College capital projects are in jeopardy due to strict and “unnecessarily complicated” government rules on borrowing that have been rapidly introduced following colleges’ reclassification as public sector bodies.
Kendal College had secured finance from a high street bank to redevelop the disused Westmorland Shopping Centre into a new campus but has now been forced to pause this option and look for “alternative methods of funding”.
Meanwhile East Durham College has had to put a multimillion-pound loan refinancing deal planned to pay for a new T Level facility on hold with no timeline for a solution despite facing a tight deadline to give the project the green light.
The issue follows a Department for Education ruling that colleges must gain special permission, which will only be granted in rare circumstances, to borrow commercially from November 29, 2022, when the Office for National Statistics changed their status from the private to public sector.
Shadow skills minister Toby Perkins said there were more college capital projects at similar risk in a letter to education secretary Gillian Keegan. He called on her to urgently investigate the situation and criticised the DfE for failing to put in alternative plans for college borrowing immediately.
The Association of Colleges said at least 20 colleges had to ask for borrowing approvals in December and “many more are in the queue waiting for an ESFA verdict in the spring”.
Julian Gravatt, AoC deputy chief executive, told FE Week that officials had explained that colleges with DfE-funded projects will be able to get a government loan in future, but it is “unclear what the terms are and there is a risk of delay while the two sides discuss the amount”.
Kendal College completed phase one of its Westmorland campus before the end of 2022 and has already moved over 150 students to be taught in the centre. It is being designed to hold up to 500 students and the project is planned to complete by September 2023.
Kendal College principal Kelvin Nash said that not proceeding with the Westmorland campus build was “not an option for the college”. He is continuing funding negotiations with the DfE.
He told FE Week: “Whilst no outcomes have yet been reached, the discussions are positive and on-going, and the college will continue to engage with the ESFA and the DfE over the coming weeks until a satisfactory solution is found.”
Sarah Judson, vice-principal of finance and business planning at East Durham College, said her college’s loan refinancing was “very close to signing” and had incurred costs of about £70,000.
She said the college had not expected an immediate “shutters down” approach at the point of reclassification and had been led to believe the process would be phased, “given the DfE knew we were in the middle of a refinancing”.
Judson added: “There is no clarity or timeline for responses in the complex consent process that has been put in place and there appears to be little consultation with and involvement in any future decision by the college.
“One of our capital projects is at risk as our match funding is now in jeopardy and we have no clarity over our ability to continue.”
When colleges were reclassified as public sector bodies on November 29 the DfE announced that permission would be required, as a condition of funding, for any new private sector borrowing. It added that colleges “may only borrow from private sector sources if the transaction delivers value for money for the Exchequer”.
The department said it was “very unlikely” colleges would be able to satisfy that condition given the higher financing costs of non-government lenders.
Extra funding worth £150 million was promised to colleges in spring 2023 through the DfE’s FE capital transformation programme to make up for the inability of colleges to borrow commercially. But Gravatt said the situation had created “uncertainty for dozens of colleges”.
He added: “The position for colleges with projects funded by other government departments, or who had planned to use bank loans to self-fund projects, is totally unclear.
“It is possible the Treasury is planning further increases in the FE capital budget to help colleges fill the gap left by the loan embargo and still meet future investment needs, including those associated with net zero targets and levelling up plans. But I am worried that state control and austerity targets will leave the sector short of the long-term finance needed in its estate.”
Judson said the situation was an “added and unnecessary complication” that was going to cause “massive uncertainties at a time when colleges are facing unprecedented challenges from the external environment, from inflation, from energy costs and staff recruitment and retention”.
A DfE spokesperson said: “We encourage colleges with commitments to capital projects which had been planned to include commercial borrowing to open a dialogue with the department as soon as possible.”