 Well, good morning. Can I welcome everyone to this, the 26th meeting of the Public Audit Committee in 2023? The first item on our agenda is for members of the committee to consider whether to take agenda items 3, 4, and 5 in private this morning. Are we all agreed? We are all agreed, thank you very much. Agenda item 2 for this morning's committee is consideration of the briefing paper prepared by the Auditor General on Scotland Colleges 2023. I'm pleased to welcome our witnesses this morning, first of all, the Auditor General Stephen Boyle, who's joined by Audit director Mark McPherson. Good morning. Tricia Meldrum, who's a senior manager at Audit Scotland, and Douglas Black, who's an audit manager at Audit Scotland. You're all very welcome and, as you know, Audit General, feel free to field any of the questions we've got to the most appropriate people on your team. Before we get to the questions, I would like to invite you to make a short opening statement. Many thanks, convener. Good morning, committee. I'm pleased to present this briefing paper on Scotland's colleges. I know that the committee will be aware that colleges are a valuable resource to students, their local communities, and Scotland's employers. In Audit Scotland, we've consistently highlighted risks to the financial sustainability of Scotland's colleges, and these risks have increased further since our report last year. Grant funding from the Scottish Government through the Scottish Funding Council accounts for around three quarters of the college's total income. The Scottish Government's funding for the sector has remained static in cash terms for three consecutive years from 2021-22 to 23-24, and at the same time, like everywhere else, Scotland's colleges' costs have increased. The flat cash settlement, therefore, equates to a real terms reduction in funding of 8.5 per cent over that period. My report notes that staff costs are the largest source of college's expenditure and accounted for more than two thirds of the sector's expenditure in the academic year 2021-22. As with other public bodies, there is pressure on colleges to give pay rises that recognise high levels of inflation and that those costs, therefore, are likely to grow further. All that means that colleges are facing difficult choices around the workforce that they can afford to employ, the curriculum that they can provide and the property estate that they need to do so. Significant changes to how the college sector operates have been recommended by recent national reviews commissioned by the Scottish Government. Those include the review by James Withers on the skills delivery landscape in which he noted the important role that colleges play and urged the Scottish Government, therefore, to think creatively about how to secure the sustainability of the post-school skills delivery system. One of his recommendations was the establishment of a single national funding body to have responsibility for administrating and overseeing the delivery of all publicly funded post-school learning and training provision. Other relevant reviews have included the SFC's tertiary education and research review, which recommended to the Scottish Government that there should be more flexibility around how colleges are funded. The Hayward review of qualifications and assessment, which will have further implication for colleges' staff and students. We have recently seen the Scottish Government announce that there will be a new national model of public funding for all colleges, universities, apprenticeships and training. My briefing paper is at a high level. I did not aim to include specific recommendations to either the Government or the funding council, but it is clear, though, that there is an urgent need to build on their on-going work to help colleges to plan for change now and make best use of available funding so that it is sustainable in the future. My colleagues in Audit Scotland will continue to track the developments through the annual external audit of incorporated colleges and continue our engagement with key stakeholders. As ever, we look forward to answering the committee's questions this morning. As you say, it is a briefing and not a full report that gives recommendations, but nonetheless contains some very stark warnings in it. One of the warnings—you have used the word risk and risks already—is a view that risks to the college sector's financial sustainability have increased since 2022. I wonder if you could give us an overview of what, in your view, those risks are. We are happy to do that. I will maybe bring Douglas in. As we set out in the paper at a high level, the risks are increasing. I spoke in introductory remarks about the nature of the colleges' income and expenditure environment that they are predominantly funded by grant funding from the Scottish Government through the funding council and that other sources of income, as we spoke in previous sessions with the committee, have become more constrained as their ability to diversify, largely as a result of the pandemic, became tighter to do. Exhibit 2 to today's paper sets out the scale of risks affecting Scotland's colleges, so I will pause for a second and invite Douglas to talk to the committee on those and anything that he wishes to elaborate on. Two key issues—staffing and also the college sector's property estate. We know that staffing accounts for such a large proportion of colleges' expenditure. There are ongoing negotiations between college employers Scotland and the trade unions for teaching and non-teaching staff. We are meeting them next week for an update. It is not just salaries, of course. It is the pension costs that are geared to salaries. We have seen a backlog of property maintenance funding over the years, with less capital funding by the Scottish Government than the college sector probably requires. Scottish funding council published a report a few years ago indicating that the sector required over £300 million of capital funding, and the funding by the Government is well short of that. As Auditor General alluded to earlier, colleges need a good-quality estate to provide a learning environment that is suitable for both staff and students to deliver a quality curriculum that generates students who wish the economy needs. Is insolvency a risk for any of the colleges in Scotland? That is not what we are seeing yet in the round. You will have seen from the paper that colleges are very closely monitoring their financial position and have adopted what we regard as quite good practice in terms of their financial assessment, their future financial projections, the relationship that they have with the funding council through the financial returns that they have to make, the assumptions that they are using, has thrown up challenges. Colleges in Ayrshire and Glasgow have perhaps got the closest to setting out the scale of financial challenges that they are facing that might either result in significant level of staff reduction through redundancy programmes and potential viability issues where there to be extreme scenarios. If extreme scenarios fall across any public body, there would be viability issues. Indeed, we have commented and discussed with the committee, the Scottish Government itself has projected that it has a significant gap in its public finances to deliver. The viability of the college sector is challenged. What today's report is looking to set out to address that challenge, there needs to be a clear plan from the Government, the funding council about what the future provision of the model looks like. However, we have come closer in today's report than we have done in previous reports to identify colleges through their own work that are experiencing those real viability issues. I am looking at Exhibit 2, which is an illustration of significant areas of risk for colleges. A couple of people have said to me who work in the sector that European social fund money. As I understand it, there are potential risks around the application of European social fund money, maybe even going back as far as the funding period 2011 to 2014, which I don't think has yet been signed off or audited by the European Commission. It has certainly been pointed out to me that that is a potential risk that is maybe not stated in the report. I wonder whether you have a view on that. I might not be able to say a great deal about it, convener. We have not covered that in any depth in today's paper. Although we are finalising our work on the audit of the Scottish Government consolidated accounts, we will be producing a section 22 report on the consolidated accounts to bring to the committee before the end of the year, in which we will update on what has been a long-running theme of the Government's compliance with the European Commission's requirements for the European social fund. The committee will recall that that has resulted in interruption, penalties and so forth. How that relates to colleges in which we are one of the vehicle bodies with which to administer the funding that we have not covered in today's report. I will maybe turn to colleagues if we have any further information that we can share with the committee. If we do not, we can certainly come back to writing if we have more detail. I am afraid that we have got any more on that. The exhibit was intended to be an illustration of the spectrum of challenges facing colleges, not an exhaustive list, but we can look further into the ESF issue. Thank you. I think that that would be useful and it would be helpful for the committee in considering its next steps. The Scottish Funding Council is obviously pivotal to this. As I read the briefing, it is the Scottish Funding Council that carries out an assessment of the sector's finances for each academic year. One of the conclusions that you reach is that there is an expectation that the expression uses an operating surplus that is considerably less. That is paragraph 10 of the briefing. Could you perhaps elaborate on what considerably less means? I am happy to do that. I will bring colleagues in as well. I will be able to set out to the committee a bit of the detail behind that. First of all, I might say that the ESF sees a role relative to our own. The committee might recall that we, Audit Scotland, produced annual overviews of Scotland's colleges for many years. In recent years, we have moved instead to produce briefing papers recognising that the funding council itself, as well as funders, are overseeing the sector as a whole and had been producing analysis reports. They are due to do another one on the back of the 21-22 financial results of the colleges, but they are also going to incorporate the results of the financial return data that I mentioned a few minutes back, which will both set out a retrospective and a prospective look at how colleges' funding position is looking. We anticipate that that will be published over the course of the next few weeks. I expect that that will, in addition to our own work, lay bear the challenges that Scotland's colleges are facing. On the detail of the operating surplus that you mentioned at paragraph 10, I will maybe ask Mark Wants to come in on that, or perhaps Douglas first of all. Mark Wants, on some detail we have that we didn't include in the report that only became available to us afterwards, is that in 21-22, nine of the colleges returned and that adjusted operating surplus rather a deficit. Nine colleges returned a deficit in 21-22 and that compared with three colleges the year before, so that's really quite a sharp change in the complexion of the college's sustainability. That's three last year, nine this year, out of how many? Twenty-four. It reflects, convener, the increasing challenge that the sector is facing, so we exhibit to you, you've mentioned, to set us out not an exhaustive list of financial challenges that the sector is facing, but, as we know of Scotland's colleges, that they are led by people. People provide services, staff costs and, therefore, reflect the significant component of their operating expenditure. With a flat cash settlement environment that they've been in for the past three years, the sector has, therefore, had to fund pay awards over and above the settlement that they've been provided. Inevitably, that brings cost pressure on financial challenges. At that rate of increase of the number of colleges going into deficit, if that trend was to continue next year, then every single college would be in deficit, wouldn't it? Perhaps not speculate until we've seen the SFC's analysis of the financial returns, but that will be a really important indication of not just the financial health of the sector, but, hopefully, and then what comes next. What guidance and support is the SFC and the Government offering to colleges to help them to plan for a sustainable future? On a similar theme and to develop some of those points, Graham Simpson has got some questions to put to you. I think that the report presents a pretty bleak picture and some of what you've said already highlights that. When you were preparing this briefing—I accept that it's just a briefing—did you have discussions with the Scottish Funding Council? Morning, Mr Simpson. Yes, we engage regularly with the Government and the Funding Council. Colleagues may wish to say a word about the nature of the engagement that we have throughout the year and, indeed, in the preparation of the paper. Thanks. We tend to have regular, not necessarily scheduled, specific dates, but we will have regular engagement, particularly at key stages of the year, and particularly if we are preparing a piece of work like this. We've dug us in the team and we will engage quite extensively around some of the detail and the data, but, obviously, it is a briefing and we know that they are doing their own work, so we tend to let them complete their work before we would then consider further. The reason I ask is because I've been told that the Scottish Funding Council keeps its own risk register. There's a list of colleges that are doing well and some that are not doing so well. There are some that are listed as potentially being at risk of closing. My understanding is that there are five of those colleges. Is that something that you've heard? My last colleague has heard the detail of that. I think that that feels like the right approach. You would expect the funding council as the funder of colleges. I know the importance of accountability arrangements. For example, the chief executive of the funding council is the accountable officer for the entirety of Scotland's colleges. So, in governance terms and accountability, that feels like the right approach that they would have a clear understanding based on their evaluation of the financial position of performance issues of Scotland's colleges, which colleges are performing well, which are experiencing financial health or which are in financial difficulties. Again, I think that that's consistent with their role to provide support and oversight of the college sector. In terms of the detail of how many colleges they would identify as experiencing financial challenges or otherwise, it's not something I've seen or can share with the committee, but again, I'll turn to colleagues if there's anything further we can add. Douglas? Thank you. Not for 21-22 yet because we're still waiting for the funding council's analysis of that, wrapping up its analysis of the financial projections. But in previous years, it's normally issued anion analysis, sort of state-of-the-nation thing on the college sector. I can just see in my mind an appendix to that, which has a colour-coded list of the colleges, which captures the extent to which the funding council considers they may need support, and that can be support for a variety of reasons there may be to do with financial matters, or it could be on governance issues, for instance. Yes. I'm glad you mentioned the colour coding. That's what I'd heard as well, and I was told that those at the most risk are coded black, and there are five such colleges. I remember that the ones most at risk as far as the council's concern are black, but that's going back to not 21-22, but 2021. That's a few years ago now, and that's not necessarily a good indication of where colleges are at now. So we probably need the current position, I think. I agree. I think that it's going to be really important, whatever the detail of what the SFC set out, both in terms of their analysis of the accounts and the forward projections, that will give a much more up-to-date picture of where they're targeting their efforts. How likely do you think it is that, given the cost pressures, industrial disputes that are continually going on likely to continue the wage pressures on colleges, how likely do you think it is that we're going to see compulsory redundancies in the sector? Again, it's difficult to speculate whether it is or isn't likely, but the aspector of compulsory redundancies has been raised within colleges. Ayrshire College, for example, may be just to set up a context, Mr Simpson. In the financial returns that the SFC asks colleges to provide, they give them, based on work that they do with the college's finance director's network, a range of assumptions with which to project their future financial health. Quite reasonably, I think that what we've seen in Ayrshire College is that they've gone further than that, so they have used more challenging assumptions about what that might mean. That college, in using it, whether you call it an extreme scenario or a more challenging scenario, have identified a threat to its financial viability. We've also seen similar challenges in Glasgow Kelvin College, which has also set out that it too might be facing real challenges that could require very real changes to staffing arrangements and the possibility of compulsory redundancies. I don't think that we're quite at that stage yet. I think that that still would be predicated on almost a, I do nothing, further environment that stops short of additional funding or reform, but the possibility of it is being discussed within the sector. I think that colleagues will probably want to delve into the situation at Ayrshire College a bit more deeply, so I won't do that. One of your key messages in the briefing was that, I'm just quoting, effective, affordable workforce planning is now a greater than ever priority in challenges and challenge for colleges. Can I ask what that means in practice? Given the reduction in college budgets that you've outlined, who's responsible? Is it the colleges or the Scottish Government? Simply, it's going to be a shared endeavour. The colleges work very closely with the funding council. I've mentioned the financial assumption arrangements, Douglas Ewing wants to elaborate a bit more on that, but the colleges themselves will need to have a clear financial plan, business plan, what that means in terms of performance, their offer curriculum to current and prospective students. We've also mentioned this morning, Mr Simpson, about the estate that colleges operate from. That's also part of the financial plan. All of those factors have to be considered in the round, but in the heart of that will be how they intend to deliver services to the people that work for Scotland's colleges. If I may convener, perhaps I look forward to speaking with the committee about it over the course of the next few weeks, but we published a briefing paper on the Scottish Government's workforce arrangements this morning, which similarly makes recommendations about the need for effective long-term workforce planning to support good quality service provision at a time of financial challenge, but a policy for a minute, I guess Douglas might want to say a bit more about workforce planning in the college sector. A key factor will be the number of learning credits which each college is expected to deliver, and that will be geared to the staffing complement that's required to provide that amount of learning activity across the range of courses, the number of students on the variety of courses and so on, and their pitch will vary across the college sector depending on local circumstances and student demand. A key document for each college is a shared outcome agreement, which is basically the contract between the college and the funding council for the type and quantity of college activity during the course of the year, and that's also the basis for which the college's performance is tracked by the funding council as well, and the number of credits actually delivered by the college is very closely monitored by the funding council as well, so there's a lot of interaction between the funding council and each individual college, both in terms of planning ahead for the years to come, what happens during the course of the year, retrospective tracking of performance, but essentially it all comes down to if there's enough funding to pay for the staffing required to deliver the quantity, the type of learning activity in the college. Yeah, and I read your report from this morning, it's extremely relevant to what we're discussing. There's just one more thing I want to ask if that's okay, convener, and it's about Arms Length Trust, which are called the college sector, Arms Length Foundations, which was set up in 2014. I just wonder, I know you've done some work on these in the past, but I didn't see any mention of it in this briefing. I just wonder whether you've been doing any sort of up-to-date monitoring of the money that's in these foundations, what it's being used for, is it going from the foundations into back to colleges and are colleges moving money into foundations? Where are we with this? Yeah, you're right, Mr Simpson. We haven't covered Arms Length Foundations in today's briefing paper, but we have, in earlier reports over the past few years, updated on primarily the extent of funds still held in Arms Length Foundations. I may need to refresh my memory or colleagues can help me out, but in general terms, the extent of funding has dwindled significantly from what it once was. You remember the history of Arms Length Foundations, this was a mechanism with which the college sector was able to continue to access reserves that they had built up before they became central government bodies and this was the vehicle with which to do so. Not all colleges had them, some had, for those that did, some had quite significant balances, but the trajectory has been one of, as we probably would have expected, the over years they have been used for the purposes, the quite clear purposes that they are intended. If we have any further detail, I don't think we do at hand today, we can come back to it, but it wasn't a feature of this year's work. So do you think it would be possible to get a sort of up-to-date picture? Yeah, very possible. I think what we might do is await the SFC's publication, where they will be analysing in more detail the annual report and accounts of the college sector. If that doesn't provide detail, then, when it's published over the next few weeks, it's something that we can look at and if we get more information we can share that with the committee. Okay, thank you. Thanks, that's very helpful. Sorry, just for confirmation, that's something that we expect before the end of November to be produced by the Scottish Funding Count. Yeah, I think I need to, it's due roundabout this time of year, convener, and actually I don't think we have a precise date for publication yet. Okay, you can't be held responsible for when the Scottish Funding Council publishes its report, I think we understand that. I'm going to now invite Willie Coffey to put some questions to you and Sharon Dowey may drop in and out of this section as well, but Willie, first of all to you. Thanks, convener. Good morning, Swarditor General. I want to just open up a little bit of discussion on the year-share college commentary that's in your briefing. Of course, there's a almost like a kind of doomsday scenario potential forecast in there that would worry everyone in the sector, it would worry everyone in the year-share, but the college principal has subsequently ruled that forecast out and has not adopted that forecast and she's written to members to clarify that, but could you just give us a little bit of flavour of where do these forecasts come from and who scrutinises their viability? Did they follow criteria set by the SNC, and why are all the colleges not doing what year-sharing Glasgow have done? Yeah, I'm happy to start, Mr Coffey. Maybe Tricia might want to say a bit more about, I think, as you allude to just how realistic or plausible the scenario was. I think that the first thing I would say, I think it's without wishing to alarm people, and there is a risk of that, and I'm quite sure from the community of year-sharing that the college serves that they might well be alarmed by a projection that suggests there are doubts about its viability, but in terms of setting out what a challenging scenario might be, I think it is important that that is clear, there's transparency about the scale of issues that Scotland's colleges are facing. The assumptions that I mentioned a few minutes ago, there are base assumptions that the SFC and the College of Finance directors operate that sets out how they should be used to inform future financial projections. Some colleges have used more challenging assumptions where it relates to information that's available for their circumstances. Again, I think that that's an appropriate thing to do, because it develops an assumption for local circumstances. It is the case, though, that this was quite a far-out assumption that would be extremely challenging and perhaps more unlikely, but in terms of risk management and future financial projections, it's the kind of thing that we would expect all public bodies to be doing. Although it's not operating as a core assumption, it's one that you should have a plan of how to deal with. If anything we've learnt, if I may just digress for a second from the pandemic, is that we need to prepare for quite extreme scenarios that how we might deal with it. That's the general background to that, Mr Coffey, but I'm going to pass to Trisha, just to say a bit more about the use of assumption development of it, and then the college's further view on how applicable that one is. Thank you. All colleges prepare their response for SFC, which is their assumptions are things that are based around Scottish Government spending review and the assumptions that you would take from that, from the information that's available around that. The finance director's network have also done their own work around different sets of assumptions that make assumptions around things like energy costs and what those are going to look like. Some of the trends in the costs that you would expect the college sector to potentially be looking at. Those assumptions that have underpinned the two different types of analysis, the SFC will be doing further analysis when they see all of their returns. That's one of the things that we're expecting to see towards the end of November around how that looks. I think that the other thing to say around the Ayrshire example is that the figure around potential loss of staff is based on that pessimistic set of assumptions, but also all the savings having to come from staffing. If all the savings came from staffing, that's what it would potentially look like. Obviously, there are other options that they could be exploring. The college has been doing a lot of work to look at the risks and how they manage those risks and how they mitigate those risks. The information that we have is that they feel that that was quite an extreme scenario and that that's not the position that they're actually in. I'm trying to get into that. In Ayrshire, are there a bit more pessimistic down there about the future? Had the other colleges embraced that similar scenario, would they have come up with the same forecast and projections as Ayrshire are doing? I'm trying to burrow in to try to find the answer to that. You said that Ayrshire and Glasgow did this and none of the others did it. Had the others, should the others do this similar level of forecasting, would we arrive at a similar picture? I think that perhaps all we can offer is maybe. Maybe that's what you were saying, but that Ayrshire has done so. We think that they are exploring and that they've shared it with their board of governance. There's visibility of the scale of the challenges that that college is facing, but also the sector more widely. I mean, I don't think... While that extreme scenario might not come to pass, I don't think it should mask the fact that there are really live viability issues for the sector in the round that has to result in a clear path we don't quite yet have. In terms of the funding council reviewing these forecasts, Mr Stephen, when is that going to happen and when will we get some kind of clarity or even certainty in this matter? I think that that's the publication we're waiting for over the next few weeks, Mr Coffey, that should set out the funding council's up-to-date view of the financial health of the sector. The analysis of the accounts clearly will be a very important statement of where resources will be targeted and what kind of support the funding council can offer individual colleges. Mark, last query on this issue for Ayrshire convener, orders of general, are you still cited in the residual PFI payments that Ayrshire college are still making? As I understand it, they still pay £2 million a year to pay off the PFI investment from 23 years ago or so, I think at 23 years, because that's still contained within the college's financial projections and would be part of this forecast scenario going forward. Again, on the big colleagues, we've got more detail in that, Mr Coffey, but certainly any payments and PFI forecasts would be captured as part of the annual audit of Ayrshire college, so those will be set out in the college's financial forecast and their annual report and accounts are going to be subject to audit this year. Beyond that, whether there's any more fundamental plans about the management and use of the PFI or we would just check in if there's any more detail. We know the matter's flagged in the annual audit report for 2021-22, but we haven't looked into capturing the detail on that for this briefing, I'm afraid. It would have to form part of these projections, surely, if it's a £2 million burden that they face going up to 2025, but it would still have to be captured within this scenario as well, I wouldn't imagine. Yes, you're right, it would have to be captured in this scenario unless there's a specific assumption around the PFI, I think, as we spoke to the committee about over the past few weeks. As we are approaching the era of the end of some of the original PFI's, it requires careful management consideration about how the public sector, including colleges, will plan to use and manage former PFI assets as they're brought back into the public sector in a state. I think that it's an important thing for both the college and the SFC to take a view on what that means for future financial projections and health. The initial college, finally, is the only college in Scotland that has a PFI liabilities still live? I'm not sure. You're right. It is. The issue is the only one that still carries a PFI burden, as I understand it, and that's been a substantial impact in the college over me. Thank you very much for answering those questions. Thanks, Willie. I think that Sharon's got a supplementary question in this area, too, Sharon. Thank you. It's just a quick one. It's just to see how accurate the forecast has been following the Scottish Funding Council assumptions compared with what the actual figures are. I don't know if you said earlier on that six colleges come back by a deficit, so I'm just wondering whether Ayrshire College is right to go in and do the pessimistic view and how accurate all the colleges' figures are following the SFC guidelines. Yeah, good morning, Deputy Minister. I think, as I've said this morning, I think that it is the right thing to do. I think that all colleges and all public bodies should be using a range of scenarios to stress-test their financial health and how they would cope with. Inevitably, it is a forecast, so does it then mean that that is what the financial results have been? Probably not. Given some of the variables that are set out in Exhibit 2, there's a range of factors that will influence the eventual financial outturn of a college over and above what could potentially be quite narrow scenarios, but I don't think that it should detract from the fact that Scotland's colleges are facing real financial pressure. Whether it's marginally consistent with the forecast or it's wildly out, difficult choices are going to have to be made to deliver a sustainable college provision for students, staff who work in the communities that they serve. Mapping exactly what the forecast was to the outturn is something that the SFC and the college should be looking at, and again, if we're inclined to do so, we can have a fuller look at this to say, well, what was the forecast and then what was the outturn? We probably need to go back through a number of years' worth of reports to do that, but that information is publicly available. Before we leave the Ayrshire College doomsday scenario, if they're talking in their pessimistic projection about a potential 70 per cent reduction over five years in staffing, and it operates, as I understand it, on three campuses—Kilwyn, Kilmarnac and Aire—would that suggest that they would just consolidate on one campus? Those would be choices for the board and the SFC convener about how they would organise themselves to deliver a service. As we talked about in our infrastructure briefing paper, the use of the estate really matters. Alongside costs, and as Douglas has mentioned already, the estate has many millions of pounds of backlog maintenance but also needs to be factored into future plans. However, the specifics of Ayrshire College and how it delivers its service will be up for the board and the SFC of that college to determine how that best meets service requirements alongside their financial health. However, it hasn't developed that picture as part of its scenario and its submissions to the funding council, for example. I am not aware of the detail of that, convener. I think that that is probably something that the college would best place themselves to comment upon, on how it would respond to, as Trish has mentioned, quite pessimistic scenarios that they have said since their use of that scenario. That is not one that they are operating to with great certainty, but it will ultimately be for the college to determine their service model provision. In the briefing in paragraph 14, you finished with the clause regarding the 70 per cent cut of staffing over a five-year period at Ayrshire College. You described that as a scenario in which it could no longer function. Is it a scenario in which it could no longer function in its present form or is the full stop after function it would be? Correct. In its present form, whether it had three campuses, if it had to lose 70 per cent of its staff, it would not be able to deliver the model of service courses that it currently exists. To take that scenario to an extreme, there could still be an entity with that name, but not one that you would recognise or ability to serve its students in the way that it currently does. We have mentioned a few times the college estate, and I know that Colin Beattie has got some questions on that. Over the years, I think that the college estate has come up repeatedly in your reports. It is not just the college estate, it seems to be across the board in the whole public sector, maintenance and so forth has fallen well behind. Looking at the figures for the college sector, it really does seem that, according to your briefing in 2022, capital funding for the college sector was £321 million short of requirements for life cycle and backlog maintenance. That is a lot of bucks. Those issues have been highlighted now so often. Is there any progress towards tackling this? Is there any real understanding and management of this? It is a hugely significant issue, Mr Beattie. There is no question of that. To reiterate some of the numbers around this, we have over £300 million of backlog maintenance. As we are alluding to in the report, some of that will be compounded by the identification of rack concrete deficiencies that have been noted in the report. Of course, there is another question that I was going to ask you, but I will not answer at the moment. I will save that thought for a minute then. However, in terms of the scale of backlog maintenance, there is yet another financial pressure on Scotland's colleges so that they can find a mechanism with which to safely deliver learning for their students. To bring this in from another angle, if I may for a second, nine out of 10 students in Scotland say that they are happy with the service that they get from Scotland's colleges. That is very impressive, given the scale of challenge that is evident in Scotland's colleges. However, they need to have a safe learning environment with which to pursue their studies. Operating with £300 million of maintenance requirements puts at risk the ability for the sector to have a safe environment with which to provide people. So much work to be done. The only things that we do know, as we mentioned in the report, is that the SFC has developed an infrastructure strategy that will look to help the sector to address some of its requirements for infrastructure. We are awaiting a publication of an infrastructure delivery plan over the next few weeks that should set out in more detail how the SFC and Scotland's colleges will work to provide that safe environment. Now, looking at your report again, the SFC has made available £4.7 million for health and safety and they have got bids of about £20 million. How is that going to work? So you are right, there is something of a mismatch. I should maybe ask Tricia just to set out in a bit of detail how that fund is operating and how the SFC is prioritising. Don't have a huge amount more detail around that, just that the SFC is looking to identify what are the kind of biggest priorities in terms of the biggest, I guess, the riskiest areas that are most in need of funding and then RAC is then always appearing on top of that as well as that as a different issue. So, yeah, it is very much part of the pressures there, but that pool of money is not going to address the scale of the challenges that are facing the college sector. I think just to add a wee bit on other things that the SFC year are doing around supporting the sector, so we know that as part of their infrastructure strategies they are doing some work with colleges around looking at the baseline condition of the college estate and the infrastructure and that is due, they are hoping to publish that information sort of late spring so that again adds to the moment there is these kind of very immediate health and safety issues and challenges. This will be a much broader look at what is the whole state of the estate and then use that information to build on the strategy to develop the infrastructure investment plan and that is due autumn 2024 and that will be a 10-year plan for 2024 to 2024 and part of that is around how that funding, how it will actually be funded to deliver on the strategy, so getting into what are the potential solutions to making sure that the estate is fit for purpose in addressing this backlog. It also sounds like a bit of deja vu, haven't we been through all this before over the years? I mean I've sat in this committee now for 13 years and you know every time colleges come up the maintenance backlog comes up and someone's going to prioritise doing some sort of assessment as to you know for allocating funds for the most urgent ones and all the rest of it. This sounds like it's exactly the same again. So you're right, there is some familiarity with this topic Mr Beattie. It's not unique to colleges I should say, we've reported in other sectors NHS for example that it too is facing hundreds over billion pounds actually of backlog maintenance. Financial context is everything here, so that you know whilst your memory stretches back a number of years just looking at the years timeframe we cover in today's reports that the three years worth of flat cash settlement plus dealing with above inflation or above financial settlement pay awards inevitably requires colleges to make choices, so if they've had to fund pay it might, what we're seeing is they've not been able to support backlog maintenance requirements and other pressures, all of that requires prioritisation and trade-off. So I think it's important to recognise that the SFC have set out a strategy and will be setting out a delivery plan on how they will be supporting the sector addresses but yeah there's important work to be done here. And presumably you'll be taking an interest into what comes out of this. Yeah quite, I think it's probably hearing today there's a number of important reports awaited from the SFC and the government about how they will be assessing the financial viability and helping colleges prioritised to deliver to a sustainable platform for the future but there are a lot of risks to be addressed. Coming to the concrete, reinforced autoclave aerated concrete, how's the college sector in terms of that? Do we have any knowledge? Has there been an assessment carried out? We do, so I think I'm right in saying again, colleagues can keep you right in this, that there are three colleges in Scotland that have identified that they have rack in their buildings which are Dundee and Angus, Glasgow Clyde and Edinburgh College. The extent to which that has interrupted learning and plans that the sector have in place will be held by individual colleges, I think there is, there's been some communication and discussion between the minister and the education committee on how this was being managed and reported. That work is in progress, Mr Beattie, but I think it goes back to your earlier point that dealing with £300 plus million of backlog maintenance and now having to potentially find additional resource to make buildings safe to address rack concrete is just another financial pressure that the sector has to accommodate. Move on to something different. Covid-19 restrictions are obviously no longer in place. Is there any evidence that colleges are pursuing non-FCFC funding sources generating money from commercial activities and so on? That was the great cry before Covid that they were going to generate all this money. Has that happened? I'm going to bring in Douglas to say a bit more about this, but your memory is right that the intention was that colleges in previous years would have been able to diversify to bring in other sources of income to lessen their reliance upon SFC grant funding, but as we reported in previous briefing papers on the sector, inevitably Covid-19 had a very significant interruption upon that, especially in the nature of some of the diversification of income would require face-to-face learning to support that. We've noted in paragraph 22 that there is still a scenario that grant funding is around three quarters of the sector's income. Other sources such as tuition fees, education contracts and examples such as catering tend to be the sources with which other income for colleges can be generated. The extent to which that is returning to pre-pandemic levels is something that we will await the detailed analysis of in the accounts. I'm not sure that it's going to be the panacea, Mr Beattie, in terms of that being the answer to the college's financial pressures. I think that it will help if they are able to pursue that diversification, but in terms of realigning their financial health, I think that it's going to be more fundamental in terms of the grant funding that they receive from the SFC. I suppose that coming back to something Graham Simpson touched on with the alfs, our college is making use of the alfs to channel their commercial income into which was the original intention to keep it out of the public purse. So, Douglas, we haven't looked at in any detail in today's briefing about the transactions that are flowing through the arms length foundations. Again, if we have more detail on that, we can share that with the committee, but it's not something I have to hand today. It would just be interesting to know if there is anything happening there. I guess the other big question is, and it's one that everybody's touched on to some extent, is real terms reduction of 8.5% in college funding from 2122 to 2324? Clearly that's going to have a huge impact. You've already highlighted some of the risks in terms of salaries and so on coming down the line. What constraints do you think it's going to put in the colleges? Just as a general question. I think it's going to be hard for any organisation to, well, to sustain the status quo with that level of funding reduction while their expenditure is increasing. So, in that context, I think what we're already seeing, you know, you're lying to questioning in terms of backlog maintenance would be one element of it. And as colleges themselves are already doing through their viability assessments, what does that mean for their staffing contingent? My paper that came out on the Scottish Government's workforce, for example, there's a really telling statistic in that where other parts of the devolved public sector haven't grown in terms of staffing numbers. Scotland's colleges haven't, they have fallen in terms of numbers. So, I'm reluctant to speculate in terribly much more detail, Mr Beattie, but I think it's safe to say that where your funding doesn't match your expenditure, it will require difficult choices and that will be about curriculum content, the extent of provision, the number of staff that's available, quality of buildings and so forth, all really difficult challenges. I mean, I would like to think that 8.5% wasn't pulled out of a hat and that there was some anticipation that colleges would be able to cope with that level of deep peace and funding and that they'd be able to find efficiencies or different ways of delivering which would correspond. Do we have any information on that? I think if you're asking to look to the future a little bit, I think about, you know, the extent of colleges' awareness of this. College might want to say a bit more about the funding environment, the extent to which the SFC supports colleges in terms of its financial planning. We might also want to develop what comes next. I mentioned in my introductory remarks that there have been a number of reviews of the sector looking to the future about how this can become a sustainable model, a sustainable sector to deliver high quality education skills training for people for the future. One of the changes that we know about that the SFC has asked for is a new funding distribution model that gives more flexibility to colleges to help them plan for the future. I think that that will be one of the early signs of more flexibility in terms of funding, but until we've got wider clarity, Mr Beattie, about really the Government's intentions about what we'll do with a variety of recommendations, it's a remaining challenge to be addressed. I'm going to pause for a minute just to say if, colleagues, we wish to sit a bit more detail about the financial projection over a more than a 12-month period. I would expect the Scottish funding councils were looking at colleges' projections to take staffing issues into account, but, as Stephen said, more widely there are other things going on. We've been engaging with the funding council and the Scottish Government as we usually do, so we know that the Government is thinking very hard about how to address the recommendations of a range of recent national reviews. The review by James where there is post-school skills delivery, the review by Professor Hayward of qualifications arrangements, the funding council's own review a couple of years ago, which also looked into the sustainability of the college sector. So, rather than taking these reviews separately, the Government is trying to look at the whole package of reviews and the implications that they have for the purpose and principles for what the college sector and the university sector is actually trying to deliver and achieve and how that will all be managed and organised. So, it's working progress at the moment. Okay. Just one last question, which I find a bit of an anomaly, is about the differences in financial years. You know, the Scottish Government obviously has a budget that works on the financial year April to March. The colleges are funded within the academic year August to July. To what extent do you think that that causes any difficulty to the colleges? I mean, it sounds a bit daft in some ways. I think it's a known complexity, I would describe it as, but it brings further financial challenges, because what you effectively have is that in funding an academic year, it straddles two financial years. So, if there are significant changes from one financial year to the next, that could impinge upon the academic year funding environment as well. I'm not sure if there's any intention to change that. I think it's a factor that is known and it's a complexity that's allowances are made for Mr Beattie, but again, it's potentially an area that the SFC are better placed to comment on than I am. Is it just a historic anomaly? I need to go back and check about the timing of it. I think that Scotland's colleges are the only sector that I'm responsible for auditing that doesn't operate to a much financial year end. Their financial results, which I think is right, reflect the way that they deliver their services, which runs from August to July year end. For me, that feels it's the right way for presenting their financial results, but inevitably it's at odds with how the rest of the funding environment operates. I'm not sure I would make too much of it, but it's just an additional complexity that the SFC has to manage. But surely it's not a necessary complexity. You can still have your academic year and your financial year. They don't have to coincide. I'll ask Mark to say a bit more. He's got some of the additional history behind this. I suspect the financial year for colleges. It's set in legislation, but it's also tied to them being before there were public bodies as such. It's a long-standing historical thing. The Government would need to explore with colleges whether it would be beneficial for them to have to change their financial year if all their planning is currently done around the academic year. There could be benefits for the colleges in having a financial settlement that aligns with their own financial year and their own planning. Do we know that there's any thought to do this, to look at this? I do have some vague recollections from several years ago now when we engaged with the college sector, but it's not something that I've revisited recently. Okay, thank you. We're drawing towards the close of this session, but I know that the deputy convener Sharon Dowie has a number of questions to put, so Sharon, over to you. Paragraph 25 states that the Scottish Government announced in June 23 that it plans to take over national responsibility for skills planning and that there will be a new national model of public funding for all colleges, universities, apprenticeships and training. Do you know what timescales the Scottish Government is working to for us? I'll ask colleagues if we have any further detail on that, deputy convener. No, we don't. We've been speaking to the Scottish Government about it. They haven't given us a timescale further. I'll have their workload pan out on this. For me, deputy convener, the committee will recall that we produced a report on skills planning arrangements in Scotland. My memory is about to fade away, but I think it was early 2022 or 21. Again, it identified some of the areas for improvement about how the Scotland skill system was operating. This is one of the impact of some of those findings and recommendations. I think as Douglas mentions, we don't quite know the detail about when all that's going to come to play. But we want to see not just the dates, but what that means in practice about how it will deliver better outcomes for people who are using and rely upon the skills system. Have you had the opportunity to consider the SFC's new funding distribution model and guidance for academic year 23-24? If so, could you provide us with any further details on that? It's something that we will be turning our attention to. We haven't considered that as part of today's paper, but very clearly we are part of our work and future reporting that we do on the college sector. In paragraph 30, it says that, while recognising the role of college leadership teams in managing their finances, it's also critical for the Scottish Government to work with the Scottish Funding Council during academic year 23-24 to support colleges in planning for change now and making the best use of available funding. Is there any evidence to demonstrate that the Scottish Government is working with the Scottish Funding Council to support colleges? Yes, there is. There is strong evidence that the funding council is aware of the issues that the college sector is facing. I guess there are a number of components to this, so there are well-established arrangements with which the SFC works with and supports colleges. We've seen that through their analysis of the accounts, their performance information, shared outcome agreements, the financial forecasts and the risk management arrangements that underpin all of that. We think that it is an important development that there's going to be additional funding distribution models and more flexibility that's intended around that. What we're really setting out in today's paper is that there's still work to build upon that the SFC and Government is working with colleges to deliver a sustainable future for the college sector. The scale of financial challenges facing the sector is significant, so using that underpinning will help, but what comes next in terms of the detail of the plan to deliver the financial health of the sector is what we're looking to see. Do you feel that they're doing enough to support them just now? I think that that feels quite a broad question. If I may, you'd have to convene on that. The scale of risk and challenge facing the sector is significant. We've talked about that already, that even allowing for support that's already in place that some colleges are forecasting that the way they deliver services at the moment might not be sustainable. To say that enough is being done is probably a judgment that I wouldn't be making today, given the scale of challenges that remain to be addressed. A query, just going back on to the beginning of the report, it says 19 colleges are classes incorporated in our public bodies and also says they are not permitted to retain reserves at the end of their financial year, so my question would be does that put them at a disadvantage to colleges that are unincorporated and is there anything that can be done? Maybe brings it back to Graham Simpson's point on alfs. I'm just kind of thinking if they're not able to carry over any excess funding at the end of the year then they risk spending at a waste in the money at the end of the year, spending at things that they don't need to spend it on. Is that getting looked at? Is that something that can be done to allow them to carry over extra funding? Mark might want to say a bit more about this. There is a great deal of history with the colleges funding environment and their ability to retain reserves. Much discussion and indeed the predecessor committee took evidence on colleges inability to retain reserves and what that means. I think a couple of aspects to deputy conveners. I don't think they're in competition as colleges for the incorporated relative to the unincorporated colleges, but, as with almost all Scottish Government bodies, they don't hold reserves. The Scottish Government itself was only recently with the Scotland reserve in a position that it can use that as a vehicle with which to support its financial planning, but I don't think there's any plans to revert to a situation where colleges can hold reserves. If there are, that would be a matter for the Government and the Scottish funding council. I'll stop for a minute. Mark might want to say a bit more about some of the history and where it goes next. I don't want to get into too many technicalities. Essentially, that is what led to the creation of the arm's length foundations, was that limitation that constrained on colleges. My recollection, and it's a few years since I was in deep in the college sector, was that the funding, as the auditor general alluded to, in the Alps was dwindling, was reducing over time. It is worth being in mind that when it is in analf, there's no guarantee that the college will get it back, because the purposes for which they were instated was not just for colleges, it's for educational purposes throughout the year. That was a very important part of how they remained independent and how it could be effectively used as a vehicle if there were funds to be deposited. Just one final question, just going back to Exhibit 2. One of the significant areas of risk is the investment required to achieve public sector net zero targets, especially in relation to the college estate. It won't just affect the college estate. Obviously, there's a lot of old buildings in there, historical buildings. Has the Scottish Government done anything to actually cost how much this is going to be to make sure that they're actually given the required funding to the college estate to get them to net zero? We're expecting to see the infrastructure delivery plan that's imminent will set out how net zero will be achieved by Scotland's colleges. I think that that has to be a core plank of that strategy and delivery plan. I said that we were in the final approach, but I've got an indication for Willie Coffey that he wants to ask a question, so I'm going to bring Willie back in. Just to follow up on the questions that Colin had posed on the potential for commercial income, it was really to ask about what the college's relationship, if any, with the European Union is now and going forward. You'll know, Stephen, that they used to benefit from European social fund money and so on, so it's to ask, was that ever replaced in any way, shape, or form, and what's stopping Scotland's colleges from continuing to develop, even if it's a commercial relationship now with the European Union? I'm not sure I have the detail to best answer your question, Mr Coffey, on college's ability to best make arrangements following what will soon be the end of European social funding arrangements. You'll know, and I know that the committee is familiar with aspects of the successor arrangements following the UK's exit from the European Union in terms of levelling up funding and so forth, how that relates to colleges. I think that we probably need to do a bit more detail, perhaps come back to the committee and write to you. Okay, thank you. Two quick final questions from me. One is, and again it's not something which I think is in this briefing especially, but it's something which has been a recurring theme in previous briefings and reports, including the section 22 report into South Lanarkshire College, and that was a question about the regional board structure and whether or not that represents a sensible part of the whole governance landscape or whether it's, frankly, surplus to requirements. I just wonder whether you've got any reflections on that question. Yeah, so in today's paper, convener, we set out a couple of relevant points to this one, is that there have been some changes to the college sector since we last reported with some amalgamations in the University of the Highlands and Islands, which was one of the components of the SSC's findings from two or three years ago that related to this general theme of murders and amalgamations. The other two aspects of that were in respect of the regional structures in Lanarkshire and Glasgow, which SSC's view was that needed to change, weren't delivering for what was originally intended. So we've not seen or not aware of any timeline or further plans for those regional structures in Glasgow or Lanarkshire. I think it's probably a question that the SSC will be best placed to update on about how they intend to progress on. Thank you, and it will be part of the committee's considerations of next steps about whether we seek further evidence from organisations, including the Scottish Funding Council. My final question was very much tying in with the final conclusions of the report, where you remind us that the Scottish Government's three missions are equality, opportunity and community. In paragraph 28, you conclude a significant reduction in a college's range of courses, student capacity or its closure altogether could have an unequal impact on students from more deprived areas. I wonder whether you could elaborate that point a little bit for us. Very happy to do so, convener, actually. I think a couple of threats. One is the undoubted benefit that Scotland's colleges provide to students and their communities. I'm sure that the committee will be familiar with the report that was produced earlier this week by Fraser of Allander Institute, which set out the economic benefit that Scotland's colleges provide of £52 billion of students over their working life who have gone through the college sector. We also know from analysis about the relative prevalence of people from disadvantaged backgrounds who are more likely to go to Scotland's colleges than they are to other education spheres. Put all that together, if there's going to be a disruption based on the financial position of Scotland's colleges, it was clear from the supporting evidence that people from more deprived backgrounds would be more likely to experience this advantage if there were to be a disruption to the provision of college learning that is on offer. On that note of sharp realism, we will conclude this morning's evidence session, but to Auditor General, I thank you and your team of Mark McPherson, Trisha Meldrum and Douglas Black for the evidence that you've given us this morning. As I say, it will be for the committee to consider what its next steps are, but I think that the briefing has been an extremely valuable brief insight into the state of finances, especially in Scotland's colleges. I thank you for that, and I'm now going to move the committee into private session.