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Business Bulletin 1999-2011

Minutes of Proceedings 1999-2011

Journal of Parliamentary Proceedings Sessions 1 & 2

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Report on the Financial Memorandum of the Graduate Endowment Abolition (Scotland) Bill

Remit and membership

Remit:

1. The remit of the Finance Committee is to consider and report on-

(a) any report or other document laid before the Parliament by members of the Scottish Executive containing proposals for, or budgets of, public expenditure or proposals for the making of a tax-varying resolution, taking into account any report or recommendations concerning such documents made to them by any other committee with power to consider such documents or any part of them;

(b) any report made by a committee setting out proposals concerning public expenditure;

(c) Budget Bills; and

(d) any other matter relating to or affecting the expenditure of the Scottish Administration or other expenditure payable out of the Scottish Consolidated Fund.

2. The Committee may also consider and, where it sees fit, report to the Parliament on the timetable for the Stages of Budget Bills and on the handling of financial business.

3. In these Rules, "public expenditure" means expenditure of the Scottish Administration, other expenditure payable out of the Scottish Consolidated Fund and any other expenditure met out of taxes, charges and other public revenue.

(Standing Orders of the Scottish Parliament, Rule 6.6)

Membership:

Andrew Welsh (Convener)
Derek Brownlee
Joe Fitzpatrick
James Kelly
Liam McArthur
Tom McCabe
Elaine Murray (Deputy Convener)
Alex Neil

Committee Clerking Team:

Clerk to the Committee

Susan Duffy

Senior Assistant Clerk

Mark Brough

Assistant Clerk

Allan Campbell

Committee Assistant

Katie Packer

Report on the Financial Memorandum of the Graduate Endowment Abolition (Scotland) Bill

The Committee reports to the Education, Lifelong Learning and Culture Committee as follows—

introduction

1. The Graduate Endowment Abolition (Scotland) Bill (“the Bill”) was introduced in the Parliament on 23 October 2007. The Education, Lifelong Learning and Culture Committee has been designated by the Parliamentary Bureau as the lead committee for consideration of the Bill at Stage 1. Under Standing Orders Rule 9.6, the lead committee at Stage 1 is required, among other things, to consider and report on the Bill’s Financial Memorandum. In doing so, it is required to consider any views submitted to it by the Finance Committee.

2. Although the provisions in the Bill do not introduce any significant new expenditure to the Scottish Consolidated Fund, given the complexity of the financial arrangements involved in delivering the Graduate Endowment (GE) and the level of income that the Scottish Government stands to forego, the Committee agreed to adopt level two scrutiny in relation to the Bill. Level two scrutiny typically involves taking oral evidence from Scottish Government officials and seeking written evidence from any organisations financially affected by the Bill. In this case, since it appeared that there was no financial impact on other organisations, the Committee did not seek additional written evidence.

3. The Committee took oral evidence from Scottish Government Officials at its meeting on 6 November 20071 and received written evidence from officials following the oral evidence session. The written evidence is attached as an annexe to this report.

the bill and financial memorandum

The Bill

4. The Bill seeks to abolish the GE for those students who successfully completed their course on or after 1 April 2007.

5. The GE was introduced by the Education (Graduate Endowment and Student Support) (Scotland) Act 2001. Graduates are not obliged to pay the GE until 1 April after successful completion of their course. The amount to be paid is set at the beginning of students’ degree courses – for entrants in academic year 2006-07, the fee payable would be £2,289.

6. The GE applies to Scottish domiciled and non-UK EU students (subject to various exceptions), but not to non-EU overseas students or students from elsewhere in the UK who study in Scotland. The Policy Memorandum states that overall the GE does not apply to “almost 50% of graduates”.2

7. Income from the GE was originally intended to fund student support in such a way as to widen access and participation in higher education, through increased bursaries and student loans. However, in practice, GE fee income has not been used for this purpose but has been applied specifically to the costs of providing student loans. The Financial Memorandum states that GE income is—

“…currently directly attributable to the Scottish Government and is applied (within the legislative restrictions) to the costs of providing student loans. This income is applied as mentioned through direct appropriation each year (by authority of the Budget Act) rather than having to go through the Scottish Consolidated Fund.”3

8. The Financial Memorandum explains that using this income for the costs of providing student loans means that existing budget can be released from what was previously the Enterprise and Lifelong Learning Department’s budget to fund additional financial pressures which arise from year to year, i.e. for end-year flexibility. The SPICe Briefing on the Bill4 explains the accounting procedure employed—

“When the Graduate Endowment Scheme was introduced, an expenditure line for GE fee was added to the student loan subsidy Budget, equal to the income expected to be received from the GE fee. The reason for this, in line with general accounting principles, was to cover the worst-case scenario that there would be 100% bad debt provision i.e. no GE fee payments would be received, and adding the expenditure line would cover this bad debt provision to minimise the risk involved with the possibility of not receiving any GE fee payments. The expenditure line included was equal to the expected generated income, producing a net effect upon the budget baseline of nil.”5

9. Therefore, as income from the GE came in, it was seen as “additional”, and used to fund the cost of student loan subsidy. In turn, this released budget that had been attributable to the student loan subsidy to be used elsewhere with the lifelong learning budget.

10. Given the somewhat unusual and complex financial arrangements involved in processing income from the GE, the Committee is concerned that the level of detail present in the SPICe Briefing was missing from the Financial Memorandum.

Costs on the Scottish Government

11. The Financial Memorandum states that the Scottish Government will forego around £17m per annum in net income from the GE.

12. The calculations in the Financial Memorandum base this figure on an expected gross income of £21.7m from the 11,558 graduates who became liable to pay the GE on 1 April 2007. The Financial Memorandum explains that around two thirds of liable graduates will opt to pay the GE by taking out a loan through the Student Loans Company. Therefore, of the £21.7m, loans will have a value of around £14.6m, with £7.1m being paid in cash.

13. However, the cost of providing student loans is 31% of every £1 borrowed. As such, the full amount of £21.7m will not be received by the Scottish Government; loans with a value of £14.6m will cost around £4.7m. Taking the cost of £4.7m from the gross income of £21.7m gives the final figure of £17m.

Costs on the Scottish Government – Student Awards Agency for Scotland and Student Loans Company

14. The Student Award Agency for Scotland (SAAS)6, the agency responsible for collection of the GE, will incur a one-off cost of £225,000 for writing off the costs for the IT system that is used to record and administer GE liabilities. This will be written off in financial year 2007-08 and will be met from the Scottish Consolidated Fund.

15. The Student Loans Company will also require one-off funding of £54,000 to remove GE functionality from its systems and processes. On top of this, the Financial Memorandum states that a further amount of £9,000 will need to be paid once the scheme is fully decommissioned and all outstanding liabilities have been processed.

Savings

16. The Financial Memorandum states that abolishing the GE should save the Student Loans Company £30,000 per annum in running costs in future years, from financial year 2008-09. SAAS will also save around £30-35,000 per annum as a result of abolishing the GE. These savings will be redeployed to other parts of the agency.

summary of evidence

Amount of income

Graduates in debt recovery

17. As explained above, the Financial Memorandum states that the Scottish Government stands to forego around £17m of income per annum from the GE. However, the figures given in the Financial Memorandum do not include those graduates in, or facing, debt recovery. The SPICe Briefing states that (based on figures from SAAS) the total amount of GE income awaiting debt recovery on 1 April 2007 was approximately £1.95m.7 Officials explained that because the level of liability has not yet been confirmed by SAAS, those in debt recovery were not included in the overall figures.8

18. The Committee appreciates this explanation from officials, but questions why this information was not included in the Financial Memorandum.

Costs of collecting loans

19. The Financial Memorandum states that the cost of collecting student loans is 31% of every £1 borrowed. Officials explained how the figure of 31% was arrived at—

“The loss is made up of what is called the cost of student loan resource accounting and budgeting charge, which is the departmental expenditure limit cost of student loans. That DEL cost is made up of two parts: a subsidy cost and a bad-debt provision cost. For every £1 of student loan that we put out, there is a DEL cost—a cost to the Government—of 31 per cent, which is to cover the fact that there is a subsidy in that loan. There must also be a small write-off provision. We have an economic model that works out what that cost-of-student-loan charge is: it gives us a percentage cost of 31 per cent. The model was developed by the Department for Innovation, Universities and Skills, formerly the Department for Education and Skills. We use a Scottish version of the model to arrive at that percentage cost.”9

20. Officials explained the subsidy as follows—

“…although the outstanding balance of a loan is uprated every year by the retail price index, the true value of the loan to the student increases at a real interest rate of zero per cent.”10

21. The Committee is satisfied with this explanation, but suggests that this information could have been included in the Financial Memorandum.

Liable students

22. As detailed above, the Policy Memorandum states that, due to various exemptions, the GE does not apply to “almost 50% of graduates”. However, the Policy Memorandum does not make clear that, of those who are not liable, only a small proportion are formally exempt from payment. The majority of those who are not liable have decided to continue their course of education. The SPICe Briefing on the Bill (using SAAS figures) shows that, for those who became liable to pay on 1 April 2007, only 1,551 (6%) out of 24,340 graduates were exempt from payment, but 9,653 graduates (40%) were not liable because they had decided to continue their course of education.11

23. The SAAS figures quoted in the SPICe Briefing also show that the proportion of graduates continuing in education has fallen since the first cohort of graduates became liable. In April 2005, the figure was around 82%; in April 2006 it had fallen to around 50% and in April 2007 it was around 40%. The large drop between 2005 and 2006 can be explained by the majority of Scottish students completing four-year, rather than three-year, honours degrees. However, the Committee is concerned that, if the GE continues, the number of those liable could increase in the future, meaning that the Scottish Government is potentially forgoing more than £17m per annum. In response to these concerns, officials stated—

“The majority of students become liable when they finish their first degrees. Any students who go on to do postgraduate courses become liable between completing their honours degrees and going on to their next courses. People who were on five-year courses became liable in the April 2007 cohort. Students who are on first-degree courses that are longer than five years will not be liable until later, but only a small number of students fall into that category; the majority of students become liable when they finish their first degrees.”12

24. In written evidence following the Committee meeting, officials confirmed that those students who started a five-year course in 2001 are included in the £17m figure but that there are currently 580 first degree students who are studying for six years or longer.13 This includes those students who have had to repeat one or more years of their course. The written submission states that—

“If all of these students eventually became liable for the GE fee then we could be forgoing approximately £1m of additional income. However, we have no way of telling if any of these students will eventually graduate (and therefore become liable). Of those that do graduate, some of them may not become liable because they fall within one of the categories exempted from the obligation to pay the GE fee.”14

25. The Committee is grateful for the clarification provided by officials and understands that there is no guarantee that any of these students will become liable. However, the Committee is of the view that this information should have been included in the Financial Memorandum, as it again lends a margin of uncertainty to the figure of £17m.

Impact of lost income

26. Budget released by GE income as end-year flexibility is not returned to the Central Unallocated Provision (CUP) but, as stated in the Financial Memorandum, is used “to fund in-year, non-baseline pressures”.15 During oral evidence, officials gave examples of what the money is used for—

“We had a list of projects and developments that were not in the baseline, such as entrepreneurship chairs, the co-investment fund, the higher education international strategy and English for speakers of other languages.”16

27. These projects were identified as being non-baseline for the current spending review period. Officials explained that the forthcoming spending review will determine the status of these projects.17 In the absence of GE income, decisions will have to be made as to whether such projects are a priority to become baseline spending.

Savings

28. The Financial Memorandum states that the Student Loans Company will save around £30,000 per year in running costs from 2008-09 and that SAAS will also save £30,000-£35,000 per year. However, in a written answer to a Parliamentary question in 2006,18 the then Scottish Executive stated that the annual cost to the Executive of operating the legislation was £156,739. Government officials explained this disparity in written evidence—

“The figure provided for the Government operating under this legislation in the response was made up of four elements: salaries; maintenance costs for IT systems; administration costs; and the depreciation costs.

The figure provided for the savings in the financial memorandum account for the current salary and administration costs for the GE fee. The maintenance and depreciation costs are ongoing costs which will continue to be charged to SAAS’ operating systems (as they are continually developed). This is why maintenance and depreciation costs don’t form part of the saving.”19

29. The Committee is not yet fully satisfied with this explanation and therefore agreed to seek further details from the Scottish Government through correspondence. The response received will be forwarded to the lead committee.

conclusion

30. When questioned on the level of detail and explanation provided in the Financial Memorandum, officials responded—

“The difficulty that we had when writing the financial memorandum was in knowing the level of detail into which we were expected to go. There are obviously a number of issues that are tied tightly into the overall accounting of the student loans system. We stuck strictly to the impacts of the graduate endowment: the difficulty was in knowing how much to go into the complexities of how we account for student loans and the subsidy charge, for example. It was difficult for us to know what would be looked for. That is why it is perhaps easier to explain at committee.”20

31. The Committee appreciates the potential problem for officials in deciding how much detail to include in a Financial Memorandum, especially when dealing with complex financial matters. However, the previous Finance Committee often raised concerns about the quality of Financial Memoranda and regularly wrote to the Scottish Executive throughout Session 2 detailing its concerns with regard to, among other things, the level of detail given in Financial Memoranda.

32. The Committee has significant concerns over the level of detail provided in the Financial Memorandum and its clarity on the financial implications of the policy. Indeed, the Committee found the SPICe Briefing more useful than the Financial Memorandum in understanding the financial implications of the Bill.

33. For example, the Financial Memorandum does not give an adequate explanation of the accounting practice used that resulted in the nil net impact on budget baselines or of why the cost of providing student loans is 31% of every pound borrowed. While the Committee appreciates the information given by officials during oral evidence, it is of the view that such important background information should have been included in the Financial Memorandum.

34. The Committee is also concerned that the Financial Memorandum only states that the amount of income to be foregone is “around £17m” and does not give a range of possible figures or a margin of uncertainty, based on either those in debt recovery or those continuing in education. The Committee accepts that the purpose of a Financial Memorandum is to give a best estimate, but wishes to make clear that the Financial Memorandum should have explained any assumptions and uncertainties surrounding the estimates given.

35. The Committee recommends to the lead committee that it takes account of the issues highlighted in this report. The Committee expresses particular concern in relation to the quality of the Financial Memorandum. The lead committee may wish to raise this issue with the Scottish Government.

ANNEXE

SUBMISSION FROM THE SCOTTISH GOVERNMENT LIFELONG LEARNING DIRECTORATE

Correspondence dated 14 November 2007

At the Finance Committee meeting on Tuesday 6 November, officials gave evidence on the Financial Memorandum of the above Bill. This letter seeks to address the points on which the Committee have requested further clarification.

Number of students in higher education for more than four years

As the Committee may recall, the lost income to the Scottish Government as a result of the Bill is estimated at £17m per annum. Liable graduates who entered university in 2001 and who undertook a course of 5 years would have completed their course in 2006 and would have been liable to pay the GE fee on 1 April 2007. These students will therefore be captured in the £17m figure.

To establish any additional liability we need to consider how many students are on a course of 6 years or more. Our analysts have confirmed that there are currently 580 first degree students who fall into the category of personally studying for 6 years or longer. This figure includes, for example, students who have had to repeat at least one or more years of their course.

If all of these students eventually became liable for the GE fee then we could be foregoing approximately £1m of additional income. However, we have no way of telling if any of these students will eventually graduate (and therefore become liable). Of those that do graduate, some of them may not become liable because they fall within one of the categories exempted from the obligation to pay the GE fee. These categories are set out in Education (Graduate Endowment and Student Support) (Scotland) Act 2001. The relevant accounting principles state that we cannot include this figure as possible income because the liability has not yet been definitively confirmed as being due and the income may therefore never be realisable.

In summary, the £17m figure is based on the number of graduates whose liability has been definitively ascertained by SAAS. This is the figure we are required to use.

Reconciliation of the annual costs of the Education (Graduate Endowment and Student Support (Scotland) Act 2001 and the savings in the financial memorandum (S2W-29550)

Derek Brownlee MSP asked for reconciliation on the information provided in the parliamentary question S2W- 29550 on the cost to the Government of operating under the above legislation and the savings that are stated in the financial memorandum.

Mr Brownlee received a response which stated that in 2005-06 the total cost to the Government of operating under this legislation was £156,739. The financial memorandum states that the savings SAAS running costs are about £30,000 to £35,000 a year from SAAS. Mr Brownlee has asked for clarification as to why these figures do not reconcile.

The figure provided for the Government operating under this legislation in the response was made up of four elements: salaries; maintenance costs for IT systems; administration costs; and the depreciation costs.

The figure provided for the savings in the financial memorandum account for the current salary and administration costs for the GE fee. The maintenance and depreciation costs are ongoing costs which will continue to be charged to SAAS’ operating systems (as they are continually developed). This is why maintenance and depreciation costs don’t form part of the saving.


Footnotes:

1 The oral evidence can be viewed on the Parliament’s website, at: http://www.scottish.parliament.uk/s3/committees/finance/or-07/fi07-0701.htm

2 Policy Memorandum, para. 5

3 Financial Memorandum, para. 23

4 SPICe Briefing 07/54 – Graduate Endowment Abolition (Scotland) Bill

5 Ibid, page 13

6 SAAS is an agency of the Scottish Government and their budget is part of the Government accounts. The Student Loans Company’s administration costs are met by the Scottish Government through the SAAS budget.

7 SPICe Briefing, page 12

8 Finance Committee Official Report, 7th Meeting, 2007 (Session 3), col. 96

9 Ibid, col. 101

10 Ibid, col. 101

11 SPICe Briefing, page 6

12 Finance Committee Official Report, 7th Meeting, 2007 (Session 3), col. 97

13 Written evidence from the Scottish Government

14 Ibid

15 Financial Memorandum, para. 25

16 Finance Committee Official Report, 7th Meeting, 2007 (Session 3), col. 99

17 Ibid, col. 99

18 S2W-29550, lodged on 3 November 2006

19 Written evidence from the Scottish Government

20 Finance Committee Official Report, 7th Meeting, 2007 (Session 3), col. 102