Capital Projects

An update on college capital funding

DFE has announced £286 million in formula capital funding today (25 March 2023) which will be distributed to colleges very soon and which needs to be spent by 2026. The full details (including terms and conditions and individual allocations) are here

This is the third formula-based capital allocation to FE colleges in the last four months. The full list is

• £50 million in energy efficiency grants (I call this EEG) announced in December, paid in January 2023
• £150 million in FE capital reclassification allocations (FECRA) announced on 29 November 2022, paid in April 2024
• £286 million in formula grants from the much larger FE capital transformation programme.

The independent review of Post 18 education made the case for government investment to upgrade the college estate and the Conservative party promised a £1.5 billion programme for England in its 2019 general election manifesto. Money was allocated for a longer-term programme in the March 2020 programme. Since then, the FE Capital Transformation allocations (FECTA) have been used in several ways:

• £200 million in formula grants announced in July 2020 and handed out in a hurry
• 16 directly managed by DFE projects
• 74 projects worth £410 million following 2 stages of bids
• The latest formula allocation of £286 million

Inflation has eroded the value of the cash set aside in the 2020 budget and 2021 spending review.

146 colleges will be getting money from this latest announcement but some colleges get nothing. The excluded colleges are

• The 44 sixth form colleges. Capital funding for SFC condition has comes via the school route since 2011
• The 16 colleges with campuses being rebuilt by DfE (even though some of those colleges have multiple campuses)
• Colleges getting more than £15 million via the FECTA bids

DfE is using a simple formula to allocate funds using the only national dataset that it has on college condition (a 2019 survey), The precise formula is

• A weighting for learner numbers, as an estimate for size of college, calculated from revenue funding amounts previously received by colleges.
• Poor condition need, as measured by the FE Condition Data Collection survey.
  Funding received in previous stages of the programme, excluding the FE Capital Allocation (FECA) which was the first phase of the programme that all colleges received a share of in 2020.

The allocations range in size from £11,000 to £15 million

AoC has encouraged DFE in successive budget submissions to use a formula alongside bids. Given that they need to spend this money by March 2025, a formula seems right and it would help to have longer lead times and better data. The next condition survey is scheduled for 2024.

There is also a continuing need for more capital investment in further education:

• Completion of the project to ensure all 850 college campuses are in adequate condition (ie completing the task started in 2020)
• Sufficient places for a rising population of young people, including industry-standard technical education facilities and space customised for high need students
• Full funding of capital spending which (post-reclassification) needs to take account of the rules that college can’t borrow and (post-inflation) actual construction costs.
• Funding to help colleges cut energy costs and contribute to net zero requirements

The college estate

There are 175 FE college corporations and 45 sixth form college corporations operating from more than 4,500 buildings on 850 sites. The college estate is valued at £11 billion for education use and provides 9 million square meters of gross internal floor area (GIFA). High quality further education requires sufficient and suitable space for students as well as cutting edge industrial equipment. That is why colleges have taken care with their estate over 30 years of self-government and why DfE, as part of its renewed commitment to skills, is part-funding improvements and modernization for the 2020s.

The case for college capital investment

The Department for Education summarized the case for capital investment in its 2021 Skills for Jobs white paper as follows:

Colleges need the right facilities to deliver high-value education and training and meet the skills needs of their local area.

The Treasury accepted DfE’s case for a higher FE capital budget in the 2021 spending review and described the package as follows:

£2.8 billion capital investment across the SR21 period [2022 to 2025] so young people and adults can learn in high-quality facilities, establish Institutes of Technology across England, and raise the condition of further education colleges in England

There are 4 main programmes in this package (T-levels, Institutes of Technology, FE condition, 16-19 capacity), each with a different focus, different rules and focused on different projects but there is a broader case for capital investment to provide the buildings needed for good quality which can be summarized as follows:

• Fit for purpose space: Education and training requires sufficient and suitable space for students with heating, acoustics etc as considerations. Colleges educating younger and vulnerable students need to have suitable security to meet safeguarding requirements.
  
• Buildings that meet student expectations: Colleges compete for students with other colleges, with schools, universities and training providers. High status education institutions spend a lot on making their buildings attractive and fit for purpose which sets the tone. Where technical education is competing against academic education, attractive buildings assist. DfE-supported research by Frontier Economics (2012) and LSE’s CVER (2021) has confirmed a sound economic basis for capital investment.
  
• Lack of an alternative way to provide technical education: Technical education and apprenticeship training can, in some cases, take place in employer’s premises in specialist rooms or spaces in a larger facility. In many cases, employer premises are not available, safe or suitable creating a need for colleges to create, maintain and update buildings that can house specialist equipment of all types to that this can be used in education and training. In cases where employers lend or donate equipment, the college still has responsibility for its safety, insurance and use, thus creating a continuing capital investment need.

The current DfE FE capital programme

DfE does not make it easy to understand the FE capital budget and programme because it presents its budget and annual financial statements on a year-by-year basis while explaining each capital fund separately in different bidding documents. It would help colleges themselves, their partners and potential suppliers if the Department explained its approach in a single document or even in a table as it does with the school capital budget.

The Treasury has updated the budget allocated for FE capital on several occasions in the last two years which adds to confusion. HM Treasury announced

• a £1.5 billion five year budget in March 2020 to upgrade FE college building
• a £200 million one-year fund in July 2020 which, it turned out, was an advance on the bigger budget
• a new 16-18 capacity expansion fund for the 2021-2 financial year in the November 2020 spending round
• in the 2021 spending review in October 2021, an overall £2.8 billion budget for 3 years combining the planned spending in these two funds with spending in two existing capital programmes (T-levels and Institutes of Technology)

Bids

The Department for Education has moved forward with individual bids for the four main parts of the programme including:

• four stages of the FE capital transformation fund
• two sets of Institutes of Technology in summer 2019 and autumn 2021 after two stage bid processes which started in January 2018 and October 2020.
• four rounds of T-level capital funding with bids invited each spring and announced in the summer, with projects due to complete in time for the start of term the following year. DfE invited the first set of bidders in spring 2019 for projects ready for 2020-1
• one 16-19 capacity round with bids invited in May 2021 and announced in October 2021.

How colleges finance capital spending

Colleges use four main sources of funding to keep their buildings and facilities up to date:

• Retained surpluses.
• Capital grants from DfE and other public bodies
• Receipts from sale of land which is surplus to requirements.
• Borrowing from commercial banks or local authorities.

In the most recent year for which we have a full set of figures (2020-1). colleges financed £685 million in capital expenditure with £318 million in grants, £99 million in asset sales, £74 million in new loans and £194 million from retained surpluses

Capital grants to colleges have always involved an element of match funding, either with a fixed rate (for example 35% of approved costs) or after an assessment of what a college can reasonably afford. A capital project often rationalizes and reduces space use, freeing up surplus property

Colleges have used loans to finance capital spending for twenty five years because this is natural choice to pay high upfront costs from longer term savings made from new and upgraded buildings, which use space more efficiently, involve higher average group sizes, lower running costs and more enrolments. Loans have also been necessary to bridge the short gaps between spending and grants paid in arrears on the basis of invoices and the longer gap between construction costs and a land sale cash receipt at the end of a project. Cuts in both government revenue and capital funding to colleges in the 2010s, combined with the announcement of a college insolvency regime in 2016, contributed to a changing attitude from the banks who have collected much more in repayments between 2015 and 2020 than they have made in new lending. Combined with the deployment of £445 million in DfE restructuring funding between 2016 and 2019 , total college borrowing has fallen from more than £1.6 billion in 2015 to £1.0 billion in 2020.

On 29 November 2022, the Office for National Statistics reclassified colleges to the public sector. DfE announced new controls on new college borrowing which are likely to see commercial loans dwindle to zero over the next decade.

Institutes of technology

DfE has provided £240 million in recent years to establish 21 Institutes of Technology in two rounds, one running from 2017 to 2019 and the second from 2020 to now. Ministers have told unsuccessful bidders there are no current plans for a third round. IoTs are college/university/employer partnerships and vary in structure but generally involve a jointly owned subsidiary company which owns the licence and regulates the partnership but which employs very few staff and does not handle grant funding because, after a long time working on the design, officials worked out that a new institution would find it difficult to get onto the OfS register, to access FE grants and to employ staff on terms including teacher pensions.

DfE used a custom built two stage bid and approval process for IoTs which involved a long gap between the stage 1 and 2 bid submission, approval and grant agreement. Almost all of the bidders approved at stage 1 in both rounds have been successful which has reduced abortive bid costs but the complexities of the approach taken to select IoTs means that it has not been a good model for distributing capital funding.

T level capital

DfE has provided £150 million in T level grants to support providers in the first three waves of the programme (starting between autumn 2020 and autumn 2022) with bids for £152 million currently being assessed for a fourth wave. The building grants have been linked to specific curriculum areas, capped at amounts in the low millions, conditional on 50% match funding and paid to develop space exclusively for T-level courses. A separate specialist equipment allocation has been paid on a formula basis.

DfE has invited all 16-19 providers to deliver T-levels but FE colleges have accounted for the majority of enrolments so far (90% of 2021-2 students) and are offering the broadest range of subjects in the first three waves. Around 20% of colleges have been prevented from starting to offer T-levels until 2023-4 (wave 4) because of their Ofsted rating and, at that point, only in four of the routes. It is unclear whether DfE plans a fifth T-level capital bidding round for courses starting in 2024-5 but there would be sense in this and, if the other recommendations in this paper are accepted, sense in DfE officials working now on a different approach to distribute funds to fill gaps.

16-19 expansion fund

DfE allocated £83 million in autumn in capital grants to 39 colleges and 16-19 academies to help them increase the number of places on offer to students. The Treasury allocated this funding in the 2020 spending round and it is rather late in the day because it has been obvious for several years that the rising birth rate in the 2000s would lead to more 16-19 year old students in the 2020s. DfE had 140 bids, took more time than promised to allocate funds and is now working on a second bidding round to allocate funds for the period starting in 2023-4. Hopefully DfE will run a single bidding round covering 2023-4 and 2024-5 and, if time permits, will consider a plan-based option for distributing this funding. The largest share of the initial £83 million went to 20 sixth form colleges and 16-19 academies who, for historical reasons, are funded for their building condition and maintenance from the DfE school capital budget rather than the FE capital budget. The conversion of 30 sixth form colleges to become 16-19 academies has divided the sixth form college group of colleges into two different legal entities but the education they offer and the students they teach hasn’t changed. It doesn’t make a lot of sense that DfE to limit the opportunity for major building upgrades to FE colleges (but not sixth form colleges) or that DfE pays an annual formula grant for maintenance to sixth form colleges (but not FE colleges). The formation of DfE’s new skills group and the promise of a more coherent approach to the oversight of post-16 education means this might be the moment for a review and a better way forward.

FE capital transformation fund (FECTF)

DfE’s use of a two-stage bidding process to allocate £400 million from from the FE capital transformation fund was intended to get some of the benefits of competitive procurement and to ensure fair assessment but, in reality, has been a remote, desk-top exercise with results that have not always made a lot of sense to college bidders. DfE has redeployed staff from its larger school capital team to work on FE and recruited new people but there is not much partnership or work put into developing and sharing expertise. AoC has worked with the FE capital delivery group to set up a Post 16 capital matters forum but this only met twice (January 2022, May 2022), does not discuss bids and only involves college staff not professionals. Given that there are only 175 FE colleges and only around 80 sixth form colleges/16-19 academies and given the continuing DfE need to work with the sector on shared goals, there ought to be scope for a more collaborative, open approach, involving a visible team and named contacts for colleges.

Capital spending in the long-term

There has been a step-change in DfE capital funding for colleges in 2022 but the programme to modernise the estate won’t finish in 2025. Colleges operate from 4,500 buildings on more than 800 sites. The funding allocated to 78 capital transformation projects will tackle less than half of the inadequate buildings while the money routed via the T level and 16-19 growth fund is mainly being used for new space. HM Treasury needs to fund a longer-term capital programme with funding for new places, IT and to develop specialist and hyper-specialist provision. Funding should be at a level that helps colleges move towards the net zero target, achievable in the sector by 2040 rather than 2050. Funds should also be put aside to relocate a few colleges currently in flood risk areas. Money should be allocated via a single college capital fund.

At the same time, the Treasury and DfE should review the capital financing requirements of education in the 2020s including the option of government loans to both academies and colleges as an alternative to 100% capital grants for the former and reliance on a vanishing commercial loan market for the latter.

Planning

The education committee has argued for a ten year plan for the education sector but it is long term planning that is really needed. DfE should take a more strategic role in overseeing the education system and should, for example, be looking at how it adjusts the provision of places to changing demographics. In the 2020s primary school numbers will be falling while numbers of in the 16-21 age group will be rising. The trends in the 2030s will be different again.

DfE should also take a more co-ordinated approach to improving technical education and skills provision across the whole country. The current approach involves over-lapping and complementary programmes with similar requirements, for example specialist training off-the-job for apprenticeships, teaching for T-levels or skills bootcamps, new courses supported by the National Skills Fund. Colleges often operate all of these programmes from the same sites but under different rules for each one. A more coherent approach from government towards trusted colleges would allow them to work more effectively with employers and on local skills planning.

This would be a different approach to the one taken by DfE over the last fifteen years which has been wedded to policies that has tried to encourage innovation by establishing many new institutions. 1,500 apprenticeship training providers, 400 new school sixth forms and 50 new university technical colleges have secured funding but at a time of limited budgets this has stretched resources and led to many notable failures:

• More institutions offering provision has resulted in an overall narrower choice of subjects for students. The curriculum in all sectors and types (academic, technical and vocational) has narrowed to focus on cheaper and more popular courses. Capacity for specialist and hyper-specialist FE has been reduced or does not exist.
• Duplication of institutions has resulted in more money spent on management, administration and support services.
• Short-term activity based funding has made it difficult for colleges to cover the fixed costs associated with employing highly skilled staff on permanent contracts with job security and running courses in good quality facilities with the right equipment.
• The lowering of entry barriers to new providers has resulted in lower operating margins and fewer funds for reinvestment.
• Students and employers face a confused and fragmented system which is difficult to navigate.
• The various funders struggle to keep control of funds and use tightly written funding rules, qualification approval, detailed audit and a complex set of rates to control public funds.

Colleges did not shy away from challenging decisions during DfE area reviews but it would be folly for measures to be confined to further education. Class sizes in school sixth forms average less than 12 students and that the small cohorts often narrow the offer to popular A-levels and lower cost BTECs. Fewer students take science, languages, engineering and digital courses than would be the case if there were fewer, larger sixth forms. Secondary schools use their pre-16 funding and superior financial arrangements to cross-subsidise these smaller classes which represents a subsidy towards students from better-off families. There are many excellent school sixth forms but it is extraordinary that School Commissioners, ESFA and councils tolerate so many small ones. In London alone (a city with excellent public transport), the Post-16 area reviews reported 221 sixth forms with fewer than 200 students . Half of 11-18 schools in the capital have non-viable sixth forms and hundreds more across the rest of England are using funds on small class sizes while limiting the educational offer .