.
I was in Inverness College on Friday to see the school pupils. A wonderful model is used there—one that every party supports. Are you saying that the SDS funding is limiting what you can do on modern apprenticeships? Bearing in mind that 77,000 are not in education, employment or training, is the budget limiting what can be done?
It is absolutely limiting what can be done. The annual bid process is oversubscribed every year. Perth College has been denied for the second year running any funding for hospitality students, and yet tourism is not only a Government priority but a particular priority for Perth and Kinross.
I am sorry to hear that. I realise that all my colleagues want to come in on the issue, so I will briefly ask my second question, which is probably for Margaret Munckton to answer.
I am not sure about the comparison between Highlands and Islands colleges and the rest of Scotland on a per capita resource basis because our higher education is funded differently. However, although it is not easy to draw that direct comparison, it is fair to say that any amount of top-slicing reduces the money that is available for front-line delivery.
I understand that that report came out two years ago. Even if you received the same funding per student, as Tavish Scott will also know, we do not have in the Highlands the critical mass in numbers that your colleagues Audrey Cumberford and Susan Walsh enjoy, and the class numbers are often smaller. It would be a sad day if those courses were to leave. Perhaps we will pursue that later.
We have recently done an analysis of data as part of our regionalisation. The class sizes for further education across the Highlands and Islands region vary from nine in Orkney, I believe, to 28 in Perth.
I will go on to my third question.
I think that, across the sector, most would have preferred the ONS reclassification not to come in.
I understand that, in England, legislation was brought forward to prevent it from affecting colleges, but that was not done in Scotland.
Yes, because the classification tends to limit the use of surpluses and similarly the use of any reserves. However, it is about to happen, and we are looking at mitigating arrangements and working as best as we can through the imminent changes.
I understand that you are setting up arm’s-length trust organisations in order to overcome that. Am I correct about that? Will you expand on how that will happen?
That is right. There were two options. The funding council offered to set up an umbrella trust that most of the colleges could join, if they wanted to, but some college boards decided that they would prefer to set up their own trust, as that might give them more flexibility in what they could do.
How confident are the principals about the flexibility? Will you be able to continue as you have done in the past? Do you think that the new concept will stifle what you are doing? What change will the reclassification bring for colleges that currently have loans from banks, for example, or even PFI projects? Is it a cause of concern?
In West College Scotland, 21 per cent of our income comes from other sources. That income is critical for strategic reinvestment in what we do and in enhancing our provision, resources and estates. To take that strategic perspective, that is where the challenge is with ONS in moving to an annual cycle.
I understand that the reclassification is to be implemented on 1 April, so we are running short of time. The 21 per cent that is coming from other sources is commendable but in relation to your college, Audrey, how will the reclassification affect that?
The effect will be on generating reserves. Our view is that it is important to be able to generate reserves to reinvest back into the college for the benefit of our students, local communities and staff. The public funds that we currently receive pretty much just cover the payroll bill. We have to do everything else by ourselves and by generating income from other sources.
So the reclassification will stop you from generating income from other sources.
It will not stop us doing that, but it means that we will have to reinvest annually. That does not allow for strategic planning and investment, which are important.
I will just leave it there. We could go further.
I would like some clarification on the arm’s-length trusts that you all seem to be exploring. Will they be completely independent? If they are, to whom will they be accountable? How will there be accountability for funding that is either transferred to or generated by those arm’s-length trusts? How will you guarantee benefit to the college from an arm’s-length trust over which you potentially have no control?
There will be no guarantee. We are going with the work of the SFC, which is acting as the main adviser to the sector on this. We need to do it in order to preserve our ability to invest in our facilities, students and staff. It needs to happen or we will be a poorer sector.
I understand why you are doing it and that you could otherwise be, as you describe, a poorer sector. I am interested purely in accountability and the money lines. Where does the money come from and where does it go? How is the money used and who assumes responsibility?
We have replied to the funding council that the single umbrella trust for Scotland is Perth College’s preference. We would therefore rely on that umbrella trust being set up as we been informed it will be set up. Our understanding is that the money will be partitioned. Because 44 per cent of our income is generated outwith the public funding, it is highly likely that we will need to put money in annually rather than being forced to spend it as we generate it within the year. It is vital to us that the money that we generate in that way comes back to Perth College. We have been promised partition, whereby what we put in will be preserved for the good of our locality, but we are not clear how long into the future that partition will last.
If there are three trustees and two come from other areas, in the future there would be nothing to stop those two trustees deciding that the pressures that were faced in the west or the south of Scotland were more significant, so the money could be used there.
Absolutely—so we are relying on compartmentalisation.
That is a leap of faith.
Yes.
You have just rehearsed the arguments that have been had in boardrooms around Scotland over the past six months.
I was just going to repeat what Susan Walsh said. The creation of arm’s-length trusts would give colleges a lot more flexibility in how they can generate commercial income, in particular, which could be reinvested in the college.
What will the charitable status of colleges be in the future? What are the implications for that?
We understand from the funding council that the charitable status of incorporated colleges will be unaffected by the ONS reclassification.
Has that been guaranteed by the charity regulator?
We have had sight of a letter from the Office of the Scottish Charity Regulator that says that charitable status will be unaffected.
Right—there should be no financial implications for colleges with regard to their charitable status.
We hope that there will not be.
I thought you said that there was a letter that guarantees that.
There has, indeed, been such a letter.
So why the hesitation?
It was not hesitation. One of the things that we learn as college principals is that the political context changes. As of today, we have a guarantee of what we can expect, but that might change in the future. We do not know.
I presume that that would require a change in the law or a change in the way in which the charity regulator operates, because that should not, in the first instance, be subjected to political influence.
I meant “political” in terms of the political will to change legislation that might have an effect.
Okay.
Could you describe the financial role that the regional boards for the 13 college regions will play, please?
One of the issues is that the regional boards will all be different. I can speak for Glasgow—Henry McLeish will allow me to do that. In Glasgow, the regional strategic body will have three assigned colleges. The funding will go to the regional strategic body and will thereafter be distributed on the basis of evidence related to the regional strategic framework that we are developing in Glasgow. The regional board will be the fundable body.
What will individual colleges do to ensure that they get their fair allocation? Will they simply have to fight hardest at meetings?
Absolutely. You used the term “fight”, but I would say that it is more like tag team. As the three colleges that now exist in Glasgow are part of what historically was known as the Glasgow colleges strategic partnership, we already had an operating framework for working together. In some ways, the regional strategic body is simply putting in a governance layer that would have lain with the college themselves.
In that case, what will the board bring to the party?
The board will bring the capacity to speak with one voice for Glasgow. Glasgow—by which I mean not just the city itself but its metropolitan area—makes the highest gross domestic product contribution to Scotland. The board will allow us to engage with key stakeholders with one voice in a way that was not previously possible.
I get that—and it seems like a fair point—but are you concerned about the potential for individual colleges to lose out? I presume that there will be some concern at lower levels that you are not all going to get everything you want from the overall allocation that will be given to the regional board for Glasgow.
I do not think that anyone ever gets everything they want. The point is that the colleges are better being interdependent than being independent, simply because the regional strategic framework and the college plans that will allow us to meet that framework’s aims are being built from the bottom up, starting with an economic skills analysis and discussions with our key stakeholders, our employers, our schools and the universities. We are not working in isolation and then saying, “I want that bit of the cake.” That is not the mechanism that we are developing.
That is fascinating.
I make it clear that the hospitality course was based on modern apprenticeship funding that flowed through SDS.
Who will make the appointment if it is not going to be made through the public appointments process?
The appointment will be made by the court itself, which is being reformed at the moment.
I presume that, given the differences, you would prefer the appointment to go through a similar process to that which is used in Glasgow and other parts of the country.
Such an approach would be a lot more transparent and open in governance terms.
On the principle of the system that you are about to be part of in the UHI—I take the point about the size of the cake and so on—how will that work? I presume that you will all get round the table once a year to sort out the allocations for individual further education institutions.
The direction of travel is that the smaller colleges in more rural locations want to offer a wider range of provision. We understand that; we have done that in FE by networked delivery, so we can deliver at a distance. However, we do not feel that that is appropriate for the maturity of the learners—I mean not their age, but their maturity as learners—at FE colleges. If, as a regional board or a committee of court, we want to support more activity being nested in the remote areas, we will need to sacrifice larger class groups in the urban areas. The reality is that a class of 28 at Perth College could be sacrificed for a class of nine in Orkney.
You will have such dilemmas.
Our regional board is formed. The financial strategy is agreed by the board, so we have a good idea of what we will be planning for and, I hope, what we will achieve in future years through our approach.
Okay. I guess that your pitch to the SFC—I assume that this applies to all the witnesses—will be for funds that are based on the assessment that you make in the strategic plan that was mentioned previously.
It will be, although the outcome agreements also tie into the approach. The SFC has its guidance from the Government on what we should focus on through the outcome agreement to make the system much more joined up.
The flipside of that argument is how much discretion local colleges have to answer local economic needs in respect of skills needs and skills training. Will there still be room to make that argument through the structure that comes with regional boards, and therefore to ensure that that becomes part of the overall strategic plan for your region?
We certainly identify needs in the community. That information is fed to the SFC, so it should form part of the outcome agreement.
So, in other words, it is not a straitjacket—there is flexibility.
There is flexibility.
Okay.
The outcome agreements are aligned to the single outcome agreements in relation to the community planning partnerships, so for local colleges there has to be alignment with their local authority CPP areas as well as with the national outcomes.
Paragraph 19 onwards of the Auditor General’s recent report on colleges mentions pensions deficits. As has been said, the pensions deficit is £115 million, which is acute and has grown over the years. There seems to be no indication that the deficit will do anything but continue to grow. I understand that that covers only the local government pension scheme and not the teachers, who are in the Scottish teachers superannuation scheme. How do colleges view that deficit? It is a lot of money. I presume that at some point somebody will have to cover it.
I can comment on Edinburgh College. Last year, we had a deficit of about £11.5 million and this year we are down to just under £9 million, so there has been a positive movement, mainly because the economy has picked up and the value of our assets has improved over that period.
How does that affect the college sector overall? It depends on the size of the deficit, but the impact is predominantly through the contribution side. If the deficit keeps rising in the future, it is likely that the contributions that the organisations pay will be increased.
The contributions have been increasing. Alan Williamson can help me out on this, but the teachers’ scheme is on a different basis and there is no fund as such, so what is received is paid out. In accounting terms, that system has a different status. The issue of the teachers’ pension scheme is not being avoided; it is just run differently from the local government scheme.
One of the comments that was made by the Attorney General was to the effect that there are a number of different contribution rates even within the same pension scheme. It is not explored in any depth in the Attorney General’s report—
You mean the Auditor General.
I am sorry—I meant the Auditor General’s report. Perhaps you could give a little more information about how that works.
When there were three colleges in Edinburgh, we all paid separate contribution rates, ranging from 17 to 20 per cent. The contribution rates were based on the age and number of staff, and when we were likely to pay the pension benefits.
Can I have clarification? Margaret Munckton said earlier that contribution rates are increasing. Does that apply to individual participants, or just to employers?
Contribution rates have also been increasing for individual participants.
What scale of increase has there been?
I am not sure, because I am not in the local government scheme.
Does the same pertain to the teachers’ scheme, or does it apply just to the local authority one?
It is proposed to increase the contributions for the teachers’ scheme, but I do not think that that has happened yet. However, the local government scheme contributions have definitely increased.
My contributions have probably gone up over the past three years from around 6 per cent to 9 per cent.
Okay. I am sorry, Colin.
The size of the deficit is obviously a worry. However, you are not alone in that situation, because right across the UK changes in accounting and bond yields and so on have resulted in deficits. For you, what would trigger a decision to put in significant sums?
Pensions crystallise only on retirement. Provided we are an on-going business, we will always have people starting in the pension scheme and people leaving it. It is about having faith in that demographic and that we will always have a timeline of leavers and no absolute hit from mass leavers.
You have a £115 million deficit now, but what would happen if it went up to £200 million or £250 million? At what point would you be concerned?
The difficulty is that the variation tends to be in response to actuarial valuations of the pension scheme. I am sure that Alan Williamson will be most distressed to hear that I tend to think of accountancy as a kind of black art when it comes to figure changing. Alan alluded to the fact that his college’s pension deficit improved by £2 million last year, as did Glasgow Clyde College’s, although we did not do anything different. The pensions’ value going up and down can contribute to that variability.
The Auditor General’s report mentions only two pension schemes. Are they the only two? Are there any closed pension schemes?
None that I am aware of.
No.
No.
At present there are only two pension schemes in the college sector, for teachers and for support staff. One is a defined benefit scheme, which is the one that is reported as showing a deficit, and the other is a contribution scheme, which is off balance sheet and is just noted in the narrative of the accounts.
I want to clarify something. You mentioned that retirement was one of the issues. If my memory serves me right, there was a significant expansion of the public sector in the late 1970s and into the early 1980s. Does that mean that there will be a bulge of people who are now approaching retirement? Although some of those people may well already have chosen to take early retirement, is there a significant bulge that would otherwise not be there?
I am not sure about the national demographic in that regard, but I am sure that the answer could be researched.
Has the impact of the early retirements been quantified?
I am not aware that it has been quantified. It may have been.
Surely that should be done. If you say that it is a significant strain, surely you should know how much that strain costs.
The impact has not been quantified on a sectoral basis, but individual colleges collect that information. We lost 154 staff last year from the three colleges that formed Glasgow Clyde College, which cost us somewhere in the region of £4.8 million. We then had a further £770,000 in strain costs. That situation will have been repeated elsewhere in the sector.
I will begin by congratulating the colleges on how they have managed a difficult period of change and transition. It is worth putting on the record that there was a 9 per cent reduction in budgets, which was dealt with by reducing the head count, mainly among teaching staff. That was a political choice, and it is clear that you have all managed it well.
Colleges have always recognised that. Indeed, a person may apply not only to three colleges, but for three or four courses at each of those colleges, so the problem is magnified.
That was quite a lot of detail, which I appreciate, but I want to get a sense of whether work is in progress across the college sector to look at a college application registrar, who could audit the process effectively but in a way that did not dissuade people from vulnerable backgrounds from applying to college in the first place. Is such work on-going?
I have a particular worry that the debate about what counts as a head count of student numbers and how big our waiting lists are is almost a distraction that could drive us in the direction of coming up with national e-solutions when what we need are local responses.
I did not suggest a solution to how you map out—
I am sorry; the rant was not at you.
No. I have to say that I have had enough of scrutinising IT systems at the Public Audit Committee to last me a lifetime, so let us not go there.
We look across trends and conversion rates, from applications to offers made to people actually turning up on the day. Actually, the demand that is exerted is often articulated when people physically turn up on the day, so any extrapolation of data will not provide clear information about that. However, we can use trends from previous conversion rates and we also get a lot of information from speaking to the students themselves. I know that we are starting to put a likelihood score against applicants. Often when we talk to applicants, they will say that they have applied to such-and-such colleges and we give some advice. Although all the MIS systems record each application, we can filter the data to say that the likelihood is that a particular student will not turn up. That is about people intervention and it is about people talking to individual applicants.
Does Bob Doris have a final question?
Before coming on to my final question, I stress that the reason that I have asked about mapping of demand for course provision is that, as well as being a key recommendation from the Auditor General, most people would think that better mapping would be a good thing. I am sorry that, due to time constraints, we are not able to continue that discussion with the witnesses.
That is something that colleges do all the time. During the period from 2002 to 2005, which was probably the most stable financial period that colleges had, we demonstrated that we could rise and fall with demand depending on what was required. Going forward, we absolutely have processes that would allow us to identify areas where growth would be appropriate. We have shown that we can respond to the opportunities provided by new organisations opening up.
We need to move on, as we are running out of time. I call Ken Macintosh, to be followed by Colin Keir.
On a related subject, it is clear that you are struggling with reduced budgets. You have lost a lot of staff in the past year. Are you looking to lose staff again in the forthcoming year?
Yes.
Yes.
Yes.
Will that be on a similar scale? I think that you lost 1,200 staff across the board in one year. Will the losses be on a similar scale this time or slightly less or slightly more?
I can speak only for my college. We expect to lose some staff but on nothing like the scale of the past two or three years.
The situation for West Scotland College is similar.
As Mary Scanlon pointed out, student head count was reduced by 48,000 in one year. Will head count be reduced further?
That is quite a difficult question to answer simply because we are also facing a changing funding methodology. Some key decisions need to be made to allow us to work out what a full-time student will be in the future and what the value will be of the weighted credit in future. Therefore, we cannot answer that at the moment, but the Scottish funding council needs to give answers on key issues quickly, so that we can plan properly.
In effect, you are going to get less money per student.
Not necessarily—we do not know. We do not know what will be the value of a weighted credit or how many weighted credits will make up a full-time student. We know what that might be roughly, but “roughly” could mean huge variance in the FE budget, so that does not give us any comfort or capacity to plan in detail.
I am conscious that SFC witnesses will give evidence in the following panel, so what would you like them to tell you?
First, we need absolute clarity on the weighted credit and on how many weighted credits will make up a full-time student. We also need much more clarity on the needs-based element. We are concerned about some of the figures that we have heard on supporting extended learning support students. At present, colleges respond to students as they come forward with special needs, but in future that will probably be limited, although not necessarily capped. We also need to know about deprivation funding, which we understand will probably be of a lesser scale than some other funds.
A key word for me is “stability”. Albeit that, given what we have just gone through, the stability in this year’s funding and in what we know about next year’s funding is fairly minor, it is welcome. However, margins continue to be extremely tight. For example, in West College Scotland, on a turnover of more than £50 million, we are forecasting a surplus of £50,000. The analogy that I use is that it is a bit like trying to land a 747 on a postage stamp. It does not take much to swing the figure into a negative. The issue that Susan Walsh just mentioned about certainty on funding is key. The funding scenario has the potential to continue to stabilise the situation, or to destabilise it.
To pick up on the point about development education courses for those with additional needs, an awful lot of such courses—I think that it was between a third and a half of them—were lost in the initial round of funding cuts. Are you suggesting that there could be further cuts to that vulnerable sector?
The funding that I was referring to was for extended learning support, which is for students who are on mainstream programmes but who have additional needs—for example, they might be dyslexic or dysgraphic. At present, such students go through an assessment process and we put together a package that allows them to remain in college and be successful. That is done individually. Those students simply gather weighted student units of measurement, and we draw down funding to allow that provision to continue. Our understanding is that, from the funding council’s perspective, that approach might not be viable in future, and that extended learning support, which has been growing year-on-year, might be not necessarily capped but limited in some way. We have real concerns about that, because as students and their parents and employers become clearer about the kind of help and support that students need to be successful, expectations are greater and therefore there is a greater demand for ELS.
Ms Munckton, do you expect either to increase class sizes or reduce the number of hours that students spend with lecturers and other staff?
At Perth College, we have resisted the removal of learning hours. We have capacity to remove hours, because the current funding system allows us to claim a tariff-weighted SUM and deliver slightly less than that, but we are determined to deliver what is appropriate. That has an impact financially because, under the existing rules, we could deliver less and get the same money. However, as Susan Walsh says, those rules are about to change. The increase in class size is absolutely key to our balancing the books. We now use lecture theatres to deliver theory to 100 students at a time, and they are then split into groups of 20 for practical work.
Is that—
This should be your last question.
Okay. Is that also the situation in the other colleges, in relation to the amount of hours that students get with staff and the size of classes?
There is definitely a benefit from full-time courses at the moment. It is the extra resource that full-time students attract, which we are going to lose under the new funding methodology, that we use to support students and maintain other facilities and services for them.
It is the same in Edinburgh.
Good morning. As far as I can see from the report, it is a little bit early to tell how painful or difficult the process that you have gone through has been. What has been the most awkward thing in managing the merger of the colleges into regional entities? How flexible will the management structure be in enabling you to respond quickly to local requirements in future years? I am pretty sure that you have partly answered that, but the projections for public expenditure over the next number of years suggest that it is not going to be easy. We all realise that everybody would like more money, but how are you going to manage this difficult situation if the period of austerity carries on for, say, another seven, eight or nine years?
For us, the biggest challenges in dealing with the funding cuts were having only a short time in which to restructure and integrate systems, and keeping staff motivated when they were going to be applying for jobs, given that, at the senior and management levels, we moved from three to one—that is one of the benefits of the regionalisation, given that the resource is less. Another challenge has been keeping budgets in a break-even or reasonably positive position throughout that period.
It is also fair to say that the loss of teaching staff included the loss of many managers. Those affected were on teaching terms and conditions, and included a lot of our middle and senior managers. Of the 1,200 teaching staff involved, a high proportion of the losses at Perth College to date have been among the middle and senior management levels.
At the weekend, I was delighted to attend the graduation ceremony at Ayrshire College’s Kilmarnock campus. The atmosphere and the excitement were incredible. If that is reflected in any way throughout the rest of the college sector, there are exciting times ahead of us.
We certainly fund courses, including loss-leading courses, and all sorts of things because it is the right thing to do, even though it may not make financial sense to do so. I am convinced that we will take the right decision for the region, the communities and our students. However, that £5 million is not sitting in a bank account. If it were, we would be getting 0 per cent return on it and therein lies the truth. We generate quite a bit—as I mentioned, it is about 44 per cent—of non-public funding annually. We will not spend that haphazardly. We get very little through the capital funding route; indeed, we have not had a lot of the capital funding that other colleges have had. We have a building that was built in the 1970s that is full of asbestos; we also have flat roofs. We have an on-going repairs and maintenance plan and an ambitious estates development plan for the benefit of our communities and our students.
Yes, please.
What the Audit Scotland report said about cash and cash equivalents was probably unhelpful because it gave the impression that the colleges are sitting on lots of cash. Edinburgh College is a good example to cite in that regard. On the cash and cash equivalent basis, it would seem that we are sitting on a £30 million surplus. However, we had an outstanding bank loan of about £7 million to pay off as a result of the merger and the banking covenants that we had in place. We also had proposals for a £5 million development at the Sighthill campus. Taken together, that is £12 million already, and it leaves £18 million. Of current liabilities, we have to pay off £12 million to the short-term creditors with a year. That leaves us with £6 million of net current assets, which is a truer reflection of the position. However, some of that money is restricted funds, which we can use only on capital purchases. If we take a long-term perspective and look at our long-term liabilities, we have our bank loan and the VAT that we must pay, which totals £15 million. On top of that, we have provisions and other stuff like that. That is why I believe that the Audit Scotland report missed the other side of the equation. The cash and cash equivalents were identified, but it would have been better to read the liabilities side along with that.
Those were very interesting answers.
That is actually the income and expenditure carry-forward. Surpluses come through the income and expenditure account every year.
We can talk about that in the next session.
It would be remiss of us not to make the point that, because of the different accounting principles that will apply to the sector under the ONS reclassification, the sector will record a massive deficit across Scotland in accounting terms. Colleges will need to show the transfer of cash to arm’s-length foundations as money spent. In future, under ONS restrictions, colleges will show deficits in their accounts, so it will look as though the college sector is insolvent.
From £214 million-worth of surpluses? I do not understand that, but perhaps we can come back to the issue.
Perhaps I could speak on the issue of the surplus. My college had a financial strategy to generate 2 per cent of our turnover—around £500,000 per year—as surplus that we earmarked for specific projects.
I had some specific questions about West and the relationship to students in Clydebank, Greenock and Paisley, but we will just write to you about that. I can raise that with the committee.
In 1999-2000, Reid Kerr College was going through severe difficulties and had a significant deficit and a very poor estate. The decision that was taken by the board and senior executive at the time was that it was not appropriate to stockpile cash reserves and that we would reinvest any moneys that we generated in the estates and back into the college for the benefit of the community. Over a 10-year period, £21 million has been spent on that campus, of which only £6 million has been supported by the Scottish funding council. The college generated income and used bank loans to pay for improvements for the benefit of students and staff. It had a strategy of working on an overdraft for that period and has successfully done that for 12 years. I absolutely believe that, at that point, given the funding environment that we were in, that reinvestment was appropriate.
Given that you are aiming for 35 or 37 days’ cash, should the Scottish funding council guidelines be reviewed?
It depends on the size of the college and its turn-in liabilities as it goes through the year. Each college would have to consider its situation. It also depends on how quickly a college is turning its debtors into cash, which influences how much cash it wants to hold, because it is really to do with short-term working capital. I have always thought that 30 to 60 days’ cash at least gives us headroom to be able to deal with liabilities should we have a problem bringing in the income.
Thank you for your contributions. We may have further questions, in which case we can write to you. Thank you very much for your time.
I welcome our next panel, which is from the Scottish Further and Higher Education Funding Council. Laurence Howells is the interim chief executive; Martin Fairbairn is senior director, institutions and corporate services; and John Kemp is director, colleges and post-92 universities.
Yes. Thank you for inviting us to give evidence on the Auditor General’s recent report. We worked closely with Audit Scotland as it developed the report, which contains a range of useful points.
Thank you.
We were here during that discussion. I will pass over to my colleague Martin Fairbairn to answer those questions.
The Audit Scotland description is broadly correct. We have that guidance, but I should clarify that it is primarily internal guidance for us in the funding council when we are reviewing the financial situation of each individual college.
Do you have any concerns that, if colleges have to operate on a month-to-month basis with less of a buffer and if they have little in the way of reserves to fall back on, that could cause problems in future?
We, with colleges, will need to strike the right balance between ensuring that colleges have enough cash or working capital to operate on what might be best described as a week-to-week basis, and ensuring that we have slick processes in the background so that, if there is sudden change in a college’s cash requirement in week 3 of a four-week month, we can respond quickly to deal with it.
I want to explore that issue. Does that mean that the Scottish funding council will be more actively involved in overseeing the management of colleges in a way that it has not been in the past? Does it mean that the SFC will need to expand its management structures to be able to do that adequately?
In terms of the cash management that I described, yes, more detail will be required. At the moment, we decide on the total amount of grant to allocate to a college or university over a year, and then we simply set out in advance the profile of payments that we will make for that full year. We do not change that unless there are very exceptional circumstances.
Not necessarily. My query is about how colleges will cope if they do not have reserves to fall back on. You used the word “buffer”, so my question is about what the implications would be if the buffer was not there.
Essentially, we have a similar situation at the moment, except that we are sitting in a different part of the spectrum. We have a fixed prediction of how much we are going to pay each college each month, which is pretty much what we stick to. Colleges have their own cash buffers or reserves—or whatever you want to call them.
Okay. I have a further question about your increasing involvement. There were criticisms in the past that senior managers at some colleges were given enhanced pension and redundancy packages, partly in order to slim down for the changes that were to be made. Concerns were expressed that there was not a great deal of clear accountability and that, arguably, senior managers were looking after themselves, ensuring that salaries were put up ahead of retirement and that enhancements were put in place. Will you have an increased role in determining what financial packages are made available to senior staff who take early retirement or redundancy?
We have issued guidance to the sector about severance packages, and the college boards are required to follow that guidance. The actual decisions about individual payments to senior managers are, of course, a matter for the board and not for us. The guidance sets out the governance process that should be followed by the colleges and the matters that they should take into account. We expect them to follow the guidance, which will be the same in the new structure as it is at present.
Would it be possible for you to send the committee a copy of that guidance?
It would.
Thank you. You say that you will have no say over the salaries. As we heard, colleges are now being treated almost like Government departments, and there are governance structures and Government guidelines. Are you suggesting that, despite that, colleges will still be free to set their own salaries for senior managers?
In Scotland—throughout the UK, in fact—there is no one single categorisation of a public body. That is perhaps unfortunate, but it is a fact. As one of the witnesses on the previous panel said, colleges will—and in fact do at present—exist in a mixed economy with regard to public body status.
You will be aware that, in recent years, concern has been expressed about the salaries of principals and senior managers in our universities. They operate almost as a cartel, in that the wages of one will increase as the wages of others in other institutions do so. Very few of them—in fact, none of them, I believe—are now earning less than £200,000 a year, and in some cases they are earning in excess of £250,000.
There is a range of issues in that question; I will deal with the last bit, on severances and so on, first.
Auditors have been singularly ineffective in constraining the pay and conditions of those at the top of universities and colleges. That does not suggest to me that any change will occur in the future, unless the Scottish funding council decides to operate more aggressively. I look forward to seeing what comes out of your deliberations.
My first question is very brief: do you still expect the merger programme and other reforms to generate £50 million of savings every year from 2015-16?
Yes, we do. The evidence is that, as a result of the reform process, colleges have delivered an increase of about 7 per cent in the number of students while receiving about 4.5 per cent less in funding since 2012-13. If we combine those elements, the real-terms efficiency gain is calculated at about £49 million.
I ask my second question as a member for the Highlands and Islands. The UHI has a different financial status from other colleges. I am concerned that the £15 million-plus that is used to run the UHI’s administrative office, with more than 200 staff, is top-sliced—that is often said—from the funding before that gets to colleges. That is different from the position for every other college. Student numbers can also be lower in remote and rural areas, so the cost is higher. Is the funding council concerned that, in time, colleges across the UHI network might be given less per student for teaching?
We expect the maximum amount of our funding to support learners and their studies—that is absolutely right. We would be concerned if money was being inappropriately top-sliced, to use that term. However, it is important to remember that some of the money that is held centrally supports library and IT infrastructure, the development of the whole network and so on.
My final question is on the ONS. I am not sure whether you were in the public gallery earlier for the comprehensive discussion about the ONS reclassification, in which the three college principals raised a variety of concerns—I am sure that none will be new to you.
The Scottish funding council has set out on our website and in the public domain a significant amount of guidance and templates for articles of association and so on—“trust deed” is not the correct technical term—for the arm’s-length foundations.
The acting principal of Perth College, if I am quoting her correctly, said that only three colleges have voted to be part of the umbrella foundation. However, I appreciate that the issue is a moving target.
First, that 30 per cent of a college’s funding will not necessarily go into the trust, as most of that funding will be earned and spent within the same year. Only the balance would be put into the trust. Secondly, the trusts will be set up so that their purposes are aligned with the purposes of the college sector, so the rules on which they will operate will support that. Finally, when the money is spent within the colleges, it will be part of their normal processes and their normal accounting.
The lady from Perth College, I think, said that 21 per cent of her college’s income comes from other sources. Obviously, we hope that 100 per cent of the money in the trusts will be spent on training and education. As accountable officer, Mr Howells, you will really have no responsibility or remit over that money. It will have nothing to do with you unless it comes within the college budget. Is that correct?
The trusts will of course be independent, but they will be allowed to be set up only if their articles conform to a standard. At the end of the day, that means that, when the money is spent, it will be spent within the college region and by the region.
You did not answer my question. Am I right or wrong in saying that you will have no responsibility for the money while it is held within that arm’s-length trust?
That is right.
Does anyone else want to follow up on the issue of the trusts before we go on to other issues?
Convener, may I clarify a matter of fact? I understand Mrs Scanlon’s point about the arithmetic and the 20 to 30 per cent of college income that comes from other sources, but that is not necessarily what will be lodged with an arm’s-length foundation. If a college spends the whole of that income during the year, it will never go near an arm’s-length foundation.
It came out in the earlier evidence session that you would have no influence or control over the trusts because they are independent, but neither would the colleges. Who, then, has influence and control, and to whom are the trusts accountable?
I was not making a change to that analysis; I was simply referring to the numbers analysis. Laurence Howells’s earlier answer is correct—indeed, it is necessary for the establishment of the arm’s-length foundations that they sit beyond public sector accounting.
To whom are they accountable?
Trusts are accountable to their trust deeds—they must stick to those.
They are not responsible to the colleges or to you—they are responsible to themselves.
That is the legal position. We will regularly look for information from colleges and, ultimately, from arm’s-length foundations. You are right, though, that there is that bit of clear blue water, which is legally necessary.
At the moment, we do not know how much money will go to the trusts. It might be a tiny percentage of the 25 to 30 per cent or it could be a substantial chunk. Any college that wants to ensure that money does not go back to the Scottish Government or central sources could transfer money to the trust and, once it is transferred to the trust, no one has any say over it other than the trustees, who are accountable only to themselves. How is that transparent?
We will seek transparency in the reporting up the line from the individual foundations to the colleges and to us, so that we understand the flow of moneys and their use. I am not taking anything away from the accountability point, convener.
However, once the trusts are established and the money is there, the trusts will be able to do what they want with it—you and the colleges will have no say over that.
They will be able to do what they want with it only within the terms of their trust deeds.
Yes, but if they interpret those trust deeds imaginatively, that is up to them; it is not up to you or the colleges. There is a leap of faith that we will see what we expect to see. However, once the money is in that bank account, the Scottish Government will have no say or control over it, and you, Parliament and the colleges will have no influence—is that correct?
In a legal sense, that is absolutely correct.
Not just in a legal sense, but in any sense the money will have gone and it will be up to the trustees to decide what to do with it.
Will it not depend on how the articles of association or whatever are written? There will be clear strictures on what the trust is allowed to do with the money. Will there be safeguards in place to ensure that the imaginative thinking that the convener is talking about cannot happen?
That is correct. We are setting up the umbrella trust as a model for all the other individual trusts that may be set up.
Would you advise the use of a model similar to yours if not exactly the same?
That is exactly what we are doing. We are looking to get copies of the individual foundation trust deeds to see the extent to which they vary from the standard template. If they vary significantly, we will discuss with the individual regions the reasons behind that.
You have no control over that money while it is in the trusts. However, when the money is out of the trusts and back in the colleges, will you then take control of how it is spent?
Yes.
We will do so in just the same way as with any other money that is spent by the colleges.
The arm’s-length foundation is not new. I am from Glasgow, where we have a number of arm’s-length set-ups for major organisations. I am sure that we will work our way round it to ensure that it works fairly.
I have a fairly basic question about something that I have not quite got my head round. What process do you follow to determine how much funding each college gets?
I will paint the picture in the regional environment, which is where we are heading. In estimating the funding need for a region, we will principally use demographic factors. Our method will be to estimate the amount of funding that is required for the region on the basis of the number of students and the amount or price per student, which will give us a benchmark for the amount of funding that the region should receive. We will then have a discussion with the region about its needs, the situation that it is in and any special factors that we need to take account of. In our negotiations with the institution on an outcome agreement, we will seek a match between the amount of funding that we will provide and what the institution will deliver for that money.
Does your process include getting bids for funding from individual colleges?
Not for the core funding for teaching, but it would be a different matter for special funding for an initiative or a building. However, as we move into the new world, we want to hear from colleges so that they and the special circumstances of their region have a chance to influence how their funding will change over time. We want to move from the rigidly formulaic position of the past, whereby a number was calculated and that was what people got, to a system in which there is opportunity for local dialogue to influence specific issues such as the best way of serving the needs of the populations of two adjacent regions, especially when people want to travel between the regions.
It sounds to be very much driven from the top down.
The core on which we wish to found our funding is the needs of the population. We will assess those needs using demographic factors and in dialogue with the college regions, which will know their local areas better than we do, and we will try to balance that across the country.
Our intention is that our funding will be driven by demographic and economic evidence as well as negotiation with the college or the region as we develop the outcome agreement. Our intention is that it is driven not from the top down, but by evidence.
To be honest, I think that a college would be a bit uncertain about how all that would work. I am not clear about the input of the colleges. Will you protect their core funding but have a bit of bidding and justification outside that to get the money?
The guidance letter to us from the cabinet secretary says that there will be a guarantee that no region will lose more than 1 per cent in any one year, which is a kind of tramline. However, we will start from the basis of asking, “What is your current funding? What does demographic change suggest that your region might need to grow to or change to over a period? What information have you got in your college that would give us a special indication that you need some change to your funding?”
The Auditor General has highlighted a pension deficit of £115 million, which might go up or down. How do you monitor that? Do you have any concerns about it, and how do you see it being handled in the future?
We monitor it through a process that we have had for some years whereby we monitor colleges’ accounts and financial projections. We are building that into our outcome agreement process so that we understand how the colleges will meet their array of obligations, including their pension contribution obligations, whether in the local government scheme or in the Scottish teachers’ superannuation scheme. Our short to medium-term focus is on how the colleges will meet their actual cash obligations, which means paying their employer contributions into pension schemes. That is part of their financial forecasting and part of our overview of the robustness of their financial forecasting.
Is there a trigger point at which you would have a real concern over the size of the deficit?
I do not think that the concept of a trigger point is so much to do with the size of the deficit. The challenge is the rate of employer contribution, which is now much higher than it was 10, 15 or 20 years ago. For example, at one stage the employer contribution to the local government scheme in Lothian was 0 per cent. Those days are long past and we are now at about the 20 per cent mark, with a possible move to higher rates as a result of future actuarial valuations. Might it hit 30 per cent? Some schemes that are kicking around outside the public sector are into that sort of territory. That would be very challenging for any public sector organisation if other moves are not made in the public finances.
I want to pick up on the points that the college principals made about the methodology that is used to calculate student funding. The Auditor General suggested in her report that she expects the average level of funding per student to fall, but the principals were not sure whether that was the case. Do you think that it will fall?
Sorry, but I did not hear that.
The Auditor General suggested that the average level of funding per student will fall. In paragraph 41, on page 15 of her report, she states:
Yes—per FTE student.
Per FTE, that is correct. That would be the sector average figure, but I think that the principals were also referring to an uncertainty about how we will allocate funding between regions. That is part of the dialogue that we will continue to have with the sector in the coming period to ensure that colleges move smoothly from the old system to the new one.
Just to confirm that, you are saying that the average amount of money per student will be reduced under the new system.
Yes—in real terms.
In real terms—yes.
There was a specific worry about support in the system for students with additional needs. Development courses have already been reduced dramatically as a result of the spending cuts, but the principals also talked about ELS funding, for which there is a specific formula. Can you offer reassurance that the new system will not affect accessibility for students with additional needs?
I see no reason why it should. This is another transitional issue: colleges will need to adapt to and reflect on any system that we implement, but we intend to implement it in a paced way so that adaptation is not an issue for them.
Yes, but clearly principals are concerned that the changes will have a disproportionate effect on those with additional needs. Will that be the case?
I see no reason for that to be the case. What we are hearing today is part of the transition to what might be our new method of funding, which we have not fully determined and which we are working through with the colleges. We are absolutely committed to that not being the case and to the fact that changes to our funding method will not impact disproportionately on people with disabilities or additional education needs.
You said something that surprised me about colleges having additional funding. The Auditor General suggested that between 2011-12 and 2014-15—the three year spending review—the Scottish Government’s reductions in spending on colleges will amount to 24.1 per cent in real terms; that is almost a quarter. There was a slight additional revenue grant of £17 million in the budget this year, but even so: a 24 per cent cut in three years. What is the real-terms figure? Is it a reduction? I assume that it is. You talk about an increase, but I imagine that it is a reduction.
There is a real-terms reduction in colleges’ overall funding, as you said—that is correct.
Do you know how much it will be?
It depends where you are starting from and finishing.
I am talking about the spending review period from 2011-12 to 2014-15.
The Auditor General’s figures said that in 2011-12 there was a 9 per cent reduction and then from 2012 to 2014-15 there was a further reduction of 11 per cent.
We agree with the Auditor General’s figures.
We heard some discussion earlier of the impact of those reductions. The principals suggested that already there has been reduced access in terms of opening hours and there have been a lot of job losses, with more to come. They were not able to answer on student head count. Do you expect student head count to fall?
Student head count has fallen over the period. If your question is whether I expect student head count to fall again next year, I do not see any reason for it to fall. It is a difficult thing to predict.
The evidence that we heard from the principals suggests that there has already been a number of job losses. We hope that the head count will not fall further, but class sizes will increase and in some cases the hours that staff spend in front of those classes will decrease. Development education, which has already suffered, may or may not suffer more, depending on other changes. Are you concerned that that will affect the quality of further education?
We monitor the quality of education through two routes, one of which is the activities of Education Scotland, which acts on our behalf to review colleges, their provision and how they organise their quality arrangements. We are not seeing any particularly worrying signs from that route.
I have a final question. You suggested that you had produced guidance about the use of severance payments. I made a freedom of information request about colleges’ severance payments. The figures that came back were that severance payments rose from £1.8 million in 2007-08 to £3.8 million in 2008-09, £4.5 million in 2009-10 and £18.6 million in 2010-11, before they reduced slightly to £16.3 million in 2011-12 and £10.4 million in 2012-13. The figures show that there has been, at best, a substantial increase. Have all the colleges followed your guidance? Are you concerned that your guidance has not been followed?
We have had no indication that they have not followed the guidance. Some of the figures that you cite are from the period when the mergers were happening, so we would have been funding at least some of those severance payments. We have made it clear that when we fund a severance, it has to have a one-year payback, so that the scheme that a college runs overall has to be one whereby, if it spends £2 million, the staff bill must reduce by £2 million per year. By and large, the colleges have stuck to that, because we will fund no more. Only on very few occasions have colleges used their reserves to fund payments that are more generous than that.
In the past three years alone, more than £40 million has been spent on severance payments. Something like 2,500 people have been laid off, although clearly a lot more have been taken on. Is that good value?
That has happened at a time of considerable restructuring within the sector and a large number of the severance payments, particularly in the latter period, have been related to the mergers. Colleges have restructured their management quite considerably in that time with the intention of producing a leaner and differently shaped service, which I think is good value for money.
Bob Doris has a final question.
Time is tight, so I will try to be brief.
Our key method of working with the colleges is the dialogue that we have through our outcome agreement managers. One of the things that we expect in an outcome agreement is a contextual statement about the situation in that region. Of course, the situation is simplified by having fewer colleges and a more integrated system and in Glasgow, for example, we will be looking to agree with the region a sensible and well-planned curriculum for the whole region that takes into account all the contexts and a range of factors such as population, student demands and the needs of the economy and enables us and the region itself to plan sensibly for its development.
I am not sure what that means in practice, but I will look back at the Official Report to see what you said. Colleges have always sought to work together but there was an impression that in certain areas they were competing with each other for the same students and that the system was not being used as efficiently as it could have been.
What we want to do with regard not just to your example about progression from NC to HNC but to the whole learner journey for those leaving school or entering college then possibly moving into higher education is to ensure that that journey is more joined up. The new regional colleges enable that to happen and give us a tool to do that kind of thing better than we have done in the past—I accept that it has sometimes been difficult to do that previously because a lot of the courses that you are talking about will not have been designed to articulate. For example, many HN courses are designed as an end-point in themselves, with people leaving with a qualification that has value in the market. Increasingly, however, people are using those courses to articulate to other courses and we want to put in place a system that does that better. The bigger regional colleges, the outcome agreements and the work that we are doing with universities will help that situation in the future.
Is your question a quick one, Willie?
Yes.
First, I will state the facts. As reported in the Auditor General’s report, the balance with regard to income and expenditure reserves at the end of 2011-12 was about £214 million. Separately but coincidentally, the total amount of cash and cash equivalents in the college sector at the same point in time—31 July 2012—was about the same number; however, as I have said, that was almost a coincidence. Is that free cash that is available for colleges to spend on 1 August 2012? The answer is no and Alan Williamson was correct to point out that that cash is to a certain extent committed either specifically or implicitly in other aspects of the colleges’ balance sheets. The total cash that colleges had at the end of 2011-12 might have been, as I have said, about £214 million but on the other side of the short-term balance sheet there were commitments of about £135 million to cover money to creditors, overdrafts, obligations under finance leases, hire purchase-type leases and so on and payments that colleges have received in advance from Europe and sometimes from us and which therefore cannot be counted as their money at that point. All of that knocks against the £214 million. All the figures are true, but it all depends on what you are asking about and what particular purpose is in mind at any point in time.
A bit. Is it real money that we are talking about?
Yes. We are talking about £214 million of real money.
Is it in a bank account or somewhere where it can be accounted for?
Yes. Of course there are commitments that have to be met, perhaps even the next day.
But even within those commitments individual colleges must have some freedom to make certain choices.
That is correct. Indeed, that is the whole point of having regional boards and individual college boards that assess the needs of their various areas and choose their priorities.
Why, then, did Mrs Munckton say that if they did not have that they would all be insolvent?
I beg your pardon. Can you repeat that?
Mrs Munckton said that when this money transfers to the trusts on their becoming public bodies, colleges will no longer be able to access it and will become insolvent.
This is all getting a bit technical, so you should bear with me for a second. Would you prefer it if I set all this out in writing afterwards?
I think so. If the issue is technical and complex, I suggest that you set it out in writing to ensure that there is no dubiety.
I am not trying to dodge the question but I think that we are getting into technical territory.
I had two further questions, one on paragraph 44 of the Auditor General’s report about merger costs and the other on paragraph 50 about the time taken for savings, but given the time we will put those questions to you in writing and await your response.