One of England’s largest college groups spent close to £4 million on ‘Project Apple’ to shut two training arms which contributed to an £11 million deficit last year.
The shortfall at NCG isn’t the group’s only financial concern: it is also expecting the Education and Skills Funding Agency to recoup funding that goes back “a number of years” following an investigation that found “significant data anomalies” relating to achievement rates.
Its chair Peter Lauener, a former chief executive of the ESFA, was tight-lipped on the potential clawback, but insisted the closure exercise, code named Project Apple, “will contribute to a material improvement in the group’s operating performance and cash position in 2019/20 and beyond”.
We could not see a credible way of rebuilding a successful operation
NCG, which runs seven colleges across the country, shut its two training providers Rathbone and Intraining in 2019. Lauener (pictured) said the decision was made because their quality was “poor”, and they were making losses of around £250,000 per month.
“We could not see a credible way of rebuilding a successful operation”, he added. The group began a managed wind-down at the start of last year. Around 300 jobs were lost by the end of October.
The group hired former North Hertfordshire College principal and now consultant Matt Hamnett following a competitive tender to lead on Project Apple.
In March, NCG estimated that the total cost of the closure project, including redundancy payments, consultancy fees and dilapidations, would come to £1.7 million.
Minutes from a meeting that month show that a governor had questioned the robustness of the prediction. He was “assured” by the managing director of Intraining and Rathbone that the numbers were based on “detailed planning and as a result were felt to be reliable”.
But minutes from a meeting in October 2019 show costs “have been £2.5 million higher than budgeted”.
This was “largely due to higher than budgeted costs in dilapidations, consultancy fees, redundancy costs and ongoing training”.
Lauener told FE Week the cost of closure hit £3.8 million in total – including the costs of withdrawing from training centres around the country, staff, legal and other one-off costs.
He noted that this is more than the first projection – but claimed it was “materially less than the estimate prepared by the closure project team once work had been fully scoped”.
The chair would not say how much Matt Hamnett and Associate’s consultancy fees were, but did say that Project Apple was “an incredibly complex programme of work” which they did “with great diligence – providing leadership, commercial, communications, people, property and MIS support”.
Hamnett said: “Our clients are best placed to comment on the work we do with them.”
Project Apple has had a significant impact on the group’s finances.
Its deficit has risen from £7.1 million in 2017/18 to £10.9 million in 2018/19, according to unpublished new accounts seen by FE Week.
They fail to mention Project Apple, but do state that financial performance has “been extremely challenging”. They also cited the freeze on funding rates within the sector, despite inflationary cost pressures (see box out).
Lauener would not go into more detail about the deficit when asked by FE Week.
He did add, however, that the group’s 2018/19 EBITDA (earnings before interest, tax, depreciation and amortization) – which they consider to be the most telling measure of NCG’s financial performance – was £0.8 million.
“That figure would have been much stronger without Intraining and Rathbone operating losses and closure costs, and that is why we are confident that our finances will be much better from our new basis,” Lauener said.
NCG’s 2017/18 EBITDA came close to £3.5 million.
As revealed by FE Week in March 2019, NCG’s two training providers were subject to an ESFA audit before their closure was announced.
Board minutes from a meeting in May make reference to a PwC investigation on behalf of the agency, the “preliminary results” of which suggested “significant data anomalies”.
We have learnt important lessons from the work we have done to close the businesses
Minutes for June 2019 state that action was subsequently taken against Intraining and Rathbone staff, including suspensions: “The chair noted that following the passing of a special resolution any members of staff who were suspended from their role (whilst holding a director role within Rathbone or Intraining) would no longer be able to attend board meetings or participate in the running of the company.”
NCG would not reveal how many staff were suspended.
July 2019 minutes stated that there “is risk in relation to any potential clawback from the ESFA”, however, the issues “originally highlighted were not materially financial as they mostly relate to achievement rates.
“When the data is being cleansed, a robust and documented process will take place to assure ESFA that the process is credible, and the issues have been investigated effectively.”
Minutes for October said ESFA clawback “could go back a number of years”.
Lauener would not disclose whether the agency had since demanded the group repay any funding, but said: “Through the process, we did identify some issues which required formal investigation. We conducted that work in close consultation with the ESFA and took action as appropriate.
“We have learnt important lessons from the work we have done to close the businesses – and will apply these in our future work to fulfil our vision to support all our colleges in their communities and to get the best out of the synergy of seven colleges working in partnership and learning from each other.”
A spokesperson for the ESFA said: “We do not routinely comment on investigations, ongoing or otherwise.”
Former CEO received a £57k lump sum
NCG’s former chief executive was paid £57,000 when he quit in October 2018 after five years at the helm.
Joe Docherty’s “payment in lieu of notice” is listed in the college group’s latest set of accounts, which also show £1,800 was paid “towards legal fees”.
NCG would not reveal any more details about this case when approached by FE Week.
Docherty’s salary in his last full academic year as the group’s boss, in 2017/18, was £232,000. He received £109,000 for working between August and October 2018, but £57,000 of this was his “contractual entitlement” after leaving after the start of a new academic year.
Liz Bromley became NCG’s permanent chief executive in August 2019.
NCG’s £11 million deficit for 2018/19 sounds concerning, but their accounts hint to a stable financial position even though performance has “been extremely challenging”.
“In recent years, the main impact on income from the group’s core activities has been as a result of the freeze on funding rates within the sector despite inflationary cost pressures,” the accounts said.
“This has been exacerbated by falling numbers of apprenticeships starts across the sector following the introduction of the apprenticeship levy.”
Learner numbers have decreased slightly across the group, but only by 4 per cent, from 32,698 in 2017/18 to 31,354 in 2018/19.
NCG’s turnover has dropped from £158.2 million to £148.5 million, which the accounts say is “largely due to the initiation of the training provider wind-down”.
They add, however, that NCG ended 2019 in a “stable cash position with cash equivalent balances of £13,413,000 with a £5 million revolving credit facility also available”.
This year’s accounts state that the group has “cash forecasts that demonstrate cash reserves and facilities are in place and are sufficient to meet the immediate cash requirements of the business”.
NCG also has a “strong” asset backed balance sheet, which prior to pension liability stand at £175,241,000.
The accounts state that confirmation has been received from the ESFA that they agree with NCG’s assessment of financial health equal to ‘requires improvement’ for the expected outturn of 2018/19.
“They are also agreeing that the budget for 2019/20 is graded ‘good’. This is based on balance sheet strength, maintenance of low gearing and improved operational performance following the close down of the loss-making training provider businesses.”
Cash flow from operating activities amounted to a net outflow of £2,916,000 (2018: net inflow of £4,306,000). The outflow in 2018/19 was “linked to the closure of the training provider businesses”.