The financial impact of the return of colleges to the public sector

Posted by Nick Pidgeon

The Office of National Statistics has concluded its six-month classification review, and confirmed that “further education institutions will be reclassified from the non-profit institutions serving households sector to the central government sector”.

What will this mean for the sector? This blog offers initial thoughts and opinions, drawing on Tribal’s 30 years of experience delivering detailed financial benchmarking to colleges across the UK, and in NZ and Australia. We’ll look at how things might change for college leaders, staff, and students.

Control versus autonomy
In the private sector, colleges have been able to operate with a good degree of autonomy. This has been a mixed blessing; on the one hand allowing the development of innovative delivery models to meet local skills needs, for example; on the other hand leading to questionable practices around partnership provision, and a few (thankfully rare) cases of serious whole college mismanagement.

We don’t yet know how interventionist the DfE and the Treasury will be. It’s hard to imagine a scenario where public sector control doesn’t mean more intervention. At best it feels like an additional layer of bureaucracy is coming; at worst, a level of central Government control which will rob colleges of the agility to meet local needs and react quickly to changes in skills demand. Having worked with college leaders for nearly two decades, my opinion is that good college leaders know their “patch” better than anyone and should be left to get on with it. Some colleges may benefit from some careful steering – but a careful balance must be found between central Government control and college autonomy.

Pay and conditions
One potential impact of the move to the public sector is a greater appetite for centrally controlled pay and conditions for college staff. Colleges in Scotland and Northern Ireland are in the public sector, and we see some sector-wide bargaining on pay and conditions. The upside of this greater collective bargaining power is that it will lead to improved pay and conditions, which will be welcome during the cost of living crisis. The downside is that, over a long enough time period, an ageing workforce and sector wide pay agreements might be very expensive for the public purse.

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Funding and financial arrangements
There will be changes to financial arrangements. For example, with colleges unable to borrow on commercial terms, £150 billion of extra funding is being provided to colleges in spring 2023 to help fill the gap.

VAT remains a contentious topic. Colleges and the UCU are keen to see public sector ability to recover VAT extend to colleges. But the DfE has been quoted as saying “The ability of colleges to recover VAT is not related to their ONS classification. Many public bodies cannot recover the VAT they incur.”

The government will now be responsible for college sector debts – with the likely result of greater DfE/Treasury scrutiny and control of college finances.

But early signs are that colleges will retain the financial reserves they have accumulated – no doubt a relief, although the question remains: will the spending/investment of those reserves be subject to greater control and scrutiny? (Answer: “probably yes”).

A broader subject is the balance between public sector college funding and college income from commercial sources. Will public sector control result in a greater proportion of college income being from the public purse than from commercial ventures? In my opinion, yes, on the assumption that commercial ventures will be subject to greater scrutiny and DfE/Treasury control.

What about the students?
As always, we should be asking: how does all this affect students? Improved pay and conditions might lead to happier, more motivated staff, and an improvement in quality. Increased government support with borrowing might lead to improved college facilities. A reduction in college autonomy might result in less innovation. Increased financial scrutiny and bureaucracy might distract college leaders and governors from the main business of delivering the best possible student outcomes.

Sound financial management remains a priority
Sound financial management and a financially efficient college operation will remain a priority. Our Financial Benchmarking work in Northern Ireland, Scotland and New Zealand clearly shows that demonstrating effective stewardship of public funds remains critical when colleges are in the public sector, arguably more than with a private sector model. By bringing colleges back into the public sector, the Government becomes more directly accountable for the money invested in colleges – and will be keen to demonstrate return on that investment. Colleges will be expected to demonstrate a rigorous understanding of costs, including where any inefficiencies lie and plans for improvement.

One thing we can be sure of: passionate college leaders and staff will find a way to navigate through the changes that are coming. If the last 30 years has taught us anything, it is that colleges always adapt, and students always come first.

To understand how a Financial Benchmarking project could help your college tackle the financial challenges, get in touch with the Tribal FE Benchmarking team. 


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