Welcome back, everyone. Agenda item 3 is consideration of the Auditor General’s briefing, “Scotland’s colleges 2025”. I am very pleased that we are joined this morning by the Auditor General, Stephen Boyle. Good morning, Auditor General. Mr Boyle is accompanied by Derek Hoy, who is a senior manager at Audit Scotland, and Ray Buist, who is an audit manager at Audit Scotland, who both worked on the briefing.
Before we put some questions to you, Auditor General, I invite you to make an opening statement.
Many thanks, convener, and good morning to the committee. I am very pleased to present my briefing paper on Scotland’s colleges.
As the committee knows, Scotland’s colleges play a vital role, delivering academic and vocational courses that provide pathways to employment, further studies and apprenticeships. Colleges can be an important stepping stone to university, support the widening access agenda and play an important role in sustaining the country’s economic growth. In recent years our reporting on the college sector has highlighted risks to its financial sustainability and this briefing highlights deepening financial challenges across the sector, which reflect sustained funding pressures together with escalating operational costs. This is due to a 20 per cent real-terms reduction in funding over the past five years, inflationary pressures, rising staff costs and the increasing costs of maintaining the college estate.
In 2023-24, colleges collectively reported a small surplus of £400,000. That is an improvement on the £14.5 million deficit that colleges reported in the previous year. Colleges are primarily achieving savings through voluntary severance schemes to reduce their staff costs. This resulted in a reduction of the college workforce in 2023-24 of around 8 per cent. Seven of Scotland’s colleges reported a deficit in 2023-24 and further deficits are anticipated in 2024-25.
The Scottish Funding Council’s September 2025 report “Financial sustainability of colleges in Scotland 2022-23 to 2027-28” projects a £10.7 million deficit in 2024-25 across the sector. Colleges delivered less teaching to fewer students in 2023-24. The number of credits delivered by colleges was almost 10 per cent lower than in the previous year, with more than 30,000 fewer students attending college during the year.
Despite those challenges, however, colleges continue to perform well with their students. Satisfaction rates remain high at 92 per cent, and the proportion of college learners entering a positive destination rose to 86.7 per cent in 2022-23, which is the last year for which data is available.
Colleges also have strong links with employers in their communities that enable them to align their curricula to local skills needs. However, the current level of modern apprenticeship funding does not meet current demand. Colleges will need to continue to adapt to meet the changing needs of employers and students, and they must tailor how they operate in line with the Scottish Government’s public service reform strategy, so that they can remain financially sustainable and continue to play their role in the post-school skills and education environment.
Our report contains recommendations to the Scottish Government, the Scottish Funding Council and to Scotland’s colleges. As ever, convener, between Ray Buist, Derek Hoy and myself, we will do our utmost to answer the committee’s questions this morning.
Thank you very much indeed for that introduction. I turn straight away to the deputy convener, Jamie Greene, who has some questions to put to you.
Good morning, Auditor General. I have to say that that is one of the grimmest opening statements I have heard from you since I joined this committee. The perilous state of Scotland’s college sector is of grave concern. The statistics that you have just reeled off are a testament to that. Thank you for the important work that Audit Scotland is doing in this space in identifying some of the sector’s issues and bringing them publicly to the fore.
My overarching question is: in your view, what is the current state of the college sector in Scotland and what does its future look like?
There are a number of facets to that. First, I will primarily focus on the financial position, which is really challenging. I am happy to start on some of the pointers to that before I bring in colleagues to give a bit more detail.
In paragraphs 16 and 17 we refer to some of the specifics of the challenges that individual colleges are facing. In 2023-24, two colleges received what is known as liquidity support—loans or funding support—from the Scottish Funding Council to support their financial balance. Paragraph 14 refers to some of the analysis that the Scottish Funding Council has done—as I referred to in my opening statement—that shows that eight in 10 of Scotland’s colleges will be forecasting deficits by 2027-28. That is on top of sustained financial settlements, which have allowed us to arrive at the figure we report, with the detail behind that in exhibit 2 in the briefing, of a 20 per cent real-terms reduction in their funding environments.
11:15There is undoubted pressure within the sector and through the audit work that has been undertaken across the sector we have seen examples of the ways in which Scotland’s colleges are responding to that. They are taking the difficult decisions that they are required to take in order to sustain financial balance and to continue to deliver learning and teaching to their students and provide support for businesses in their communities. How much longer they can continue to do so is perhaps an unknown because, as ever, any sustained period of financial pressure makes it harder to make the savings year in, year out. There is a real challenge.
Just to pause for a moment, we seek to make recommendations in today’s briefing about the position that Scotland’s colleges will be in as part of wider public service reform. There are aspects around that in respect of the use of the estate. Some colleges are already having to make difficult considerations at present about their estate, but where do those decisions fit into the wider scheme of supporting learning and teaching, the various pathways, employment and economic development? It is a moment of decision on the sustainability of the sector and what its role is.
Lastly, I emphasise that they are making those decisions. You can see that where there is evidence of the pathways that they are achieving, together with some of the satisfaction rates—and that is commendable, given the challenges that they are facing. The question is whether that can be sustained if the financial pressures that the colleges are facing continue into the medium term.
Thank you for that. You talked there about a 20 per cent real-terms reduction in funding over the past five years and the effect that that is having on what colleges do. You mentioned some statistics—30,000 fewer students and staff numbers down 8 per cent—as well as voluntary redundancies, which some warned could become compulsory redundancies, and the reduction of the physical estate. The phrase that struck me most was: “less teaching to fewer students”.
Fundamentally, how on earth can the college sector help the Scottish Government to meet its main objectives of governance, improving the economy, improving the health and wellbeing of society, getting people into the workplace and skilling up young people? How can the college sector do that while teaching fewer people fewer subjects? The two do not add up, in my view, and I get the impression from your briefing that you agree.
What we are setting out is the current challenge. Ultimately, the Scottish Funding Council, Government and colleges will set out a decision on how they want the vital role that Scotland’s colleges play to be discharged in the medium term.
I mentioned in my opening statement that the role set out for colleges is part of that longer-term strategy. Where do they fit into public service reform? This committee has considered many times the sustainability of public services. I have commented in recent reports on some of the developments that have taken place in respect of public service reform strategy and medium-term financial planning. We have a spending review coming up, together with the budget. Those will be the opportunities for Parliament and ministers to set out their intentions.
In today’s briefing, we sought to illustrate the scale of the challenge that the sector is grappling with to continue to deliver the vital services that it provides.
Let us look at the reality of the college sector’s finances. You said that eight out of 10 colleges are forecast to report a deficit. When might that take place, and what happens when a college reports a deficit? How would they be able to sign off accounts and what governance issues would they face? If a business was in that position, it would be unsustainable—it would close down. Is there a risk that some colleges could close?
There is a range of factors to cover. I will bring in colleagues to say a bit more about the specifics of how all that operates. The eight in 10 figure is from the Scottish Funding Council’s report “Financial Sustainability of Colleges in Scotland 2022-23 to 2027-28”. It is a forecast based on evidence that the SFC has drawn together in its role in the funding and oversight of Scotland’s colleges. The report was published in September of this year, so it is up to date and draws on relevant sources. Eight in 10 colleges are forecast to be in financial deficit by 2027-28.
You asked what happens if a college enters financial deficit. We say more about some of the specifics in paragraphs 16 and 17 of the briefing. The Funding Council now operates what is known as an outcomes framework and assurance model that sets out the support, interventions, oversight and expectations when a college is experiencing financial challenge.
Responsibility ultimately still resides with the individual college’s board of management to deliver financial balance and to deliver on the objectives that they have agreed in the outcomes agreement with the Funding Council. However, sometimes that engagement is not sufficient in and of itself to support sustainability, and some colleges now need liquidity support to continue to deliver their operations.
In the briefing, we give the examples of the University of the Highlands and Islands Moray, New College Lanarkshire and UHI North, West and Hebrides—which the committee has recently become familiar with—receiving financial support. For completeness, I should say that the details of UHI North, West and Hebrides are not summarised in the briefing because of the timing of the completion of the audit, given the circumstances that the committee is familiar with.
There are now live examples of liquidity support being provided. However, we have not yet seen the SFC set out what happens next in terms of repayment arrangements, as takes place in other parts of the public sector when loans are provided to public bodies. Sometimes, public bodies are required to repay those when their financial position improves. Therefore, colleges are entering into somewhat new territory in terms of the support with which they are being provided.
I will bring in Ray Buist to set out briefly a bit more detail on the role of the Funding Council.
Thank you. We say in paragraph 27 that the SFC requires colleges to set a balanced budget, which stems from the governance arrangements. The SFC’s financial memorandum with the college sector has a governance section that requires college boards to ensure that the colleges plan and manage activities to remain sustainable and financially viable. Clearly, being able to achieve a balanced budget is a core, fundamental part of demonstrating the ability to remain sustainable and financially viable.
As the Auditor General said, the outcomes framework and assurance model is a new model that the SFC implemented from 2024-25, so it is early days—this has been its first year of implementation. It sets out a number of tools that the SFC has at its disposal to intervene where colleges are struggling to achieve financial balance. Those cover both funding powers and regulatory interventions that it can make.
The SFC has powers to recover funds from colleges if they are not achieving their outcomes in terms of credit delivery, but it can also provide cash advances and liquidity support, which the Auditor General talked about. In addition, it can implement additional restrictions or conditions of grant funding to a college.
On the regulatory side, what we have seen with the colleges that we refer to in the briefing—UHI Moray and New College Lanarkshire—is that where liquidity support is required, the SFC requests that an action plan or a recovery plan be presented. That happened in both those cases.
The SFC also has other options open to it. Those include it just having an increased level of engagement with the college; it can undertake investigations; it can be more heavily involved in asking for additional information or data from the college; and it can be more present at college board meetings and committee meetings, in order to have closer sight of the challenge.
That is all really helpful and a useful backdrop to what might happen if a college is in that situation. I guess I am looking at it from a more fundamental, bigger-picture point of view, in that not just Audit Scotland but other forecasters are looking at the finances of specific colleges. There is extreme concern that some of them will be financially unsustainable without either more drastic cuts to expenditure, which presumably means job losses, fewer students or courses cut, or financial intervention from the Government through liquidity from grants, loans or other mechanisms—in other words, an injection of cash just to balance the books year by year. That does not sound to me like a long-term sustainable plan for the college sector; it sounds as if, year on year, colleges are fighting to balance the books, and eight in 10 will not be able to do so.
According to some of the unions that we have received communications from, and Colleges Scotland itself, in one of the models that they have presented to us, there is a serious risk of closure of some colleges—a “Shut the doors; we are done” scenario. Is that a risk?
All the discussion that we have had so far, together with the evidence that you referenced, suggests that there are significant risks to the sector collectively, together with more acute risks.
The analysis that you have from us this morning is something of a snapshot, and it predates some of the more acute circumstances in which some colleges currently find themselves. Audit is typically a retrospective function, so it will not necessarily include the up-to-date cash-flow pressures that I think you are alluding to, but I have no reason to doubt that there is acute pressure in the sector.
This is probably more of a role for the Scottish Funding Council as part of its funding and regulatory approach, but I do not think there is a divergence between ourselves, the Funding Council and, indeed, the narrative that is coming from individual colleges and their representatives about the scale of the challenge that is apparent.
You made a number of recommendations. What is your principal or most important recommendation on how we get the sector back on its feet?
This is not a new problem. I sat on the Education and Skills Committee five years ago and the college sector then was crying out for cash and warning of job cuts, course cuts and fewer students, with the negative outcomes that that would have for society and the Scottish economy. Here we are today and I am afraid that the proof is in the pudding in your briefing today. Something has to give. Colleges Scotland calls it a “fork in the road”. Of the recommendations that you have made, what do you consider that the Scottish Government should focus on first?
They all matter, if I can put it in those terms. Our recommendations are designed to support the sector in the challenges that it is facing right now.
I do not mean to oversimplify it. It is all well and good to say that you should come up with a long-term funding and public service reform strategy—so, that is there—but we would also say that some of the immediate challenges around staffing and the estates matter. Those will be more of a help in delivering the path to resolving some of the longer-term sustainability issues that are set out in the briefing.
As ever, I am sure that, should the committee decide to take evidence on our briefing, you can choose to explore that directly with the organisations that we make recommendations to. However, we think that all the recommendations matter.
Okay, thank you for that.
11:30
I now bring in Joe FitzPatrick.
You mentioned in your opening remarks, and it is also mentioned on page 9 of the briefing, that there was a shift from a deficit in colleges’ funding of £14.5 million in 2022-23 to a surplus of £0.4 million in 2023-24. That represented a 2 per cent shift. The briefing goes on to mention that much of that was achieved through voluntary severance.
One argument that was made as to why colleges had to go through that painful process was that it was required in order to make their institutions sustainable for the longer term. However, it does not feel as though that has happened. Obviously, with voluntary redundancy, the biggest cost is the cost of the package, but on-going savings should be made.
I am trying to understand why a process that was predicted to help the college sector to become more sustainable, which will have caused a lot of pain to be felt by staff who were at the sharp end of it, does not appear to have resulted in a more sustainable system.
Yes, you are right. I will mention some relevant numbers. There has been an 8 per cent reduction in the college workforce. The analysis of audit reports that the team has looked at shows that, from a numbers perspective, that has been broadly shared between teaching and non-teaching staff. You are also right to point out that staffing is the most significant component of colleges’ expenditure—about 65 per cent of their total expenditure goes on staffing costs. The head count has gone down.
I also agree that going through a voluntary severance or retirement process—or a compulsory programme, which some people have gone through—can be very difficult. Feedback from individual colleges and representatives has shown that that can be a traumatic experience that can cause uncertainty for people who work in the sector. In spite of the challenges and the pain that some colleges have gone through, that process, in and of itself, has not delivered the financial balance that will be required in the longer term, according to the Scottish Fiscal Commission’s analysis.
It is perhaps worth sharing with the committee some of the on-going financial risks that the voluntary severance programme has not helped to entirely resolve. Inflationary pressures remain. The college estate is a significant factor that needs to be addressed. There are the on-going financial pay settlement requirements of those who work in the sector. The sector has received a real-terms reduction in funding, which people who work in the sector did not anticipate, and they themselves are dealing with inflationary pressures. There is also the on-going job evaluation process, which has been going on for a number of years in the sector and has still to be resolved.
Derek Hoy or Ray Buist might want to say more about the detail of the voluntary severance arrangements. Despite the challenges that colleges have faced in going through that process, it has not, in and of itself, resolved the financial pressures in the sector.
I might pass over to Ray Buist to talk about the specifics of the job evaluation process, but one factor that is in play in relation to financial sustainability not being achieved through the severance process is, as the Auditor General alluded to, the pay deals that have come through as a result of national bargaining, which the colleges do not have much control over. An element of the savings that would have been delivered through the severance packages has been eaten up by the additional costs of the new pay deals that have come through. I think that that has been quite a big factor.
Ray Buist might be able to say a bit more about the job evaluation process.
The job evaluation process presents a significant financial sustainability risk to colleges in the future. A number of colleges highlight that specific aspect in their accounts, and it also features in the annual audit reports for those colleges. It is fair to say that colleges are a little nervous.
Under the current accounts direction, colleges must account for provision to meet the liability that will fall as a result of the job evaluation process. In their accounts, they no longer present an asset in terms of the money that has been set aside to meet that liability. That now sits with the Scottish Government; I think that it took on that responsibility in March 2023. In relation to complying with accounting requirements, the Scottish Government does not currently, in its accounts, set out a liability or set money aside to account for that.
Therefore, there is an element of nervousness among colleges in that respect, which relates not only to meeting the back-pay element of the job evaluation process but to what that will mean for their staff costs, which make up about 65 to 70 per cent of colleges’ expenses, in the future.
There has been an 8 per cent reduction in staff, and I think that it has been suggested that that figure might have to be higher if some of the other pressures continue. You mentioned at the start that the experience of students is still positive. Will that continue, or will the staff reductions have other, longer-term implications? All staff reductions, whether on the teaching or the non-teaching side, have an impact on the student experience and course availability. You have said that teaching time has already gone down. What will the long-term implications be if colleges continue to go down this route?
The first thing to say is that it is noteworthy that satisfaction levels have held up. That is an important factor in the context of the volatility that the sector is facing, but I do not know whether it is a good indicator of future satisfaction levels.
It has been suggested that colleges will have to make choices about the type of courses that they provide. In the briefing, we refer to analysis on the optimal size of classes and whether that will drive particular course offerings with a view to informing satisfaction levels. In addition, changes might be coming through in the estate and in the availability of support. We can come on to say more about the additional support that colleges provide, which includes the provision of mental health support for students.
Those are all variables that we would identify. Whether those things can be addressed in a way that does not impact on student satisfaction and the attractiveness of the sector in the round is unknown at the moment. However, without speculating on specifics, they probably represent genuine risk factors that will influence satisfaction levels in the future.
The briefing suggests that some areas are already being squeezed. One area that you flag is English for speakers of other languages. There is a big push for people to be able to speak English if they decide to live here, and there is high demand for that. People who, for whatever reason, have come here want to learn English as a second language so that they can contribute more fully to our society.
How severe is the situation in that regard? There is high demand for ESOL courses, which clearly help people to contribute to our economy, but some people are not able to access those courses.
In the briefing, we cite an example of an oversubscribed course and one of the Glasgow colleges having to make a difficult decision about its ability to provide that service. That is indicative of the wider difficult choices that colleges will have to make about their course provision, which will sometimes not necessarily be based on the demand that exists for a particular course among students.
I will ask Derek Hoy to say a bit more about that.
I think it would be useful to draw your attention to the recommendation that we made to the Scottish Funding Council that it should identify how it will measure unmet demand for college courses.
At this point, we do not have a clear understanding of where the unmet demand is. We have some examples, such as the ESOL example that you mentioned, but it is really important that, across the sector, analysis is carried out to understand where there are gaps, especially in relation to the Scottish Government’s economic objectives. Consideration needs to be given to whether the courses that are being cut are ones that would deliver against those objectives.
There is a lack of understanding of exactly where we are with that just now, so it is important that such analysis is undertaken to give us a better idea of what is going on. One would hope that that would help to inform decisions on what courses might go in the future.
Do we need to consider a different way of funding those courses, or do you think that the Scottish Funding Council can wrestle with that?
Whether it is those courses or wider commercial offerings, that point is relevant, and we touch on it in the briefing. Some of our recent reporting to the committee on individual colleges has been about where they have sought to diversify into income-generation approaches. Some of the examples have not been successful—I will not repeat them. We recognise that colleges will have to continue with that approach as part of a wider strategy of financial sustainability. We are perhaps learning from some of the examples in which that approach has not been successful, in order to give colleges more security and certainty when they deploy more commercial approaches, whether around ESOL, trading or activities with third parties. That will inevitably become a greater part of the model than it is already, but doing it with the right underpinnings really matters.
Thank you.
Thank you very much. I will move straight along and invite Graham Simpson to put some questions to you.
Following on from what Joe FitzPatrick asked about courses, do we have any analysis of which courses have been cut so far? Colleges are vital for providing the skills that Scotland needs. Are we at risk of reducing the impact that colleges can make?
I will ask colleagues to give more detail that might help the committee. With this briefing, we tried to provide a higher-level summation of the sector’s financial position and performance from one year to the next. I think that it is helpful to repeat some of the change in the scale of engagement with the sector. In 2023-24, 30,000 fewer students were taught than in 2022-23. The position varies, to some extent, from college to college—some numbers will have increased and some will have decreased. However, I agree with your point about the vital role that colleges play in economic contribution and social mobility.
There are some indications around course completion rates, which it might be helpful to get more detail about, so I will pass to colleagues to say a bit more about that.
I will give you more of an overview. The colleges that we spoke to were quite clear that they have worked hard to protect the courses that they are offering. We have seen that, rather than courses being completely withdrawn, colleges might reduce the number of cohorts that they offer the course to, or a course that they have previously delivered at two or three different campuses might now be offered only at a single campus. That has impacts on students.
Therefore, it is less a case of getting a clear picture of specific courses or subjects that are being withdrawn and more a case of colleges looking to deliver those courses in a more efficient manner. As we mentioned in the briefing, colleges are taking measures such as having increased class sizes and reduced class times, and moving more to online delivery, to make it more efficient for them to deliver the same courses.
Rather than seeing specific courses being withdrawn, it is more about the unmet demand. On pure delivery, West Lothian College, for example, currently delivers around about 44,000 credits per year. That is its threshold that is agreed with the SFC. The college estimates that it has demand in its area for in excess of 50,000 credits, and it would delivery them if it had the funding. The college expects that demand to increase as the population in its catchment area increases.
Ayrshire College—I think in an evidence session with the Education, Children and Young People Committee—talked about turning away more than 700 students after interview, so that figure does not include those who were not offered an interview. The college highlighted that many of those students were seeking courses in science, technology, engineering and mathematics subjects.
Similarly, Glasgow Kelvin College told us that it has unmet demand in its area for STEM courses, as well as the ESOL course that we highlight in the briefing.
11:45
Okay. Basically, there is a demand and there are not places to meet it, so I suppose that my point stands and things could just get worse.
It is an illustrative example of where colleges are having to make difficult choices about funding and the associated income that they receive, and about the funding arrangements through the credit system, which has eased, as we set out in the briefing, with more flexibility around learning credit targets. However, as with the steps that they have taken around voluntary redundancy, colleges are having to make challenging choices around course provision and managing access where courses are oversubscribed. Again, it is just one of the many challenges that are in front of colleges.
In the submission from Colleges Scotland on the budget, which I am sure you have seen and which Jamie Greene mentioned earlier, there was a paragraph at the start about the reduction in funding. It says:
“The Scottish Funding Council ... has also recently set out the stark reality of the impact of this continued reduction in funding in a report which concluded ‘most colleges are not sustainable’ under current funding assumptions, and there is ‘an imminent risk of some colleges becoming insolvent by the end of 2025-26’.”
Do you agree with that?
I am not party to the very specific detail on which Colleges Scotland made that assertion. In order to make an informed decision, I will need to base it on the up-to-date analysis that the external auditors will carry out of individual colleges.
As I mentioned to the deputy convener, that statement is based on 2023-24 audited accounts. In the period up to the date that you just mentioned, Mr Simpson, a further two sets of audits will take place. One of the key criteria that auditors will look at in their analysis is financial sustainability. Overall, I do not have any reason to doubt the continuation of some of the financial challenges that the sector faces. I have not yet been able to triangulate what that means for individual colleges, but as we mentioned this morning, some of the numbers are really stark—eight out of 10 colleges are forecasting a deficit—and then there are the financial interventions that colleges are asking the Funding Council for to stay afloat.
I do not think that there is any real disagreement in overall terms, but I do not have the precise data on the who and the where when it comes to the colleges that are forecasting severe financial issues in 2026.
Colleges Scotland sets out a range of scenarios for the budget, one of which is flat cash, which it calls a “Decline” scenario. It then goes on to set out “Diminished”, “Survivable” and “Sustainable” scenarios.
If you look at the “Decline” scenario, which is flat cash, according to Colleges Scotland, 11 colleges would be at risk of running out of money and would not be able to cover operational costs. Those 11 colleges employ around 6,500 staff. There is a fear that some colleges could close in that scenario.
In your briefing, you mentioned that two colleges were bailed out—they were given extra money by the Government and will presumably have to pay it back. In previous evidence sessions, we were made aware of the Scottish Funding Council risk register, which highlighted that some colleges were at risk. Can you see a scenario in which colleges could close?
I do not know whether it is helpful for me to speculate on that. Inevitably, beforehand, what would happen is what we have seen examples of already, such as emergency support—liquidity support—coming from the Funding Council to avert that cliff-edge scenario that has been referred to.
That illustrates the wider point that colleges have already taken some of the very hard decisions that other parts of the public sector have not taken. Voluntary severance schemes are not normal elsewhere in the Scottish public sector, but they have become embedded within Scotland’s colleges as a means of managing their financial position. They are taking the difficult decisions.
To go back to some of our earlier discussion, it is about whether they can continue to do that. I know, Mr Simpson, that you and other members of the committee will be familiar with the fact that some of Scotland’s colleges are already considering very difficult decisions about individual campus services. That is an example of an incredibly difficult decision that some colleges are having to take to support their financial position, which other parts of the public sector are not.
If those measures do not work, we might be in the scenario that you referred to. However, the Funding Council’s support that we have examples of, alongside some of the very hard operational decisions that colleges might take, might avert the closure scenario. It all speaks to a sector that is under severe pressure.
In the interests of time, I will leave it there.
Thank you very much indeed. In the interests of time, I will go straight to Colin Beattie.
Auditor General, I would like to have a quick look at estates. Paragraph 31 of the briefing says:
“The chair of the College Principals’ Group recently told MSPs that the cost to cover backlog maintenance ... and transform campuses to”
comply with
“net zero emission targets is now estimated”
to be nearly
“£1 billion.”
Paragraph 32 explains that colleges are
“considering physical and digital estate rationalisation to help achieve savings.”
Can you provide any more detail on what the colleges are actually considering by way of physical and digital rationalisation? What additional challenges are raised by their attempts to meet net zero targets?
I will start with a specific example and then bring in colleagues on some of the broader ways of potentially addressing such a large number, if it is possible. A billion pounds is such a significant number in terms of the overall funding position of Scotland’s colleges. There are equally large numbers elsewhere in the Scottish public sector in relation to backlog maintenance, so the issue of addressing maintenance of the estate is not unique to Scotland’s colleges, but it is a very real challenge.
I will mention some of the specifics around how colleges manage their estates. We said in the briefing that the funding that individual colleges receive is not keeping pace with their maintenance requirements. For example, the City of Glasgow College is cited in the briefing as needing many times more investment in its estate than it receives in its share of capital maintenance funding from the Funding Council. That is replicated with other colleges.
At the more acute end of the scale, some members of the committee will be familiar with the processes that Forth Valley College is going through in respect of its Alloa campus. The most recent position is that it has stepped back from some of the decisions, to allow for further discussion with the Scottish Funding Council, employees and students.
That illustrates the significance of the decisions that colleges are considering to balance their financial position. They also look at their estate and the services that they provide in different locations, and at what that means. All those considerations have to go through a really important process before any decision is made.
I will pause at that point. Derek Hoy or Ray Buist may wish to say more about the maintenance requirements across the sector.
Before they respond, I should say that I am not just asking about the maintenance of the buildings. I want to understand more about digital rationalisation, because I do not quite grasp all of that.
We are still to see some of the detail of that come through. Colleges are working on their estate strategies at the moment and considering estate rationalisation. That is being supported by the Funding Council.
Encouragingly, from the conversations that we have had with the Funding Council, we know that it is supporting colleges to take a forward-looking approach to their estate rationalisation and look not just at what they have in place now and how they maintain that, but at what their estate needs are for the future. That will be a difficult thing for them to predict, obviously, and they are looking at demographic trends and so on. What estates do they need in the years to come?
Those strategies are in the process of being developed in the lead-up to the SFC publishing its infrastructure investment plan—which it will do next year, we hope—so I do not have much detail, although Ray Buist might want to add to that.
The encouraging thing for us is that the SFC is supporting colleges to take a forward-looking approach and plan for the future, not just think about the here and now and try to prop up what is already in place.
Ray, would you like to add anything on the specifics of digital rationalisation?
On paragraph 31, due to the scope of our overview we cannot talk about specific colleges, but in simple terms we are talking primarily about selling land, buildings or campuses.
As for digital rationalisation, I will perhaps use the City of Glasgow College as an example. The City of Glasgow College has talked about the funding that it requires to upgrade its digital network under its capital plan. I think that it requires something in the order of £2 million—I cannot remember the details, but they are in the briefing—but its funding does not meet that. That is an example of the digital transformation that is being proposed.
The cost of digital rationalisation would actually be a relatively small figure compared to £1 billion.
Yes—it would be a component of that.
Ray Buist mentioned that the way that colleges are delivering learning is changing. We give a bit more detail on that at paragraph 36. Pre-pandemic, most of that would have been done face to face, but there is now a digital component. It is the norm for many courses to take a hybrid approach to learning with a mix of digital and face to face. We make the point, which is consistent with the briefing on digital exclusion that we brought to the committee last year, about the need to strike the right balance between the needs of learners across the sector.
Digital rationalisation, managing the sector risks and embracing new technologies are all harder when there is a maintenance backlog that will also be a call on the already constrained capital budget.
Okay. In the interests of time, I will move on and look at something slightly different.
Paragraph 42 of your briefing says:
“The Scottish Government is keen that colleges identify additional ways of generating income”.
Can you provide a bit more information on that? I recall that, in previous years, colleges’ ability to gain income from external sources by running courses for businesses and so on was actually shrinking. Where are they now? Are colleges diversifying into other areas outside of that?
I will turn to colleagues to give you a bit of detail on how the breadth of income-generation activities across the sector is developing.
As I mentioned to Mr FitzPatrick when I spoke about colleges broadening their reach, you can clearly see the signal from the Scottish Government on income generation. It is supportive of it.
Broadening income-generating activities is perhaps necessary, but it has to be managed in a really careful way. If colleges are going to broaden their reach into commercial activities, they should do so with a full understanding of the necessary skills, the risks and the governance that is needed to support such activities, so that they do that as safely as they can. Doing that means that colleges are taking on more risk at a time when they are facing significant pressures, and pressures in that environment have to be managed.
Although I understand why broadening income generation is a necessary step that colleges will have to take, given the financial pressures, that brings an additional layer of risk, which we have seen in some of our recent reporting on individual colleges that have not quite got the balance right.
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Where will colleges try to identify external sources of funding?
My colleagues might want to come in and give a bit more detail on that.
Effectively, that income will come from individuals and businesses in colleges’ communities. Colleges have to tailor their offer to what their communities require and provide the pipeline of support and talent that businesses in their areas want. Colleges need a commercial component to their work so that they get the right engagement.
As we say in the briefing, colleges are starting from a good foundation. Colleges know their communities and they know what businesses need, and they need to find a way to evolve with the changing ways of business and industry and have relationships that allow them to benefit from that financially.
Ray Buist might want to come in.
To answer your question, Mr Beattie, that is why we make a recommendation to the tripartite alignment group, which consists of the Scottish Government, the SFC and colleges, through Colleges Scotland. The group has a workstream specifically on exploring opportunities to increase income generation. We make the recommendation that the tripartite alignment group should, within the next six months, set out plans for that. We are yet to see those plans, but that is the vehicle by which we would expect to see that.
We have seen that some colleges have set up subsidiaries, with varying success. Is it within their capability to do that? You touched on that, Auditor General. Is it within their capability to manage subsidiaries and the new income-driven aspect to what they do? Is that really where their expertise is?
It is for the boards of management and the Funding Council to satisfy themselves that colleges are taking on additional risk and activity in a managed way. I would not want the recent examples where we have reported on a small number of colleges that have not got this right to give the impression to the committee that that is symptomatic of there not being the skills in the sector to do that. That would not be a fair conclusion. The breadth of skills and backgrounds that are represented on the boards of management of Scotland’s colleges, along with the backgrounds of the executive leaders, suggests that, fundamentally, with their relationships with business and other people who are interested in their services, they have the right platform to do this. However, it is important that they get the underpinnings right so that the governance, risk management, scrutiny and oversight are all appropriate for a different model, in which they are not necessarily managing a college, especially if they are going into a commercial subsidiary model. Fundamentally, it is for the board of management to satisfy itself of that but to do so in the full knowledge that the new activities that the Government is supportive of them undertaking are a new risk.
As colleges are putting more effort into this area, everybody is now fighting for funds from the private sector. Is there not a lot of competition there, even between the colleges? As I have said before, in the past, we have looked at reports where there has been shrinking rather than expanding revenue from that source. Is that not a challenge that they will struggle with?
That is a very important point. We cannot assume that this will be the route to financial balance for Scotland’s colleges. I suspect that, in and of itself, it will not be. You are right that there will be competition between colleges. Universities will also be operating in this market. Colleges have to be clear about what their offer is and clear that their forecasting assumptions are realistic. There has to be real scrutiny from the board of management when it casts its eye over forecasts that show that an individual commercial activity will solve a college’s financial problems, I suspect that it will take a combination of factors such as funding, management of the estate, staffing and course content along with commercial activities that a college might undertake.
Let me move on to a final area, which is the credits and funding model. In paragraph 49 of your briefing, you say that credit-based funding is “output driven” and that colleges must
“meet their credit target to avoid funding being recovered by the SFC.”
Can you explain in a bit more detail how the credit system works for colleges and their funding?
I will bring in colleagues to set this out in a bit of detail. It is complicated. As I alluded to earlier, the system has changed in recent years in terms of the targets and the greater flexibility that the Funding Council is affording colleges over how many courses they must provide to individual students. Ray Buist can set that out for the committee.
I will certainly do my best to try to explain it. In the first bullet point in paragraph 52, we make the point that, from 2025-26—the current year—the SFC has changed the way in which the distribution model works. From this year, each college receives a single core credit price for each credit of teaching that it delivers. Fundamentally, there is an agreement between the college and the SFC on the number of credits that it is expected to deliver, with a specific credit price for each of those credits, which, multiplied together, comes to a funding allocation for that college. We are not yet at a point of saying that this is happening, but in the report we are recognising a potential risk that I think colleges recognise exists, which is that, as they increasingly find it challenging to achieve financial balance, and given that there is a set core credit price that they are allocated for all credits that they deliver, regardless of the specific course and the cost to deliver it, they may feel pressured and pushed towards delivering more of the courses that are more cost effective to deliver, potentially at the expense of courses that are more expensive to deliver but more in demand. In a sense, we are moving to a position where those more cost-effective courses are in effect subsidising those that are more in demand.
I can give you an example. A course that requires expensive machinery or equipment that can be delivered only to a smaller class size for health and safety reasons would become more expensive to deliver a single credit on, compared to others that can be delivered to a larger class size and do not require the expense of those pieces of equipment. Ultimately, that leads us to a position where, in the current funding model, a college could achieve credits more efficiently through the choice of the course that it provides.
Is it not inevitable that lower-cost courses will subsidise the higher-cost courses? Is there a problem with that?
I think that it is a possibility, given the financial pressures, that lower-cost courses just become the norm. To build on Ray Buist’s example, the report talks about additional support for learning courses, which typically have a far lower number of students in them. That is an expensive model. If that is part of the difficult decisions that some colleges have to take, they may go for larger class sizes as the norm. That might not necessarily suit the needs of their communities or businesses and the courses that they are looking for the college to provide. Colleges will need to strike a balance, but you can see some of the motivations that might be at play, given the severity of the financial position of some of Scotland’s colleges.
Presumably, Audit Scotland will keep an eye on that and report on it in the future.
I am very happy to confirm that to the committee. We will continue to maintain a strong interest in Scotland’s colleges, both through the individual annual audits and through sector reporting, which will feature as part of our work programme and which we will bring back to the committee for consultation.
I have one last question. Can you tell us a bit more about how the SFC’s college transformation framework will work in practice?
Yes, I am very happy to. We set out a bit of detail about the college transformation framework that is coming in in 2025-26. I have talked to some extent this morning about the additional flexibility from the Funding Council, which no doubt recognises the financial pressures that some of Scotland’s colleges are facing. They will be afforded flexibility in terms of the number of learning credits that they can underachieve by without penalty, which will increase to up to 10 per cent. Ray Buist might want to say a bit more about some of the overarching aims, but I think that it is indicative of the need for more flexibility and the evolution of the assurance and scrutiny model, together with the funding that the Funding Council provides.
Briefly, as the Auditor General has just set out, the fundamental point of the college transformation framework is that it gives colleges a little bit of breathing space and an opportunity to submit a proposal to the SFC. As part of that, they would be allowed to reduce the number of credits that they deliver by 10 per cent, without the recovery of the funding that equates to those credits.
The SFC has advised that a couple of colleges are going down the road of exploring that with the SFC and have proposals that are being developed. There is certainly one other college that is at an earlier stage of that process, so there is some interest in it. The point that we make, however, is that flexibility will certainly be more suitable for those colleges where there is less unmet demand. For colleges where there is already unmet demand, it does not necessarily have as much value.
Before I put my questions, I refer members to my voluntary register of trade union interests.
The accounts of the City of Glasgow College, which has cropped up a couple of times, show that it is carrying cash reserves of £12.3 million, which is up from £10.5 million in the previous financial year. Why is there such a high proportion of cash reserves held by a college in the midst of this financial crisis?
It could be one of a range of factors. I do not have the college’s accounts in front of me to see whether there are any trends behind that. If it is coming from the statement of financial position or balance sheet, it is only a snapshot of the cash position, so it could change significantly in the following month or in a month thereafter if there are any large invoices that are due to settle.
Cash balances matter—I recognise that point—particularly with regard to some of the liquidity issues that the sector is facing. The use of medium-term financial forecasting is an important part of how Scotland’s colleges do business. If there is a specific challenge for that college or if there is more stability, from our perspective, it does not necessarily change the overall analysis that the sector is experiencing challenge. Cash does matter, so I am happy to look into that.
Thank you. In appendix 3 of the report, you set out a table of what is happening to full-time equivalent posts by college. The biggest percentage cut in full-time equivalent staff is at the City of Glasgow College. Incidentally, the second biggest cut—we will come on to it—is at Forth Valley College.
Do you have any understanding of why, at the same time as a college is sitting on significant cash reserves, it is also reducing its teaching and non-teaching staff by such a huge number—160-odd people walking out the door within 12 months?
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In percentage terms, that is probably moderated by the number of people who work for that college. I understand the point that you are making in that the City of Glasgow College and Forth Valley College are taking the scale of challenges that are in front of them and reflecting that in the voluntary severance arrangements that they are going through. What I do not have in front of me are the accounts that would perhaps allow me to answer your questions more fully about what that means for their financial plans into the future. If there are specifics, I would expect that those cash balances are earmarked for projects. Normally, there would be a correlation between the cash balance and the amount held to deliver activities in the future. If it is helpful, unless colleagues have the detail to hand, we may need to come back to you in writing on those two specifics.
Does the Scottish Funding Council need more powers and greater sanctions to stop colleges getting themselves into financial difficulties? Would that work?
In recent years, we have seen an evolution of the Funding Council’s roles and responsibilities and of the support that it provides to the sector. The outcomes framework and assurance model provides perhaps the most obvious example, as the Funding Council is clearly setting out what it will do and the role that it will undertake. That is on a spectrum—from monitoring, supporting and engaging with colleges right through to providing financial liquidity support, which we have seen examples of.
Beyond that, I would need to think more carefully about whether Funding Council actions should translate into regulatory interventions. As both a funder and a regulator, the Funding Council is already being much more active than it would have had to be in previous times, because of the financial pressures that the sector is facing.
The job evaluation of non-teaching staff came up earlier, as it has come up almost every year when we have had similar evidence sessions or looked at particular colleges, because it is a long-standing and outstanding piece of unfinished business. You mentioned money transferring to colleges and then transferring back to the Scottish Government. My understanding is that the Scottish Government has underwritten the outcomes of the job evaluation. Is that your understanding, too?
Yes—broadly speaking, the Scottish Government is committed to funding the cost of the job evaluation scheme. As we referenced in paragraph 19 of the report, the cost has been estimated at more than £86 million to date.
I observe that, as we set out in the report, this is taking quite a long time—we are now seven years or so into the process. I am sure that it would be helpful for all concerned for the situation to be resolved as quickly as possible.
I am sorry that I am jumping about a bit, but I will take you to paragraph 35, which speaks about the importance of the relationship between a college and the community in which it sits. I cannot help thinking of anywhere except Alloa. Clackmannan College, which was established there in the 1960s, became part of a merged group with a campus in Stirling and the long-standing Falkirk campus. As you alluded to this morning, the Alloa campus is now under threat. In paragraph 35, you describe why the community relationship is so important. Do you want to elaborate on that a bit before I get to another question?
Perhaps there is not terribly much more to say beyond the comments that we have made in almost all the college overview reports that Audit Scotland has produced on my behalf about how central colleges are to the communities that they serve because of the pathways that they provide to education, training and employment. Inevitably, if colleges are having to make really difficult decisions—they are having to do that on their campus provision—they need to do that through careful engagement with their communities.
We can spend a bit of time on considering the frameworks that Scotland’s colleges are required to operate under in terms of engagement. Perhaps this reflects the era that the legislation relates to, but neither the Further and Higher Education (Scotland) Act 1992 nor the Post-16 Education (Scotland) Act 2013 directly addresses college closures.
As we reference in the report, there is guidance from the Scottish Funding Council on disposal arrangements. Maybe a better reference is to the steps that the “Code of Good Governance for Scotland’s Colleges” sets out for the board of management to take so that the voice of students is central, given the importance of corporate and social responsibility. Over and above legal expectations, that all translates to the importance of proper engagement and consultation with students, staff and communities when any of these difficult processes and decisions are being considered.
With that in mind, do you have any oversight of the study that is being established by Forth Valley College to look at the feasibility of the Alloa campus? What are its terms of reference and what is its scope? Who has been hired to carry out that feasibility study? I think that the Scottish Funding Council is involved in that.
I have no direct role in that; it is a matter between the college and the Funding Council. My interest is served through the work of the appointed auditors, who review the college’s arrangements and the audit of the financial statements, together with a wider-scope annual audit report, which will capture some of the decision-making arrangements that the college makes as it goes through that process. As you said, convener, this is a matter between the college and the Funding Council, together with staff, students and the community.
I will finish by going back to a point that Colin Beattie raised. With the subsidiaries and other enterprises that colleges are entering into, is there a proper sense of the risk that is involved? Are the governance structures fit for purpose to give proper oversight to and have accountability for such initiatives?
I cannot give you complete assurance on that point. That is informed by the fact that three recent statutory reports from me have referred to engagement with third parties and commercial activities that have not gone well enough.
We expect, as I am sure you do, that statutory reports that are produced on a sector are used by the whole sector as part of any lessons-learned management of risk. It is clear that this is additional risk that the sector is planning to take, and it is important that the sector gets that right. Proper oversight, scrutiny, governance and engagement are all key steps that the sector will need to take as it embarks on new activities.
That draws the evidence session to a close; I am sorry that we were a bit pushed for time. I thank the Auditor General, Derek Hoy and Ray Buist very much for the evidence that they have provided. We will need to consider our next steps.
I now move the meeting into private session.
12:24 Meeting continued in private until 12:48.Air ais
“Adult Disability Payment”