Mergers, structures and other issues Julian Gravatt, Assistant Chief Executive 17 May 2016

Area review expectations “Area reviews… likely to result in rationalised curriculum, fewer, larger and more resilient organisations and where practicable shared back office functions and curriculum delivery systems” “Reviewing post-16 education” May 2015 This workshop The area review options (conversion, partnership, merger) Merger trends & types VAT, Banks, Pensions, Staff & Finance

Area review timetable Wave 1 Wave 2 Wave 3 Wave 4 Wave 5 Sept 15 Jan 16 May 16 Sept 16 Jan reviews per wave Target date is March 2017 No reports published yet Waves 1-3 all now in progress 200+ colleges “in review” right now

Area review implementation Area review Meeting 1,2,3,4 and 5 Convert MergeRe-Form Self-fund Restructuring Fund Transaction Unit

This workshop Conversion (for sixth form colleges) Federation, shared services, joint ventures Mergers

Sixth form college conversion Advantages VAT reclaim LGPS guarantee Avoids an FE merger Standardised status New local relationships Others will convert “Join the mainstream” Disadvantages The MAT requirement External financial control Income restrictions HE, SFA and Visa issues Bank and contract issues Distracts leadership Could take 12 months “No going back”

Federation, shared services, JVs Partnerships come in many varieties 2006 Education Act gave federations a legal status Two or more governing bodies can pool sovereignty Kingston/Carshalton or Reigate/Coulsdon two models Colleges & gov bodies separate; joint committee & CE Various academy federations (“MATs”) but under DFE control Some college MATs (eg NCD, Blackpool) Some sustainable shared services (eg Wessex, Essex) New legal models (eg TEN in Norwich, LTE in Manchester) Lots of interest in joint apprenticeship companies

College mergers – a brief history Incorporation Rationalisation Fund Ministers vs Mergers Area reviews

Merger types and consultation Type A New corporation Sec of State approval Double/triple dissolution New contracts needed Used in past for 3-ways Only 2 in last few years Type B The standard model College runs the timetable Single dissolution Consultation 4 months > due date Decisions by both corporations

Merger relationships Students LGPS SFA / EFA / Ofsted Councils LEP / CA College Bank College neighbours Staff / Unions Suppliers / services

VAT Mergers or sixth form college conversion One or both colleges may have a zero-rated post-2011 building HMRC cancel certificate if there is a change of ownership BIS/DFE offer to re-fund VAT cost via Transaction Unit Federations / shared services VAT due on many services from one college to another Cost-sharing group rules may allow VAT-free transactions

Banks Issues 200 colleges with £1+ million in long-term loans c90% with two banks (Barclays, Lloyds) All banks keen to rebuild their margins Mergers likely to require new loan application on new terms Bank due diligence via a firm on their roster Interaction between govt & bank loan (“intercreditor”) Future New college insolvency regime (2019?) may affect T&Cs

Eligibility Teachers employed in a college eligible for TPS All other college staff eligible for LGPS Subsidiary companies Staff not eligible for TPS (unless seconded in) Staff eligible for LGPS if company is admitted Mergers Barely an issue for TPS; big issue for LGPS Pension regulations and colleges Colleges

LGPS and mergers College A College B LGPS A LGPS Talk to both funds early on Fund actuaries share data, report on deficit and future service cost Discussions over best option Either Directions order to consolidate fund assets, active & pensioner members (Part 2, Schedule 3, Para 3-4 of Regs) Or May be possible to leave assets & pensioners where they are College A LGPS B

Pension – do colleges have an alternative? TPS Teachers in schools, colleges, post-1992 unis get TPS High on-costs (16.48%) but no liability Subsidiary company staff cannot access TPS LGPS Support staff employed by colleges get LGPS High on-costs and liabilities (average FRS17 deficit 30% of income) LGPS valuation as at March 2016 will change contributions in 2017 Scheme closure liabilities are high (“section 75 debt”) Subsidiary companies can be inside or outside of LGPS

Staff, principal and governor issues Governing body Joint committee to supervise project with shadow chair Balance between continuity and change Principal and senior staff AoC legal advice available. What do I&As say? Mergers in past generally involved ringfencing & continuity Some external pressure for external appointment Colleges don’t work well if there’s a vacuum Staff Big TUPE and harmonisation exercise

Costs & funding Area of expenditurePossible costs Preliminaries Legal, bank due diligence, comms financial analysis Perhaps a hundred thousands On merger completion Bank payment, redundancies Could be hundreds of thousands In the first year Investment in people, IT, buildings Anticipate large costs Funding ollege wn res Notes i Self-funding (reserves, council)Also long-term savings Transition grants£50k or £100k Restructuring fundNegotiated loan

Final thoughts More mergers than ever between 2016 and 2019 with a one-off opportunity to apply for financial support. The lesson of the recent capital grant rounds is that the money shouldn’t drive the strategy. Just because you can doesn’t mean you should. College mergers more complicated than they were even 5 years ago because colleges are on their own, have nervous creditors and operate in an unforgiving environment Several current mergers are taking longer (12 months) to execute