Select Committee on Education and Skills Minutes of Evidence


Exmination of Witnesses (Questions 300-315)

MR GEOFF HALL AND MR MICHAEL STARK

WEDNESDAY 6 FEBRUARY 2002


  300. If you had been setting up that scheme, or if you had been asked for advice—and we have heard a suggestion that LSCs were being involved in this—if you were involved in setting up a replacement scheme, would you advise a government sector scheme that had no quality assurance whatsoever on the providers?
  (Mr Stark) We operate in a quality-assured environment; it is natural, it is part of what we do. If it is public money, we would want to see quality assurance. That does not have to be at any particular threshold. The threshold is determined by the value of the public contribution.

  301. So you would never recommend a scheme like ILAs mark 1, which had no quality assurance?
  (Mr Stark) Certainly for the future we think there should be quality assurance.

  302. Was it a victim of its own success, and the plug was pulled effectively because it was over-run in its budget, or was it a victim of fraud?
  (Mr Stark) I think we have seen what the evidence has been on this, and I have no reason to disagree with what ministers and officials have told you.

  303. We have heard in different sessions of this Committee very contradictory versions of that. Today we have heard people say it was just a licence to print money; it over-ran its costs and the plug was pulled, as happened on other occasions; yet we have heard ministers say there was fraud. So far, there is very little evidence of fraud that has been put.
  (Mr Hall) I wonder if I could comment on that, to try to be helpful? As some members know, I have had some experience with these issues arising from the difficulties of franchising at a number of colleges. I have had the equal pleasure of being associated with the PAC hearings. I would say, from my experience—

Chairman

  304. I hope you said that seriously! There was a hint of tongue-in-cheek there.
  (Mr Hall) I would not use the word "fraud". There have only been one or two prosecutions for fraud arising from what generally we refer to in the vernacular as "scams", and that was when, quite deliberately, no students existed and enrolment registers were forged in order to draw down money. In most of the so-called scams, something happens, and the question is whether it was eligible for public funding when we had Schedule 2—but that has now gone—so it is whether it is of any value whatsoever. That is one aspect of it. The Minister has explained to you that in this particular case, on top of possibly some, but I suggest very limited, fraud, there were a lot of scams apparently but also what I would call hacking in to the computer system. The Minister explained to you that approaching 80 per cent of claims in one week were from less than 10 per cent of the providers, and that suggested a very serious risk to the control of public funds, which I am sure the Minister and the Permanent Secretary as accounting officer could not countenance.

Mr Chaytor

  305. Did either of you at any point in the last 15 months advise the Government about the potential loopholes in the scheme?
  (Mr Stark) We were in constant touch with the Department. We were fully informed. We knew exactly where they were at each stage of the discussions. We have had close liaison.

  306. Is that advice in writing?
  (Mr Hall) If I could break the question down, there were a number of cases that came to our attention in the summer of 2001 which of course we drew to their attention. There was a liaison body, so there were opportunities. There was liaison between audit teams and special investigation unit teams of both the FEFC and then the LSC, so if cases came to light you would obviously do that.

  307. But by June 2001 the abuse of the scheme was already well established. My concern is, at what point did either of you identify the potential for abuse and advise the Government that this could happen, in advance of it actually happening?
  (Mr Hall) I would have to answer a Committee of Parliament and say that we advised of the risk of abuse in May 2000.

  308. On the future of the scheme, you both mentioned the potential for re-invigorating the concept of the account as a savings account, as a financial instrument. My understanding is that at an early stage the research ruled out that possibility because there was no demand for it, and the concept of saving for learning did not seem to be attractive. Against all the evidence to date, why do you not think there is mileage in re-establishing that? The banks, with a few exceptions, have not shown any interest. Do you think there is really any potential for the banks to come on board?
  (Mr Stark) I think we can break this down. If you take a non-learner, the hardest-to-reach learner, and say, "would you like to take out a bank account and save up for 15 years and build up money and then you can spend it on learning?" the answer would obviously be "no". At the other end of the spectrum, it is a very natural for people who are engaged with financial transactions to hold their money in different pots and to build it up, and sometimes the account is in credit and sometimes it is in debit. So there are two different markets there, and there is not a single mechanism that is going to hit exactly what you want. Essentially, for the non-learner you want a fee discount scheme and you want it to be instantaneous, and for other people you want a mechanism that will build over time. We did not ask the banks exactly the right question, I think. We tended to say, "would you like to engage with us in a set of transactions of low value each of which is a single one-off process with nothing that follows from it?" Naturally, the answer to that is, "no thank you". If we ask a different question: "Would you like to engage in a process which builds communities and brings employees closer to their employers, which enables learning to be funded in flexible ways?"—we already know the answer because banks already are doing that. That is what the HSBC has been doing in Birmingham and what another bank did with the Gloucestershire accounts. There are opportunities here.
  (Mr Hall) The Hereford & Worcestershire TEC worked with credit unions to address that group of people that Michael said may be reluctant.

  309. Returning to the advice you provided in May 2000, that was in your position as employee of the FEFC.
  (Mr Hall) Correct.

  310. Could the Committee have a copy of that advice?
  (Mr Hall) The advice was at a meeting when the way the scheme was going to operate was explained to us. As I have outlined before, because of our very difficult experiences in franchising that we had gone through, we did draw the attention of our colleagues to the fact that there may be the potential for some of the providers to be brought in to be the same providers that we had difficulties with. That was the nature of the advice.

  311. My question is, have either of you provided any written advice at any stage in the last 18 months? If not, why not; and, if not, has anybody else in the LSC, nationally or locally, provided any advice?
  (Mr Hall) There were regular liaison meetings and issues about whether or not audit arrangements were raised. They are in the minutes of the meetings. When cases came to attention, they were drawn to the attention of the relevant official in the Department; but in the sense of, at the highest level has anybody written saying, "I hereby give due notice . . ."—no. That is not how life is, is it?

Chairman

  312. It is interesting, Mr Hall, that early on you said you did not have anything to do with ILAs, but as you have given evidence you have actually suggested that you had quite a lot to say about ILAs in terms of liaison meetings.
  (Mr Hall) We have to be specific about the roles we had. We ran two schemes in the FEFC. We were running them through, and around May 2000 a national scheme came in; it was designed and the arrangements were through Capita. It started in 2000. Once it started, we did not have direct influence and I personally then did not have any involvement in preparation for this—and then another evidence session, and then one looks back at the files. More junior colleagues were part of the liaison arrangements and I see that they drew the Department's attention to some cases of concern in 2001.

  313. Looking at those files, and bringing back some memory from an earlier witness, the Principal of Preston College said, "I am familiar with this kind of pattern because it has happened twice before." In fact, he was pointing to the very clear response of the Further Education Funding Council; and he said there were two other examples of schemes going wrong, very similar to the way in which the ILA went wrong. Did you not feel a little pain when he said that, because you were there with the other two schemes?
  (Mr Hall) I am not sure what the other two were. He referred to the withdrawal of the demand-led element. It was the previous government that withdrew the demand-led element in January 1997 because the FEFC had to try and manage the loss of £100 million in the following financial year. The Government did honour its obligations in that year.

  314. Do you recognise the point that he made? There is nothing new in the FE sector in having schemes like this that seem to go wrong, and the people who carry the can at the end are the colleges.
  (Mr Hall) I thought I heard the Principal of Preston saying that one of the difficulties is that perhaps the success—

  315. I am very happy to call him back, so he can refresh our memories.
  (Mr Hall) I thought he said it is the success that had to be taken into account.




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