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PBD responds to apprenticeship funding consultation

Following the report by Doug Richard (pictured), the government has published proposals to reform the funding of apprenticeships by giving employers a greater role as purchasers of training.  PBD has serious concerns about the workability of these proposals and fears that they will kill apprenticeships altogether in the SME sector.   Here is our response.

Apprenticeship Funding Consultation
BIS/DfE Joint Apprenticeships Unit
Department for Business, Innovation and Skills
Orchard 1, 2nd Floor
1 Victoria Street
LONDON SW1H 0ET

1 October 2013

Dear Sirs

Response to the Consultation on Funding Reform for Apprenticeships in England

I am pleased to submit the response of People and Business Development Ltd (“PBD”) to the above consultation.  PBD is a training provider specialising in training and qualifications for the children’s workforce (early years, playwork, learning support etc.) which has a direct apprenticeships and adult skills contract with the Skills Funding Agency.  In 2012/13, PBD delivered about £1m of government funded training.

Before turning to the specific questions, we would make some general remarks about the current system and the various options for reform set out in the consultation document.

The document wrongly assumes that players in the marketplace will respond as intended, rather than developing ways to turn the system to best advantage.   It is necessary to examine the proposals from both perspectives in order to avoid unintended consequences.

We agree with the need to “dispense with large numbers of government set funding rates” and we welcome the recent simplifications in this area.   However we do not accept that the present system is unfit for purpose and we have serious concerns that the proposed overhaul will make matters worse.

The reason that market disciplines do not currently operate has nothing to do with the direction of funding: it is simply that the government is paying too much for training.  Unless and until this is addressed, it is an illusion to think that routing funding through employers will make a difference.

The benchmark rate for an apprenticeship should be the minimum price for which a reasonably efficient training provider is prepared to deliver the required training without compromising on quality.  If the government pays above this rate – as it does at present – there is no incentive for providers to become more efficient.  Equally, employers have no need to contribute to the cost of training and in consequence tend to undervalue it; because they do not see themselves as purchasers of training, they do not demand higher quality.

If government funding were to fall towards the benchmark rate, inefficient providers would no longer be able to generate taxpayer funded profits.  They must therefore:

  • drop quality (which can be controlled through publication of transparent data such as success rates and learner/employer views, and through Ofsted inspection);
  • increase efficiency (e.g. by improving assessor training and investing in technology);   or
  • charge employers.

Efficient high quality providers, by contrast, will be able to prosper without levying employer charges.  This will create market differentiation and gives employers a stake in choosing their provider carefully.  It will achieve the objectives set out in the Richard Review without radical changes to the administration of funding.

If the government thinks that all employers should contribute on principle, the way to achieve this is to reduce funding to the point where even efficient providers are forced to make a charge in order to be sustainable.   As we describe later, any attempt to impose an employer contribution which is not required by the market will be thwarted by the development of avoidance measures.

It may seem strange for a private training provider which depends on apprenticeship funding to be arguing for a cut in rates.  This, however, is a measure of how dangerous we consider the present proposals to be.

In our judgement, either of the first two models will destroy the engagement of SMEs in 16-23 apprenticeships, much as the introduction of loans has all but wiped out 24+ apprenticeships.

It is already very difficult, even with free training and the availability of the £1,500 AGE grant, to convince SMEs to engage in apprenticeships.  Anything which adds to the burdens – whether financial or bureaucratic – will make it all but impossible.   Models 1 and 2 both require SMEs to finance training and then recover it, either directly or through the PAYE system, from government.  This will have serious consequences in terms of both cash flow and bureaucracy and SMEs will simply have nothing to do with it.

Of the two, model 2 is easily the worse.   It is difficult to imagine that HMRC will be any more enthusiastic about the administrative and IT complexity than will the SME sector.  We foresee delays in implementation, spiralling costs and a loss of confidence in the system, accelerating the withdrawal of SMEs from the apprenticeship marketplace even faster than model 1.

Model 3 is marginally better because the up front cash flow provided by the employer is minimised.  However, any proposal which aims to ‘buck the market’ by imposing a cash contribution will fail.

If the government will provide 70% funding for the training element of an apprenticeship up to a maximum figure of (say) £2,100[1] but will do so only when the employer has contributed £900, this will be of no avail if a training provider will do the work, at an acceptable standard, for £2,100.   All that will happen is that a system of discounts, rebates or ‘cashbacks’ will emerge to reduce or eliminate the employer contribution, while leaving the government funding 100% of the cost.

Nor are such arrangements necessarily illegal or undesirable.  An ‘immediate cashback’ arrangement between provider and employer which, in effect, inflates an invoice for the purpose of accessing increased funding would certainly fall into this category, although it would be extremely hard to detect.   However, it would be entirely acceptable for a provider to pay a cash incentive to an employer when an apprentice passes a specified milestone or achieves a qualification, even where the incentive is equal in value to the employer’s initial contribution.  Such schemes have been actively encouraged by government and providers have been praised for their innovation in developing them.

Three years ago, we responded to an earlier consultation on the reform of skills funding which followed publication of the Banks Report.  In that response, we argued for a system of ‘outcome based funding’ where providers are paid exclusively on results.  If the introduction of this change created cash flow difficulties for providers, we argued that these should be addressed as a short term ‘banking’ issue rather than by institutionalising a system of phased payment which merely creates problems for auditors to solve.

We went on to argue as follows:

The Banks solution is at first sight ingenious: a transparent system of course pricing on the part of providers, clearly published maximum funding rates, and a system where government matches the price paid by employers up to the published maximum, but not beyond.

We believe this is almost right but that the matching principle is over complex and liable to failure. In the first place, by insisting that an actual contribution is collected, it would amount to government intervention in commercial relations between providers and employers. Secondly, it would encourage providers to find ways to charge employers an upfront amount which will maximise the government’s contribution, while returning some of the funds to employers later in the process. And thirdly, it will be difficult for auditors – without a significant extension of their remit and powers – both to detect such schemes and to distinguish them from other arrangements with similar effect but entirely legitimate intentions.

For example, a provider might charge employers 50% of the published rate up front and claim the full maximum contribution from government under the matching rules, while entering into an unrelated agreement with the employer that, for every young apprentice who completes within their planned end date, a terminal bonus will be paid. This would be a bona fide policy to incentivise employers to recruit and retain young learners and support their training: since the retrospective payment is contingent on results which may or may not happen, it cannot be said to be flouting the matching rules. However, to define rules which can unequivocally distinguish between evasion, avoidance and unintended consequences, and then to expect Skills Funding Agency auditors to police them effectively, risks compromising the whole system.

We argue for a simplification of the Banks proposals. Government should publish maximum funding rates – which could be varied, as an instrument of policy, to incentive more difficult outcomes. Allocations to providers would be based on a form of ‘Dutch auction’, with those providers offering the lowest rates receiving allocations first. Providers should then be free to negotiate with employers as they see fit.

It is essential that this proposal is to be seen in the context of the move towards outcome based funding outlined above. Without it, there would be a serious risk to quality. Providers who followed a ‘lowballing’ strategy to win business would have an incentive to compromise on quality in order to reduce costs, while continuing to collect on programme payments. If, however, payment is based on results, this incentive disappears: reducing quality will simply defer receipt of funding. But providers will have a major incentive to develop more efficient ways of helping learners to achieve the awarding organisation’s standards in the minimum time.

In summary, we think it would be extremely unwise for the government to embark on these reforms without fully considering, with the help of the sector, how they will play out in practice.  To do otherwise risks either eliminating apprenticeships entirely in the vitally important SME sector, or imposing a cumbersome and costly bureaucracy which will leave the economic realities unchanged.

Our answers to the specific questions posed are therefore.

 

Question Response
1. No
2. There would be a rapid withdrawal of SMEs from apprenticeships
3. We can see no advantages to the proposal which could not be achieved   by the simpler expedient of announcing a phased reduction in funding rates   while leaving the current system broadly unchanged.
4. No.  You do not create a free   market merely by introducing new players while continuing to distort market   forces.
5. No
6. Future prospects and hence outcomes would be significantly reduced.
7. It would be disastrous.
8. N/A
9. It would be even more disastrous.
10. N.A
11. It involves less bureaucracy for employers and would not therefore   lead to the same level of disengagement.    However it would not work as, without action to stop market   distortion, employers and providers would engage in a variety of avoidance schemes,   both acceptable and unacceptable.
12. See our proposals above for outcome based funding and a system of   ‘Dutch Auctions’ by providers designed to secure value for public money without   loss of quality.
13. Model 3 is the least undesirable
14. See our discussion above
15. Amending the current system as we propose would preserve the   engagement of SMEs, drive quality and efficiency improvements on the part of   providers and secure better value for money

 

Yours faithfully

 

 

Ross Midgley MA LLB FCA

Director



[1] The consultation document is unclear whether, in the illustrative examples used, the £3,000 maximum applies to the total cost or to the government contribution.  We have assumed the latter in the discussion above, although the principle is unaffected.

 

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