Further Education and Skills Investment Directorate
Department for Business, Innovation and Skills
1 Victoria Street
30 September 2010
Dear Ms Ward
A Simplified Further Education and Skills Funding System and Methodology: Consultation
I am pleased to submit the response of People and Business Development Ltd (“PBD”) to the above consultation.
By way of background, PBD is a work based learning provider operating nationally and specialising in early years and playwork. We hold a Skills Funding Agency contract for apprenticeships, currently worth some £800k p.a. in addition to a small Train to Gain contract.
We are leaders in the use of e-portfolios for maintaining assessment evidence and we have recently developed eQual Learning, a suite of interactive e-learning materials aimed at the new QCF qualifications. We are the smallest provider to be approved by the Skills Funding Agency to maintain electronic records for audit purposes and we are members of the Technology Exemplar Network.
We are accredited as a training centre by City and Guilds and the Institute of Leadership and Management. We are also recognised under Investors in People and accredited under the Matrix standard for information, advice and guidance.
In general, we strongly support the changes which have already been made to simplify the structure of funding, streamline contract management and target compliance efforts at things which matter. We also welcome the proposed direction of travel as outlined in the consultation document.
We believe that the single most important further reform which can and should be made is a move to outcome based funding. This will largely eliminate the need for on programme payments, which constitute the main driver of contract management, accounting and audit bureaucracy.
Such a change will also make it possible to adopt a greatly simplified version of the recent Banks proposals, which we think stray too far into commercial relationships between providers and employers and which will be difficult and costly to police effectively. We argue for a system where there is a maximum government contribution for each qualification but where provider allocations are based, not on the level of employer contribution secured but on a form of ‘Dutch auction’. Provided this is implemented in parallel with outcome based funding, the quality of training delivery will be protected and innovation and efficiency encouraged.
In terms of general efficiency, we support a move towards minimum contract values but we urge a measured approach. There are two reasons for this. First, the consolidation of existing providers into fewer, larger, groupings has the potential to damage quality and incur additional cost in policing consortium arrangements. Secondly, a move away from on programme payments towards outcome based funding will significantly reduce the Skills Funding Agency’s contract management and compliance burden and may remove much of the imperative for minimum contract values.
Given that the largest impact on contract management costs will come from removing the very smallest contracts, with only a limited marginal benefit from further increases in the threshold, we recommend a relatively low initial threshold of £500k p.a. The impact of this should be thoroughly assessed before ‘raising the bar’ higher.
We now address a number of specific consultation questions. We have not attempted a comprehensive answer to all questions as some of them are outside our experience or not relevant to the specific circumstances of our business.
The Wider Further Education and Skills Landscape (questions 1 and 2)
We entirely support the core principles and the resulting system as expressed in the consultation document.
Outcome Based Funding (question 12)
We are addressing this question out of sequence because it underpins much of what we have to say in relation to funding policy. We strongly support the principles set out in paragraphs 35 to 40 of the consultation document.
We believe that most of the present accounting complexity, bureaucracy and administration cost in the funding of workplace learning is directly attributable to the system of on programme payments.
For every individual learner in the system, there is a potential mismatch each month between the cash paid, and the amount earned, to date. This, in turn, creates a need for audit effort to detect (and, where necessary, make recovery for):
• payments made for learners who do not exist
• payments made for learners who are ineligible
• payments continuing to be made for learners who have ceased to participate
• manipulation of planned end dates
• subcontracting arrangements involving excessive contract skimming.
In addition, contract managers must focus regularly on cumulative monthly payments in order to monitor the extent to which providers are delivering, or falling short of, their contracted volumes.
We propose a radical change (as foreshadowed in paragraph 40 of the consultation document) under which providers receive most or all of the attributable funding on achievement.
This will greatly simplify contract management. First, it will no longer be necessary to monitor success rates, since providers who underachieve will simply not be paid. Secondly, it will not be necessary to monitor providers’ ongoing progress against profile. Instead, providers can be given an incentive to do this themselves by combining the message ‘use it or lose it’ with the power to trade surplus contract value between themselves. Payment to a provider in excess of its agreed MCV will be possible only where the provider submits a contract note as evidence of having acquired additional contract value, which can be matched to the corresponding contract note submitted by the seller. A market driven mechanism such as this is likely to be very effective at ensuring that the overall budget is delivered in each year.
From an audit viewpoint, payment on achievement will, at a stroke, remove incentives to invent learners or manipulate dates. The audit issues will be considerably simplified: since quality control is the function of the awarding organisations and payments are made only on production of a certificate, auditors will be able to confine themselves to making sample checks on the genuineness of certificates and the eligibility of learners. This can be done centrally without the need for any visits to providers to inspect documentation supporting claims for work in progress. Furthermore, the number of auditable transactions will be significantly reduced.
Because payment will be based entirely on achievement, providers will no longer be paid anything for early leavers. While this may be initially unpopular with many providers, the likely response will be for providers to ask for some upfront payment from the employer or the learner (possibly refundable on completion).
The proposed system may create cash flow problems for providers but these will generally be limited to two situations: the initial, transitional year when funding is suspended before a ‘pipeline’ has been established; and when faced with a significant expansion of activity. These can be mitigated – and the change to an achievement based funding model facilitated – by a system of short term advances to providers to cover the cash flow deficit caused by the change, much as an employer might do during the first month of changing its payroll system from a weekly to a monthly basis.
The actual pattern of cash flows while the system is phased in may therefore be little different to the present. The key difference, however, is that the advances will no longer be linked to training delivery but will simply be ‘banking’ transactions. Advances will be repayable on an agreed basis from earned achievement payments and can command a commercial rate of interest. It will also be possible to impose minimum quality standards for negotiating an advance, with new or high risk providers required to provide additional security if they wish to apply.
A move to a system of payment on achievement begs the question ‘achievement of what?’ In principle, we support the idea that what really matters is not the achievement of a qualification but the delivery of a successful outcome, such as a learner securing employment or promotion, increasing productivity, starting a new business etc. However, we consider that the difficulty in defining, and reliably measuring, such outcomes is such that, for funding purposes, it will be preferable to regard the achievement of a qualification as a proxy for the outcome. There is no point in instituting a simplified system for targeting scarce public funds at policy outcomes, if those outcomes are either so warm and fuzzy as to be unmeasurable, or so precisely defined that complexity is re-introduced by the back door. At least, with qualifications, there is clarity about what has been achieved and a reasonable measure of positive correlation with the outcomes which are their ultimate goal.
As to the pricing model options set out in paragraph 43 of the consultation document, we favour the first, QCF based model where price is linked to the size of qualification, with the ability to use higher or lower rate bandings to reflect its supply or strategic importance. Our only concern is that treating awards, certificates and diplomas as discrete but homogeneous entities is a very blunt instrument. For example, a qualification which just meets the 37 credit threshold for a diploma may involve only half the work and cost involved in a larger diploma of, say, 74 credits. It would be both unfair, and liable to distort the market, if these were treated equally. Since the number of credits involved in a qualification is already available as a continuous variable, we propose that the price should be a simple function of the credit value of the qualification and the price band (uplifted / standard / lower) which applies.
We consider that these principles are equally applicable to post-19 apprenticeships and we see no need for a separate approach as floated in paragraph 47 of the consultation document.
Funding Policy (questions 3 – 10)
In the light of the foregoing discussion, we now turn to the questions of funding policy.
In relation to question 4, we would strongly echo the feedback from the sector as described in paragraph 16 of the consultation document. A funding envelope for the whole spending review period will enable providers and colleges to plan staffing and recruitment and to target investment in promotion and in delivery systems such as e-learning. The abrupt ‘stop go’ changes in funding policy (and in the machinery of government) of recent years are not helpful and a period of stability – even against a background of budget reductions – would be welcome.
For training deemed as requiring co-funding, government currently assumes an employer contribution and bases its own funding rates on this assumption: providers are encouraged, but not required, to collect the contribution. As long as there are providers prepared to absorb the employer contribution and provide training free to employers, there is strong competitive pressure on other providers not to break ranks. This, in turn, creates a modern variant of Morton’s Fork: if you collect the contribution, you lose business; and if you don’t, government will conclude that you are overfunded and will cut funding rates further.
We support the principle, set out in the Banks Review, that it is necessary to change the culture which regards training as a free service, fully funded by government. Not only is such a culture incompatible with the need to reduce and target government spending: it also devalues the service which training providers are perceived by employers and learners to provide. We accept the recommendation that government should define and publish a maximum contribution for each course, based on a proportion of the national funding rate.
The Banks solution is at first sight ingenious: a transparent system of course pricing on the part of providers, clearly published maximum funding rates, and a system where government matches the price paid by employers up to the published maximum, but not beyond.
We believe this is almost right but that the matching principle is over complex and liable to failure. In the first place, by insisting that an actual contribution is collected, it would amount to government intervention in commercial relations between providers and employers. Secondly, it would encourage providers to find ways to charge employers an upfront amount which will maximise the government’s contribution, while returning some of the funds to employers later in the process. And thirdly, it will be difficult for auditors – without a significant extension of their remit and powers – both to detect such schemes and to distinguish them from other arrangements with similar effect but entirely legitimate intentions.
For example, a provider might charge employers 50% of the published rate up front and claim the full maximum contribution from government under the matching rules, while entering into an unrelated agreement with the employer that, for every young apprentice who completes within their planned end date, a terminal bonus will be paid. This would be a bona fide policy to incentivise employers to recruit and retain young learners and support their training: since the retrospective payment is contingent on results which may or may not happen, it cannot be said to be flouting the matching rules. However, to define rules which can unequivocally distinguish between evasion, avoidance and unintended consequences, and then to expect Skills Funding Agency auditors to police them effectively, risks compromising the whole system.
We argue for a simplification of the Banks proposals. Government should publish maximum funding rates – which could be varied, as an instrument of policy, to incentive more difficult outcomes. Allocations to providers would be based on a form of ‘Dutch auction’, with those providers offering the lowest rates receiving allocations first. Providers should then be free to negotiate with employers as they see fit.
It is essential that this proposal is to be seen in the context of the move towards outcome based funding outlined above. Without it, there would be a serious risk to quality. Providers who followed a ‘lowballing’ strategy to win business would have an incentive to compromise on quality in order to reduce costs, while continuing to collect on programme payments. If, however, payment is based on results, this incentive disappears: reducing quality will simply defer receipt of funding. But providers will have a major incentive to develop more efficient ways of helping learners to achieve the awarding organisation’s standards in the minimum time.
Minimum Contract Levels
As indicated above, we consider that the system of on programme payments is directly responsible for the overwhelming majority of the accounting complexity, bureaucracy and administration cost in the present system of funding. If this is changed, we believe that the effect on the contract management process will be so profound that most of the current drivers for minimum contract values will disappear.
Having said that, it cannot be sensible for the Skills Funding Agency to manage almost 1,400 separate contracts, the smallest 43% of which account for only 4% of the total funding. The chart overleaf represents the table in paragraph 53 of the consultation document in even starker form.
In our view, this makes a good case for introducing a lower limit of £500k, which will reduce the number of contracts under management from 1,361 to 779. It does not, however (and here we must declare an interest as a provider with a contract in the £750k – £1m range!) make such a strong case for a further extension.
Any policy change which tends to drive smaller, niche providers into the arms of profit driven consortia has the potential to damage quality, even if the Skills Funding Agency decides to take a detailed (and costly) interest in the internal arrangements of such consortia. For this reason, we advise that the impact of any initial move to a £500k threshold should be thoroughly assessed, in terms of its impact on quality as well as the cost savings generated, before any further increase is contemplated.
Finally, whatever decision is taken on this matter, we urge that the Skills Funding Agency is flexible about the kind of contract arrangements which it will accept and that it gives clear messages to providers, well in advance of any change, of the intended direction of travel. With two years notice, it will not be difficult for providers to find ways of co-operating so as to reduce contract management costs while preserving their independence. With only a few months notice, the only winners will be the large consortia operating in a government-created buyers’ market.
I hope this response is helpful. Please do not hesitate to contact me if you would like any further information or explanation of any of the points made.
Ross Midgley MA LLB FCA