Debts & Loans

Colleges have run up record levels of debt, casting doubts on the future of the rebuilding programme.

Woolworths, MFI, London Scottish Bank - the list of high street casualties of the recession is growing. Could a further education college be next to go under?

Colleges collectively have run up record levels of debt, largely owing to the huge rebuilding programme that has been going on for the past five years and is scheduled to carry on for a similar period. This debt now stands at around £1bn, having risen fivefold since 2001-02.

In the past, institutions that have mismanaged their finances have met undignified ends and been hustled into mergers, but to date a college has not gone bust. With the Learning and Skills Council (LSC) acting as a safety net, the further education sector looks a secure bet. Or so officials claim.

MPs are not so sanguine, at least not those on the public accounts committee (PAC). In a recent debate on the rebuilding programme, its chairman, Edward Leigh, was uneasy about 19 colleges with long-term borrowings of more than 40% of income during the last financial year. "It seems to me very high," he said.

A report by the National Audit Office (NAO) warns that colleges with big debts could be more vulnerable to loss of income if they fail to generate the projected demand for courses by employers and learners. Last year, the number of colleges assessed as financially weak rose to 89, from 61 in 2005-06. "I think we're going to have to keep a close eye on the smaller colleges ... so their position is not put at risk," says Leigh.

But Ian Watmore, permanent secretary at the Department for Innovation, Universities and Skills (Dius), has dismissed any likelihood of collapse. "Should they get into difficulties, the Learning and Skills Council has a good, well-established procedure for helping colleges through with a financial recovery plan," he says.

Julian Gravatt, director of finance at the Association of Colleges (AoC), considers the debt as "more theoretical rather than practical".

"It's difficult to say if there's too much - you could say any debt is dangerous," he says. "Total college turnover is £7bn; but the total debt is £1bn. The problem is that colleges run tight margins: for every £100 they get, they spend £99."

Gravatt sees the LSC as "a lifeboat operation" for any institution at risk of going under. "It comes out to a stricken vessel, chucks the principal overboard and ferries students off to be merged with another college. No college has gone bust - that would be terribly messy."

But what happens after 2010, when the LSC ceases to exist? Gravatt believes recovery arrangements will still be in place, but will become "more ruthless" under the LSC's successors.

The college rebuilding programme is only half finished and now finds itself in a financial climate much harsher than when it began. Some colleges are finding that land they intended to sell to help fund their projects has dropped in value, raising questions about the projects' viability.

Borrowed money is not hard to find, insists the LSC's chief executive, Mark Haysom. "It's very low-risk ... for lenders to come to the public sector," he told MPs. And yet, says Gravatt, only two major high street banks - Barclays and LloydsTSB - are active in the FE market. "They invested in doing it properly, while others just dipped their toe in the water," he says. "We'd like to see more competition." Gravatt and the LSC are meeting another bank this month "to encourage it that colleges are a good bet".

For the colleges that have yet to start any rebuilding, Gravatt predicts tougher times. "Public-sector expenditure will be squeezed from 2010, as it will be frozen in cash terms," he says. "Even if there's a demand for what colleges do, the spending climate will turn. There's uncertainty about how things will work after 2010. You hope colleges that have sold off land for rebuilding to developers have the cash - if a house builder has gone bust, there have to be risks."

The possibility of squeezing building contractors has clearly entered the minds of senior civil servants. "We are looking at whether there is better value for money to be gained from existing contractors," Watmore told the PAC. "We would probably be looking to get more result from the same money, rather than less money."

The LSC is singled out in the NAO's report as a stumbling block to detailed approval of building projects. "You should be a facilitator rather than a delayer, surely?" Leigh asked Haysom. The LSC's chief executive replied that it applies "very stiff tests" for parting with money and testing whether colleges can manage debt.

Since the rebuild programme started, £5.3bn of applications have been made and £2.45bn of grants have been agreed, equating to 693 capital projects.

"We have huge applications coming through in huge numbers and have to make sure we balance those very carefully," Haysom said. "We have built momentum very fast." Whether that momentum can be sustained will be the question hanging over FE in the coming months.