Today the Office for National Statistics published its decision to reclassify the further education sector and its subsidiaries as part of the central Government sector.
The ONS is an agency independent of Ministers, and it periodically reviews the classification of all sectors of the economy for the purposes of national accounts. More information on classification and how the ONS has reached this decision is available on its website.
This means the statutory further education sector—FE colleges, sixth-form colleges and designated institutions—and its subsidiaries are treated from today, 29 November 2022, for financial and accounting purposes as part of the central Government sector, with my Department as the principal Department responsible for ensuring the sector complies with financial and accounting rules. In practice, this means that colleges are now subject to the framework for financial management set out in the parliamentary document “Managing Public Money”, guidance on senior pay and other relevant central Government guidance.
The mission of colleges—to continue to fulfil their role at the heart of their communities, working in partnership with employers, local government and other providers to meet the needs of learners and the labour market—has never been more important. The decision to reclassify the FE sector will not alter these strategic aims. Colleges will continue to play a leadership role in England’s skills system. My officials will work to make sure that they provide the world-leading skills infrastructure that our country needs while adequately demonstrating that we are managing public money well.
My officials said at the start of the review that we wanted to ensure that if colleges were reclassified, it happened in as seamless a way as possible, maintaining continuity and stability for the sector where possible. We have taken the time to get these changes right; to give colleges the support that they need as the transition takes place; and to explore the ways that colleges, learners, employers and communities might all make the most of this change. Colleges will retain many of the flexibilities they currently have and day-to-day operations will continue with minimal changes, so colleges can maintain a smooth delivery.
With that in mind, my officials are publishing the Government’s response to this reclassification decision today, which sets out how my Department will continue to support colleges following the ONS’s decision.
To support and protect colleges, we will be:
Investing £300 million of payments before the end of the current financial year to eliminate the current deficit in funding experienced by March and move to a profile of funding that better matches need, recognising the challenging environment the sector faces;
Providing an additional £150 million of capital grant funding in 2023 to 2024 to support and protect colleges planning to invest in their infrastructure/estate where previously they would have borrowed from commercial lenders;
Allowing colleges to retain flexibility on using surpluses and sale of assets, ensuring that colleges can continue to invest in their estates while complying with the “Managing Public Money” framework; and
Working in partnership with the sector to develop the future approach to financial reporting, and a new college handbook
This means that how colleges report to and interact with Government will change. Colleges will be required to ensure their systems of financial control support public sector standards of accountability.
“Managing Public Money” is clear that public sector organisations may borrow from private sector sources only if the transaction delivers better value for money for the Exchequer. Because non-Government lenders face higher financing costs, in practice it is very unlikely that central Government bodies—now including colleges—will be able to satisfy this condition for future private sector borrowing. If colleges have any proposals for new private sector borrowing, they will now need Department for Education approval—we will update college learner grant agreements to include this as a condition of funding.
In recognition of the limitation on private sector borrowing that reclassification as part of central Government imposes, and in response to feedback from the FE sector and stakeholder groups, I am pleased to confirm that my Department will be investing an additional £150 million of capital funding in further education and sixth-form colleges. This change means that although colleges will have only very limited access to private finance, they will benefit from additional grant funding to improve the condition of the college estate. From the research we have done with colleges, I understand this is one of the main reasons that colleges currently seek private finance, so I hope it will be welcomed by the FE sector.
Furthermore, to help colleges manage their cashflow, my Department will address the historical issue of uneven monthly payments from central Government, which leave colleges out of pocket by March each year. My Department will invest £300 million in bringing forward payments into this financial year to enable us to smooth out the funding, so we have a new even profile for colleges from 2023 to 2024 for both the 16 to 19 and adult education budgets.
I can also confirm that colleges will retain the flexibility to carry over surpluses from one year to the next, and to keep and spend the proceeds from the sale of assets, subject to certain conditions, and this will be kept under review.
Many colleges have subsidiaries, some of which are profit-making entities with commercial operations. Subsidiaries play an important role in the college system, both in delivering provision and generating commercial income. Colleges will also retain the ability to operate their trading subsidiaries, which the ONS has reclassified to the central Government sector.
Regarding financial reporting, colleges will continue to produce their own annual report and accounts as normal for the year ending 31 July 2023. The Department will eventually be required to consolidate the accounts for all FE colleges into one. This means we will require additional information from colleges. We will be working with the sector to ensure that the impact of this request is manageable.
My officials will begin work to write a new college financial handbook and engage with representatives from the sector from the outset, with a view to sharing it in draft with colleges and sector bodies in autumn 2023 for consultation so that they are clear what is expected of them and build their understanding and support. In parallel, my officials will set up the necessary processes and data collection systems to operationalise the new MPM requirements. The handbook will be finalised for publication in March 2024, ahead of an effective date of August 2024 to coincide with the start of the financial year.
The changes will be explained in more detail in a letter from the accounting officer of the Education and Skills Funding Agency to all college financial directors and will be followed by further guidance to help colleges comply with the “Managing Public Money” framework and other central Government guidance as quickly as possible.
I am also writing today to college principals to explain the changes that need to be made and to thank them for the important role they will play in the public sector.
We have taken the opportunity of reclassification to strengthen our arrangements for, and invest more in, this hugely important sector, which is now more obviously than ever a vital part of the Government’s skills agenda for the future.
The Government’s response ensures we use this opportunity to continue to support colleges to do what they do best, while balancing this against the need to adequately demonstrate that we are managing public money well.