Corporate muscle can help reshape the sector

28th May 2010 at 01:00
Comment: Andy Argyle

Increasing speculation about the number of further education colleges deemed to be "struggling", "vulnerable" or at risk of failing on quality or financial issues has turned the spotlight on the sector's restructuring needs.

The potential to adopt aspects of private-sector methodology to accelerate the current merger and acquisition processes should be firmly on the political agenda.

In recent years, a number of institutions have innovated by creating new structures and delivery models while working within the current legislative constraints.

Through merger, acquisition of private firms and regional strategies, the stronger FE colleges have created efficiencies while preserving the local delivery of education (492 colleges in England at incorporation in 1992 are down to about 350). International experience in countries such as the Netherlands and Australia highlights a trend toward larger regional delivery units.

Nevertheless, the scale of the current and future budgetary challenge, coupled with the traditional merger route propped up by Learning and Skills Council funding being no longer available, means change is needed. This has prompted debate around the opportunities for the private sector to play a role in consolidation.

The need for a "level competitive playing field" to facilitate this has been cited by bodies such as the Confederation of British Industry (CBI) and through debates around private provision within the health sector. But both the public and private sectors face structural issues which distort competition.

FE colleges were incorporated under the Further and Higher Education Act 1992. A variety of collaborative structures have emerged within the sector to remain within the legislative guidelines. But a review is needed to consider alternative corporate and governance structures which strike a balance between assuring quality and local provision while not inhibiting the drive for efficiency and consolidation. The experience of publicprivate sector collaboration in the health sector and alternative school models such as academies should also be included in the debate.

Merger processes are lengthy, often with little effort made to quantify and track expected efficiency and operating savings post-transaction.

While leading FE colleges have made progress in accelerating merger timetables in their bid to consolidate, more updated guidance is needed, including the idea of the modern merger and its new rationale, which is not about "saving failing colleges".

A revised process with more focus on comprehensive acquisition or vendor due diligence at an early stage would help to shorten timescales. The barriers to entry and restructuring caused by current pension and tax arrangements are well documented, meaning either public or private provision can have an advantage, depending on the circumstances. We need an open debate to consider ways to overcome these barriers.

FE colleges are constrained in the level of external borrowing they can raise. The entry of well-capitalised private-sector influence could distort competition unless colleges are freed of unnecessary constraints.

A working group building on research from the CBI, KPMG and others is needed to help Government consider these issues. The aim should be to create a competitive environment in which the most efficient institutions in the public and private sectors can play a role in reshaping FE.

Andy Argyle, Partner, KPMG Audit Plc.

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