Hansard

Set against that relatively positive picture of college finances, four colleges—Edinburgh's Telford College, Elmwood College, James Watt College and North Glasgow College—reported operating deficits totalling £1.9 million. However, with the exception of James Watt College, they had sufficient reserves to cover those deficits. The Auditor General has produced two section 22 reports on the 2006-07 accounts of James Watt College and Kilmarnock College. Those have only just been laid before the Parliament, so we will bring them to a future meeting. Six other colleges that have been the subject of section 22 reports in the past five years have, for the most part, improved their financial performance.Part 2 of the report explains that the overall improvement in financial performance is down to a number of factors. First, there has been an increase in public sector funding. Core grant funding has increased since 2002-03 by around £79 million, in cash terms, to £355 million in 2006-07. Capital funding has increased by £67 million in cash terms over the same period. While there has been some funding for growth in student activity, it has not been substantial. As a result, colleges have been able to concentrate on improving their overall financial position. The Scottish funding council launched a financial security campaign in 2002 and provided associated, ring-fenced funding of around £38 million to support that. In 2002, it launched its further education development directorate, which works largely through peer support. Colleges can draw on the support and experience of their peers in the sector. We spoke to people in different colleges who indicated that they appreciated that support, particularly when dealing with difficult issues or challenges.Although the improved financial position is encouraging, part 3 of the report outlines challenges for the sector over the next few years. First, while the overall funding that is allocated to colleges will not decrease over the period of the most recent spending review, the increases of recent years will not continue at the same level. The focus now for the college sector will have to be on financial sustainability. Colleges will need to respond to cost pressures associated with limited increases in public sector resources. Other funding sources and income streams are also likely to change, with reductions in European funding and uncertainties surrounding income streams from Scottish Enterprise and Highlands and Islands Enterprise due to the recent structural changes in those organisations. In addition, as we outline in the report, many colleges are proposing major estate or campus developments. That will be a significant area of spend, which presents management and financial challenges for the sector. Our report describes how some estate developments are linked to several colleges forecasting deficits in the next few years. One development that may help to alleviate that is sector-wide procurement. Other sectors in the public sector are aiming to create centres of excellence, and a centre of expertise for the college and university sectors has been established. However, progress has been slower than anticipated, and concerns about the level of subscription fees required to fund the centre's activities will need to be addressed if the sector is to secure the anticipated efficiencies.Colleges operate within relatively narrow margins. Our analysis found that, across colleges, the average operating surplus has grown in the past few years to around 3 per cent. However, that is relatively low and may not provide sufficient year-end flexibility. The potential consequence of operating within such narrow margins is that even relatively small changes in income or expenditure can move a college from an operating surplus to an operating deficit. That is shown in the report. Auditors found that the governance and management arrangements were generally sound both in the funding council and in individual colleges, although some relatively minor weaknesses were identified in some colleges.We highlight in our report two areas in which the committee has expressed interest previously. First, college boards of management should ensure that they have members with recent, relevant financial experience. Secondly, colleges should prepare good-quality draft accounts so that the audit can be completed smoothly and on time. That sounds very bureaucratic, but it is not meant to be. The issue is not one of auditors being under pressure. Rather, it is about the capacity of the finance function of colleges; the avoidance of additional fees should accounts not be presented in a good way; and, most important, the need for boards of management to have access to good sets of accounts and audit reports, so that they can consider their own role in the management of the college.The report highlights two colleges where there have been significant delays in the process. We also found that the accuracy of colleges' financial forecasts could be improved. That is important, because inaccurate forecasts could result in college boards of management making the wrong decisions or in the funding council providing support to the wrong colleges. The report is positive, in that we found that colleges are in better financial shape and that their overall financial performance has improved. That has been achieved through a combination of increased funding and peer support. The sector has genuinely learned some lessons from the difficulties that the previous Audit Committee highlighted. However, the sector faces a number of challenges, and it will have to respond to the cost pressures that are looming before it. As the Auditor General indicated, we are happy to take questions on the report.