Colleges resort to loans to pay for redundancies

3rd September 2010 at 01:00
Fear that repayment `time-bomb' could wipe out cost savings

Colleges have been forced into debt to pay for cost-cutting redundancy measures, one of the largest lenders to educational institutions has revealed.

Banking giant Barclays, which is responsible for about half of the lending to England's further education colleges, said some institutions were taking out short-term loans for between three and five years because they did not have the cash for restructuring costs.

Chris Hearn, national head of education at Barclays, said: "It's a time when a lot of colleges have to transform their business. We've been talking to them about using short-term finance to help pump-prime that transformation agenda.

"Some don't have the cash, some might have it but are in the middle of an investment programme so can't access it. In the early years, they will have to use some savings to fund the repayments. This is how we can support them through this."

He said the number of colleges that had taken on this kind of short-term borrowing was in "single digits" and borrowing costs were relatively low at about 3 per cent each year.

But the need to repay the loan within a maximum of five years meant they were likely to be paying back significant sums each year, potentially wiping out savings from reduced staff costs until the debt was repaid.

The move raises concerns again that some colleges might find themselves in financial difficulty due to their level of borrowing. Last year, the House of Commons public accounts committee warned that colleges may already have taken on more debt than they can repay.

By 2008, 23 colleges had borrowed more than 40 per cent of their income and, prior to this year's cuts, MPs feared they might be vulnerable to a downturn in demand. Last year, five institutions had borrowed more than 100 per cent of their annual income. Most have building projects under way.

But the Association of Colleges maintains that overall finances at FE institutions are healthy, a view Mr Hearn backed. "We understand it has some significant challenges," he said. "But we're optimistic."

The University and College Union said it suspected some colleges were using the Government's austerity rhetoric to carry out restructuring which went beyond what was necessary. It said if colleges were not going to see savings for at least three years while the debt was repaid, that fuelled their suspicions that colleges were not restructuring solely out of financial necessity.

Barry Lovejoy, head of colleges for the union, said: "One thing we had worries about was colleges taking the main chance in terms of making redundancies and restructuring to a greater degree than was required by their finances or funding shortfall.

"If they are borrowing to do that, and seeing the savings eaten up by the repayments, we may have been right to worry. It would be better to retain staff with a view to achieving more income further down the road. It's building up a time-bomb."

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