Tuesday, 3 September 2013

Apprenticeship Funding Reform: The Big Issues

In advance of the Campaign for Learning's seminar on 19th September, Mark Corney assesses the Government's current consultation on funding reform for Apprenticeships in England and sets out the issues.

Money will ultimately determine the outcome of the apprenticeship funding consultation.* Who pays, how much they will pay and who controls the purse strings are the questions that matter. 

Getting the financial incentives wrong in small scale pilots is permissible. Getting them wrong in large mainstream programmes such as apprenticeships is not an option. 

The Coalition Government published its response to the Richard Review in the Spring. Yet the ministerial foreword to consultation paper published in July tellingly states “one crucial aspect of this reform agenda was deliberately not addressed – funding.”

The options set out in the consultation paper are radical, arguably too radical. But the key point to make is that there is no need to rush the move from consultation phase to implementation phase.

The consultation paper itself should also be seen as part of the wider agenda of public services reform. Empowering the user is a central theme of Coalition policy towards the public services, and a specific aspect of this approach is placing purchasing power in the hands of the user.

In the education and skills system, the Coalition Government has to date defined the user as the individual. The mechanism used to place purchasing power in the hands of individuals has been income contingent loans.  They have been introduced and extended where co-funding between the taxpayer and individual has been deemed necessary, namely full-time and part-time undergraduate HE and 24+ Level 3/4 FE.
Important as apprenticeships are, they cannot be immune from a debate on placing purchasing power into the hands of the user as a matter of principle.

What can be expected, however, is a clear statement by the Government on who the user is with respect to apprenticeships.

The consultation paper defines the end user as the employer. Yet, the public contribution for 24+ Level 3/4 apprenticeships is routed through income contingent loans taken out by individuals.

To choose, they say, is to govern. The end user can either be the employer or the individual but not both. Given that applications for apprenticeship loans taken out by adults remain in double digits – unlike adult FE loans where interest is relatively much stronger - the answer has to be the employer.

Rather intriguingly, however, the consultation paper proposes three models. Two models seek to place purchasing power in the hands of the employer - the direct employer payment model and the employer PAYE payment model. The third, the Provider Payment Model, as it name suggests retains the present system of routing public funding through providers, and so is not an employer model at all.

Common to all models is that the public contribution takes the form of a grant. There is nothing new in this for providers. Grant funding has in the past been distributed to individuals too - the classic example being the £150 state contribution under Individual Learning Accounts – and is presently paid to employers delivering apprenticeships directly. The difference is the scale of grant funding which might be distributed to employers - up to £1.6bn.

But without question the eye-catcher in the paper is the requirement for mandatory cash contributions from the employer as a pre-condition for the release of public funding under each model. 

The inclusion of the Provider Payment Model with employer cash contributions is an insurance against unthinking resistance by apprenticeship providers to direct employer payment. Rejecting the employer models out of hand implies getting cash contributions from employers under the Provider Payment Model which will not be easy.

The status quo is not an option. Concluding ‘none of the above’ is not permitted. Abstention will be taken as support for the Provider Payment Model. 

The rationale for mandatory cash contributions linked to the employer models is the potential for downward pressure on prices.  Having to make a cash contribution themselves and knowing they can claim a percentage of the total price up to maximum from the taxpayer means if, by shopping around, the total price falls their own cash contribution diminishes. And for a given level of public spending, around £1.6bn per year, more apprentices can be funded.

Without the illustrative cash contributions by employers in percentage terms towards apprenticeships, the consultation would be meaningless.  Focus so far has been on the 30% contribution for adult apprenticeships. In fact, the consultation paper implies an employer cash contribution of 15% for 16-18 apprenticeships reduced by one-off payments to reflect the lower productivity of younger apprentices. 

On the assumption that the figures used in the consultation paper are gross payments by employers, reclaiming VAT and deductions against corporation tax liabilities could mean net contributions of less than 20% for adult apprenticeships and less than 10% for 16-18 apprenticeships for some employers. These deductions should ease cash flow problems for small firms to some extent, although the reality is that credit is still not flowing freely from the banks.   

Rightly the consultation paper states that the devil is in the detail, but wrongly it encourages views on the advantages and disadvantages of each model when the Coalition has not provided a clear rationale for the scope of the policy.

The crucial policy implication of the paper, irrespective of the model chosen, is the requirement on employers to make a mandatory contribution to 16-18 apprenticeships whilst simultaneously Raising the Participation Age to the 18th birthday in September 2015. 

Participation on apprenticeships counts towards the RPA. Employer recruitment of apprentices before the age of 18 is less than 6% of the 16-17 age cohort and has fallen from 20% in the 1980s.

Requiring a cash payment from employers, even of 10% after tax deductions, would be another hammer blow to employer demand. Progression from traineeships by 16 and 17 year olds into jobs with apprenticeships by age 18 would also be undermined.

Neither fees nor fee loans rightly apply to students, trainees and parents in state funded 16-18 education and training system. Although mandatory cash contributions paid by employers would not contravene this principle, lower employer demand could undermine apprenticeships as a potential pathway for young people alongside full-time further education.

The Coalition Government should reject out of hand mandatory cash contributions paid by employers taking on apprentices before their 18th birthday. Furthermore, the present provider system should be retained for 16-17 apprenticeships at least until the RPA policy is fully embedded. 

If the DfE is under pressure to find savings from its £0.8bn apprenticeship budget, the department should restrict funding to young people starting apprenticeships before their 18th birthday and, if necessary, reduce national funding rates for 16-17 year olds. 

Hopefully the Cabinet Office review of 16-24 youth unemployment due to report directly to the Prime Minister and the Deputy Prime Minister later in the autumn will conclude that apprenticeship funding reform should not apply to 16-17 year olds and cut across the RPA.

On balance, therefore, the scope of the funding consultation should be limited to apprenticeship starts after the 18th birthday. As a consequence, the consultation paper should be viewed primarily affecting BIS rather than DfE apprenticeship funding.

In this context, there are five macro policy issues which need consideration before very detailed analysis of the models is undertaken.

The first is the fit between adult apprenticeship funding and industrial policy. BIS funding of adult apprenticeships (£0.77bn) is ten times greater than the Employer Ownership Programme funding (£0.07bn).

If BIS wishes to achieve a closer fit between the adult apprenticeship budget and sectors identified in the industrial strategy the best choice would be the Direct Employer Payment model. 

BIS officials are probably better placed to direct funding to firms in identified sectors than the Employer PAYE Payment model, which is essentially a first come, first served approach, whilst the Provider Payment Model would rely on intermediaries to engage the right firms in the right sectors.

The second issue is public expenditure control. At first glance, both the Direct Employer Payment model and the Provider Payment model are better placed to achieve this objective, since civil servants can control allocations to either providers or firms.  The Employer PAYE Payment model requires a stop mechanism within Whitehall which denies employers public funding if the budget is spent. That said, at a time of underspends the Employer PAYE Model could ensure the Treasury allocation is fully utilised.

The third issue is boosting employer engagement in adult apprenticeships. On this criterion, the Employer PAYE Payment model would deliver the best outcome. Very few enterprises are exempt from falling within the PAYE system and they are familiar with using it. Reclaiming the public contribution should not in principle be too difficult for employers.

The fourth issue is that apprenticeship funding reform cannot be assessed in isolation from other policies which might increase employer demand and thereby place pressure on public expenditure.   The most obvious example is the inclusion of funding apprenticeships in large public contracts. The second reading of the Public Contracts Bill is due in the autumn.

And finally, given that all of the main political parties are champions of apprenticeships but acutely aware of the pressure on public spending, the issue remains of how to increase employer investment in apprenticeships when public funding is fully exhausted.

Perhaps the answer lies is an employer national insurance rebate. 

A Consultation on Funding Reform for Apprenticeships in England, BIS/DfE, July 2013. Closing date - 1st October 2013.

Mark Corney is policy adviser to the Campaign for Learning. He will be speaking at the Campaign for Learning seminar on 'Apprenticeship Funding Reform to be held on the 19th September 2013.

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