 Hefyd yn fawr, wrth gwrs, gyflygau ar y iawn i gfastafolol, gynchon a gyfan yn fawr. Fy enw i'r fawr, mae'r ddiffus fyddai'r fawr yn chydag i watershawdd o ddim yn ei ddrygiadau. Felly, mae'r ddim yn ei ddiffus I yn ei gafodd. Felly, mae'r ddiffus I yn ei ddiffus I yn ei ddiffus I yn ei ddiffus I yn ei ddiffus I yn ei ddiffus I yn ei ddiffus I yn ei ddiffus I a ddiddartadol yw'r Gwylion Shelfnau o'r Unifuustiad o'r Audit neu Llywyddyn SAID yn yr unedig? Llywyddyn SAID yn yr unedig, Llywyddyn SAID yn yr unedig, Andy Wight, Andy Wight, Llywyddyn SAID yn yr unedig, Lithu Cymru, Tricia Meldrum, syng Nygreaddor, a Cersti Hwydd Audit, o Gyeisbu Aoudit o Gwylion Shelfnau. Felly, rwy'n defnyddio'n gweithio i ddiddartadol y Llywyddyn SAID yn yr unedig Lansgap hwych i Llywodraeth yn Ysgolenedd, a ddych chi'n gwybod i'r opatynu i ddwylltodd y gwybodaeth sy'n gyntaf sy'n gyfnod y Llywodraeth hwych i'r cyffredinol, ac mae'n ddyn nhw'n digwydd i'r ddweud o'r sector i'r cyffredinol. Rwy'n cyfrifuddol y Llywodraeth hwych i'r cyfudd y Llywodraeth yn iawn iawn a'r rhanau gweithio. Llywodraeth hwych i unig oherwydd y ddyfiadau o'r ddigon o'i cyffredinol a'r UK, the UK's innovation agency. Other aspects of UK government policy do affect the higher education sector in Scotland, such as UK immigration policy and English higher education policy. Scottish universities generate funding from a wide range of sources, both public and private. So while universities are independent, they operate within an environment of multiple stakeholders, regulators and accountabilities. I don't appoint their auditors unlike the other bodies on which I report you here in Parliament, but since 2010, I've had formal powers to undertake performance audits of bodies funded by the Scottish Funding Council, and that's the basis of this report. In 2014-15, the Scottish Government provided £1.1 billion in funding for universities through the Scottish Funding Council and £623 million in fees, grants and loans for individual students. Scotland's economic strategy is clear about the contribution that higher education makes in supporting Scotland's economy, but we think the Scottish Funding Council needs to do more to make sure the funding it allocates to universities makes the maximum contribution to those national policy aims. Overall, the sector was in good financial health in 2014-15. Its total income was £3.5 billion, up 38% in real terms over the last decade. The sector made a surplus of £146 million in 2014-15, and it had reserves of £2.5 billion, or large sums, as you'll recognise. Universities increasingly use their surpluses and reserves to fund investments in their estate and to subsidise some of their activities, particularly research. Despite the overall positive picture, though, there is wide variation across the sector and a number of underlying risks. Income is increasingly concentrated in the ancient universities. Some universities rely heavily on funding council funding, and that creates risks at a time of continued pressure on public finances. The surpluses and reserves that I mentioned are heavily concentrated in a few universities, particularly Edinburgh and Glasgow. Of course, the EU referendum result has increased uncertainty for the sector, with the possible impact on the public finances generally adding to risk to EU funding for Scottish universities and the effect on EU students and staff. The challenges facing the sector include potential further reductions in Scottish Government funding, risk to their ability to continue increasing their income from fee-paying students from the rest of the UK and from outwith the EU, the need to invest in their estate and challenging new targets on widening access. Turning from universities to students, I want to highlight just two points. First, it has become more difficult in recent years for Scottish undergraduate students to gain a place at a Scottish university. This is mainly because applications from Scottish students have risen faster than the number of funded places available for them. Since 2010, applications have increased by 23 per cent, while offers increased by 9 per cent. We have recommended that the Scottish Government and the funding council should carry out research to assess what impact the limits on funded places have on access for Scottish students. Secondly, recent changes to student financial support increase the amount of loan funding available to all Scottish students, while the amount of funding for bursaries and grants fell. As a result, levels of student debt are increasing. Scottish students from more deprived areas continue to have higher levels of debt than students from less deprived areas, and the gap is widening. As I have highlighted, universities, the funding council and the Government are facing a number of significant challenges to this very successful sector, and we have recommended that they need to work together to address them. It is essential that the Government ensures that its approach to funding higher education is sustainable in the medium to longer term if its policy priorities are to be delivered. I convene to my colleagues and I are, as always, happy to answer questions. Thank you very much, Auditor General. I invite questions from members. Monica Lennon. Thank you, convener. Good morning, Auditor General. On page 46, you identify that Scottish students from deprived areas have higher levels of student loan debt than students from less deprived areas, and you have said so in your opening statement. Is the cost associated with going to university in the prospect of presenting a barrier to school leavers from deprived areas? The straightforward answer is that, at the moment, we simply don't know. It's why we've recommended that the Government and the funding council should be carrying out more research on the impact of the current approach to funding higher education to understand the effect of current policy decisions and of the future. I'll ask Trisha to talk you through that in a bit more detail if I may. We know that there is a review of approaches to funding. Our funding student support is going on over the summer, or it's going on over the next 12 months or so, so it's due to report early next year. We'll see what the implications of that are. There's also obviously been the commission on widening access report and a number of recommendations around access for opening up access to students from a wider range of backgrounds, more deprived backgrounds. Again, the first action there is going to be to appoint a commissioner for fair access and then to take forward that programme working with the Scottish Government, SFC, universities. Again, those will all be issues to look at through that programme of work. On the point about the commissioner for fair access, I see in his response to the committee, Paul Johnston, the director general of learning and justice suggests that progress on implementing the recommendations of the commissioner on widening access is contingent on the appointment of a commissioner for fair access. Do you agree with that assessment that it's contingent on this appointment? I think that the appointment is obviously a very important symbol of the Government's commitment to widening access and to taking forward the recommendations from the commission. It is only one of the recommendations that the commission put forward. There has been a delay so far in making the appointment. I think that there was an announcement this week made about how it will be taken forward, but it certainly isn't the only thing that's needed in order to answer the questions that we set out here about both the number of places available for Scottish students and the effect of the student support system in Scotland on students from different backgrounds. Okay. Just to go back to student debt on page 44 of the report, you identify that Scottish student debt has increased in recent years with financial support shifting from non-repayable bursaries and grants to loans. Overall, we're seeing student debt levels rising 14 per cent between 2013 and 2015 and are projected to average around £20,000 by 2019. What impact would you see that is having on student retention rates? Again, it's not well enough understood in terms of research. We can all speculate about what the effect is. I think one of the things that's concerning though is what we set out in exhibit 18 on page 47, which is that it's students from the most deprived backgrounds who are ending up with the highest levels of debt. That exhibit shows levels of debt according to the most deprived fifths all the way through to the least deprived fifths, and students from the most deprived backgrounds are ending up with more debt at the end of their studies. The more the increase, the more reliance there is on debt to fund studying, the more that picture is likely to become a problem. That's why we've recommended the research to explore it further. In relation to information on retention rates, some of the information that we've got there is from 2013-14, but that's showing overall that 8 per cent of students are not staying beyond their first year, so 92 per cent are staying beyond their first year. Again, there's a wide variation within universities there, and the highest number of students are not staying beyond their first year in university of highlands and islands, so there's quite a wide variation there. Okay, it is quite an important theme in the report, because on page 49 the report notes that it'll be difficult to achieve the national targets for widening access to higher education for students from deprived backgrounds, and you're recommending that the Scottish Government, the funding council and universities need to all work together, and you said that in your statement. Would more funding help to meet these widening access targets? I think there's no doubt that more funding would help because it would help to keep the number of funded places increasing at a similar rate to the increase in applications, which seems to be the underlying cause of the growing gap we're seeing, and we know that the pressure on public finances is real and continuing. That's likely to happen whatever we hear in the autumn statement in November and whatever the Scottish Government's draft budget looks like after that. As always, there are choices to be made here. We are very conscious that the choices made about higher education sit within the Government's wider programme for government, and there are always trade-offs there, that's what government's about. It's why we think it's so important to properly understand the impact of the policy choices that have been made, and to tease out any tensions or inconsistencies that there might be in there. I'll just pick up on funding, convener. On page 20, I think paragraph 35, you said that the Scottish Funding Council allocated £1.1 billion to universities in 2014-15. That's a reduction of 6 per cent in real terms since 2010-2011, so this reflects the reduction of funding received by the funding council from the Scottish Government. Do you feel that this level of funding is sustainable? That's a question, I think, really for government rather than for us. We do recognise that there is pressure on the Scottish Government's budget overall. From next year there will be significant choices to make about the use of the new financial powers, but they're not going to be a magic one that will massively increase the amount available for public services across the piece. I think what we're concerned about in this particular area and higher education is that there are some ambitious policy commitments around widening access and around the funding of student support, which will butt up against some of the cost pressures facing universities already around their difficulty in raising income from other sources, particularly tuition fees from students in the rest of the UK and outside Europe. It's really important that the Government and the funding council together with universities understand how those pressures will face together. It may be something that the committee decides to explore further with the funding council and the Government to see how their thinking about the way those different challenges will be balanced in future has been developed into the medium to long term. On 7 September, at the Education and Skills Committee, Professor Andrea Nolan from University of Scotland said that your report, and I'll quote Professor Nolan, indicated quite clearly that the sector sustainability is not being addressed. We need the funding for a sustainable sector that will recover the cost of our teaching and our research while recognising that we are in difficult times. Do you agree with Professor Nolan's assessment? That's really the message of our report that the sector is, as I said, internationally renowned, generally very successful and it's facing some real pressures in relation to the funding available to it, the costs of continuing to deliver what it does and the Government's policy priorities. Now we have identified some ways in which those tensions can be managed to do with universities continuing to seek efficiencies, to invest in new ways of delivering both research and teaching and to work together in doing some of that, but more generally it is a question for the Government and the funding council to work with universities to really understand how public funding, government funding, can have the biggest contribution to the things that the Government wants to achieve and support the sector that is currently one of Scotland's strengths. Just to pick up on a point that Monica Lennon was making there about the debt levels of students from deprived areas versus those from less deprived areas, would you not expect that students from deprived areas would have a higher level of debt simply because, firstly, they qualify more than the students from the less deprived areas to be able to access funding and secondly, they obviously have the need for it? I think intuitively that does make sense and it's certainly a pattern that we see more widely than just in Scotland. I think the issue is the question that Ms Lennon asked which is do we understand the impact on that as students applying to Scottish universities and taking up places and there isn't good enough information about that part of the mix. In England I think there's good evidence that actually higher levels of loan funding for higher education actually isn't deterring students from applying. We simply don't know what the picture is in Scotland at the moment and that would help to make good policy decisions. Is that something you're going to follow up in due course? We've recommended that the Government and the funding council should be doing that and we'll certainly be following up our recommendation with them once the committee's finished its deliberations on the report. Have your recommendations been accepted by the various parties? The committee has written to the director general and the chief executive of funding council and I think you have the submissions before you today. I think the Government's response to that point is slightly ambiguous and maybe something you want to follow up with the Government after this session. You've talked about research and development and obviously there's concerns in various parts of the sector about that. Is this something you're going to be keeping an eye on and following up because obviously it'll only be in time to come that we'll understand what the impact is of Brexit? I think our concern is that the Scottish funding council strategy for research and for funding research in universities is somewhat out of date now. It hasn't been revised for a while and it needs to be so in order for the funding council to be clear that its funding is having the effect that it needs to and we know there are some challenges with the research funding that's available from other sources not covering the full costs of research. I'll ask Kirsty to talk you through that issue if I may. In terms of research and the funding approach of the funding council, we know that they're starting to review their approach to research at the moment. One of the issues we identify in the report is that the performance of Scottish universities in terms of research is improving. It's improved between 2008 and 2014, the annual exercises that assess how well universities do research, if you will. However, at the same time, the research funding hasn't got any bigger. What that means is that the research budget has been spread more thinly and some of the very high-performing research universities saw a reduction in their research funding after the 2014 exercise. As we say in the report, it raises issues around sustainability. As the Auditor General mentioned, research is traditionally an activity in universities that doesn't cover its costs. Universities recovered just around 80 per cent of full economic costs last year. That differs depending on the source. Some universities who win a lot of charity funding are only recovering around 65 per cent of the full economic cost of those activities up to just over 80 per cent for the UK Research Council funding. As the Auditor General said, it places an additional pressure on universities and raises issues around sustainability. Another point that seems to come up all the way through the report is reference to SFC and issues about the way that it handles funding and various other things. Is there a problem here with how the SFC is handling this? We have said in this report and in the one that appears a bit later on your agenda in relation to further education that the role of the funding council has changed very significantly over the last few years with major reforms in both sectors to the way funding is allocated and to the responsibilities that the funding council carries out. However, its role hasn't been reviewed for at least 10 years. We have made a recommendation in the light of that and in some of the problems, particularly in further education that the committee has looked at, that the Government should look again at the role of the funding council and make sure that it is clear and that it is properly equipped to carry it out. That is being taken forward as part of the current review of the skills and enterprise agencies by the Government at the moment. One thing that comes out in the report—it doesn't come out in great detail—is the commercial operations of the universities, which are fairly extensive and fairly lucrative. There is nothing in great depth. Have you looked at it? There is an exhibit in the report, which one of the team will point me to in just a moment. Exhibit 9 on page 32 shows the sources of income for different universities. You are right, they do very hugely. Exhibit 11 on page 34 shows the income profile. Across the 19 institutions that we have looked at, some of them at the bottom of the exhibit have a very heavy reliance on Scottish funding council grants, more than 80 per cent in the case of the University of the Highlands and Islands, right down to less than 20 per cent for the University of St Andrews, and the other income that they receive is made up from a range of different sources. The extent to which they are reliant on public funding obviously places them at greater risk at a time when public funding is under pressure, as it is across the UK at the moment in Scotland in relation to funding council grants and tuition fees and from the UK research councils in relation to research funding. We haven't looked directly at their success in generating commercial income, but it is very clear that they have had very different levels of success and differing approaches to generating income outwith what they get from the funding council and in student support. Again, that highlights our concern that although the sector as a whole is in reasonable financial health, some universities are much more at risk than others in the current climate. Given looking at exhibit 11 here, given the value of the commercial element to the universities, would there be merit in a closer look at this? There certainly would. I think the universities themselves pay a great deal of attention to it and they have different assets, different sources of expertise, different capacities to generate commercial income. It is one of the reasons why we have recommended that the funding council should take a closer and more transparent interest in the financial health of individual institutions. We think that that is not well enough understood outside the universities and is something that could lead either to better funding strategies by the funding council or to a better identification of opportunities for collaboration, for example, between universities or with other parts of the public sector and with business. Does the success or otherwise in the commercial sector of the universities compare well with universities south of the border or elsewhere? I think that it depends very much on which universities you are talking about. Kirsty might be able to give you some insight into that. You do not need to press the button. Apologies. It is not something that we looked at in a lot of detail. It is however an agenda that both Scotland and universities in the rest of the UK, particularly England, are focusing on in terms of the innovation agenda, the further commercialisation of research activities, spin-off companies. We know that Scotland overall is quite successful in terms of the higher education sector, in terms of spin-offs per head, if you will, compared to the rest of the UK. However, as I say, it is something that I think the funding council, the Government and universities are working on and certainly could look at further. Liam Kerr. Just to follow up on that point before I get into what I was wanting to ask, are you aware of any studies? It seems to me that the sector delivers a much wider benefit to the economy than simply producing students graduating. Would you care to talk about what appears to be the return on investment wider than just putting students through university? On page 11 of the report, we reference a study that was commissioned by University of Scotland from an economics consultancy, bigger economics. They estimated that the contribution was around £7.2 billion, which is obviously quite a favourable return on investment compared to the £1.1 billion plus £600 million, which is direct Scottish Government investment in the universities. Clearly, there is always some judgment about that, but it gives you a feel for the economic benefits and all of us who live in university cities will recognise the wider benefits that come from the liveliness and the openness that they bring with them. I enjoyed the report, so I thought that it was very good as usual. I also took from it the environment that the sector is operating in is clearly very challenging, but it continues to produce extraordinary results. That is to be acknowledged and commended. Can you draw any conclusion on the outcomes—the long-term scenario, if I can put it that way—if nothing changes in relation to the funding? Obviously, in response to the challenges, the various institutions might sell some of the estate, they might seek fee-paying students, they might use the reserves that you mentioned, but I would not have thought that that is sustainable for any length of time. At some point, you have sold all the estate that you can possibly do. What is the outcome, if nothing changes? I will ask Anthony to come in in a moment. I think that our concern is that within the 19 institutions that we have here, there are very different groupings. The four ancient universities, for a whole range of reasons, are more successful in bringing in a wider range of funding. They tend to be the places where the surpluses are built up and the reserves therefore are available for investment. They are more likely to be able to get into that virtuous spiral of being able to invest and to build their success from there. The universities that are much more reliant on government funding, particularly at a time when that funding is constrained right across the Government's budget, tend to be the ones that have fewer opportunities for generating income from other sources and therefore run the risk of the vicious circle that you were highlighting in your question. That is not by any means a foregone conclusion. It is what the risks are unless the Government and the funding council together with the universities are able to understand the interplay between the various priorities that they have and to make sure that the public funding that goes in is achieving the maximum contribution both to the Government's policy aims and to the sustainability of individual institutions. Anthony, do you want to comment? I think that the report highlights the fact that when we talk about this as a sector, in a way it is not a sector, there are a range of different institutions serving different audiences with different markets providing different services that deliver different outcomes. Whilst we think of universities as being a higher education, they do do different things for different people. The report highlights a series of risks that face the sector collectively, but it is very clear that the institutions need to think through what market they want to be in, how they might grow or retrench in the face of the challenges that are facing them in terms of Brexit and the financial pressures that are facing the public sector. We are very aware from our fieldwork that institutions are quite alert to this. They have business planning processes in place, they have oversight boards through the principals and the boards, but there is a role nationally to have an overview of how the collectively institutions work together to support the economic goals and the broader learning outcomes that are set out in the Scottish Government strategy. If one has a university that seeks to commercialise itself further by bringing in fee-paying students, do you get any sense that there is an issue with that they will presumably then have to provide courses that attract those fee-paying students to the detriment of courses which do not? I do not think that it is possible for me to answer that question, but it is quite clear that institutions that have a good reputation both within the UK and internationally are likely to draw in fee-paying students and they clearly want to position themselves as bodies that have particular skills. I think that there is probably something in what you are saying, but I am not sure that the evidence that we have gathered could confirm that one way or the other. Sure. Final thought, it was just on, Trisha, that you talked about this research and report that is going on about the Scottish students. I have a concern or rather, I have had concerns raised to me frequently, that very good Scottish students are unable to get a place at universities in Scotland because the cap has been hit. Do you have any comment to make on that, or have you found anything about that? So we lay out some of the information and the data around this and the report, so what we found, as the Auditor General said in her opening remarks, was that the number of applications from students has been increasing at a faster rate than the number of places that are funded. When we have worked that through, we have managed to identify the number of people who do not get a place at all through that process. We set that out in paragraph 95 on page 41 of the report. For the last year, where there is information available, we know that almost 9,000 or applicants, potential students, did not receive any offers at all, and that is about one in five of the people who applied. There is not any information available about what subsequently happened to those people, so we do not know if they then got a place at college or if they worked for a while and then subsequently reapplied and went to university down that route. We have made recommendations about more research to understand what is happening and what impact the limits on the number of funded places are happening on applicants and different groups of applicants and applicants from different backgrounds. Alex Neil It is almost kind of following on from what Liam said. If we get this differential between the increase in places and the increase in applications, what would be the order of magnitude of the additional cost of bringing the increase in the number of available places up to the same growth level as the increase in the number of applications? It is a difficult question to answer. I think that the commission on widening access looked at this and they made some estimates about that figure, but they also made some other recommendations about how you could balance demand with the funding that is available, looking at things like making the Scottish degree shorter, so that the cost is less in comparisons and getting more student funding from the same amount of funding, making articulation more straightforward, so that students could do some of their studying in further education and then carry on into higher education. I think that it is a question for the Government and the Funding Council to think through both the impact of the number of funded places and the related question of widening access to enable more students from the more deprived backgrounds to come through. Trisha may be able to give you some of the figures around the commission's work, but it is not simply a matter of the amount of funding per extra student that you include in funded places. I do not have those figures. The only thing I want to add was that the commission made very clearly the point that this is a whole systems issue, so it is starting from early years through school, through college, through universities, so it is not just that it cannot fix it as it were just in universities, so it is looking and planning across that whole system. That is for some things, but in terms of just the capacity in terms of places, that is not a whole system, that is a decision in terms of the availability of resources, surely. I accept that getting a higher percentage of kids to come from poorer backgrounds, that is a whole system approach and that starts from primary, it starts probably even earlier than primary, but in terms of funding, the capacity to keep pace with the increase in the applications, that is nothing to do with primary education, that is a resource issue. What I am trying to get at is everything else being equal. If you just had to close that gap and do it by additional money, what is the order of magnitude of the cost of closing the gap? Colleagues on my right are trying to contribute to that, so I will ask Kirsty to come in. Yes, apologies, we did not make, we have not done that calculation, but I am happy to come back to committee. The easy option is to multiply the amount of funding grant by the additional demand that sits there and calculates it that way, however it is not quite as easy as that in terms of working out the levels of funding, because it depends where the demand is directed, so some courses will be much more expensive, for example, medicine than your social sciences courses, so it is a more complicated calculation than perhaps a very easy one. I am not suggesting that it is easy, but I just wondered if you had an order of magnitude of how much you would take to close the gap, but it would be useful if you were able to give us an indication, I think that would be quite useful to get the follow-up to see if the funding gap is there. Secondly, can I ask if you looked at productivity in the university sector, because I think that is an issue that certainly merits some investigation? Not in this audit, you will recognise that it already covers quite a lot of ground and we were keen to keep it manageable. The universities are required by the funding council to generate efficiency savings as part of their conditions of grant. They have been of the level of three per cent in recent years, but it is taking further the recommendation from the commission on widening access. There has to be a scope to look again at the way in which teaching and research are organised and funded, the extent of collaboration across universities, a whole range of things that would come into that question of productivity and efficiency and what we get for the money that is spent. Do we have too many universities in Scotland? I do not think that that is a question that I can answer. That is a nice way out of it. My final question is, obviously with Brexit, at some point in the next probably five years or so, we will not have the situation where we will have EU students getting free education in Scotland, because obviously that was a consequence of the abolition of tuition fees. Obviously we want to maintain a very cosmopolitan and internationalist approach to recruiting students to come here, but clearly at the moment we fund EU students to come to Scottish universities. When that finishes, or just today, how much does that cost to the Scottish Government? One of my colleagues will be able to give me in a moment, I am sure, a figure for the number of EU students who are funded by the Scottish Government. Before that, I just want to flag that it is not entirely a sort of one-way bet that the universities are concerned that they get a significant disproportionate share of EU research funding coming into Scotland. There is also a significant reliance, as is the wrong word, that many EU staff, research and teaching staff come from the EU as well because of that, and there is a concern about the lesson. If you look at the spice briefing on EU funding, it is our money getting recycled back into Europe to come back to us, and it still leaves a surplus when you take everything, including cap and everything. We still have a surplus of £800 million a year, notionally, according to SPICE. The funding for that is available if we repatriate the EU funding back to the Scottish Parliament for our notional share, but that is not the case with the funding for EU students. Do not get me wrong, I am not looking at this from the point of view of wanting fewer students from Europe. I think that the more students we have from Europe and the rest of the world, the better for the education system, the better for our economy and our society. I am just interested in the round figure of how much we spend on providing free higher education to EU students today. I have the number of students, so in 2014-15 there were 20,805 EU students and 29,000 students from other countries out with the EU. Students who get free higher education here, what is the cost, what share of the budget? In 2014-15, the Government spent just under £25 million on tuition fees for EU students. I also enjoyed your report. I thought that it was very valuable and delighted that the Scottish higher education sector is doing so well and that it is internationally renowned. That is something that I am very proud of as well. However, when you read through your report and go back to the points that have been made earlier, the fact that you are stating that the financial position is actually masking underlying risks, to me that is ringing alarm bells because I understand that it is spread between the older universities to the newer universities, etc. If we do not really address that now, we are sitting with a potential crisis situation in five, ten years time. Is that something that you have any more thoughts on or is it really just back to let's take it back to the Government and the SFC? What do you feel? I think we've tried to capture our thoughts in the recommendations. Clearly, there are real strengths in the sector. It's one of the things Scotland can be most proud of and there are these challenges facing the sector as a whole to some extent but really focused on some particular universities that don't have access to the same range of income as others. Part of the challenge is to understand the interplay between the Government's different policy priorities around free tuition for all Scottish students, around widening access for students from more deprived backgrounds and continuing to fund world class research. Understanding how those things interplay for the sector as a whole and for individual institutions is very important. As is understanding the impact of decisions about student support and tuition fees on the decisions that Scottish students and potential students make about where they want to apply. We've tried to capture that in the recommendations. We don't think it's an easy fix but absolutely sitting down now and understanding the way those things interact with each other and thinking through how that nearly £2 billion every year can be spent to the best effect seems to us exactly the right thing to be doing. If we don't get it right we do have a potential disaster. There are certainly risks to the sector and particularly to some institutions. I'd like to ask a couple of questions around capital funding. Given that we know how students are attracted to come to universities for multiple reasons but obviously good facilities, attractive facilities, the capital funding reduction of 69 per cent seems absolutely huge. Obviously, it's trumped by the 77 per cent reduction in capital funding in the report that we're about to look at from colleges. Can the panel tell me if there are any comparisons across the public sector in Scotland where we've seen such a huge reduction in capital funding? I'll ask colleagues in a moment if they've got any comparative figures, if not we may be able to come back to the committee with it. I think it is important for us to note that the Scottish Government's budget, which has been very largely funded through the block grant over the last few years, has taken a very significant hit on capital funding, more so than on revenue funding. If you look at Exhibit 12 in the report, you'll see that the drop in funding body grants has been counteracted to an extent by an increase in the use of internal funds, so there are surpluses and reserves by universities, and an increase in borrowing in loan funding over the last couple of years particularly. We absolutely recognise how important that is that universities need to make sure that their estate is fit for purpose, that it continues to be fit for teaching and for research, which often brings very particular needs with it, and it's that which enables them to attract staff and students that affect their long-term sustainability. It seems to us that that's a really key issue, and it's why we focus so particularly on the importance of the funding council having a clear capital funding strategy for the way it will allocate that money to the universities over the medium term. You mentioned surpluses, but we know that certain universities have healthy surpluses, but there are universities that don't. I'm thinking of my own university in Dundee, which is currently running a deficit. In terms of equity across higher education, how does that affect the quality of different universities? Is there not an inequity there? I think it's another example of the way there is such variability across the sector as a whole. We know that Edinburgh and Glasgow account for a large part of the reserves that are available across Scotland. I think the figure as a whole is two and a half billion. A large amount of that reflects, belongs to those two specific ancient universities. I think, as I said in response to Liam Kerr's question, there is that danger that the successful universities are able to invest on and build in their success and the ones that have a greater reliance on public funding find it more difficult to invest in that way and therefore risk decline. It absolutely is a key part of the long-term sustainability of individual institutions. Can I also stick with sustainability? We've heard from Liam Kerr raised, and I think that the economic impact of universities is important. As parliamentarians, we are all acutely aware of that. Government ministers and us as parliamentarians often trump at the fact that we have so many universities in the top 100 in the world. The reduction in research funding, how will that impact, one, the economic impact of universities and two, the standing of our universities in the world? Research success is key to both of those things. I will ask Kirsty if I may to talk through what's happening with the different streams of research funding because it isn't only Scottish Government funding through the funding council that has an impact there? Indeed, thank you. In terms of research funding, as I mentioned earlier, it's traditional in activity that universities have struggled to recover their full economic cost. A lot of the funding streams are deliberately designed that it's not 100 per cent of funding to cover that activity that is provided to universities. There's an element in the bill of efficiency to try and make universities deliver efficiencies, if you will. In a tight research budget, in a funding package, it places pressure, as the Auditor General said, on universities' ability to be able to generate surplices elsewhere in their activities to cover those costs. As I mentioned earlier, a lot of charity research income is very successful in generating research income, but a lot of that comes from charity sources, which is making it very difficult for them to be able to continue to cover their costs. Similarly, research council and industry funding isn't 100 per cent funding, so it continues to place additional pressure on universities to be able to generate those surplices and make those efficiencies to try and continue their research output. Is there a risk that, if they continue to attract good amounts of research funding, if the level of funding from the Scottish Funding Council can't cover that 20 per cent, is there a risk that some of that research might go by the wayside effect research standing of our universities in Scotland? It's really up to universities how they want to position themselves and how they develop their own financial strategies to address that. Universities will look at their own research profiles and identify where can we make surplices, how do we want to attract alternative income, for example recruiting more students from non-EU countries, to try and generate those surplices. It is up to individual universities in developing their own robust financial strategies, but the SFC also has a role. As we say in the report and recommend that they have a look across the sector at the risks and the different information that is available so that those challenges can be identified. Do members have any further questions for the panel? I would like to suspend while we change witnesses. Thank you all very much. Is our evidence session on the Auditor General for Scotland's report entitled Scotland's Colleges 2016. The Auditor General is joined by Mark McPherson, Senior Manager and Stuart Nugent, Auditor Manager of Audit Scotland. Welcome. The Auditor General will now make an opening statement before I open up to questions from members. Thank you, convener. Scotland's colleges have been through a period of major change, which I have reported on previously. Today's report provides an update on progress and implementing and managing these changes, including the impact on students and staff. It also comments on the sector's financial position and again the role of the Scottish funding council. While the merger process is now complete, colleges are continuing to adjust to the changes, including regionalisation, reclassification as public bodies and new funding and monitoring arrangements. Against this backdrop, the sector continues to exceed its national targets for the provision of learning. However, the Scottish Government is still not able to fully measure the benefits and costs of its merger programme. Since some measures such as student destinations and employer engagement lack baseline information, it will now be difficult for the Government to demonstrate whether its reforms have delivered all of the expected benefits. Scotland now operates with 13 college regions, 13 of which contain more than one college. Only one of the three regional bodies was able to perform the role expected of it in 2014-15 and 2015-16. In terms of student participation, there is a mixed picture. The number of under-25-year-olds in full-time college education has increased by 14 per cent over the last 10 years. Over the same period, the total number of students has fallen by 41 per cent and of part-time students by 48 per cent. Most of the reductions have been among women and people aged over 25. It is not possible to determine if those reductions reflect a fall in demand as data is not collated at national level. The overall percentage of full-time FE students successfully completing their course increased year on year between 2009-10 and 2013-14 but then dropped slightly in 2014-15. Colleges told us that the amount of change in the sector, along with efforts to widen access to students from more deprived areas, contributed to that reduction. Information on destinations for college students was published for the first time this year. This showed that in 2013-14 at least 82 per cent of students went on to education, training or employment. Staff numbers fell by 9 per cent between 2011-12 and 2013-14 before increasing by 5 per cent in 2014-15. Staff feedback on the impact of mergers is mixed. Some felt that mergers had been successful and cited benefits from sharing best practice and offering more opportunities for development, while others had concerns about the impact of voluntary severance and the reduced number of support staff on their workloads. The sector's financial position deteriorated in 2014-15. While the overall financial health of the sector is relatively stable, we have identified four colleges that face financial challenges. Colleges do not have long-term financial plans that would help and prepare for further financial pressures, such as national collective bargaining, estate maintenance and student support funding. I have reported previously on significant governance failings in a small number of colleges. The College Good Governance Task Group has published its recommendations now, and I think that they should mitigate the risk of significant governance failures in future. As you'd expect, the Scottish Funding Council undertakes regular monitoring of colleges. This has improved over time, but it hasn't always resulted in timely and effective resolution of problems. We found that the Scottish Government had not undertaken a comprehensive review of the Scottish Funding Council's role in the last 10 years, and we recommended that that should take place. My colleagues and I are happy to answer the questions of the committee. I am just contrasting the responses that we have received from SFC and from Government. The SFC's responses seem fairly clear. They indicate very straightforwardly whether they agree with the recommendation. I am less clear about the responses from the Scottish Government. They don't seem to be terribly clear. I had the same reaction on reading the response, Mr Beattie. I think that it's a question that the committee would need to direct to the Government. I think that it's possibly something that the committee might want to take up. I'm looking at page 26 of college finances, item 3, and the key message is about depreciation. What is complex about depreciation and the way that the Scottish Government approached that? I knew that this would be an area that you'd want to drill into. Depreciation itself, I think, isn't complex to accountants and people who understand it. That's not many people in the world and I respect that, but it's a straightforward way of recognising the fact that fixed assets deteriorate in value over time and that there's a cost to that. The way in which depreciation has been funded in colleges in the past has been unusual, and the change to them being classified as public bodies has added to the complexity around that. I'm going to ask Stuart to talk you through it. Prior to being reclassified, colleges were provided with cash funding to cover all elements of cost, which included depreciation. As depreciation was not a cash spend, colleges were free to save that money and put it towards their reserves or were free to spend it. If they spent it, it would result in a deficit. Following reclassification, colleges can no longer apply that to their reserves. They can still spend that money, but if they do, it will result in a deficit as before. However, the Scottish Government approved certain items of expenditure that they could spend that cash on, such as student support payments, repayment of loans and specific regional pressures. If the cash that was set aside for depreciation was spent on those items, that would result in a technical deficit, which the Government would understand and accept as such and not as a normal operating deficit. That is the difference between the before and after reclassification. That makes it a bit odd. What is the total value of that? The total value in 2014-15 was—including the repayments of loans—17 million. Not a small sum for the colleges. Can I ask about something that we have spoken about before, which is ALFs? What are colleges doing now with ALFs? I know that when they were set up, they moved initial funding into the ALFs to avoid losing it. Are they still putting money into ALFs? Have you looked at ALFs at all? We have, as part of our review of the accounts for 2014-15 and Mark will talk you through the changes that we have seen this year. Colleges are still transferring money into ALFs. Seven million is a figure for 2014-15. As far as we can determine, ALFs are operating as they have been intended. Colleges are paying money in and are making applications. In most cases, I think that they are receiving the money back from the ALFs. It remains the case that colleges may be refused in their applications, and that has happened in a few colleges. The other bodies can apply to the ALFs and secure the money providing it is for the intended purposes of further education, which has happened in a few cases too. Where did the seven million pounds come from? Colleges can still generate surplices, and they will make an estimate at a certain point in the year about how much they think they may be able to transfer into the ALF. I guess you would say for safekeeping, if you can guarantee they will get it back. So it would be public funds that they are putting into these ALFs? Well, colleges can generate their own income, of course. It is still public money. Even if it is from commercial operations? Well, I think that it depends on how they have generated it. Presumably, if they can fund it from the commercial income, they can fund the delivery of whatever it is that they have been paid to deliver then. That is more than just a grey area. Public institutions, if they generate income, it becomes public funding, surely? As we discussed in relation to Coatbridge College with the committee in the last session, colleges generally are not able to account for their funding as being either public or private. There is generally a good deal of allocation of costs between different headings, and colleges are accountable for the funding that they receive from the funding council. So I think that the overall management of the budgets is a matter of proper public interest and interest of this committee. So is the amount of funds in the ALFs increasing? I think that it decreased over the period since last year. Obviously, they made a large transfer in the first year that they existed because they had reserves that they were able to transfer. Now they are obviously operating on a year-to-year basis, and so the amounts that they are able to transfer are smaller. As we talk about in the report, when we talk about capital funding, it is clear that they obviously have to rely on some of the funding that is sitting in the ALFs to pay for some of the changes that they want to implement. Over time, I would expect that the funds in the ALFs will reduce. But it is something that Audit Scotland will keep an eye on. Absolutely. The other thing is SFC, which keeps coming up in these reports. On page 35, you say that SFC's role in regulating college governance is not clear, and, as you say, it is not effective in some issues. We have seen that. Is there indications that it is getting better? We say in the report, and I said in my opening statement that we think that they have more effective at monitoring what is happening in colleges. It is not always clear that their monitoring has led to the resolution of problems rather than just the identification of them. We saw a good example of that in Coat Bridge. It is also true that the funding council's role has expanded quite markedly over the last few years, with big changes in both the funding council and the further education sector that it is responsible for. That is why I recommended that the Government should review its role and how well-equipped it is to carry that role out. Is it to any conflict of interest that SFC is effectively becoming increasingly a regulator as well as the organisation that dispenses funding? I do not think so. I think that colleges and indeed higher education institutions are accountable to the funding council for the money that it distributes on behalf of the Government. It does not seem to me a conflict of interest that the funding council is monitoring their financial health and how well they are fulfilling the conditions of funding. I do think that, as I said in the report and the higher education report, there is room for them to do that in a more strategic way. You recommended last year that the Government and the funding council should publish financial information on the costs and savings that are achieved through the major process. On page 12, you said that many of the costs of the major, such as from harmonisation of pay and other costs, were not included in the SFC assessment. What other factors have been meted from those calculations? The funding council has now published its summary of the costs and benefits of the merger programme. We think that there are two broad areas where it does not provide full information that we would expect to see. The first is, as you have identified, the full cost of the mergers themselves and particularly the cost of harmonising terms and conditions across the colleges that have merged, which is potentially quite significant. The second is in terms of the benefits that mergers were intended to achieve, where there is some good information and some very good examples of where colleges are working better after merger, but there is not baseline information on some important questions. I think that you will keep me straight, but for students the question of their destinations and their satisfaction with their studies and for employers the measures of employer engagement, the evaluation says that there are improvements in employer engagement, but there is no baseline to compare that to. Without that full picture, it is very hard to be clear what the full costs were and whether the intended benefits have been achieved. In the absence of that baseline information, it is just not possible to establish if the estimated £50 million savings have been achieved? It is difficult to be clear whether the full benefits have been achieved and it is not clear whether the full costs have not been captured. The evaluation takes account of the amount of money that the funding council provided directly to colleges to support mergers, but we know that colleges incurred costs themselves in significant areas like carbonising the terms and conditions of their staff, and that information has not been captured and played into the evaluation. Will it be possible to fully capture all of that information, or is it too late to go back and get all that baseline? It is a good question and it is why we have been recommending it for the last couple of years. In some ways it should be possible to go back and calculate the cost information, although the further out you get, the more difficult that gets. At this point I think it would be very difficult to go back and generate the baseline information that was not collected in the first place. We have been reporting on reform programmes across the public sector for a while and have been clear from the start about the need to have good baseline so you can see what has changed as a result. That did not happen in this case and it will be difficult now to go back and generate that baseline information. Does that mean that it will be difficult to provide evidence that the original aims of this whole process have been fully achieved? I think that the longer we go from the point of mergers, the more difficult it gets. You report big falls in certain subject areas due to cuts in part-time places. Exhibit 4 on page 19 illustrates that very well. We see courses like computing and health have fallen by almost half, so that is quite significant. In your statement you talked about the reduction in part-time students and the gender dimension to that. 53 per cent of that decrease is women. Looking at those courses in Exhibit 4, what is the impact of the cuts to those particular subjects? Is there a vocational aspect to many of those courses and do we know what students are doing now to acquire the skills that they would have obtained through those courses? I think that it is worth saying initially that the changes to a great extent reflect the Government's policy decision to focus funding on full-time courses that are likely to lead to a qualification leading to employment. Therefore, they are likely to be vocational courses that are gaining or directly vocational courses. One of our concerns is that there was not a full impact of both that change and the funding council's later funding change on what it meant for students. We do not have an overall picture in Scotland of demand for further education to know what is happening to the students who were displaced by this process. I will ask Stuart to pick up the question. One of the recommendations that we have in our report is that the funding council should assess the demand for college places, which would allow us to answer the question of what has happened to the students who no longer attend college and are still applying. At the current time, there is not a national picture of demand for college places across the country. Individual colleges have their own information systems, but there is not a national picture, so we have made that recommendation in light of that. Liam Kerr. Really, just a quick follow-up question on that. On what Monica was asking, you talk about the student numbers decreasing, particularly amongst women and people aged over 25. He said in your statement that the date is not collated at national level. Are you able to categorically say why these reductions have happened? Yes. In paragraphs 28 and onwards, we talk about the policy changes that led to these changes. In 2009, the Scottish Government asked the funding council to focus its funding on courses that were most likely to lead to employment. That led to less funding for courses that did not lead to a recognised qualification or that were less than 10 hours in duration. That is an entirely appropriate policy choice for a Government to make. It is what Governments are for. There has also been a shift in the way in which the funding is allocated through into the funding policy for the way that students are counted. That has had an impact as well. We think that that is what is behind it. What we are concerned about is that the Government did not carry out an impact assessment in advance of what was likely to happen to the people who were not able to gain places in further education as a result of that. As Stewart said, information on demand for FE courses is not collected across Scotland. Although individual colleges have their own information, they do not know if a student they turned down for a place went to a college somewhere else, so we do not have that overall picture. We are not clear whether this is people who simply moved somewhere else or who are now not able to access further education that they would have been able to before the policy change that comes in. Is there more to sale, Stewart? Can I turn to the recommendations in the report? You have said that the Scottish Government and the Scottish Funding Council should work with colleges to determine the current condition of the college estate and prepare a plan to ensure that it is fit for purpose. Is there a concern that the college estate across Scotland is not fit for purpose? I think that we just do not have the data clearly in the report. We talk about some work that the Scottish Funding Council has undertaken to try and make some assessment of the areas where there has been less investment. However, as our recommendation suggests, I think that they need to make a proper analysis across the piece. I am sure that at individual college level many colleges will have made an assessment of their own estate, but I think that that needs to be brought together to allow any funding decisions to be made on the basis of a solid evidence base. Was your concern about the college estate driven by the 77 per cent reduction in capital funding for colleges? I do not think that we have necessarily got a specific concern about the college estate, but what we are concerned about is that when there is a limited amount of capital investment available, you need to make the best use of that. If no one has a clear picture of the overall state of the estate over the whole country, it might be difficult to allocate funding that does become available. Similar to the question that I asked in the previous item about capital spending, you explained why there has been a reduction in capital spending. In terms of comparison across other public sector bodies, have any other public sector bodies in Scotland experienced this huge reduction, 77 per cent in capital spend? We will, as we said earlier, come back to the committee with any detailed comparisons we can provide, but we know that the Scottish Government's overall capital Dell budget reduced more significantly than its revenue budget did over the period since 2010. Different public bodies have different ways of compensating for that. At the moment, councils are really the only bodies that can borrow and have used that to continue investing in their capital assets over the last period. Other bodies have not had the same ability to do so. There has been some investment through things like public-private partnerships in some of the college estate, but, as Mark said, what we don't have is that picture, as we do have for the NHS, for example, where there is a regular condition survey that gives the assurance that the estate is fit for purpose or gives an estimate of how much investment is needed to bring it up to an acceptable condition. I noticed from page 26 that the Scottish Government is now looking to PPP in the future to mitigate some of those capital funding cuts. Do you think that their plan of £300 million is going to be sufficient, or is it hard to say? At the moment, we just don't know. Without that regular condition survey, it's difficult to be clear what is needed. At the moment, the plans have centred on public-private partnerships because that's the only way the Government has had to complement its capital allocation through the block grant. From next year, there will be new borrowing powers for the Scottish Government under the Scotland Act 2016, but all of that has long-term revenue consequences. The Government and the Funding Council need to be clear right across the budget of where the priorities are for investment and what the long-term effect is of paying that back in inverted commas. I'm just interested that the Government always tells us that they've moved away completely from PPP, but it's clearly not the case from this report. Can I return to the reduction in overall student numbers? She said that there is a 41 per cent reduction overall. From Exhibit 9, it is clear that overall funding to the college sector has reduced. It looks from the graph to about the tune of £150 million since 2009-10. That reduction in spending and reduction in students. Is it fair to say that the college sector has taken a huge cut? The reduction in funding to the college sector has been more significant obviously than we've seen in the health service and I think in local government as well. The Government has had to respond to a very significant reduction in the budget. It has available since 2010 because of the direct relationship between the UK Government's budget and the block grant that funds Scottish Government services and choices have to be made in that. I think it's a question for Government about how they've made the decisions on allocation, looking backwards and obviously looking forward in future budget discussions as they take place. I think it's important also to note that the reduction hasn't only reflected a reduction in funding, it has reflected a shift in policy as Mr Kerr was asking about earlier, with a reduction in the number of people but a significant increase in the number of full-time students coming through there of 14 per cent over the same period. I noted what you said earlier, Auditor General, about it's not possible to see if there's a reduction in demands. There's been a reduction of 41 per cent in students but you don't have the data to show a reduction in demand. Locally, I, over the years, have seen numbers of applications. Why aren't those collected? Surely that would be a priority for Government in terms of funding places at college to have a clear idea of how many students or how many young people or any people want to go to college. Why isn't that information collected? We think it's really important that it should be. As you say, individual colleges obviously know how many applications they receive, how many offers they make and how many students accept those offers. What they don't know though is that if they don't make an offer or a student doesn't accept an offer, whether that person is doing nothing or if they're moving to another college to take the same course or a different course, we do have that information for higher education in Scotland. We think it's important that we have it for further education, both because of the shift in policy we're seeing here and because of the increasing recognition that the link between school and college and higher education is really important in terms of people being able to fulfil their potential however well they do in their early years. Is that one of your recommendations that the Government needs to collect applications? It's quite possible that there are hundreds, if not thousands, of students that want to go to college but can't go to college in Scotland, that we just don't know. It's possible, but we don't know. It's equally possible that those students have managed to access further education in a different college, perhaps doing the course they wanted to or a second preference. It's possible they've gone into employment of some sort but without collecting that information across Scotland, we don't know and that seems to us the key thing, the funding council should be resolving with colleges as a matter of urgency. If higher education has collected this data for so long, why hasn't further education? There is a system to do it across Scotland for higher education, but there hasn't been for colleges. They've been seen as being much more local institutions in the past and the way the funding has worked for students has meant that it's not had the same priority. It now does, clearly, for all the reasons we've been discussing this morning. Members have any further questions? Just to ask a couple of questions. Obviously, the whole thrust of the policy change was to get a closer alignment between college courses and employment. 82 per cent in the latest available figure, 82 per cent of levers had it from college at a positive destination. How does that compare to the same figure in 2009 when the new policy was introduced? The information was published for the first time for 2013-14 and I think we saw a very slight reduction between 2013-14 and 2014-15. It's not clear what the reasons for that reduction are, but obviously it is an early warning that colleges and the funding council should be paying attention to to make sure that the policy is having the desired effect. But we do know where the destination figure was before the policy was changed. 2013-14 is the first time that information was published. The other figure that struck me was the drop-out rate. Although it's improved from 59 per cent to 64 per cent, it slipped back a wee bit in the last year, but that still represents, even in the best year, a 36 per cent drop-out rate. That's very wasteful, isn't it? Why do you think the drop-out rate is so high and what can we do to reduce it? We haven't had the chance to look at it in detail yet. I think we heard from colleges that the changes that were going on in the system and the attempts to widen access of students may both be contributing to it, but it's one of the reasons why having the data is so important and why colleges and the funding council should be exploring what's happening across Scotland and in individual colleges so that we can reverse the trend. As you say, it's not good for the students, it's not a good use of the public money that the Government is spending in this area, and addressing that has to be a priority. I would have thought so, yeah. Good. Thank you very much for your evidence on that. I'm going to suspend until the next item. Thank you. I move to item number three, which is our evidence session on the Auditor General for Scotland's report entitled... Sorry, I'm on the wrong one. Item four, in section 22 report, one entitled the 2014-15 audit of Edinburgh College and the other entitled the 2014-2015 audit of Glasgow College's regional board. The Auditor General is joined by Mark Roberts, senior manager of Audit Scotland, Mark McPherson, senior manager of Audit Scotland, Hugh Harvey, partner at KPMG, and Gary Devlin, partner at Scott Moncrief. I now invite the Auditor General to make an opening statement, which will cover both audits before I open up to questions from members. Thank you, convener. I'm briefing the committee this morning, as you say, on two reports that I've prepared under section 22 of the Public Finance and Accountability Scotland Act 2000. The first of those is a report on the 2014-15 audit of Edinburgh College. Edinburgh College was formed in 2012 by the merger of Jewel and Esk, Telford and Stevenson Colleges. Although the auditor gave an unqualified opinion on Edinburgh College's financial statements for 2014-15, his annual report highlighted that the college had experienced financial difficulties at the end of that financial year. This was the result of the college failing to meet its activity targets for 2014-15 and led to the Scottish Funding Council seeking to recover £800,000 from the college in November 2015. Following confirmation from the funding council that it was seeking to recover those funds, the principal initiated a detailed review to better understand the reasons for the failure to meet the target. That review highlighted a number of underlying problems, including issues with student recruitment and retention. The findings led to the college negotiating a 6% reduction in its 2015-16 target with an associated reduction in funding. The college's scope to reduce its fixed cost was limited and the funding reduction led to a funding gap of £2.5 million for that year. This placed the college in severe financial difficulty. My report on Edinburgh College was laid in Parliament in March this year. Since then, the college has developed a transformation plan to address the issues identified in the principal's review. The funding council has agreed to provide transitional funding support to help the college to implement the plan. The plan envisages that the college will return to a surplus position in 2018-19. I've asked the auditor to monitor developments and to report on progress as part of the annual audit and I'll report again early in 2017. Alongside me is Hugh Harvey from KPMG who is the auditor for the college and Mark McPherson, who is a senior manager with Audit Scotland. With your permission, convener, I'll pause there and we'll answer questions about that report and then introduce the Glasgow College's regional board separately as they cover quite different issues. Obviously, the report that we have in front of us is fairly brief. I, for one, might have appreciated and realised that this came from the audit of Edinburgh College rather than an audit of Scotland intervention. I would have liked to have had a bit more information around how actually this took place and a bit more on the timelines under which it took place. Anecdotally, I've been told that it happened under previous management. I can't tell really from this whether that's the case or not. Are there any plans to do more detailed investigation? We can certainly provide you with more information in answer to questions this morning and, as I say, I will report again on progress with this particular case. I think it's fair to say that the problems came to light quite late in the financial year under audit and that's limited to the extent to which it's been possible to report, given this timeline, on the history of what's happened. But Hugh might want to say something more about what's come to light about the problems since it was identified at the end of the 14-15 financial year. The main issue that has arisen in relation to the college's ability to meet its liabilities is the fall due, putting it quite simply. The activity levels within the college upon which it is funded had fallen below those that were forecast and, as a result, the funding it was able to claim from the Scottish funding council reduced. The college still had a large cost base, one that supported a higher level of activity. As a result, with reduced funding and a too high cost base, there are clearly issues in the look forward period. I recognise from the report here that it's from the college failing to deliver the agreed activity. It's through the reasons for that, what led up to that. How did they get in that state? Did it happen gradually? Did it happen overnight? Was it one particular year that it went wrong? There's a lot of questions here. I recognise the report as brief. That reflects the way in which the problem came to light as a result of a grant claim from the funding council. The core of the issue is a shift in the funding priorities from the funding council. In the past, colleges have been able to claim for activity almost regardless of which students that activity related to. There was a widespread practice called additionality, where colleges could claim funding for a student who was effectively meeting the full-time minimum requirements. The college would then deliver additional learning to that student and could claim additional funding for that additional activity as part of the policy to make sure that the funding was achieving the best impact in terms of equipping as many students as possible to move into employment. The funding council removed that ability to fund additionality and instead required more students to be recruited and retained to generate the same level of funding. The newly formed Edinburgh College didn't fully understand the extent to which it was relying on funding through additionality to cover its cost base. As the merger worked through and the information came to light, it became clear that there was a problem of about £800,000 relating to grant funding for 2014-15. Further investigations showed that that was a much bigger problem going ahead, which the college and the funding council tried to work together to resolve. It is an emerging picture and that's why the report that was laid in March is quite high level. We've clearly done work since then to explore the issue and I will report again early in 2017 about it, but it's been an emerging picture for the college and the funding council as well as for us. Given the nature of the problem, is it possible that other colleges might have the same difficulty and that hasn't come to like yet? The same question occurred to us as you'd expect. I'll ask Mark to talk you through what we've done in that area. We're aware from discussions with the funding council that the Edinburgh College wasn't the only college that used additionality and indeed the use of additionality has not been outlawed as such. It's just been limited, they've placed a limit on it to try and encourage colleges to focus on individual students and additional students rather than additional activity. I don't think that we've got the data to hand about how widespread it might be in other colleges, but we understand from the discussions with the funding council that Edinburgh was essentially an outlier in terms of the amount of additionality that it was using to bolster its activity. Did SFC do any assessment as to the risk involved in such a fundamental change to the way that business is being conducted and the possible impact on colleges, including Edinburgh? I think that's the question you'd have to ask them. As I say, we understand the policy basis for the shift. The extent to which they carried out a full assessment of the risk associated with it isn't something that I think we can answer to the committee's satisfaction. Anything you want to add to that, Mark? No. This was a decision of SFC, not the Scottish Government? Or did it come from the Scottish Government? I think it was a decision from the funding council in 2014 that relates again to the Government's policy priority of focusing funding on helping as many students as possible to gain qualifications that will help them into employment, links back to the increasing focus on full-time students rather than part-time students and on courses that lead to a qualification. SFC interpreted it in that way and sought to implement policy by making this change. That's my understanding. On that point, just so I'm absolutely clear, because I think that Colin Rathbone raises valid concerns. What we've got is a college that is in financial difficulty. There is a move to recover £800,000 due to the additionality that has been done or the additionality better prepares the students for the workplace. You mentioned in your answer to Colin that that policy shift has come because the colleges are trying to get more students recruited to get the funding. In other words, we're trying to put more students through the system rather than better prepare the ones that we've got for the workplace. That's why there's no problem. That's a policy decision by the Scottish Government or the Scottish Funding Council. In any event, is recouping that £800,000 really what the SFC should be doing in the circumstances? There's a lot of questions in that. I'll make a start and then ask Mark to come in behind me. The starting point of this is the point that we were discussing in relation to my earlier report this morning. In 2009, the Government asked the funding council to focus its funding on courses that were most likely to lead to employment. That led to less funding for courses that didn't lead to a qualification and less funding to shorter courses. It was one of the drivers behind the increase in the number of full-time students and the reduction in the number of part-time students that we've seen over that period. In 2014, the Scottish Funding Council introduced new guidance to help ensure that colleges place an emphasis on increasing the number of students that they recruit rather than the amount of learning that the students they've already recruited experience or benefit from. The previous practice of recruiting a student who met the minimum requirements for full-time study and then providing those students with more learning and receiving more funding for it was moved away from. Instead, the focus was on recruiting more individual students who each met the full-time minimum threshold. During the process of merger, Edinburgh College did not fully understand the impact of that change on their funding model. It became clear towards the end of the 2014-15 financial year that they were therefore at risk of overclaiming funding from the funding council under the old model. When they thought that through, they recognised the impact on their funding for future years, which gave them this much bigger funding gap that needed to be filled. They've been working with the funding council to understand that and to manage the financial implications of it, but it's one of those misunderstood policy changes that's had a particular impact on this college and that can't be easily undone in a single financial year. Just a couple of points. I think that just to emphasise again that the additionality that we talk about is a legitimate use of funding and activity that the funding council has not said that the college shouldn't do it. I think that it wants to understand very clearly why it's doing it and whether that might be at the expense of giving other students an opportunity to participate in learning and to qualify. It asked the question as well about the 800K. The current situation—you can correct me if I'm wrong—is that the funding council has not recovered the 800K. It has decided to allow the college to retain that in order to implement parts of the transformation plan. It's very important to emphasise that the college has still got a difficult period ahead of it and has still got a lot of work to do in the funding council and we will be keeping a close eye on that. Are you able to tell us what learning is being captured out of this? In order that it doesn't happen again, clearly it is not impossible that there will be similar shifts in the future, similar institutional movements. How do we ensure that this does not happen again and who will be taking the learning from this? I don't think that we're entirely well-cited, as the generalist mentioned, about what consultation or engagement with the sector took place before the change was made. I'm pretty sure that the funding council will have acknowledged this and I'm pretty sure that other colleges who may be having the past relied on the additionality or have made use of additionality will be looking closely at their own circumstances to understand that that would work. I would see it as a role for the funding council and colleges themselves to be reflecting on the learning from this particular college. Thank you for that. I don't just mean on the additionality. In general, there is a situation at the Edinburgh College what is being done to ensure that the learning outcomes from that process in general will not happen the next time that there is such a merger. In general terms, I think there are two points we've taken from it that we've tried to play through our reports on the college sector as a whole. The first is that reform programmes, particularly those involving mergers, are times of higher risk and things can go wrong, whether it's people misunderstanding their funding models, problems around voluntary severance, letting staff go with redundancy packages. We've seen problems in all of those areas and we've reported previously that the funding council could have done more to help and support colleges through that process. The second relates specifically to the policy change that happened in 2009. As I said in the earlier agenda item, we don't think that the funding council did enough work to fully understand the potential impact of a very appropriate and well-intentioned policy change towards focusing on getting people into employment. At the same time, it's important to understand the impact on other people affected by that policy, and I think that the same is true here. Both of those underlie the recommendations that we've made to the Government and particularly the funding council about reviewing the role of the funding council and what it's expected to do and how well-equipped it is to carry out that role. Alison Harris I just really wanted to, if I picked up your figures correctly, you said that the college didn't have money to meet its liabilities. However, by 1819, it's going to be in a surplus, so that's quite a quick turnaround in only what, two financial years, you say? I'll start off, and Hugh may want to add to what I say. Our sense is that the college has responded to this problem very quickly and thoroughly. The principal, who is relatively new, as soon as the problem was identified, initiated a very wide ranging review to understand what had happened and make sure the problem was fully understood. They have engaged with the funding council to agree a short-term funding solution to get them through, and they've got a transformation plan in place, which they expect to return them to a surplus by 2018-19. Like you, I think that's ambitious. I hope they can do it, and there's an awful lot that's required to do it over that timescale. Hugh, as the appointed auditor, will be keeping a very close eye on progress, and I'll be reporting back to this committee at the end of each audit to bring you up to speed with how well it's going. I hope that, in terms of success, but equally, if there are problems, I'll make sure that the committee is aware of that. Hugh, thank you. You do want to add anything? The only point that I would add is that, during the transformational plan, the costs are higher because of the cost of the voluntary severance. They are part of the plan and are inevitable when you're trying to reduce the cost base in an organisation, but once those additional costs are incurred, then the savings identified should get them back to surplus. That's good, so they're on the case, really. Very much so. Alex Neil. Can I just clarify a couple of things? First of all, what was the timeline between the funding council—I take the point that I hadn't consulted on it, but once they take the decision, they then presumably inform the colleges through the guidance of the change of policy. What was the time gap between the funding council informing the colleges of the change in policy through guidance and the college realising that it was engaging in something that was no longer acceptable practice? Romatively short, I think. The new guidance was introduced in June 2014, and this problem arose towards the end of the 2014-15 financial year as the college was finalising its funding claim to the funding council. That's right. I don't think that between the formal guidance being issued and the college embarking on its next academic year, there was a particularly big time gap. I think that what's a bit unclear is how much consultation and notification there was in advance of the formal change being introduced. I accept the point about consultation, and clearly one of the lessons as the SFC needs to consult before it makes a decision in these matters. Once it made the decision, you're saying that it was a short time frame between the SFC getting new guidance coming out and the college realising that it had to change its practice. If it was such a short time frame, why is there so much money involved? I think because Edinburgh College is a big college, it's one of the largest ones in Scotland now. 800,000 was the amount for that initial year, so it's significant, but it's not a huge sum of money. It's when you roll it up to a full academic year and looking ahead, you get to the £2.5 million gap, which is what we have here. To practice more or less whenever they realise their mistake, did they not? Sorry, I missed the beginning of that question. When the college realised their mistake, did they not very quickly stop the practice of additionality? It's quite difficult to stop it in the middle of a financial year, when you've already recruited students to your courses in a particular way. I think Mark said it was near the end of the financial year when they discovered it. Just to be clear what you're saying here, because something here doesn't quite add up in my mind at the moment. In June, I think you said the SFC decision was notified to the colleges. Is that right? Presumably the college financial year is April to the end of March, April to April. And did you lie? So it was notified in June before the start of the new financial year? Yes, but it wasn't picked up until near the end of the financial year. There were discussions on going between the college and the SFC at various points, as there normally is, between individual colleges and the SFC, to monitor performance and progress towards delivering the activity targets that have been agreed. At various points of the year, the college was operated on the belief that it was going to deliver, and all of the activity would be eligible for funding from the SFC. Only when the final checks were conducted towards the end of the year did it become apparent that a portion of the activity that the college expected to claim for and it had delivered would not be eligible for the SFC funding, which then triggered the issues. So there were prior checks during the financial year and nobody picked up the discrepancy? I think that at that stage the checks are not obviously based on activity at a particular point in time, but activity runs throughout the whole of the financial year. But it's still a check. I don't know about the level of detail at the check at that point. So who does the check? The college or the auditor? It's usually the internal auditor. The internal auditor in the college? Yes, the college has internal monitoring systems and then the internal auditor carries out a check on the claim at the end of the financial year. Is one of the lessons not to the internal auditor in the future to be much more thorough in what they're doing and actually check that they're following the guidance issued by the SFC? That would require them to carry out their work throughout the year, whereas, as I understand that, they're engaged at the end of the year as the claims are issued. Is there not a lesson in there about internal management of the audit function? Because clearly, had a more robust audit function, internal audit function, been operating presumably this would have been, or the chances are this would have been picked up at much earlier stage? I think there's a lesson about the college's overall system for making sure that it's managing its finances properly. You're absolutely right, but the college needs to have a system to make sure that the assumptions it's made about the funding it will receive from the funding council and from other sources are rolling up during the year, as expected, and that they're being properly claimed. This college chooses to have internal audit to do that check at the year end. I think there's a very strong question about whether for colleges that have got such complex sets of income streams, their systems are robust enough to pick up problems during the year as they come through. I mean, surely in any robust audit system, that should have been picked up much earlier. It depends what the internal auditors are asked to do. I expect that in this case the internal auditors are a firm who are appointed by the college to do a specific task. The college remains responsible for the quality of its internal controls and the systems of assurance that it has. It sounds as though that system may need to be reviewed to make sure that it's fit for the best of future. If the college employed an external auditor, surely the external auditor would have checked the guidance from SFC as part of their work? Hugh's point is about the timing of that check. If they're being asked to do it as a final check before submission, it may pick up problems too late for there to be any adjustment made to both the income and the expenditure projections that the college has. Is it not a basic auditor general to check that the income expected fits in with the guidance provided by your substantially main funda? It absolutely is, Mr Neil. I agree with the point. I think the auditors have had something to answer for here as well to the know. I don't know the detail of the way Edinburgh College organises its internal audit, but in any organisation, internal audit is there to support management and the board by providing assurance about the governance systems that they have in place, and it's answered the governance system of which internal audit, as a part, hasn't operated as well as it needs to in this case. So there's a lesson to improve internal audit? Internal audit as part of the system of internal controls and assurance, I think, yes. Because it failed? The system of internal controls and assurance, I think, failed. Any further questions on the Edinburgh report? Colin? Just on the back of what I was asking there, in most businesses of any size, they don't have a snap short audit at the end of the year. They have an on-going audit through the year, which, of course, makes the year-end audit a great deal easier and quicker. Typically, maybe quarterly or something, the auditors do an update. Is this not the common thing in the public sector? In terms of the auditors that I appoint, absolutely it is. The work will normally take place in at least two chunks. There'll be some work during the financial year, which is looking at the systems for controlling expenditure and risk, and the process of financial management during, and then a shorter financial statements audit after the year-end that produces the audit opinion that I use to report to this committee when needed. That's not necessarily the case for internal audit. Normally, the situation with internal audit is that an internal audit plan is approved by the audit committee at the beginning of the financial year, and that will contain six, seven, eight internal audits that are phased throughout the year and will report back as they're completed. I think there's an important difference that I was trying to explain earlier, which is that internal audit is responsible to those charged with governance, to management and to the board for providing assurance internally about controls. External audit is responsible for providing assurance to me as the Auditor-General and on to you as the committee about the financial statements and the wider governance, so they do have different roles, and it may be that in this case internal audit has failed, but I don't think we can draw that conclusion from the work that we've done so far. What's clear to me is that the system by which the college understood its likely income and expenditure didn't pick up this change early enough and led to a funding gap at the end of the year. You say that you yourself, when you appoint auditors, have them do an on-going audit process. Is it common among the colleges that is just a snapshot at the end of the year? No. Hugh can tell you how he goes about the audit of Edinburgh College. I appoint Hugh as the external auditor, and he will take the approach that I described. Hugh, do you want to give us more detail on that? In terms of our communications and interactions with the college throughout the year, they are on a quarterly basis. And it generally means us looking at the internal management accounts that are prepared and preparing questions to then speak to management about. But I guess to answer the question around the funding issues, to get into the level of detail that would allow us to do that would take a week or two weeks, and we don't have that much time during the year to do that. However, that's our role as external auditors. The internal auditors, just to expand on what the auditor general had said, they will do what they are directed to do by those charged with governance. Should management decide that they want a closer look at the level of funding throughout the year, they will direct the internal auditors to do that. It's not within the internal auditors' remit to always look at those particular areas that they will do as they are asked, effectively. So you do a quarterly update with the college and you ask questions of any issues and so on that might arise according to a fixed programme that you've got. Would you not be asking about any changes that would impact on their funding? We would ask about how funding was going during the year, were there any issues with student numbers, student recruitment, that are driving the underlying numbers, we wouldn't necessarily get into that level of detail. Then would it be the internal auditors in Edinburgh College that you would expect to supply you with the information? If they were directed in that way, then we would look to them and work with them so that we could leverage the work that they had done. However, when it comes to our work that we carry out following the year end, because as the auditor general has pointed out, my role is to report on the robustness of the information supporting the numbers in the year end accounts. That is when this issue arose, we became aware of it and so our role is to ensure that that issue was appropriately reflected in the accounts. So internal auditors did not pick it up at all, you picked it up as the external auditor when you saw the year end? No, we were told of it when we were carrying out our work at the year end and so our role is then to ensure that that information that we were told was appropriately reflected in the accounts that it was. And that was the first indication that you'd had? That we had had, yes. Who told you? We were told by the director of finance. Not by internal audit? Not by internal audit, no. Whose responsibility was it in the first place to follow the guidance from the SFC? Was that director of finance? Yes, the director of finance, the management team, effectively within the organisation. So director of finance should have read the guidance and followed the guidance? The director of finance would be responsible for understanding what the guidance was. It would be those within the curriculum who are recording the students and the activity against those students who then provide the information which allows the claim to be pulled together. You understand that, but here is guidance to paraphrase from the SFC the issue and instruction from now on you cannot apply additionality, paraphrasing, okay? I take it the financial controller of director of finance in the college then what you're saying is responsible for making sure that from that day forward no assumption is made about getting additionality and come in and you don't invoice the SFC for additionality because it's no longer claimable, is that right? That would be my view, yes. So has the director of finance been disciplined? No. £800,000 of public money down the swani and nobody's been disciplined? Or has nobody been disciplined? I think that's a question for the college rather than for us. But you do not be commenting on it as the auditor. As I've said in my report, the principal has carried out a very wide-ranging review to look at what happened here and the impact on the financial position of the college in future and put in place a transformation plan for it. I can't comment on the individual responsibilities for it. My responsibility is to highlight to this committee what the impact is of the failure that took place in this case and the wider lessons that might come from it. But I think there's a pattern that's like last week, you know, large amounts of public money are getting wasted as a result of incompetence and yet nobody seems to take responsibility, nobody gets disciplined. I mean if that was in the private sector he'd be sacked for losing £800,000. If it was his responsibility or her, whoever he is or she is, their responsibility. £800,000 of public money is down the swanny because somebody didn't do their job properly. Not good enough. The investigation into this, as Mark had mentioned, is still on-going. I think that it's unfair to point the finger at the director of finance because nobody knows who, if there is indeed one person, was to blame in relation to this. It's a bit responsibility, I mean I asked you the question and you're the auditor. So I'm taking it from you, you said he was responsible. He is the person who has to implement the policy as you would expect. In any corporate body the finance director has to implement new guidance on what's claimable and not claimable. So I'm not saying maybe he had somebody he employed who was supposed to check these things because obviously it's a big college, you can't individually check everything. What I'm saying is, yet again, a lot of public money down the swanny and nobody it would appear has been taken responsibility for that. And we've got a finance director in the finance department, we'll get internal auditors, we'll get external auditors and between all of you wasn't picked up to the tail end of the financial year as a result of which £800,000 was lost. Briefly convener, I'm not here to apologise for the college or the funding council but I think this case is a bit different from the others that I've reported to the committee on in the past where for example voluntary severance has resulted in payments that were higher than justified to individuals and money was lost to the public purse. In this case the situation is that funding hasn't been claimed from the funding council, wasn't available from the funding council for activity that had been delivered learning activity. So the money wasn't lost to the public purse, what we have is a funding gap for the Edinburgh College. I recognise that as a fine distinction but I think it's important for the record to be clear about it. Fair enough, but clearly £800,000 is not an insignificant amount of money. I wouldn't disagree with you at all. And if you look at the total fees for the internal auditor, the external auditor and the finance department, you would expect for that amount presumably a fairly substantial amount of money you would expect between them to get this sorted, to have got this sorted. I think that external audit has done its job in this case. The management, the charge with governance of the college are responsible for having systems in place that prevent this sort of thing from happening and clearly those systems failed in this instance. Absolutely. That's why I've reported to you. We can maybe take that up with them. Alison Harris. No, I'm fine. You're fine. Okay, can I ask finally on the Edinburgh report, are you satisfied with the Scottish funding council's response and Edinburgh college's response? I think it's early to say that. We've said they have a transformation plan in place. There is a funding agreement to cover the college's funding gap through to 2018-19. In a sense, the proof will be in the pudding and the progress they make with that transformation plan. And I'll be in a better position at the end of the next, the 2015-16 audit when I'll report back to this committee on what the current position looks like. Okay. I'm now going to move to the Glasgow report. Can I invite questions on the Glasgow report? Does anyone? Colin? I suppose the Glasgow report in some ways is a story, but I would just like a reassurance that all the issues that came out in this have been fully dealt with and that Audit Scotland is now satisfied that Glasgow college is where it should be. I'll ask Gary to pick that one up if I may, Mr Beattie. So all of the issues have not been fully dealt with, but the majority of them have been dealt with. So, for example, all of the issues you have in paragraph 2 of the section 22 report around risk management frameworks, internal audit function, key committees operating effectively, an approved scheme of financial delegation and so on, those are all in place, but the financial memorandum, the draft one between Glasgow college's regional board, and the assigned colleges has yet to be finalised. Also, the Scottish funding council probably quite reasonably want to observe how GCRB and the assigned colleges are working together over a reasonable time to see how that relationship is developing before the release funds, but most of the building blocks that we asked for in the section 22 report are now in place just about to be finalised and they're at the final stages of those processes. So, would it be correct to say that there's certainly no public funds at risk at this point? There's sufficient governance, there's sufficient internal audit and processes to be assured of that? In the main, yes, although the final judgment of that is resting large with the Scottish funding council around the point at which they are assured that they are able to grant operational, fundable body status to GCRB. So, from where we sit, great progress has been made over the last 12 months in putting those building blocks in place and those are now working. Some of them are more recently in place than others, so there's just a little bit of time just to make sure that those processes are now operating effectively now that they are in place. Is it because there's still some concerns that the date given in paragraph 22 of 1 August 2016 for granting operational, fundable body status has been pushed back into January? I think that that's really a matter for the funding council around how they explain how they have gotten to that position. I do know that from GCRB, which is the body that I'm the external auditor for, they have been working really hard with the funding council in partnership and those relationships are much improved and they've been working together on that programme to make sure those building blocks of governance are now fully in place. As I said in my previous answer, they're largely in place now. I mean, there was a date given here. I mean it said to know why it's not been adhered to, what's caused the slippage again, because this report was done when March and at that time August was the date in which it was going to be implemented. It is only our understanding that, as Gary said, the funding council would like to see how the relationships between the regional body and the three colleges play out in practice, given the history of this, and they expect it to be fully in place by January. As of today, that's our understanding of the position. Mr General, did you want to make any remarks on this report? I'm happy to go ahead with questions. Thank you, convener. Any further questions? Can I thank you very much indeed for your evidence this morning? I'm now going to suspend for a comfort break. Thank you.