Education, Lifelong Learning and Culture Committee, 24 Sep 2008

Meeting date: Wednesday, September 24, 2008

Official Report 288KB pdf

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Budget Process 2009-10

Item 2 is the committee's consideration of the draft budget for 2009-10. The committee will take evidence on further and higher education issues as they relate to the draft budget, for which I am pleased to welcome Professor Anton Muscatelli, who is the convener of Universities Scotland; Howard McKenzie, who is acting chief executive of the Association of Scotland's Colleges; and, from the Scottish Further and Higher Education Funding Council, Mark Batho, who is the chief executive, and Laurence Howells, who is the director of learning policy and strategy. I congratulate Mr Batho on his appointment to the Scottish funding council.

Thank you for providing written submissions on the budget before today's meeting. The committee will go straight to questions. I ask Mr Gibson to kick off.

I have no questions at this time. You will remember that I want to speak at the end. I apologise for that.

Good morning, gentlemen. Universities vary in their ability to generate income from sources other than Government grants. The University of Edinburgh and the University of St Andrews, for example, can generate income from elsewhere. My questions are about the SFC, but any witness should feel happy to comment. The distribution of SFC funds is driven largely by a formula. Does that remain fair? Would the new approach that "New Horizons: responding to the challenges of the 21st century" proposes shift the position? Would placing the focus on individual institutions' ability to raise funds from a range of sources benefit smaller specialist institutions that rely on the money from central Government?

You are right that the significant majority of resource into universities is formula driven. Using a formula has an advantage for institutions, because it provides stability and allows for planning and a significant amount of innovation. The formula is not a dead hand.

That said, "New Horizons" considers whether the balance is right. I can say only that discussions on that continue. However, the report reflects the fact that it has been acknowledged around the table that opportunities exist for incentives in the funding arrangements. Such measures exist already and operate in several areas—a good example is that research pooling has been incentivised by particular funding.

The funding of specialist institutions has undoubtedly been a challenge and they have expressed concern that, under the formula, they have not had a fair crack of the whip. At this stage, I will leave it at saying that that was part of the consideration of "New Horizons", which talks about the diverse missions of different institutions. As we move forward, there will be opportunities to consider whether an adjustment of formula response is necessary or whether we can take action on the suggestion that there could be a more differentiated stream of funding within the overall map—Professor Muscatelli might want to comment on that.

The key message is that formula has an important part to play, but it is important that dialogue continues, as the three parties involved—the universities, the funding council and the Government—recognise. It is important that we continue to consider the appropriateness of formula levels.

The universities' capacity to raise resource from other areas has always proved to be quite a difficult nut to crack. Everyone looks at America and says, "They can hoover up vast sums of money. Why can't we?" There are undoubtedly cultural differences. The other week, I read a newspaper report that said that a number of American fundraisers who have come over to UK institutions have not done as well as everyone expected because of those cultural differences. I will hand over to Professor Muscatelli to talk about that because he knows far more about it than I do. That said, there are opportunities, which a number of our institutions are exploiting. Significant increases have been achieved in funding streams from a range of alternative sources, including business and charities, as well as alumni.

In November, I think, the Council for Industry and Higher Education, which is a UK body, will produce a report on its findings on how some of what we might call the non-usual-suspect American universities—not the Yales and Harvards, but the state universities—are doing in that territory. It is incumbent on all of us to look at that to find out whether lessons can be learned in our different cultural context.

I echo everything that Mark Batho said; I will add just one or two remarks.

We must be careful in drawing any correlation between the proportion of funding that comes directly from the SFC and what that might imply for formula funding. I echo what Mark Batho said about formula funding. In general, universities have welcomed it because it ensures a degree of stability and predictability. As "New Horizons" makes clear, it is likely to be an important feature of any future landscape.

Some universities draw a smaller proportion of their turnover from SFC funding. You mentioned the University of Edinburgh and the University of St Andrews; Heriot-Watt University is another example. SFC funding tends to account for between 30 and 35 per cent of their turnover. In general, that is because they tend to be more research intensive, which means that they draw much of their income from UK research councils and European funding, for example. It is difficult to conclude that one should adjust formula funding to reflect that. Those are two quite separate areas.

I echo what Mark Batho said about alternative sources of funding. We must not jump to conclusions when we consider other sources of funding, whether philanthropic or from commercialisation. Even the best fundraising institutions in the UK—if one puts Oxford and Cambridge to one side—will generally not raise much more than 2 or 3 per cent of their turnover from philanthropic funding. That 2 or 3 per cent is important, of course, because 2 or 3 per cent in turnover gives an institution a strategic adaptive capacity, but we must not think that it is a substitute for other sources of funding.

It is interesting to look at comparisons between what Scottish universities are doing as regards commercialisation and what happens in the rest of the world. The University of Edinburgh publishes a regular report comparing the commercialisation performance of the top eight Scottish universities with that in the top US universities.

On a variety of indicators—except one, I think, which might have been licensing—Scottish universities do better than some of the top universities in the United States. In cash terms, of course, the US universities look as if they are doing a lot, but they are much larger institutions. Proportionally, Scottish universities do extremely well on commercialisation.

Colleges are different from universities in that our ability to raise money from alternative sources is very much more restricted. A quarter of our students are drawn from the poorest 10 per cent of the population, so getting a cash yield from them is difficult.

Like the universities, we are funded through a funding formula. My colleague principals would probably say that it is the worst system that we could have except for all the other systems. The formula is extremely complicated, but it is well administered by the funding council—that is a compliment. The system is clever: I deliver 2.8 per cent of all further education in Scotland and I get 2.8 per cent of the money that is available, in various ways. It is a good system and it has given to the further education sector the stability that Anton Muscatelli was talking about in relation to the universities.

I accept that the universities and colleges do good work on a tight budget. I want to ask about the wider picture. It strikes me, particularly given the evidence that the witnesses submitted, that there is a major issue with our continuing to widen access to higher education. Under the current set-up, we cannot continue to finance more and more people to go to college or university, which is a fundamental problem. It is clear from your submissions that that is what you think.

I agree that the funding formula is important, but should we be taking a much wider perspective and considering how we can fund universities in the long term, not only by working hard to secure alternative sources of funding but by ensuring that students who enter the system make some payment at some stage?

If we consider the international scene, we encounter very different patterns of funding as well as different patterns of provision. Universities Scotland has always taken the position that this is a political judgment. It is not for us to tell the country how it should fund higher education.

In some countries, including Nordic countries such as Finland and Sweden, a higher proportion of young people enter higher education, which is funded largely out of the public purse. Those countries spend a higher proportion of their gross domestic product on higher education. Other countries, such as England, have introduced an element of student contribution. In the United States, there is a mixed system, although in the US the public contribution to universities as a percentage of GDP is higher than the contribution in Scotland.

Our view is about the amount of funding that goes into higher education and we do not want to comment on issues to do with political economy and society's choices about whether we spend money on higher education or expect individuals to contribute. "New Horizons" made a clear statement on that. That is the Government's position, which we accept. We simply say that if that is the way to go, the money must come from public funding.

In my new role, I am not in a position to comment on that. However, I make the point that widening access remains on the agenda even though in effect we currently have a capped HE and FE system. It is about broadening the base of people who have the capacity to enter HE or FE on the basis of their ability to learn rather than their ability to pay—as the mantra goes. That will remain an important agenda, as is highlighted in "New Horizons". It is a critical part of the role of colleges.

I accept that you cannot force politicians' hands in political decision making, but we are talking about an issue that is important to the future of our universities and colleges. The nub of the problem is that we are trying to maintain high standards in Scotland while allowing more and more people to enter the tertiary sector, and you tell us that we simply cannot do that under the existing funding settlement.

Either we have to spend a greater proportion of GDP on improving the situation, as Professor Muscatelli has said, or we have to change the whole structure. In other words, perhaps too many people are going into college and university. That is a very contentious issue, however, because we obviously wish to improve educational opportunities for everyone.

Would you accept that we have a responsibility to do more for youngsters who are coming out of school and who might not wish to go to college or university, and that one way to solve the potential problem and to alleviate some of the huge strain on resources is to provide more opportunities through apprenticeships and other skills-based training?

Universities Scotland has made it clear that we should join what is normally regarded as the race to the top in international competitiveness, not the race to the bottom. We feel strongly that, over time—not over one year or two, but over the next 20 years—we will need to increase the number of graduates in the economy.

One considers what is happening in our competitor economies. They already have higher participation rates. China, India and the other emerging economies are growing the graduate proportion of their workforce. Increasingly over time, the jobs that will be created in sectors that we think are important for the future of the Scottish economy, such as biotech and electronics, will be jobs for graduates rather than non-graduates.

There is sometimes a false dichotomy between vocational training and graduate skills. One is about short-term needs in the economy; the other is about trying to grow a long-term trend in graduate education. I am not going to tell you that there are no shortages of vocational skills in some sectors—of course there are—but Universities Scotland is discussing where we want to be in 20 years' time. Over time, we must shift the proportion of people with graduate skills in our economy. I do not wish to comment on short-term vocational or skills mismatches.

That is where we would put the emphasis. We do not think that the answer for Scotland is to reduce access to university, to reduce the number or proportion of graduates or to focus on other things. It is not an either/or question. Of course we need to address short-term vocational issues, but we also need to increase the number of graduates coming out of the system in the next 20 years.

I wish to clarify that it is the view of Universities Scotland that, just as you sum it up in the three conclusions that you have presented, you would like us to spend a higher proportion of GDP on education.

Absolutely. We should achieve at least the top quartile of Organisation for Economic Co-operation and Development countries. At the moment, we believe that we are spending below average. If one includes the proportion of higher education funding that is spent on colleges, the figure might come to around the OECD average, although there are some issues about how it is measured. In any case, we need to achieve a level of 1.4 or 1.5 per cent, which would take us into the top quartile.

Your previous witness, Blair Jenkins, was talking about the need for digital media people. In general, those people will be taught in colleges. That work will be on a self-employed basis, with people setting up and running their own small businesses. We have heard a clear statement about where skills are needed, both in the short term and in the long term. In the colleges' view, the HN route—higher national diplomas and certificates—is a good route for people to start their higher education and to go on to university and get degrees at that level if they are capable of doing so, if they wish to do so and if they can afford to do so.

Another important role for colleges is in giving students and people who did not do so well at school a second chance. The mc2 group has been mentioned, and there is a particular role in relation to looked-after children, which we are working on. Our view is of a seamless stream of activity and education, where people can start at school, progress to college and then make the connection from college on to university. That is how we can organise our education system more effectively.

On the point that Elizabeth Smith made, Universities Scotland referred in its submission to the challenge to the Government that

"by not later than 2028 Scotland should be in the top OECD quartile for proportion of GDP invested in higher education".

To many of us, 2028 seems a long way off. Are we currently making the right spending decisions to enable us to meet that target?

That is a good question. The current spending review settlement involves a 2.9 per cent real increase across the period of the settlement—that assumes an inflation rate at the GDP deflator of 2.7 per cent, but of course inflation has been rising a lot recently.

On the basis of GDP projections for the next 10 years—even projections of the Scottish average—it is unlikely that we will reach the top OECD quartile, where we want to be, unless we begin to make progress towards achieving that increase in the proportion of GDP spend from the next spending review. If we do not make progress from the next spending review, life will be difficult and large real-terms increases will be required in subsequent reviews. We feel strongly that the first steps must be taken from the next spending review.

Mr McKenzie, in your written submission you mentioned the current financial climate and the budgetary pressures that further education establishments face in relation to wage increases. You said:

"These pressures are amplified by the statutory requirements for colleges to carry out job evaluations and equal pay audits."

You suggest that budgetary pressures will increase. Does the current budget allow you effectively to address the challenges that you face?

The difficulty with the current budget is that, as Anton Muscatelli said, inflation is rising faster than the 2.5 or 3 per cent rate that has been allowed for. There is industrial unrest throughout the college sector and four colleges are currently balloting on strike action on pay. Most of us can offer about 2.5 per cent but, because of the university settlement, demands are being made for at least 5 per cent and usually for double figures.

We have to carry out job evaluation and equal pay audits by 2010, which add between 6 per cent and 30 per cent to the wages bill, depending on the college and how it approached the issue. Much of that is to do with the legacy that colleges had from local authorities. Some colleges have roots in four different local authorities, with four different pay and bonus structures. Pulling all that together is immensely difficult and complicated.

Under the current settlement, we will struggle and experience unrest. The general levels of employment that we can offer will reduce, to make things fit. It is a heck of a challenge, but in the past we have shown that we can rise to meet such challenges and we will find ways of meeting this one—we have to.

Are you saying that you can meet the aspirations of employees in the sector within the budgetary constraints in which you are operating?

No, I am saying that I think that we can manage the disappointment that people will feel when their aspirations are not met.

In the draft budget, there is an intention to transfer £20 million to the health and wellbeing portfolio in 2009-10, which will be repaid in 2010-11. Are you happy about that? Was the approached discussed with you?

We are not unhappy. When a capital project is undertaken—believe me, I know this—the profile of spend changes. The funding council is running about 17 projects across the country. The principals were delighted that the £20 million would be used for affordable housing, because that is where most of our students come from. We thought that there would be a nice virtuous circle. We have been seeking a cast-iron guarantee that the money will come back, because it is committed. It was not being spent only because things had changed—perhaps as a result of the weather or because there was a six-month delay in appointing a contractor or a delay in planning applications. Numbers are bound to shift, as all sorts of things get in the way when one is running projects. Prudent management by the sector and the funding council has enabled £20 million to be released for another purpose. We are quite proud of that, but we are a bit worried about whether it will ever come back, as we have worked with politicians for a while.

Does that mean that you do not have the cast-iron guarantee that you would have liked?

This is quite a new concept. We have not received a cast-iron guarantee. The committee may want to ask ministers about that.

It is partly about managing projects, as Howard McKenzie described. It is also about having the capacity to exploit the fact that the funding council funds institutions on an academic-year basis, whereas funding comes to the funding council on a financial-year basis. Management across two different six-month periods gives additional licence. We are satisfied that the combination of the management of expenditure profiles across a number of capital projects—I will not use the term slippage, because it is derogatory—and the flexibility that is built into the system because of the mismatch between the academic and financial years will ensure that there is no need for reprofiling of any of the projects that are in the pipeline at the moment.

You can make a case for that. The test will be whether the money is returned to allow the capital projects to which the sector is committed to proceed. I am sure that the committee will return to that issue.

I would be thankful if we could be reassured that the £20 million will be returned. Does the £20 million that has been transferred come from the £30 million that the Government has guaranteed for student support in the 2010-11 budget?

The £20 million that has been brought forward for housing comes from the FE capital budget within the funding council's overall resources. As the convener indicated, I am not in a position to talk about guarantees. A clear assurance has been given that the resources have been moved between financial years. All our planning will proceed on that basis.

My main question relates to the 2009-10 budget. Do you believe that the budget is sufficient, especially for the university sector? You have already touched on that issue. We know that, in its submission to the comprehensive spending review last year, Universities Scotland judged that an increase of £168 million was sufficient for universities over the three-year period of the review. The universities argued that they were able to match that figure, but the amount that they received was considerably smaller.

We have touched on the inflationary pressures that universities are experiencing. This morning we heard that Queen Margaret University will lose 35 members of staff. At the weekend, it was reported that there is pressure on pay deals. Howard McKenzie suggested that the further education sector will be able to manage such pressures. Should the Government help universities and further education colleges through this period?

We are well supported through the funding council. Colleges and universities are independent institutions. It is for the management of each institution to work out its own way of doing things.

It is a big challenge and a lot of colleges will look at expensive provision and decide whether to continue with it. Many issues must be considered. Some provision is a lot cheaper. Clearly, teaching in a classroom is a lot cheaper than teaching in a workshop. If you are teaching someone at a higher national level, that is a lot easier than it is to teach someone at access 1. If you are teaching someone who does not have dyslexia or other learning difficulties, it is cheaper than teaching someone who has. Colleges will have to consider those options in the near future to balance their books.

It is clear that the universities will find the period challenging. As Claire Baker said, some universities are already facing severe pressures. Nobody could have forecast at the time of the spending review submissions what would happen to inflation this year—even the Bank of England did not forecast what has happened to inflation this year.

Universities Scotland is not taking the position that because the economic climate has changed, we will come back for more, but we must recognise that there are cost pressures. We reckon that the shortfall in the sector relative to what we had estimated for cost pressures will be of the order of £40 million, if the retail prices index stays above 5 per cent.

Government has come back since the spending review with additional tranches of money—£20 million in recurring spending. That is welcome and any additional allocations made through the funding council to universities would also be extremely welcome. However, as a sector we are sensible and we realise that such funding has to be planned in the spending review and that it is unlikely that there will be major reallocations between spending reviews. As Howard McKenzie said, we face cost pressures. We will have to deal with them and colleges will have to deal with them, but it is important that people out there recognise the extent of the pressures that we face.

People sometimes say that the universities pay deal is substantial and that it could not be forecast two years ago what an RPI-linked pay deal would lead to. However, we have to compete internationally for our staff. Given that our academic staff are hired not only from within Scotland but from around the world, it would be difficult for us to start offering pay and conditions that are very different from what other countries offer. We face a competitive scenario.

The funding council's planning is not proceeding on the basis that a large cheque will come our way from Government in the middle of a spending review process. That does not mean that we do not engage with HE and FE at institutional level and at sector level to listen to concerns and help to address them. We have a number of mechanisms, short of writing large cheques, that are designed to help to alleviate particular pressures as they emerge. We are not ostriches and we see those pressures when they emerge.

I will ask some questions about the joint future thinking task force report. I appreciate that the final meeting of the task force was held yesterday and that it has not yet produced anything in addition to the interim report that it published a few months ago. Can you give us any information on the horizon fund and the timescales for implementation? Today, we are considering the 2009-10 budget. Is it the intention that the outcomes of the task force will apply to the 2009-10 budget?

The matter lies between Anton Muscatelli and myself. Does Anton want to lead off?

I am happy to lead off. I echo Mark Batho's earlier comment that discussions are continuing. Those are obviously important discussions on the allocation of the various funds and it would not be appropriate to comment at this point. It is unlikely that in the short run the discussions will lead to anything different. None of us anticipate receiving large cheques, because matters are dealt with on the basis of spending reviews. The discussions are about setting a framework and getting it right in preparation for the next spending review.

I support those comments. There has been tripartite engagement and the position that we have now reached is that the interim report is out there and there needs to be significant discussion between Government, the funding council and the sector around implementation as we move forward. None of us is currently in a position to put timescales on the process or provide more details.

I think that the committee's intention is to consider the task force's report once it is finally published and to take evidence at that stage. There are still issues around the horizon fund—whether there will be additional funding to support that or whether we will be in a top-slicing situation. However, I appreciate the fact that, if the discussions were not concluded until yesterday, it is difficult for you to comment further.

I have asked my OECD question, so I take the opportunity to ask another question specifically for Mr McKenzie. Your written submission refers to several cost pressures, some of which we have heard about this morning. What discussions have you had with the Scottish Government about developing the curriculum for excellence and the proposed baccalaureate, given the need for additional training and provision within the colleges? How will that be dealt with?

Colleges have just joined the management board of the curriculum for excellence. Although we have been kept informed, it is the first time that we have been involved. There are lots of committees and things, and we are now being pulled into those. A colleges group is about to be formed to consider the interface between the curriculum and excellence.

Colleges are already running the theory behind the curriculum for excellence. As you know, it is normal in colleges for the lecturer to determine what is taught and how it is taught and for course teams to develop their own courses; however, the situation is completely different in schools. We are involved in that.

We are aware that neither the schools nor the colleges are set up to do the project work that is involved in the two baccalaureates in languages and science. Very few of us still have working science laboratories, and the new builds have only specialised laboratories. For instance, the laboratory in my new-build college is more about human anatomy for beauty therapy and massage than it is about chemistry and physics. We do not do highers in chemistry and physics in my college; neither do we teach languages any more, although other colleges do.

So, some of the skills are not available because we do not need them. Industry has moved on to different things and is doing things in a different way, and we are responsive to that. The previous witness talked about how the education institutes have responded to the changes in digital media in the past three or four years. Such skills come and go, and that is how we have changed.

We are just becoming aware of the requirements of taking sixth formers for the first time. We take them for highers, but to take them to do specific things is new to us. That will put quite a lot of strain on colleges. Our budgets have been capped for nearly 10 years, and the previous witness talked about a big increase in the number of students. I am not sure how colleges will respond to that, as we are not capable of dealing with big increases in the number of students. If there is such an increase, I will have to cut something. In order to run a course for people to undertake curriculum for excellence activity in a college—be that at secondary 2, S1 or S6 level—I must cut something else to make space for it.

I am a little concerned to hear that you have only just joined the discussions on the curriculum for excellence—although I am pleased that you have. I hope that the resources will be available to enable you to play a full part in the curriculum for excellence. You say that you may have to make substitutions. In the discussions that you have had, has there been any suggestion that additional resources will be made available for something that you were not already committed to taking on?

No, but that is not what the discussions have been about. They have been about what is going to be done rather than how it will be done. The discussions are now moving on to the implementation phase, which is why we have been brought in. Additional resources have not been discussed but, to be fair, that is because the discussions have not got that far. They are just getting there now.

It seems rather late in the day.

There are, of course, a long-standing set of developments in that area in relation to schools and colleges. A lot of work has been carried out, and has been a great success. We are also discussing the reform of the national certificate with the colleges and the Scottish Qualifications Authority, which will become part of the seamless web of activity. We are seeking, with the SQA, the colleges and the Government, to build those bridges and connections, and to support the colleges collectively to make those changes.

One of the biggest things that will impact on us is the decision, as part of the curriculum for excellence—before we were involved in the process—to stop offering intermediate 1 and intermediate 2 qualifications. Our colleges have between about 60,000 and 100,000 adults who are studying for those qualifications, so if the Government gets rid of them we will have to replace them with something else. That will cost a lot of money, and we are now starting to put that forward, but the decision was made without any consultation or any input from the college sector. A greater number of people are taking the qualifications in colleges than in schools.

I thought that the discussion around intermediate 1 and intermediate 2 was part of the consultation on the exam system and so no decision had been taken on it.

The committee has heard teaching staff in schools in Scotland complain that they are concerned about professional development to allow them to take on the curriculum for excellence and any proposed baccalaureate. That needs to be explored further. I have concerns about what you say about how we will enable college lecturers to take on that extra responsibility. You say that they already structure their classes in a different way, but there is still a need to ensure that they feel fully confident about what they are taking on. We thought that the curriculum for excellence was perhaps further down the line than you are suggesting.

We have just joined the party, so that is only our impression of the point that it has reached. It might be much further along. Several of the committees that we have been asked to attend have not met yet. We are joining a room where the party has been in swing for a couple of years already.

I suspect that that is a discussion for another place, rather than the budget process debate. However, the committee might wish to pursue with the minister the provision of sufficient budget resources—which we thought would be the case—to enable the curriculum for excellence to happen.

On the OECD comparison, we all agree that we want Scottish institutions to be competitive on the world stage. However, the Universities Scotland submission states:

"direct comparisons between the OECD and Scotland are not easy to make".

Is that because the other nations do not have to rely on a grant from another Government to run their affairs, as is the case with devolution, or are there other reasons why it is difficult? If it is the former, how useful is it to draw comparisons with other OECD nations?

The statistical comparisons are sometimes difficult because of the need to calculate Scottish GDP as a proportion of UK GDP. We know pretty well how much is spent on higher education in different countries, so there are no problems with comparability. The issues are often about how one measures GDP. I want to correct any indication I may have given that there might be problems.

There might be marginal issues in making comparisons, because of issues around GDP measurement, but the broad indicators clearly show that we do not spend as much as the OECD average—indeed, we are nowhere near our ambition of moving into the top quartile of OECD countries in relation to such spending. Any discrepancies will be small, relative to that bold statement.

Do you accept that the different countries are starting from different places?

They are indeed starting from different places. The dynamic is interesting. Over the past two or three years, countries have been increasing the proportion of their GDP spend on higher education. Last year, the average proportion was 1.2 per cent; I gather that the latest data show an average of 1.3 per cent. The target is therefore a moving one, and catching up with it will be difficult unless we start investing soon.

I would like Professor Muscatelli and Mr McKenzie to confirm something. Will you be making submissions on behalf of your respective institutions on the Scottish Qualifications Authority consultation proposals, which will potentially have a major impact on entry into your respective institutions?

I expect that we will be making a submission.

We will be, yes.

I am pleased to hear that you are not looking for a large cheque. Unless the Treasury gives one to the Scottish Government, it is unlikely that there will be any resources to pass on.

I like paragraph 16 of the submission from the ASC. It says:

"Despite these pressures ASC believes that the strength of college governance and management combined with financial stewardship of the SFC and a sympathetic Scottish Government means that Scotland's Colleges can continue to offer excellent further and higher education opportunities for Scotland."

What monitoring is there of expenditure in individual colleges? I am well aware of what the levels of autonomy are. In particular, I know of at least one college in the west of Scotland that has had severe difficulties over recent years. I am pleased to say that it now has a new management, and appears to be making significant progress in addressing some of the issues, but I have heard some horrendous tales from that college about how money was chronically mismanaged, with a lack of professional development among staff. Some courses are archaic, and staff have been allowed to ossify over many years.

What steps are being taken in the college sector—and, I suppose, in the university sector—to ensure that the courses that are being taught provide value for money and effective outcomes for Scotland?

We monitor the provision of courses through the activities of Her Majesty's Inspectorate of Education, which provides quality assurance and an overall judgment of what colleges provide. The funding council considers patterns of provision and take-up across the country, both at the geographical level and in terms of type of student. We engage with individual colleges on their provision, and we rely to an extent on colleges' own local intelligence and engagement with their communities in adjusting what they provide to meet needs flexibly.

The key tests in the area to which you refer indeed concerned a college that allowed its curriculum to get out of date, to be frank. We are in close discussions with that college about its recovery and about how to transform that aspect of its provision. We are confident that we and the college will together make some significant changes pretty soon. There are lessons to learn that will apply in other parts of the country, and we are working with other colleges. We can all do better, and we share the ambition to do so.

One of the most exciting things to have come out of the college sector in recent years is college principals' continuing professional development activity. College principals are working together to improve their leadership and management. I note the extent to which different groups of principals act as critical friends of one another and learn from one another. That helps us to spread excellent practice across the system. Howard McKenzie might wish to comment on that, too.

There is a balance to be struck. First, we need our colleges to respond to the needs of local communities, of schools and of schoolchildren. We expect them to engage with local authorities in doing so. Secondly, we expect colleges to meet the needs of local employers and industries and to engage with local government and the enterprise agencies to do that effectively. Thirdly, we expect some of them to have specialisms and to focus on things that only they do or that only they do in their region.

We would like those three elements to be strengthened in institutions so that, as in the Lothians, there is a general expectation among all colleges in an area that if one college has particular strengths, the others will agree not to pursue them. Howard McKenzie gave an example of that earlier when he said that they do not do highers in certain subjects at his college. We are confident that that is okay because we know that that is sorted at Stevenson College down the road.

On the subject of principals' CPD, the new principal of the college to which Kenny Gibson referred held a session with the other principals to explain her findings and we discussed strategy. We have learned from that example.

I refer the committee to the curriculum for excellence. As in schools, what should happen in colleges is that the people who determine what is taught are the lecturers. They are in daily contact with the industries that they serve, usually because they see the students and the employers. They are the best people to tell me which unit to teach, how to teach it and how the industry trends are changing.

HMIE has encouraged colleges to put in place self-evaluation, which, I might add, did not happen in the college to which Kenny Gibson referred. In that way, the course teams review what they do, tell us what we should teach and how we should respond. It is remarkably clever and very much like the school curriculum for excellence model. Such an approach might highlight some of the problems for the schools and the distance between what society expects of them and what some of them provide. As there are good schools and poorer schools, there are good colleges and less good ones. I mention principals' CPD, but also HMIE holds a series of best-practice events at which the colleges present what they are doing.

A hidden part of the system is the verification and moderation system, which is run by the SQA. It is probable that none of you has ever heard of it, although one or two members might have been involved with it. Verifiers from different colleges check the marking—for want of a better phrase—of lecturers in another college to ensure that the standard of a unit in Thurso is the same as it is in Kelso. It is an effective method of achieving best practice. If a college is doing the wrong units, it is not awfully helpful.

Part of the approach is about invigorating staff so that they take part in the process and use their professional judgment. That is the direction in which the curriculum for excellence is moving. It is incredibly motivating and satisfying for the staff and principal to take part in that process and to turn around a college that has the kind of issues that Kenny Gibson spoke about. It is also a bit of a challenge.

In its submission, Universities Scotland highlights the fact that the proportion of funding for higher education in Scotland since devolution has fallen from 3.63 per cent to 3.16 per cent of the Scottish block. How was that situation allowed to develop? I understand that the proportion has now levelled out or slightly increased.

We spoke about OECD comparisons and percentages of GDP, but surely GDP is different in different countries. For example, 5 per cent of GDP in a country in the developing world is very little, whereas 1 per cent in a prosperous country is a lot of money. Surely it is not just the shares that we spoke about that are important but the absolute moneys that are injected into the higher education sector.

On the proportion of the budget, I agree that, as members will see in our submission, our comparison largely reflects the trend from 1999 to now, during which time the proportion in cash terms has declined. Over the past few years, the proportion has been flat. That is not surprising when you look at our most recent spending review settlement, which was 2.9 per cent in real terms, and at how the budget was allocated across different sectors in Scotland. Higher education was placed around the middle of those sectors and did not increase its share of the overall budget. That is where we are.

On OECD comparisons, there are difficulties when comparing deliveries in an emerging economy and an advanced economy. That is why we compare ourselves with OECD countries, which are similar to ours. Also, we look at percentages because we cannot compare the absolute amounts that are spent by large and small countries. We would expect to scale spending by GDP. It could also be scaled by the number of students who are taught. Of course, that misses the point that I made earlier—in our view, the percentage of people who participate in higher education is strongly predictive of the dynamic of an economy. We think that the comparison is valid. We are comparing investment in Scotland not with investment in China or Zambia, but with investment in countries such as Norway and Sweden. The Scottish Government makes that comparison as part of its economic framework.

I used the figures of 1 and 5 per cent to emphasise the point that I was making. Is 1 per cent of GDP in Norway or Switzerland not much more than 1 per cent of GDP in Scotland? Surely the emphasis must be on the number of people in higher education, rather than the share of spending. We cannot make direct comparisons between spending on higher education in different OECD countries, because universities in those countries are structured differently and have different courses. The length of degrees is different in different countries. Ultimately, is the issue not the proportion of people who go through the university system and reach a certain standard?

I agree that such comparisons are important. Our participation rate lags behind that of many other OECD countries, which is why we have argued recently that we should increase participation. We think that there is a causal link between better performance on investment and the number of people who go through higher education. We compare participation rates as part of our campaign to ensure that there is more investment in higher education.

Do you think that the social structure of Scotland—I refer to wealth distribution—is a factor? In some of the Scandinavian countries that have been mentioned, there are fewer people in poverty than there are in Scotland. There is a direct correlation between social background and access to university. Is wealth distribution a major contributor to access issues? Is the problem one of demand from potential students, rather than just the money that is available to universities?

That is an interesting question. I will wear my economist's hat, rather than the hat that I wear as convener of Universities Scotland, to address it. Recently, Universities UK has carried out studies on how to improve access. It is important not just to increase provision, but to ensure that people take it up. The problem relates to the whole education system. At school, we must encourage people from an early age to have greater ambition, to raise their sights and to think about higher education. Our remit is to focus on universities—to ensure that the necessary funds are there and that places are available for people to take up—but this is an holistic problem. We must consider how we can raise ambitions and ensure that students are able to access the places that are available. I agree with the member on that point.

About 25 per cent of all higher education in Scotland is delivered through colleges. The biggest factor that influences people to decide not to grasp that potential is debt. Another issue is the interface between the student support system and the benefits system, which is quite good in some instances but remarkably unhelpful in general. That is what really stops people taking advantage of the opportunity to enter higher education.

The demographic to which Kenneth Gibson referred consists of adults, who usually start at a college and move on to university. A good chunk of people at university in Scotland take that route. I hope to appear before the committee again fairly soon to discuss how student support operates. One of the biggest issues that we must try to sort out is how the system interfaces with the benefits system, to encourage people who are perfectly capable of participating in higher education to do so. At the moment, they are thwarted by the system, rather than the education that is available or their intellect, which leaves them disappointed.

Recent figures indicate that although there has been an increase in the number of young people entering further and higher education, the number of young people who do so from poorer backgrounds is not increasing at the same rate. What action should we take that would encourage young people from such backgrounds to take up places? How can we address the matter in a more targeted way?

As Howard McKenzie said, there is evidence that the pattern of participation in the college sector among different social groups is pretty even—in fact, it is astonishingly close to what we would expect it to be. He said, however, that better links between colleges and universities could create routes for young people from poorer backgrounds, who might start at college but move on to university. We are trying to create stronger regional groupings in different parts of the country in order to improve those connections.

There is an issue about part-time students who want to progress from higher national level. We need to work on that and improve the situation.

The task force addressed the demographic changes that are taking place, which mean that fewer young people will come forward in the future. There is an oft trotted out statistic that 70 per cent of the workforce of 2020 are already in work, so if we are going to increase the skill levels of Scotland by 2020 we must educate many people who are already in the workforce. That points to a situation in which the supply side genuinely addresses lifelong learning and people enter education in colleges and universities at different stages in their lives—outwith the 17 to 21 paradigm that has been heavily weighted until now.

We are already witnessing that effect in a number of institutions. For example, 50 per cent of students at the University of the West of Scotland are part time. The task force is addressing that important issue, which must be taken forward. Because of the way things are going, we will witness a shift in what colleges and universities do to meet the requirements of the economy. Colleges are ahead of the curve in that regard.

The concern is that if we have not been able to address lower participation rates among 17 to 21-year-olds from poorer backgrounds, who are probably easier to reach than older people are because they are less likely to have other responsibilities, how will we meet the challenge in relation to people who have family and other responsibilities? We need to get that right but we do not seem to be focusing on the issue.

As part of the review of student support, which Howard McKenzie mentioned, consideration is being given to support for part-time study. Student support is part of the issue; the nature of provision is another part. It is much harder for someone who is married with two children to leave work and do a full-time degree, which involves four years of higher education.

There are already offerings that allow articulation, through the Scottish credit and qualifications framework, from qualifications that people gained at an earlier stage, for example at HN level. There are also opportunities to do modular study, which is much more flexible provision. The funding council will consider the system on the back of the task force's work and we will work with colleges on how we can encourage and support changes in the nature of provision in order to meet the requirements of a falling demographic and the increasing need for graduate-level skills, which Anton Muscatelli mentioned.

It is difficult for people on low incomes to study part time because the whole system is designed for people being either in work or out of work. The benefits system militates against part-time study; for instance, council tax relief is available only to full-time students.

In one of our papers, we mention the fact that, although a further education bursary is seen as discretionary and does not affect a person's benefits, a loan is a right—an entitlement—and is taken off their benefits. That has the effect of making it quite difficult for people on low incomes to go part time. If you look at our HN numbers in colleges, you will see that the headage figure has gone down, although the figure for the activity has gone up. A lot of that is down to the benefits system. It makes a substantial difference. We can get up to 30 per cent subsidy for somebody whose household income is less than £15,000 a year—that is an awful lot of money. We must get that part right to encourage people to go on to study. Such people strive to go to university, but we keep putting barriers up. We need to take all the barriers down. Nevertheless, our system is a lot better than the system that is used further south, which has a lot more barriers and problems. We get a lot more youngsters and adults involved in higher and further education than is the case elsewhere.

One of the budgetary restraints that you face is the result of students dropping out. How well furnished are you with information about why students drop out of courses? We could improve things if we knew why because those who drop out take funding away from the people whom you have just described, and who might relish the prospect of higher education more than these drop-outs.

Each time a student withdraws, we record the reason why, according to the categories that the funding council gives us. Sometimes, the reason is "personal reasons" and we want to find out what those are, or it may be "financial reasons". We need to dig down, underneath those categories, which we are often able to do. We examine the trends of why people withdraw from colleges, and I am pretty sure that the universities do exactly the same. We really want to know why people withdraw. I want to ensure that it is not because we are boring them or because the experience is not good enough, and I want to be able to make interventions. The majority of people who withdrew from my college last year left for reasons of illness or finance—they had to go back to work because they could not make the numbers stack up.

The same investigation is undertaken in the universities, and we have focused resources on the universities that face the most difficult challenges in that respect. Those resources have been used to identify the problems and what the universities can do about them—the same kind of analysis that Howard McKenzie has done. One of the universities reported the other day that it is starting to see the trend moving in the other direction, so I hope that things are improving. We will monitor the initiative that we have taken with the universities so that others can learn from the successes and so that the system as a whole can improve.

Claire, do you have a supplementary question?

No—my question is on a different subject.

I draw the panel's attention to the issue of charitable status, as discussed in Howard McKenzie's written submission. It gives a helpful countdown to the loss of charitable status. That sounds a bit like my son already counting down the days to Christmas: he keeps reminding me about it, which is a bit scary. The first Scottish statutory instrument on the subject that came before the committee came into effect at the end of June. A second statutory instrument is due to come before us in the near future. Is the issue still causing concern? If so, how can we remedy that?

Thank you for giving me the opportunity to tell you that there are only 311 days until colleges lose their charitable status, which is causing concern because there were, at one stage, 790 days. We have not yet seen the second statutory instrument—there is a process that it must go through, which took 180 days for the previous instrument. I am not that good at maths, but it is starting to get a bit neat. I am sorry: I should perhaps not have used the word "neat"—or NEET. Rather, we are getting very close to the date when we might lose that status, which is 31 July next year.

So you think that having the Scottish statutory instrument in place will remedy the situation and will alleviate concern.

Once the SSI has come through, the check must be redone by the Office of the Scottish Charity Regulator. We have 311 days to do the whole lot. If, at the end of that time, the Office of the Scottish Charities Regulator says "Oi, wait a minute, you've forgotten this bit"—pointing out that we have written "but" where there should be an "and", for instance—we could well lose charitable status. There is a lot of concern about it. Until it is done, it is not done. The impact on us would make things quite difficult, as you know.

The point is well made, and it is noted.

The second SSI will come before the committee. Would I be right in assuming that you are still in discussion with the Scottish Government on that? Have you not been kept informed of what stage it is at in its preparation of the second SSI?

We do not know, and we have not been in discussions about it.

Is that regrettable? Would you have liked to have been kept informed?

It is a technical point. The provision is about two sentences long, I think. We do not know anything about the instrument. The Scottish funding council might know more—it has been involved directly in the consultation, whereas we came in later in the system.

We are not in that loop.

I return to funding and the adequacy of the 2009-10 budget. We all know that universities have been working within a very tight settlement. Universities Scotland's submission for today calculates that there will actually be a 0.2 per cent cut this year, largely due to inflationary pressures. I appreciate that other organisations are having to cope with that factor as well. Where, to borrow a phrase from Christina McKelvie, might the tipping point be as regards how well we fund Scottish universities? I appreciate that we will always have Scottish universities, but where is the point at which it becomes too difficult for them to compete internationally and in the UK? Is it when there is a poor comprehensive spending review settlement the next time round?

That would be my view. Scottish universities have been competing extremely well internationally. The number of our universities that are in the top 200 in the world is very large compared with similarly sized countries. I have already mentioned commercialisation. If we consider the top eight according to many other indicators, Scottish universities compete extremely well. However, if it is not possible to keep up in what is a very competitive environment, it does not take long before key staff are lost. Many of our universities employ staff from all over the world. The next spending review settlement will be absolutely critical for retaining our competitiveness.

I have a question about one of the other cost pressures that you are having to bear. Many of the development plans of universities and colleges are based on an ability to sell assets—predominantly buildings and land—and to make use of the proceeds. Can you give us any evidence on the impact of changes in the property market on the value of assets that are held by the sector? What about the timing issues that come with that? It might be supposed that institutions will get less money for their assets now, and that that will have an impact on decisions as to whether or not assets are sold at all at this point. The timing simply might not be right because of the market situation.

I can speak only in general terms, because we have not carried out an assessment within our sector. However, the committee will appreciate that the sector is diverse in respect of land-based assets: some universities are campus-based, which means that land disposal is often limited because of planning regulations. That is also a consideration for our city-based institutions.

There will be an effect on the value of property on the balance sheet, and a reduction—I hope—in inflationary pressures in building. I cannot give you a detailed reply; we will have to examine the issue over the next year or two to judge the impact.

There is—thank you very much—a large capital rebuilding programme throughout the college sector, and the selling of land is a key aspect of the funding mix. I will give a specific example, which I am already discussing with the funding council. In my own build, missives have been concluded for land sales, but the developers might not be able to fulfil them because they cannot get the money from the bank.

The current conditions will have an impact across the college sector, as they will on the university sector. In the college sector, we get a dollop of money from capital, we raise some money in loans—which is not easy now, even for colleges—and we sell some land or assets off in order to get the package together to enable the building to take place. The current situation will raise a lot of issues for colleges.

It is not easy to get a loan now, because the banks have no money even for fairly secure processes. Land market values have reduced by something like 14 or 15 per cent, if the land sells at all—it is a bit like housing—and that will cause difficulties for colleges. The funding council is well aware, from those of us who are currently building, that we are talking to the financiers and the property developers about our situation. It is a live and running issue.

What flexibility is there for the funding council to take on board the specific difficulties that particular institutions might face?

We respond on a case-by-case basis. The most pointed cases are happening right now, in which planning has been done on one basis but the market has changed—although different institutions are, of course, in different positions. We cannot contemplate leaving an institution unable to function because it has been caught in that position. The solution varies, depending on the individual institutions, where they are in the cycle and to what extent it is a matter of saying that we will wait until the market picks up and the assets get sold.

More generally, we are considering the impact that the current situation has on our whole programme and our ambitions for the whole sector. We have to adjust to the reality of what that will mean for us, and for the colleges and the universities.

Is it fair to say, from what you are hearing throughout the sectors, that the market is currently having an impact throughout Scotland, and that there will be impact on many institutions in terms of things such as the timing of a programme?

The situation will also have an impact on the extent of ambitions for those programmes.

With regard to the funding issue, we have heard the word "challenging" a number of times today. It is a nice word, as it covers quite a lot of things. Queen Margaret University is close to my heart, because it has left my constituency and gone to Musselburgh and because one of my sons is there, and we have heard today that there are already job losses there. Is that what "challenging" really means?

We have heard from Howard McKenzie about the practical impact that job losses will have in colleges, with regard to the loss of courses and that sort of thing. Anton Muscatelli used the word "challenging". I wonder if he can tell us what the reality will be in the universities. In particular, I want to consider potential job losses. You said that if you do not get a decent settlement in the next spending review you will lose staff. However, we have also heard that jobs will probably be lost two years before the next spending review. Is that a short-term impact of the cost pressures that you face and the current settlement?

I cannot comment on individual institutions; I can talk only about the sector as a whole. It is difficult to come up with a global picture, because institutions are at different points in their strategic planning cycles. Universities would have been planning, restructuring and strategically reshaping what they do and their staffing needs regardless of current cost pressures.

Six months ago, when inflation was thought to be unlikely to reach the levels that we are experiencing, my institution unveiled a strategic plan. The plan involved some voluntary severance in the short term but it also included an investment plan and envisaged net growth in jobs during the next 10 years. Other institutions are at different points in their planning cycles, so it is difficult to disentangle what is happening and I cannot speak for the whole sector. Different institutions will be able to link the current inflationary shock with particular job losses, but I cannot give you a figure for job losses across the sector.

It is perhaps trivial to make this point, but two years ago we were planning on the basis of an envisaged pay settlement of a 2.5 per cent pay rise this October, on top of other pay increases, but now, because the pay rise will be linked to the RPI, we envisage a rise of at least 4.7 per cent and perhaps higher—depending on what happens during the next month. That indicates the cost pressures in the sector, but it is impossible to link that to a precise number of job losses, because so many other factors are involved.

A difference between the colleges and the universities is that colleges negotiate individually, whereas the universities do so nationally. Therefore, the particular challenge of making pay rises and pay processes fit the institution that is being managed is much easier for colleges than it is for universities. Colleges have far more levers than the universities have in that regard.

That concludes the committee's questions. I thank the witnesses for coming. I am sure that we will revisit a number of the issues that have been raised as we continue to scrutinise the budget.

Meeting closed at 12:38.