Education, Lifelong Learning and Culture Committee, 28 Nov 2007

Meeting date: Wednesday, November 28, 2007

Official Report 342KB pdf

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Budget Process 2008-09

Agenda item 3 is further oral evidence on the Scottish Government's budget spending review 2007, as part of our stage 2 budget scrutiny. I welcome back to the committee some of our regular visitors. We are joined by Howard McKenzie, the acting chief executive of the Association of Scotland's Colleges; David Caldwell, the director of Universities Scotland; and Roger McClure, the chief executive of the Scottish Further and Higher Education Funding Council. Thank you for joining us this morning, gentlemen, and thank you for your written submissions. To maximise the time for questioning, we will move straight to questions.

Given the funding package that has been provided, will further education colleges be able to absorb the costs, which are subject to increases above inflation, without requiring further reductions elsewhere in their budgets?

The straight answer is no. To absorb what is going on, we will have to change what we are doing. The capital line that we have been given is welcome, but it is not quite enough—it will not do everything, and some colleges will be left waiting.

The revenue is just about enough to do what we are doing now, but if we are asked to do any more we will have to start to move the chairs around in the colleges quite quickly. Several principals have told me that they will have to make decisions about some of the more high-cost courses and perhaps move some of the provision for those to lower-cost courses. High-cost courses include engineering, construction and special needs. To deal with the additional costs, the funding may be put into business and other courses that are cheaper to deliver.

If you experience difficulties, what will be the likely effect? What hard choices might Scotland's colleges have to make?

I can give an example from my college, where 120 people take 10 per cent of the funding on extended learning support because they have some sort of learning need. There are 8,500 other students. Decisions would have to be made about how many students would get what and where, and whether the college should continue to deliver high-cost support or look for other types of student.

In your written submission, you say that you assumed a funding increase of inflation plus 3 per cent. Have you been able to obtain that increase in the budget allocation that you have been given?

It is clear that we have not. If we are lucky, we will receive an increase of inflation plus about 0.5 per cent—the Scottish Further and Higher Education Funding Council helpfully referred to that figure in its written submission. One of the hidden costs arises because the Scottish Qualifications Authority has lost its charitable status. Fees for qualifications will go up by nearly three times the rate of inflation so that it can claw back the money it needs as a result of losing charitable status.

As the assumed funding increase will not be received, how will colleges ensure that they generate sustainable surpluses to allow them to continue in the years ahead?

A surplus of 0.8 per cent is produced across the college sector. Some colleges that are in the margins of surplus will go back into deficit, and colleges will go away from financial security. Colleges are in much better health than they were, but it remains the case that a lot is done on quite meagre rations.

You mentioned financial security, which is one of the key things the sector has regularly asked for, and said that some colleges thought that they had it. If the financial settlement that has been offered will not allow colleges to generate the surpluses that will be needed to guarantee their future, will there be no financial security for the sector as a whole?

For most colleges, the financial security campaign that the funding council has run over the past five years has worked. Colleges are financially secure and sustainable, but those at the back of the convoy will struggle a fair bit. Some colleges that have given evidence on their financial status to the committee or to its predecessor committees will again struggle. The settlement really just enables colleges to survive, not to move forward. In our submission, we say that we could do much more. We are concerned that we will not be able to meet demand, that we will be unable to do more and that we may have to change curriculum profiles to maintain our financial viability rather than to do what students want us to do.

Roughly how many establishments could find that their future is not as secure as they hoped?

I cannot answer that question with facts. I think that half a dozen or so of the 43 colleges could find themselves in that position, but that is a guess.

I have a question for Mr McClure. What actions will the funding council take to ensure that colleges that have found themselves with financial difficulties in the past will not find themselves with such difficulties again?

It is important to stress that there were several components to the financial security campaign, including components that were designed to improve the financial management capability of colleges. For example, there was the sector-wide cost benchmarking exercise. Detailed annual reports on costs are published so that colleges can compare their costs. We have resuscitated the financial managers support group, which had been allowed to fall into limbo. That group has become much more active. There are other initiatives that the sector is active in as it seeks to improve its efficiency, such as the efficient government initiative. We must now find out whether all the improvements have been embedded in all colleges so that they can master the challenges that will arise in the next couple of years.

At the moment, I feel fairly confident. Scotland's colleges have come together as a group and now operate as a brand to help each other. That is shown by the further education development directorate—FEDD—which is largely made up of practitioners from colleges and other active practitioners. The sector is in a much better position to deal with the challenges it faces than it was four or five years ago, when we embarked on the process. We have to see whether it is able to cope.

Colleges do not have much scope for diversification to try to get funds. You have stated that the largest barrier to entry to progression into advanced vocational skills qualifications such as higher national diplomas is the policy that does not allow higher education students in Scotland's colleges to access higher education bursaries. That is a concern to us. Do the witnesses consider that the budget will allow increased access to bursaries at a level that is equivalent to the higher education funding that students in universities can receive?

We are not entirely sure. The committee asked about that during the previous evidence session. I am not sure what answer was given. It is clear that a movement from loans to grants will benefit higher national diploma students in colleges. It should be remembered that about 20 per cent of all higher education in Scotland is delivered in colleges, not universities, and that college students tend to come from the most deprived backgrounds. They are also the people who move on to universities in their second or third year. The nation needs to build on that route, and part of that is ensuring that those people have access so that they do not go into debt in the first place.

So you welcome the move from loans to grants?

We will wait and see what it looks like, but yes, we do.

We should establish what impact the lack of charitable status will have on colleges' finances if legislation is not changed to allow the FE sector to benefit. Would you like to comment on that?

The first thing to say is that it is 612 days until colleges lose their charitable status. That will cost us about £50 million a year—which, incidentally, is the amount of cash that is extra over the three-year spending review. So there we go; that is how much it will cost us, and we would be negating whatever we have done.

Howard McKenzie has given you the figure from the top end of the range. It is not an easy figure to calculate, but I think we gave evidence that the figure is likely to be between £30 million and £50 million. The figure will be substantial if charitable status is lost, so we welcome the fact that the Government has made it clear that it will—by whatever method—make sure that the status is not lost.

Thank you for dealing with that.

What impact would an improved uptake of individual learning accounts have on college income and course delivery?

ILAs have been fairly effective in some areas but, over the piece, they have not been as effective at getting people in as has, for example, the fee waiver process. Some of that is to do with the way in which the means-testing process is done.

An individual learning account is for the individual, so my wife could obtain an individual learning account, but she could not have a fee waiver because that is based on household income. The fee waiver system can help people who receive substantial benefits because of how eligibility is calculated and the impact on benefits; ILAs involve people in the middle ground rather than those in deprived areas.

Colleges are using ILAs imaginatively in community activities, but they provide only fee income—they do not pay the full cost of a course. If someone takes the European computer driving licence course, an ILA provides a good way for them to obtain money to pay their fees, but we must still use our money from the funding council to deliver the course.

So you think that the fee waiver scheme is a better way to give people access than an individual learning account?

Both schemes follow a means-testing process. The key is that fee waivers tend to hit the very poorest in our society—they are a good way of supporting those people. The scheme is fairly crisp and quick, and the process is done on site. An applicant receives an answer remarkably quickly.

The scheme links into support such as further education bursaries and hardship funds. We can use the result of the means testing to make all the calculations so that a student goes away with a package that includes advice on benefits. That is important and helpful, because if someone makes the shift of deciding to go to college, their benefits will change, so they will have to obtain a new package of funding to survive while they are at college.

To obtain an ILA, people must send away to obtain something. Some people find that daunting, and the process is not the quickest. It does not deal with the other issues, either.

If the number of students in further education who use ILAs or even the fee waiver scheme increased substantially, would that have a financial impact on further education establishments? You said that, even with that funding, you must still cover the cost of course delivery. If such an increase were to have an impact, has that been budgeted for or would you have to find money for that from your existing budget allocation?

We would have to fund the courses from the existing budget, so we would just replace one piece of funding with another, because we cannot grow or do any more. The money that an ILA provides would not be enough to pay for us to run a course on a full-cost basis, unless the amount increased substantially.

One issue that colleges have with ILAs is that we are paid late for them. The funding council provides us with fee waiver money up front and we draw money from that pool. At the end of the year, we must account for how we have spent that money.

If a student were given an ILA on 1 September, I would not receive money for that in my bank account until after Christmas, but I would have to find the finance to run that place for the best part of three or four months. If we suddenly had thousands of ILAs, which would be worth thousands of pounds, I would have to find a couple of million pounds from a bank—or somewhere—to fund the process. The bureaucracy behind ILAs is complex. I have heard some of the wonders of accountancy in Government finance and that is another story of similar magnitude.

You have spoken about the tight financial settlement and the hard choices that will have to be made. Money talks and the situation will be difficult in many areas. Do you recommend any other changes, to give colleges more flexibility to increase the number of students?

Giving us a lot more money would of course be very helpful, but there is an awful lot of clutter in the student support mechanism, starting with how the benefits system sometimes militates against students. The process has step changes. When someone who went to college to do a further education course takes a higher education course, a different support package applies.

There are other packages, the young person's bursary, the mature person's bursary, the hardship fund, the very hardship fund, the child care fund and the immediate child care fund. They all have little bits of money and we all have to manage and administer them all. Then there is money from local authorities in relation to issues such as child care. It makes life very difficult for people who are making quite a difficult value judgment about whether to give up work and do a college course. However straightforward that decision might seem, it is quite earth shattering for them and it is quite difficult for them to make that change to better themselves. The stuff that they are presented with takes a bit of skill to get through—they are good at doing it, but it can be quite difficult. It would be great if, when a student turned up at the college, we gave them an academic package and a support package and said, "Off you go."

Can I just confirm that you are saying that it would be helpful if the process were simplified? Am I right in thinking that you think that the marketing of what is available is quite good but that the process needs to be simplified?

A simplification of the system would make it a lot easier. You heard some of the wonders of Government accounting—we have to live with that. The funding council is extremely good at interpreting that accounting and making it as simple as it possibly can, but it sometimes proves taxing for that organisation as well.

I will need to check my facts to ensure that what I am about to say is accurate, but I believe that, in recent years, we have increasingly bundled the various funds together so that colleges have the flexibility they need to switch money between them, for the very good reason that that is much simpler.

Mr McKenzie, am I right in assuming that you do not think that the settlement will lead to an increase in student numbers in colleges?

It will not lead to an increase in student numbers. The unmet demand—which in some colleges is quite substantial—will remain unmet.

So in terms of widening access and increasing student numbers, you view the key policy area as relating to ways of enabling you to provide those places?

There will be no more places—the funding council cannot give us funding for them because it does not have the money.

The move from loans to grants will widen access more than putting hundreds of thousands more people through courses will. That sounds odd, but we are more likely to change the type of people who come forward and to get better penetration of the groups of people who we need to get back into the economy that way.

Is the priority to do with addressing the amount of debt people have when they graduate or the amount of money that is available to students while they are studying?

Both are important. The majority of our students, who are further education students, get further education bursaries, which they do not pay back. They struggle on the amounts they receive and some of them have to dip into hardship funds—for which we use funds that are given to us by the funding council—but they seem to manage reasonably well. As Mr McClure said, in recent years we have been able to move money around between the funds. That has been extremely useful as it has enabled us to cover ever more people. The issue relates to how we fund the package of funding we give students to get them through.

Can you explain where the one-off capital investment of £100 million should be in the budget documentation? Which financial year is it for? Where should it be displayed?

I am not an expert on Government accounting, but the money was clearly made available in 2007-08 and that is when it has to be—and is being—disbursed. We are able to do that because, in both sectors, the council allocates significant proportions of its capital line to formula funding, which is targeted at maintenance of all kinds, contributions to backlog work, new projects and so on. As members know from the Auditor General's report on the higher education sector, there is no lack of work and projects to be done in the sector to put it into good order; the same is true of the further education sector.

We were able, with the money that we received in the current financial year, to make an early formula allocation for 2008-09. That means that when we enter that financial year we will, in effect, get the money back again and be able to decide what to use it for. In the colleges, it will undoubtedly be applied to on-going projects, for which it is needed—there is more than enough demand on our budget in that area. In the university sector, the money will be divided between substantial formula funding for all the needs to which I have referred and funding for emerging needs.

I am expecting my share of the money to be in my bank account in February. I account for cash when I can see it. I assume that the money is for this financial year, as I will get it in this financial year.

I remind Howard McKenzie that he will not get next year's allocation twice—he will get it this year and not next year. I make that clear in case he plans to spend it twice.

For clarity, are you saying that the figure will not be reflected in future years' capital investment lines?

That is one of many questions to which one would expect there to be a straightforward answer, but there is not. Technically, the funding will be accounted for in 2007-08, because that is when it was made available and is being disbursed, although I insert the caveat that I hold no brief for how accounting is done technically in the Scottish Government. However, the impact of capital spending is rather different from that of recurrent funding. That is clearest in the universities.

The Auditor General has published the figure that we identified for the backlog of maintenance in the university estate—about £700 million. I will put the matter in simple terms. If the universities are able to use their share of the £100 million—£50 million—to reduce that figure to £650 million, they will have reduced an on-going problem. That capital funding could be seen as equivalent to a much smaller amount of recurrent money in the baseline for 10 or a dozen years. If the capital had not been provided, the institutions would have had to take out a loan or to finance the work from their recurrent budgets.

In a way, there are two answers to the question. It is technically correct to say that the money will be accounted for in 2007-08, but because this is a significant contribution of a capital kind it has a long-lasting effect.

I appreciate that point. You are talking about investment, which can be buying a car or something else. From the funding council's perspective, where should the money be identified to give the correct view of the financial year to which the money is allotted? Given that you have said that the money was allotted in 2007-08, would you be concerned if it was reflected in capital budget lines for 2010-11?

I shall offer a straightforward answer to that question. While the £100 million is extremely welcome—we are delighted about it—it does not come from the Scottish block allocation for the years of the spending review period that we are examining: it comes from unspent moneys from previous years. In so far as you are asking whether it comes from the Scottish block that has been allocated for 2008-09, 2009-10 and 2010-11, it does not.

Do you agree with that?

Certainly. My question is, how do you consider its effect?

Given that there has been a tight block grant settlement from London, which curtails what Government can and cannot spend, how will the universities strive to make savings in their costs?

The universities are always striving to make savings in their costs. I direct committee members to a publication that you have probably all received from us—possibly more than once—entitled "Making Every Penny Count: Efficiency and effectiveness in Scottish higher education". It demonstrates not just the savings that the universities have made over the past 10 to 15 years, but that they have achieved much more efficiency than any other major sector that receives significant amounts of public money.

My other point is that we offered an outstanding bargain in the case of the spending review. We said that by the end of the spending review period, we were capable of delivering an additional £340 million-worth of public benefit. We were seeking an additional public contribution towards that of £168 million, or only half. Universities are absolutely committed to continuing to deliver efficiencies and to using additional public investment to lever in money from other sources so that we can get twice as much public benefit as the additional public investment.

In which areas might efficiencies be possible or might you be able to make cost savings?

In the past, efficiencies have been delivered in a wide variety of areas, most obviously in student to staff ratios, which have increased significantly during the period. It is interesting that people are keen to reduce class sizes in schools but seem untroubled by pressures for increased class sizes in universities. We have achieved enormous efficiencies, but they have resulted in larger class sizes. There is a stage where we cannot take that form of efficiency any further, and we have to look hard at the quality of provision in our system.

There are many ways in which efficiencies can be made, not least in the renewal of our buildings. That is one reason why we are so grateful for the capital investment, which gives us major opportunities to achieve efficiencies, because old buildings tend to be inefficient buildings. We do not need to scrap them all—some of them are quite capable of being refurbished, but their refurbishment delivers significant efficiencies.

Another area in which we can deliver a major contribution to efficiency is procurement practice. The universities have been in the van for a long time in terms of collaborative procurement. About 80 per cent of university procurement is collaborative, and we are now energetically engaged in the rather more ambitious public procurement initiative that was launched and fronted by John McClelland.

Returning to the impact of the settlement, you say in your submission that the total new money that is available over the spending review period is £43 million, which is only a fifth of what you asked for. According to your submission, you were looking for a more generous settlement. The reality is that you think that next year there will be a £20 million funding gap as a result of a real-terms decrease in your revenue budgets and the impact of the academic staff agreement. In that context, what will be the impact of the disappointing spending review settlement on you?

There are significant cost pressures on universities in the first year of the spending review period. As Mr Baker says, those are connected with the fact that we are tied into a three-year United Kingdom-wide pay deal, the terms of which were widely supported by all political parties in Scotland, as elsewhere. That was not a surprise—it was acknowledged that staff in universities had fallen behind, and the pay deal was intended to make up some of the ground that they had lost. It was widely agreed that that outcome of the pay discussions was appropriate. In the final year of the pay deal, the uplift—taking into account the cost-of-living element and the staged increase—is likely to come to between 7 and 8 per cent. At a time when universities are receiving an increase of inflation minus 0.2 per cent, that clearly involves cost pressures. We have calculated that over the sector as a whole, for the relevant staff, the total gap is about £20 million. That is an approximate figure, but it is a pretty good estimate.

The universities are well managed in a financially responsible way—they will ensure that they meet their commitments. However, there are cost pressures, which inevitably will restrict the new things that we hoped to do and proposed in our spending review case. I am not saying that we can do none of those things—the universities are leaders of change and are not at all resistant to it, and we will see what can be done within a more limited settlement—but there are cost pressures. If the Government wishes us to make our full contribution towards its strategic objectives, it would be enormously helpful if it found additional flexibility beyond what has so far been announced.

We understand that the spending review settlement from Westminster is more generous than was perhaps suggested by the impression that the Government gave earlier. You spoke about seeking more support from the Government, but at the moment you have the spending review settlement, and you have pointed to problems regarding the funding of the academic pay deal. There has been a great deal of speculation about the impact of the cuts—or, to be more generous, the cost savings—that you will have to make in terms of, for example, freezing or not increasing student numbers. Will there be problems for universities in that?

It is worth reflecting on student numbers. I heard what the Cabinet Secretary for Education and Lifelong Learning said earlier about the drop in the participation rate. I agree with her that we need to increase the participation rate again. As it happens, the actual number of people who are taking degree courses in universities has not reduced at any time during the period that the participation rate has slightly dropped. The number of those who are eligible to enter has increased, so the overall number has remained largely flat rather than decreasing during that period. The effect has been that the participation rate has dropped.

One of the additional things that we had hoped to do was create places for 4,000 additional first-degree undergraduates. We might not now be able to do that, which concerns us, because it is extremely important that additional places are properly funded. The university sector—this applies throughout the UK, not just Scotland—went through a period of unfunded expansion in the early 1990s, which set up extremely serious problems that we are only now beginning to finish dealing with.

Unfunded expansion presents a major problem. It is hard to see how the extra first-degree undergraduate places can be created, given the spending review settlement. That raises an issue in connection with the Government's ambition to widen access through the abolition of the graduate endowment, because it is hard to see how that can take effect if no additional places are created.

So there is an inconsistency with the stated ambition of the bill.

There is a potential inconsistency.

There is obviously pressure with regard to staff numbers. What is likely to happen to the situation of academic staff?

Of course there is pressure, but I do not want to cause any disquiet, because the most important thing to say about the university sector is that it is a highly people-intensive business. We have extremely talented people working for us, whom the universities want to hang on to. Although the situation will be difficult and no absolute guarantees can be given, the universities will be as ingenious as they can be in hanging on to those talented people. I do not want to suggest that there will necessarily be adverse consequences for staff numbers, but I reiterate the fact that we are talking about serious cost pressures that will be difficult to cope with.

I have a question about research, but first I return to the overall spending review settlement from Universities Scotland's perspective. I have a letter of 22 November from the First Minister, which you may have seen, because it was made public. It states:

"The reality is that spending in real terms on higher education institutions will increase by 4.4% in real terms over the spending review period".

What is the real-terms increase in spending over the spending review period? Your submission to the committee says that it is 2.9 per cent.

It seems unproductive to get too hung up on an argument about numbers that can be presented in a variety of ways, but I cannot come up with the 4 per cent figure however I do the calculation—the answer always comes out as 2.9 per cent. That said, I do not have a closed mind on the matter. If it can be demonstrated to me how the 4.4 per cent figure is arrived at, I will be open to looking at that. I have been able to work out how it has been possible to justify some other claims that have been made, so I certainly do not want to say that the Government figures are necessarily incorrect; I can only present the figures as they appear to us. They seem to be solid numbers, which I genuinely believe we have not misunderstood. They indicate that, by the end of the spending review period, the baseline will have risen by 2.9 per cent in real terms.

Does Mr McClure have a comment on that?

What David Caldwell has said is accurate. It is a matter of fact that the difference between the figures is the £50 million of capital that was mentioned earlier.

If that sum was spread out over subsequent years—in other words, if it was used for the financial years 2008-09, 2009-10 and 2010-11—that would take us to the 4.4 per cent figure.

I think that that is right. If you apply the £50 million to the spending review period, of course that gives you a different answer. The figure that matters enormously to the universities is the percentage by which the baseline is raised by the end of the spending review period. It matters because of international competition, the nearest component of which is our colleagues south of the border. We do not know for certain exactly what the uplift in England will be—I understand that precise figures will be given in an announcement on 4 December—but we know that the English institutions will benefit from the roll-on effect of the final third of the extra tuition fee income in 2008-09, which is probably worth about 3 per cent to them in real terms.

In addition, they anticipate—subject to the announcement on 4 December—that they will get a real-terms uplift worth about 2 per cent a year in each of the three years of the spending review period. If we take that total, which is about a 6 per cent uplift in the public sector contribution, plus another 2 or 3 per cent from tuition fees, that suggests that the English will benefit to the tune of about 8 per cent by the end of the period. If we get 2.9 per cent, a gap of about 5 percentage points will open up. That will not be disastrous, but it will be significant.

What would your view be if the figure that the First Minister used included the identification in subsequent years of the one-off capital for 2007-08?

I would respect the way that he made the calculation. I want to reiterate that we are grateful for the £50 million. It will be a real help to us and it is real money. In a sense, it is fair to count it, but it does not go into the baseline. The baseline is important for the long-term future of the universities.

Forgive me, but if you are saying that it is fair to count it, but not in the baseline, it should not have been fair to add it, so the figure for the real-terms increase over the three-year period should not be 4.4 per cent.

The First Minister was probably not talking about the baseline. He was probably talking about the overall increase in resources, including the £50 million, over the period, but I ought not to interpret what the First Minister may or may not have meant—that is a matter for him.

This is delicate territory, because one thing that I know Universities Scotland and the funding council do not want to do is give a misleading impression outside Scotland's borders that Scotland's universities are in some kind of desperate crisis. They certainly face challenges, but we must reflect on the recent success in attracting leading researchers into the country in what is a genuine international competition. The universities are probably the only parts of the public sector that compete directly for staff and students and others on an international stage. It will not help us if we give a misleading impression of the position, so we must recognise that people can give at least five different answers to the question of how to measure the increase, each of which tells us something different. Depending on a person's starting point or what they are trying to prove, they will no doubt favour one answer over another, but the arithmetic stays the same whichever answer they choose.

On the university settlement, I draw attention to the maintenance of and increase in the capital line, not counting the £50 million. That is significant and important for the universities. Prior to the previous settlement, there was no such capital line for the universities, which meant that all their capital development, struggles to deal with the backlog and so on had to be funded from their own resources out of the current budgets and through disposals of surplus sites and so on. Baselining that substantial capital contribution has the effect, to an extent—we could argue for a long time about exactly what that extent is—of relieving the pressure on institutions' recurrent revenue budgets. You can go as far as arguing that if the capital line is sustained, it could be worth up to a 1 per cent real increase on the revenue budget, because the institutions will no longer have to find that money within the revenue budget, as it is capital grant.

The issue is complicated. As David Caldwell said, bandying around percentages and trying to make clear cases on them will overstretch our ability to make such cases.

Yes, but the reason for my question was that last week the Government issued a table to the press that spread out the £100 million over the three years of the spending review period. That allowed the First Minister to arrive at the figure of a 4.4 per cent real-terms increase over that period. Given what you have said about the signals that we should give to people outside Scotland, one would think that the First Minister of this country would wish to give the correct signals on the settlement by accurately placing that £100 million rather than adding it on to each of the three years. That is the significance of the issue.

If I may say so—and as David Caldwell has already said—it is real money. For the universities sector, that £50 million will be applied to their estates. Without it, the universities would either have further deferred work or found money from their revenue budgets. I am less worried about where that money is placed and which figure people count. I am much more concerned about the fact that an additional £50 million that was not available before can now be applied to dealing with capital issues.

As we are debating the budget settlement for the universities, the accuracy of statements is important. Repeatedly, it has been said in Parliament that Mr McClure has said that the share of the budget for higher education will rise over the period of the spending review. However, the reality is that higher education received 5.12 per cent of the budget in the final year of the current spending review period whereas its share will be only 5.08 per cent in the final year of the next spending review period. The reality is that higher education spending is falling as a share of the budget. Surely, given your comments on the previous occasion that you appeared before the committee, when you urged the Government to make a real investment in higher education, we need to be clear about those important figures if Parliament is to have a correct debate on the budget.

I cannot argue with that. The figures should be absolutely clear. You cannot defeat the laws of arithmetic. What matters is the money that is available and how it is used. When I previously appeared before the committee, I said what I thought the Government ought to do, but I also said that the Government is elected to make difficult decisions. That is why we live in a democracy.

Do you think that it is a sensible decision in terms of economic strategy for the higher education sector to receive a smaller part of the Scottish Government's overall budget?

Convener, I do not think that it is reasonable for me to answer that question, as I am not privy to the demands and pressures on all the other parts of the Scottish budget.

Fair enough.

Let me add, on this fraught issue about the proportion of the budget that comes to universities, that some of the controversy over numbers has been slightly unhelpful. We probably need just to agree sensibly that our share is actually broadly flat. I looked at the figures recently to be absolutely clear about them. In the current year, funding council grant for the universities is 3.12 per cent of the Scottish budget. Next year, it will go down to 3.11 per cent. The following year, it will go back up to 3.12 per cent. In the final year of the spending review period, by my calculations the share will increase to 3.14 per cent. We are working within a very narrow range—at the second figure after the decimal point and over a long period of time. Essentially, our share of the budget is flat. I am quite happy to drop arguments about whether our share of the budget is increasing or reducing because, in any meaningful sense, it will remain pretty much exactly the same.

A significant point is that, in the first year of devolution, the proportion of the Scottish budget that was spent on higher education was 3.63 per cent. If that 3.63 per cent were restored by the end of the next spending review period, the universities would have received every single penny that Universities Scotland argued for as well as a bit more. That is the real issue about the proportion of the budget. The issue is not where our proportion of the budget is going now—it is carrying on much as it has been—but whether we can restore the real value that higher education had in the first year of devolution. That would solve all the problems that the universities have identified.

Clearly, arguments about the figures will rage back and forth. However, it seems to me that when people are faced with difficult settlements, the cuts that they suggest first are often the most unacceptable ones, which is why we get discussions about staff or student numbers being cut in universities.

It has been suggested that some back-office savings could be made. Could the universities do that, and would it allow you to increase your spending pro rata on front-line services?

The universities are looking for back-office savings all the time, and they look for those greater efficiencies precisely so that they can divert more money to front-line services. However, a characteristic of university expenditure is that a very high proportion is on front-line services; relatively little is spent on back-office services. Even if universities were able, for example, to reduce back-office costs by a third, it would make little difference in providing additional resources for front-line services.

The proportion that is spent on management and administration is quite low, and on the whole it is money well spent. The reason why universities are well managed and financially responsible and have not run into financial crises is the quality of back-office services. Of course savings can be made at the margin, but it would be a great mistake to think that a big pool of money could be released in that way.

Can you give us any figures on what you think could be achieved?

It is hard to give a precise figure, and there are also legal obstacles. It is often suggested that universities should collaborate on the provision of back-office services. The trouble is that, as soon as you create a collaborative vehicle that has a separate legal identity from the institutions, you introduce a VAT liability. That problem has been drawn to the attention of Government many times over the years, but no answer has been found. Unless collaboration achieved savings of at least 17.5 per cent, we would get nowhere.

There are practical issues to be addressed, but there is considerable willingness on the part of universities to consider them. We have only to look at other areas, such as the research pooling initiative, to see how willing universities are to collaborate when there is mutual benefit in doing so. That certainly applies to back-office services as well.

I can add an answer from the college point of view. In my college, we have a turnover of about £14 million, £11 million of which is for staffing. That gives me only about £3 million to play around with, and by the time I take away the statutory stuff that I have to pay—rates, water and electricity, for example—I have only about £1 million for procurement. We are part of the procurement process with the universities—the Government e-procurement programme—and the amount that we can save is small. About £60,000 or £70,000 would be the maximum.

I reiterate the point that although shared services sound like a great idea, the fact that we are independent organisations means that the VAT element adds 17.5 per cent straight away, which negates any advantage in sharing services. The colleges in Edinburgh and Lothian share a lot of common services, but we do it in a slightly different way: the service is provided in one place—there is a bit of conjuring. However, sharing employees to do the same work is actually very difficult.

I can add to the list of activities in which such savings are real, not imaginary. All the building projects that either have been completed or are going on in the college sector—which is a substantial number—have had to meet far more demanding space standards than before, for example on the number of square metres for each student. The capital saving from that is significant, but the on-going running and maintenance costs are also reduced.

There is also cross-sectoral activity. In Galashiels, Heriot-Watt University and Borders College are coming together in a single campus. In Glasgow, we are trying to get the city-centre colleges to come together. As part of that project, we are well advanced with developing a joint sports and health facility with the University of Strathclyde, which will save both sides a substantial amount of money, as well as provide much better facilities.

Networking is crucial to the activity of colleges and universities. It would be very effective and cost efficient if all the information technology networking to connect the various institutions was procured and managed collectively. As David Caldwell has emphasised, on a whole range of activities the sectors have come together as a matter of course to save money, and they will continue to do so.

I appreciate your thorough answers on that. You will appreciate that it is for us to look for possible savings to offset the impact that the settlement will clearly have on students in universities and colleges. Universities Scotland raised the figure of £168 million in its first bid for funding. Was that realistic? You seem to be saying that you will mitigate any impact from the budget. Clearly, however, it does not meet the amount that you originally set out with. I find it difficult to know what your position is.

The two things are not inconsistent. The settlement causes us severe cost pressures, and it means that we will not be able to do quite a lot of the things that we wanted to do. However, we will of course try to mitigate the effects. There is a balance to be struck. We will try to avoid the worst effects. There is no question of reducing student numbers, although there is a real question whether it is possible to increase them.

We wanted substantially to increase the support for research activity. That is important, considering that the most recent international league table placed five Scottish universities in the world top 200. That is an amazing achievement; per head of population, it is the best result of any country in the world. That league table was driven predominantly by the quality of research work—that was the biggest single factor that was fed into it. That shows that our research-intensive universities are delivering for Scotland. They were invested in at the previous spending review, and they are showing a strong return on that investment.

We believe that, in the next research assessment exercise, both the quality and the quantity of research that is put forward by Scottish universities will increase. Ideally, we needed a substantial amount of extra money to support the increased volume that we have achieved. We have to try to mitigate the position as best we can. We have to support the high-quality research activity and we have to support knowledge transfer, so that the outputs of research are effectively commercialised for the benefit of the Scottish economy. We must do that as best we can within the more limited resources that are available to us.

However, we must not delude ourselves: we will not be able to do as much as we had hoped to do. There are real consequences of not getting the £168 million, which, as I said, offered Scotland a much bigger benefit than £168 million—we would in effect have been able to double that benefit.

If the settlement has to happen, how will universities protect departments that show significant academic value but which might not generate the same income as other areas in which students are involved?

It is not simply a question of how much income is drawn in; there is the question of the strategic importance of subjects. Change will happen. Even if budgets increased by the amount that we want them to, we would still have change in Scottish universities, because they are about change. The external environment changes all the time and universities are active agents of change. We will always have situations in which some departments might close and other new initiatives will start. Universities will try to protect everything that is vital while maintaining the process of change that ensures that they remain up to date and relevant to the current circumstances.

On that point, do you have any evidence that universities are considering dropping subjects or merging aspects across faculties, or are you reasonably confident that new initiatives will take their place?

I do not have any evidence that specific considerations are taking place about changes in the wind. I was making a more general point that universities are not resistant to change; they are ready to change to meet new needs. That means that, from time to time, a university may adjust its strategy and concentrate on particular areas and perhaps begin to withdraw from others. However, I have no information that anything specific is in the wind at present.

You rightly pointed out that Scotland wants to compete in an international environment and to attract students from other parts of the country to study here. Universities in Scotland have been good at marketing themselves to students round the world and encouraging them to come here, which generates income for the universities. Given the resource pressures, is there a potential that the numbers of students from overseas will be increased because they are an income source and that that will disadvantage Scottish students, who would have to compete for fewer places because student numbers have been capped?

International students from beyond the European Union are no threat to places for students from Scotland, because those who come from outwith the EU pay full-cost fees and do not count against our student numbers—we are free to increase the number of such students as much as we can. The trend has been encouraging in recent years. Not only do the individual universities market themselves effectively but, increasingly, they have been marketing collaboratively and on a Scotland-wide basis.

One initiative that we are enthusiastic about is the international lifelong learning strategy, which is designed to take the internationalisation of universities and colleges in Scotland to an even higher level. That is a tremendously important and worthwhile initiative and we can probably push up our international numbers a bit further. Those students are an important source of income, but that is by no means the most important reason why we want them. Their biggest contribution is the fact that they enrich the cultural mix. Studying alongside well-motivated people who come from all parts of the world benefits students in Scotland—that is enormously valuable.

Inevitably, that is one of the more volatile income sources, because, alas, we are not in control of world politics; that is one reason why I downplay it a little as an income source. Events happen and so, for reasons that are entirely outwith our control, the number of international students may rise or fall. Those students are extremely valuable because of the income and, more important, because of the cultural aspect, but we should not become overreliant on that source.

I want to clarify a point that you made earlier about English tuition fees. Is it the case that English tuition fees are used not to provide extra funding in English universities but, rather, to replace Government funding?

No, that is not correct. The Government in England gave an assurance that the fees would represent additionality. One of the firm outcomes of the spending review south of the border is that the English universities have been given an absolute guarantee that the teaching unit of resource will not fall during the spending review period. English universities will get the tuition fee income as a bonus, on top of a fixed, real-terms teaching unit of resource.

I seek the panel's views on the level of funding that is provided for student support. Is it likely to widen access to tertiary education when seen in the context of the total budget for university education? The Scottish budget states that the total package for student support is £119 million over three years, which is for a phased transition from student loans to grants, starting with those for part-time students. The settlement also includes £38 million over three years to fund support for part-time students.

The evidence is equivocal. Universities south of the border have undertaken a certain amount of research to see what difference the introduction of much higher fees has made to access. The answer so far—I stress that it is provisional—is that it appears not to have made much difference. That is not to say that there has been no effect, but, rather, that the effect has been relatively small. One therefore has to express slight scepticism about whether improvements in student support will necessarily improve access to tertiary education. However, provided that such support is targeted carefully and directed at the groups who need it most, it is probable that it will have some positive effect. It is really important to ensure that you get maximum value for the money that you spend in that regard.

We have always been keen to emphasise that it does students no favours if their support arrangements are improved at the cost of the funding of institutions, because that undermines the quality of the learning environment, which weakens the student experience. The two things run side by side. We need to have properly funded institutions and proper systems of student support. That is one of the reasons why we welcomed the repeated assurances that we received from the current Government that the improvements in student support were entirely separate from decisions on the funding of institutions.

About 10 per cent of the further education line, as well as further education bursaries and so on, goes into student support. It tends to get forgotten, but it is in there. The universities' figure is purely for learning and teaching, but ours is for learning and teaching, and £50-odd million is for FE support. We have a mixture in that budget line. Will moving from loans to grants have an effect? We talked earlier about the fact that higher education numbers in Scotland had dropped. A large proportion of that drop was in HN students in colleges, and that coincided with the introduction of loans. That is the nearest that I can get to evidence that answers your question.

The committee is probably fed up of being told that the situation is complicated, but I fear that it is. Let us start with figures that we know to be true. Something like 27 or 28 per cent of colleges' intake is drawn from the 20 per cent most disadvantaged households in the country. The colleges, therefore, are very effective at reaching into that population group and getting them into college to do a variety of things. The question, then, is whether in the remainder of that group, in which the problems are pretty intractable, many students might not be participating solely because they do not have enough money. The answer to that is probably no. If people are not participating, it is because a multiplicity of issues is preventing them from doing so.

I have no doubt that making more money available will always help, because it can be used to provide a richer experience and to allow more staff to reach out to and engage with people in, for example, one-to-one work and counselling. That will all make a difference, of course, but the question itself is very complicated and there is no straightforward answer to it.

Have there been any further developments since David Caldwell's recent meeting with the cabinet secretary?

Developments have been limited. The major development was the meeting itself, which, as the statement issued afterwards said, was constructive. The cabinet secretary listened carefully to our comments, showed considerable sympathy for the points that we made and indicated ways in which she might be able to help. Perhaps the single most important outcome was the agreement to establish a joint future thinking task force, which will be asked to complete its work in a very short timescale. There have been discussions about the task force's composition and modus operandi, and we hope that the arrangements can be confirmed at a meeting in December. In the new year, we will embark on an intensive work programme, which will end in about May.

As Mr McClure said, many issues are involved in widening access, including a buoyant employment market, which must impact on the number of students coming to university. The Government has put the abolition of the graduate endowment fee on the table. I took on board David Caldwell's welcome for the Government's announcement that student support arrangements would be separate from the overall funding settlement. However, when I pressed the cabinet secretary earlier on why that should be, she said that the £17 million could not be part of the spending review settlement as the money would come out of end-year flexibility. However, that is still income forgone; EYF money could go into other areas, including funding for universities. We have just received a submission from the Royal Society of Edinburgh on the nature of the settlement. Are people in the sector still relaxed about the abolition of the graduate endowment and confident that the funding for that will be separate from the disappointing funding settlement for the sector?

In a technical sense, the issues are separate, because they have been separated by the legislation. However, in another sense, they cannot be separated, because all the Scottish Government's expenditure has to be met from the fixed amount in the Scottish block. If money in the block is used for one purpose, it will not be available for other purposes.

I do not want to get into the question of where extra money for universities might come from, because that is not our job. Our job is to make a positive case for the benefits of universities and to make it clear that investment in higher education is the most productive investment that the Government can make. It is not for us to say where money should come from; politicians must make judgments and political choices about priorities. Obviously, I feel strongly that universities should be one of the top priorities. As Muir Russell said in his press statement, this is a missed opportunity.

That is a thought-provoking comment in the context of the funding being forgone in the future in the departmental budget.

When the funding settlement was announced, Sir Muir Russell, in a statement from Universities Scotland, raised concerns about how the Scottish universities will be able to compete with their English counterparts, particularly in relation to research funding. Will you elaborate on that?

Also, to follow on from Christina McKelvie's question, the idea was mooted that more funding will be available to universities from end-year flexibility during the spending review period. Have you had any guarantee of that from the Government?

No. It would be unreasonable to expect such a guarantee to be given so soon after a spending review announcement. However, we have an undertaking that the universities will be high on the list of priorities when end-year flexibility becomes available, and if additional consequentials become available during the spending review period. We have had that assurance.

What are your thoughts on competitiveness in research?

I will come back to that.

In the statement that we made immediately after the spending review, we drew attention, among other things, to our competitive position relative to universities in England. Earlier in today's meeting, I said that we calculate that a gap of up to 5 percentage points might have opened up by the end of the spending review period. However, that is subject to the detailed announcement in England. We cannot be firm and say that that will be the precise figure.

Competitiveness is a reason for concern—not only in relation to research, but research is one of the most important components. If there is a gap of 5 percentage points, will we remain as sharply competitive as we are now? I echo something that Roger McClure said—the Scottish universities have done extremely well in attracting international research talent. We want that to continue. We have been net gainers in the recent period. That is a good position to be in, and we do not want it to be eroded. Maintaining the volume and quality of our research is a key priority, but so is opening up opportunities for a larger number of students, and so is more effective knowledge transfer of the outputs of research so that Scotland reaps the economic benefit of the work that is being done.

Although there is a debate about the figures, it is important to note that Muir Russell also said that there was a real-terms increase. Is it useful always to look towards funding mechanisms in England? We talked about the international element of universities in Scotland. Are there useful international comparisons to be made?

Indeed there are. I am always keen to say that the matter is not just about making comparisons with England. It so happens that England is particularly important because we have a permeable border with England and there is a lot of cross-border student movement between our two countries. Even more significant is the cross-border staff movement, especially of research-active staff, who move to the places that offer them the best opportunities to prosecute their research. They go where there are good research facilities and strong research teams of which they can become a member. Occasionally, research teams migrate from one university to another because they see the opportunity of much better facilities for their work.

Those are significant issues of competitiveness. They affect our relationship with England most immediately, but increasingly they are international in their effect. A remarkably high proportion of the academic staff in Scottish universities—this applies even more strongly to the most research-active staff—comes from outwith the UK. The figure is more than 20 per cent. That shows the international nature of research and the importance of maintaining that degree of competitiveness. It is a big issue.

That concludes our questions to you. Thank you for your attendance.

Meeting continued in private until 13:31.