Gov’t will encourage academies to take out loans to fund development – announcement sneaked out at half term

Janet Downs's picture
 5
The Government will 'actively 'encourage academies to take out loans, TES reports. They're forbidden to do so now but there's a sweetener - academies which take out loans will be viewed more favourably for the Condition Improvement Fund (CIF).

CIF is only available for academies and sixth-form colleges. Although there's 'no obligation' to take out a loan to fund development, academies which do so would gain a higher eligibility ‘score’ than if they applied for a CIF grant alone.

Repayments plus interest* would be made by reducing the annual amount paid to the academy or college. These mustn’t be more than 4% of the revenue grant awarded by the Education Funding Agency (EFA). There are restrictions: an academy trust can’t be under a Financial Notice to Improve, for example, and must have a ‘cumulative revenue surplus’.

This raises the question why the Government is so keen to fund academy improvement by loans instead of grants. The Priority Schools Building Programme is already mainly funded via Private Finance Initiative (PFI) – a system which was derided by Chancellor George Osborne as ‘a bit of dodgy accounting’ when he was in opposition. Nevertheless, the ‘discredited’ system has been resurrected supposedly with more checks. It works like this: the EFA releases the PFI ‘batches’ after reviewing bids from contractors. The ‘operational period’ is 25 years. That means schools wanting essential building will be locked into a contract for a quarter of a century.

So, PFI and loans – all representing future expenditure – is being encouraged by the Government.

However, CIF raises more questions than whether the DfE should be pushing schools into seeking credit:

1Can the EFA cope with its ever-increasing responsibilities especially when it’s been told to reduce its operating costs?

2Why are CIF grants only available to academies? Non-academies cannot ask for this money. Is this fair?

3The DfE says it wants to support ‘popular and successful academies’ to expand ‘irrespective of the demographic demand in the local area’. This allows academies to increase their numbers even when there’s no demand for extra places. This could cause havoc with local authorities’ ability to plan school place provision. It could create surplus places and even threaten the viability of neighbouring schools. Is this a prudent use of public money?

The Government’s blinkered support for academisation has already resulted in financial scandals and waste of taxpayers’ money (remember the £1b overspend on the academies programme?). Encouraging academies to take out loans is foolhardy. Even if an academy is seemingly in good financial health today it might not be tomorrow – a downturn in the number of pupils following, say, a poor Ofsted would trigger a reduction in funding. But loan repayments would still have to be made and would be taken at source. And what about those academies where finances appear to be managed well but are subsequently found to have used public money recklessly?

 

No wonder the DfE sneaked out this announcement during half term.

ADDENDUM The paper edition of Academies Week reports that a DfE spokesperson said ‘many council-run schools already have the option to borrow funding’. However, I’ve been unable to find much information about this. All schools can apply for 0% loans for green projects. LA schools can’t borrow money unless they have permission from the Secretary of State (SoS). Voluntary Aided schools can apply to the SoS for a loan but permission is unlikely to be given. DfE guidance about academy conversion refers to loans to schools from local authorities but these appear to be confined to ‘supplementary cash loans’ for schools with deficit budgets or non-standard spending. This isn’t quite the same as borrowing to fund capital projects.

Any further information with links to official sources about lending to ‘council-run’ schools for development would be welcome.

*Interest is charged at Public Works Loan Board rates of interest currently 1.55% for a loan of £100k over two years and 2.55% for the same amount over ten years.

(cash loans)
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Comments

David Barry's picture
Fri, 07/11/2014 - 23:27

It would seem that the Loans would be made by the Government through the EFA.

This begs the question as to what would happen were an Academy Trust to find itself unable, for any reason, to repay the loan. If you are lending anyone any money you need to know what happens in the case of default.

SBM's picture
Sat, 08/11/2014 - 06:34

I think they are referring to the possibility of local funding schemes allowing pooling of schools individual devolved formula capital and schools 'borrowing' from that pot


Andy V's picture
Sat, 08/11/2014 - 09:10

Whichever way you cut it this scheme is has all the potential to end in tears.

Borrowing money using existing funding streams is standard practice in the commercial sector but in state education poses real difficulties. The screaming example is what happens if a school or chain over extends its borrowing and the pupil roll drops or predicted increases don't materialise? What happens if a chain over extends and then pulls out of education leaving DFE to either find another sponsor and/or pick up the bill through writing off the loans (and interest penalty payments)?

Janet Downs's picture
Sat, 08/11/2014 - 14:37

Thanks, SBM. This seems to point to cash advances to cover short-term cash flow or deficit reduction not loans for development, building etc.


Janet Downs's picture
Sat, 08/11/2014 - 14:48

Andy - that's a good point about how having a loan could affect any proposed change in sponsorship or academy chain. The DfE says any loan repayments musn't exceed 4% of an academy's annual grant. But this would be calculated on the annual grant at the time the loan was agreed. If, as you say, the academy faced a drop in pupil numbers, then the annual grant would go down. The amount of repayments would remain the same but would then be a bigger proportion of the annual grant and potentially unaffordable.

When LA maintained schools converted to academies they had to repay any loans from the LA before converting. Would this be the same with academies changing sponsors or chain? Would they be required to repay the entire loan before moving? If not, would the prospective sponsor or chain be put off? Or would the DfE, as you suggest, write off the loan as a sweetener to the new sponsor or chain? There's a precedent here - the DfE took over the debts of £5m when the independent King's School joined the state system.


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