Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  60. I am sorry, you are still not getting the point, are you? The fact is that you left them in the lurch.
  (Professor Melville) No, I have been absolutely clear. The demand-led element was open-ended funding on which there was commitment from the previous Government. Whatever colleges did, they would be funded at a rate of £6.50 a unit in that funding. At the end of 1996 and beginning of 1997 the Government withdrew the demand-led element of funding, the Funding Council simply did not have the funds for that provision and therefore quite a number of colleges had what funding they expected to be able to draw down on a demand-led basis no longer available. That was the £80-100 million that I referred to earlier. That was simply a Government decision at the end of the previous Government. They withdrew that funding, and therefore, of course, we did not have it to give to the colleges.

  61. I think my point is proven then that you left them in the lurch. If I have time I will come back to that, but I want to move on to other topics. The funding methodology is very complex, is it not? I read an article in The Times Educational Supplement[8] which said "Byzantine monster, that stifles participation, promotes conservatism and is hugely expensive." You actually agreed with that, did you not, because I have an article here in which you were quoted as saying that it had too many rules and was too inflexible. If that was the case, why did you not do something about it a lot earlier?

  (Professor Melville) I came into the Funding Council in 1996 and it instigated a fundamental review of the funding methodology. It was followed on with a subsequent review. We have simplified the methodology to some extent with the removal of the three rates of funding, for example, and a number of other complications. Currently colleges receive their allocations in a much more direct way rather than bidding and being unsure as to what they get. One has to say that it was a very detailed funding system. My own view is that it lived its course—I have been very clear about that—and therefore we are ready for change. The shift to the Learning and Skills Council is providing that change, and a new funding system which is largely along the lines that we have recommended—that is, a broader-banded funding system—is being adopted by the Learning and Skills Council.

  62. I take the point that you are making, but at the end of the day that is the very first point that I made. My view is that some of them were left in the lurch. This is clearly proving the methodology also put colleges in a very difficult position, and because of the way funding was organised it put colleges in quite a considerable lot of difficulty. Can I just follow on, because I want to follow on from what Mr Leigh was saying about agricultural colleges. I am quite sure you will have come briefed this afternoon on this, because you must have known I was going to raise it—that is, the mergers. You talk about mergers being important. The merger that took place in my area between an agricultural college and a further education college was originally turned down by the region on the basis that it was to solve a financial problem, is that right?
  (Professor Melville) Yes.

  63. So how on the one hand can you argue and say that you are keen to see mergers taking place because of the financial situation of particular colleges and yet turn down the one in my area on financial grounds and only on appeal to the FEFC did they then allow the merger to take place on the basis of an educational plan? It seems to me that there seems to be a little bit of to double talk here.
  (Professor Melville) No, I think, with respect, I believe I have been perfectly consistent on this point. The point I made to Mr Leigh was that decisions of the Funding Council are never made purely on financial grounds, our main issue is education and the capacity for efficiency and the quality of education. The Regional Committee, when it considered the merger of East Durham and Houghall considered that the educational case had not been sufficiently well made. With respect, there was one slight misunderstanding in what you said. It was not an appeal to the FEFC. The Regional Committee is merely advisory. The decision is made by the FEFC Reorganisations Committee, and on this occasion, as has happened on a number of other occasions, the Reorganisations Committee saw the proponents, they made a very good presentation, I was present there, and they accepted the case that they had done everything properly.

  64. What would have happened if they had not accepted the case?
  (Professor Melville) It would not have been recommended.

  65. What would have happened to Houghall?
  (Professor Melville) Obviously the Funding Council would have continued its discussions with Houghall.

  66. Would it have closed?
  (Professor Melville) Not necessarily, no.

  67. It was running at a huge loss.
  (Professor Melville) You will recall that there were other colleges who at the time were interested in merger with Houghall, also I believe in your constituency.

  68. But it was in real financial difficulties and you were not going to fund it indefinitely, were you?
  (Professor Melville) The steps that we would take in the case of a college like that are that first of all we look to see if it is needed, if the provision is needed, secondly what steps can be taken to secure it. Sometimes those are associated with an existing college. In the case of Houghall we felt that merger was the most appropriate. In all cases we ask colleges to consider a whole range of options and possible merger partners and of course Houghall did consider two colleges in your constituency and chose East Durham. There were still other options, and of course we would have pursued that.

  69. Let us move on, then. Although I am being very parochial, this can occur with any agricultural college in the country. I want to give an example of a similar merger, and the example I am going to give is in Northumberland. When Houghall merged with East Durham the FEFC gave no financial help whatsoever. A similar merger took place in Northumberland between a further education college and an agricultural college, and financial aid was given. What was the difference between the two mergers?
  (Professor Melville) You and I have corresponded upon this.

  70. You have, and I did not accept what you said the first time.
  (Professor Melville) Let me try again. It was simply a matter of time. At the time the Houghall/East Durham merger was considered there were no funds that the Council had available for this process.

  71. Yet within a year you had funds available?
  (Professor Melville) That is right, it was the following year.

  72. They came back for money a year later and you still said no?
  (Professor Melville) If we had gone back on all the mergers, as I just indicated you, and said how much would they have wanted at the time, of course we have would have exhausted the funds, but they only became available in the year in which the Kirkley Hall merger came along. East Durham were not treated any differently from any other college, I do not think, at that time.

  73. East Durham was a reasonably successful college and was not in financial problems, as I understand it. Therefore, would it be true to say that FEFC then took advantage of that and because they were in a financial position they did not offer them funds, whereas in Northumberland they were not so financially viable and, therefore, funds were made available? What I am saying is, where a college appears to be financially viable no help is given and where a college is not performing as well help is given.
  (Professor Melville) That is not correct. It is associated with the existence of the funding for restructuring. However, given I should answer you fully, if the funds had been available then you are quite right, considerations such as those are taken into account. Generally, and I believe quite rightly, we take the view that we only apply scarce funds where we need to apply them.

  74. Is there going to be any incentive for a good performance, a profitable college to take on a failing college, when they know they are going to get no help whatsoever?
  (Professor Melville) They do now receive help.

  75. Are you saying they can apply retrospectively?
  (Professor Melville) No. There is an incentive and we see it working. In particular we have helped a number of colleges. Unfortunately since the merger you referred to we have helped a number of colleges in helping them with due diligence. We have supplied funds for a due diligence study, and we have also helped them with some additional funding where we see some inherited liabilities, that we felt would be unfair for a college to take on. This deals with a number of the issues in this report.

Mr Rendel

  76. Can I ask, firstly, a question about external auditors. It is clear that the state of college finances has in many cases gone from bad to worse to a very considerable extent before it really comes to light. That says to me that the quality of the external audit has been pretty poor. Can you give any general reason why external auditing of colleges has been so poor?
  (Professor Melville) I think some of the major issues that are highlighted here, and have been highlighted before by us in our discussions with the NAO, are to do with the detailed audit that is associated with the funding system. That is that external auditors are required not only to audit the accounts but also to sign off the actual funding unit claim, that is to sign off the number of students that have been educated. Auditors found this difficult to take on. It was a task that does not fall within the scope of a normal audit. This was the reason why this decision was made to take this particular part of the audit out of the external audit conducted by college auditors and put it into the responsibility of the Funding Council.

  77. I can understand that if all of the auditors were small town accountants, if you like. I understand from you that at least the one auditing Bilston were Deloitte & Touche, who are not exactly a small firm, you would think they would have a sufficient quality of people there to audit things like student numbers. How many of the others were small town firms and how many of the colleges had been audited in general by quite large, well known firms?
  (Professor Melville) One has to say, first of all, that we do see variations between offices. They do tend to operate locally. I am sorry to say that quite a significant number of the large companies are those that we have concerns about on audit. In fact we discourage colleges from using small town firms, we encourage them to use experienced auditors.

  78. You are currently suing Deloitte & Touche.
  (Professor Melville) We are considering suing.

  79. Considering suing. Are you, in fact, suing anybody else?
  (Professor Melville) No[9].

8   Note by Witness: Times Education Supplement, July 2000. Back

9   Note by Witness: Deloitte and Touche are the only firm that the Council is considering suing in relation to the external audit of final funding unit claim. However, it is also considering legal action against Garratt and Co in relation to internal audit work at the former Bilston Community College and Evidence, Appendix 1, p 19-20. Back

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