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A series of articles looking at academies and ongoing education finance issues.
Is it tougher for a non-sponsor academy to negotiate the financial aspects of managing and running the school than for those with sponsors?
In terms of the cash available, the picture has changed. Now that sponsors no longer need to make a financial contribution, or establish or support an endowment fund, it’s questionable whether there is any automatic disadvantages for a successful local authority to convert.
Certainly, sponsors can still make significant contributions financially, but they are not obliged to.
Really the differences we see are in the skills that can be introduced by a private backer.
Converter academies may find the process harder than those with a backer, for the simple reason that the skills required to effectively manage the academy are very different to a local authority school.
Academies need to be run like a limited company and while some experienced heads and governors will have the expertise and confidence to deliver effective financial management processes, this is far from the case for all.
In a sense there is no clear answer as it depends on the individual school, and its existing team. But generally we can determine that local authority schools converting to academies could find it trickier as they will not necessarily possess expert finance professionals as a sponsor would probably would.
As discussed in CIPFA’s whitepaper, Financial management for academies: what next?, there are a number of additional requirements for academies, such as increased audit scrutiny.
Sue McAvoy, business manager at Bennett Memorial Diocesan School in Tunbridge Wells, Kent, explained in the report how the skills set can change as you adapt to academy status because there are different requirements placed on the financial team.
“Take reporting - a lot of the work was done for you when you were an authority-run school, but as an academy you have a lot more autonomy and have to do it yourself. Even if you purchase external support you do need that knowledge in-house,” she said.
One answer to this is converting as part of a chain. Schools can convert together as part of a multi-academy trust or an umbrella trust. As the government points out, this could allow schools to share staff and expertise, and make savings when buying goods and services such as training.
But accounting skills are just one part of the picture - compliance is just as important. As a recent report to MPs indicated, converter academies may be more predisposed to enjoying clearer oversight of financial processes.
The review, carried out by Professor Toby Greany and Jean Scott of the Institute of Education in London, cited a lack of transparency and safeguards over how sponsors spent public money as a major worry.
In particular it raised concerns about rules that allow companies sponsoring academies to provide services for them “at cost”.
It found that “checks and balances on academy trusts in relation to conflicts of interest are still too weak”, adding: “There is a requirement for trusts to report on the extent to which they provide value for money, but the survey of annual reports suggests that these statements are largely meaningless.”
Sponsors may make it easier for academies to manage finances effectively, but equally they may create their own complications around compliance. There is no reason why converter academies cannot adapt quickly to the changes with the right support.
How can we better deliver sustainable model for financing education in Britain while still producing the best outcomes for young people? This is the key question asked by CIPFA, and one that is at the heart of what governments seek to achieve with education reforms.
Academies, first developed under Labour in 2000 and massively expanded under the coalition from 2010, are a means to this end. Publicly funded, they offer governors much greater control over the running of the school.
Operational control pertains to staffing, curriculum, ethos and so on, but it also includes finances. Successfully managing finances is a key requirement for an academy to be run well.
The central tenet of academy schooling has been that schools should not be run for profit. Sponsors may be linked to private firms, but the institution under their sway may not be used to turn a profit.
But can this last? At a time of increased pressures on local authority budgets, is the current way of thinking sustainable from a financial perspective? Sweden and America have both operated a for-profit academy model; why not the UK?
Nicky Morgan, the education secretary, initially seemed to leave the door open to for-profit academies. While she admitted “most people may not be very keen on it”, it’s something about which she would “have to think very carefully”. Subsequently, Ms Morgan has claimed there is no place for “the profit element in education”.
Nevertheless, the issue keeps rearing its head. Michael Gove, her predecessor at the Department for Education, said he had “no ideological objection” to businesses deriving profits from academies. Indeed, he based his flagship free schools project on Sweden’s Friskola, two-thirds of which are run for profit.
Labour and the Liberal Democrats appear ideologically opposed to “making a fast buck from children’s education”, as the then shadow education secretary Stephen Twigg put it in 2013.
But political inertia aside, the central question remains whether for-profit academies would create a more sustainable financial model for education in the UK in the coming years.
For some, allowing private business into the mix would increase the number of those willing to start schools. A singular focus on non-profit groups and a lack of competition has led to some chains to overreach themselves. For-profit enterprises could invest to drive up standards and create competition.
Others are less than keen. "The Swedish experiment (using for-profit private providers) has proved expensive and has not led to significant learning gains overall," explained a 2010 Institute of Education report.
A 2009 study from the LSE’s Centre for Economic Performance also pointed to a number of problems with the Swedish model, which allows profits to be made.
It suggested that “increasing shares of school budgets have been devoted to the maintenance of poor quality state schools” and that there is “a general weakness in the application of market economics to the public sector”.
“Closing down schools can be slow, political and unpopular. The reality that governments will have to support simultaneously the new schools and the older ‘bad’ ones, and that the latter will not exit at an efficient rate, needs to be factored into the expected cost-effectiveness of a ‘school creation’ policy,” said authors Helena Holmund and Sandra McNally.
Creating new schools can also be an expensive policy if large capital outlays are required and they questioned whether capital spending is the most efficient use of funds: “What about all the evidence on other things that work to improve educational performance, such as teacher quality, reducing class size, etc? And what about recent research that evaluates the academies programme?”
But these reports, published before Mr Gove’s free school project, pre-supposed that academies would not necessarily drive up standards. We know have some evidence to the contrary and there is a picture being built that academies have so far proved successful, albeit through a non-profit model. While this remains up for some level of debate to this day, it’s important to remember that academies seem here to stay. Finding a long-term sustainable financial model is therefore essential.
Holmund’s and McNally’s research throws up an interesting angle - if the capital outlays are the biggest concern, private companies could play a beneficial role by investing in schools at the outset to reap rewards from improved performance later. This would allow local authorities the time to close down failing schools and shift resources to these new for-profit free schools.
Even now the problem of abuses in the academy sector is large. Under a for-profit model this could be exacerbated through a thirst for yield.
Loopholes in regulation mean sponsors can cash in, a report sent to MPs from the Institute of Education. It noted examples of overly-large executive salaries, individuals with links to directors being paid significant amounts for questionable consultancy work and the awarding of large contracts to the companies of directors.
Whilst it stated that the “vast majority of academy trusts" were staffed by "honourable people", it raises serious doubts about how a regulatory regime could cope with a for-profit system where such practices would become legitimate.
Authors of the report, professor Toby Greany and Jean Scott, said: "Cases of deliberate fraud are rare and many of the instances where real or perceived conflicts have arisen are the result of people being asked to work too fast with too few controls.
"Nevertheless, the general sense from the literature and the evidence collected for this study is that the checks and balances on academy trusts in relation to conflicts of interest are still too weak.
"In the course of the research we came across a significant number of real or potential conflicts of interest that we found concerning."
Whether schools are designed to turn a profit or not, there are already plenty of instances of private firms charging free schools for services. The case of Internationella Engelska Skolan (IES), a Swedish provider brought in to run the Suffolk free school IES Breckland in a ten-year £21 million deal, is perhaps the best known example. More cases like this could occur under the current system, although it’s interesting that this is the only one of its kind and there have been problems with standards.
Moreover, the issues cited in the Institute of Education report last year make it clear that the profit motive cannot be ignored even under the current system.
It would make sense, therefore, for the DfE to make up its mind to provide more certainty to sponsors and would-be backers of free schools. We must significantly toughen up oversight and make it clear whether profits from education are the way we want to go.