Learndirect case highlights "too big to fail" concerns in government contracting, says PAC

REPORT SUMMARY

With the collapse of Carillion, questions are rightly being asked about how Government manages companies who deliver our public services.

The failure of Learndirect in delivering quality training to apprentices whilst receiving millions of pounds of taxpayers’ money – £121 million in the 2016/17 academic year alone – is another stark example of a poorly performing contractor and poor oversight by Government and its regulators. And another contractor with contracts across several Government Departments.

Learndirect Ltd’s performance on apprenticeships has been in steep decline since 2013. Learndirect failed to address its under-performance, and has failed to act in the best interests of learners.

Ofsted had concerns about Learndirect Ltd in spring 2015, but despite the company’s 75,000 learners making it the UK’s largest commercial further education provider, Ofsted decided not to inspect until November 2016. Even then, Ofsted accepted the potential sale of part of the company as a reason to postpone its inspection, and only finally inspected in March 2017.

When Learndirect Ltd found that it had been rated as ‘inadequate’, it launched a legal challenge which delayed publication of the inspection report. The judge ruled fully in Ofsted’s favour, and the report was finally published in August 2017.

The Department for Education would normally cancel an ‘inadequate’ provider’s contract and withdraw its funding almost immediately. But Learndirect Ltd threatened that such a course of action would harm its learners and jeopardise its ability to deliver other key government contracts. 

The company continues to function, and expects to receive over £105 million of funding from its main government contracts in 2017/18. This apparent special treatment clearly begs the question of whether Learndirect Ltd was too big, and too important to government, to be allowed to fail. 

The Government needs to learn lessons from the failure of its contractors and, particularly where a company holds contracts across several Departments, ensure it has a grip on how these companies are performing.               

COMMENT FROM PAC CHAIR MEG HILLIER MP

“Outsourcing is an abiding interest for our Committee but recent events have brought concerns about Government’s relationship with its contractors into sharp focus.

“In the case of Learndirect, thousands of learners have been let down amid poor oversight by Government and at significant public expense. There has been disruptive legal action and, finally, a scathing Ofsted report. Yet still Learndirect appears to hold the whip hand.

“It expects to receive over £105 million of funding from its main government contracts for this year, a consequence of assessments made about the risk to public services should Learndirect’s funding be terminated.

“It cannot be right that individual contractors should command such large sums of public money regardless of their performance. No commercial provider should be allowed to become so essential to the delivery of services that it cannot be allowed to fail.

“Government has a duty to manage taxpayers’ exposure to risk diligently and we urge it to act on the recommendations set out in our Report.”

CONCLUSIONS AND RECOMMENDATIONS

Learndirect Ltd has received hundreds of millions of pounds of public money, while neglecting its learners in pursuit of profit and frustrating the Ofsted inspection regime with delaying tactics and spurious legal action. ESFA and its predecessor the Skills Funding Agency (SFA) gave Learndirect Ltd almost £500 million in the academic years from 2013/14 to 2016/17. The quality of Learndirect Ltd’s apprenticeships provision was in decline from 2012/13, and in 2015/16 it failed to achieve ESFA’s minimum standard for apprenticeships. Yet, despite this downward trend, the company waited until September 2016 to develop an improvement plan. In March 2013, Ofsted rated Learndirect Ltd as ‘good’ for overall effectiveness, but by March 2017 Ofsted considered the company’s performance to be ‘inadequate’. Learndirect Ltd launched a legal challenge, claiming that: Ofsted should not have inspected its apprenticeships provision, because it was about to be moved to another company in the Group; and Ofsted had not gathered enough evidence to reach reliable conclusions on its apprenticeships training. The judge ruled fully in Ofsted’s favour, but the legal action meant that the report could not be published until August 2017, five months after the original inspection. This prevented valuable information on Learndirect Ltd’s performance from being in the public domain, and stopped government from intervening sooner.

Recommendation: Government should learn the lessons from the failure of Learndirect Ltd, in particular concerning the need to understand how many government contracts a company holds at a given time and how well it is performing against each of those contracts.

Having awarded Learndirect Ltd several vital contracts for a variety of public services, government was then restricted in its ability to take decisive action when the company’s apprenticeships provision began to fail. Learndirect Ltd is England’s largest commercial further education provider, and in the 2016/17 academic year around 88% of the £121 million it received for carrying out work for central government came from ESFA. It is also the single supplier on the government’s framework contract for testing services. Under this framework, the company delivers UK citizenship tests for the Home Office and initial teacher training tests for the Standards and Testing Agency (STA). From May 2017, following the 2017 Ofsted inspection, ESFA began work to establish the full extent of government’s involvement with Learndirect Ltd, and to develop a coordinated plan for the future of those contracts. ESFA had to consider whether to withdraw the company’s funding for further education activities within three months, in line with normal practice. Learndirect Ltd stated that unless it received £48 million in the 2017/18 academic year from its main source of ESFA funding, the Adult Education Budget (AEB), it would likely enter administration or become insolvent. This would affect large numbers of learners, and jeopardise the company’s ability to deliver against its other government contracts. ESFA decided that the size of Learndirect Ltd made it an unusual case, to which special considerations should apply. It awarded Learndirect Ltd £45 million of AEB funding for 2017/18 and extended the company’s contract to July 2018, the end of the academic year.

Recommendation: The Department for Education and other government bodies should develop a framework for identifying any risk that a commercial provider becomes so large and essential to the delivery of public services that it cannot be allowed to fail, or requires special treatment if it begins to do so. The Cabinet Office should report back to us on progress with developing that framework by the end of December 2018, and the Department for Education should do so separately by the start of the next academic year.

Learndirect Ltd charges unusually high management fees to its subcontractors, which means that a large amount of funding is not available to be spent on teaching and learning.Learndirect Ltd subcontracts some of its work to smaller providers, and charges them a management fee. This fee ranges from around 15% to 40%, depending on the level of support offered. The company has said that around 30 of its subcontracted providers pay the full 40% management fee. ESFA requires all providers who subcontract their provision to be transparent about the level of management fee that will be charged. But ESFA provides no guidance on the support that providers should offer their subcontractors or the levels of support that might be merited by different levels of management fee.

Recommendation: ESFA should formally publish, in time for the next academic year, its expectations about the services that should be offered to subcontractors, and the associated management fees that are reasonable.

In assessing when to re-inspect Learndirect Ltd, Ofsted did not take full account of the company’s size and the consequences for learners of its declining performance. Learndirect Ltd was training over 20,000 apprentices each year, many of whom were affected by the declining quality of its training and support. Yet it was nearly two years after first expressing concerns about Learndirect Ltd’s declining performance that Ofsted finally, in March 2017, conducted another inspection. A full inspection of Learndirect Ltd requires Ofsted to commit around 15% of its total inspection capacity for the further education sector. Given the resources involved, Ofsted decided that the rate of Learndirect Ltd’s performance decline did not justify an early inspection as a matter of immediate priority. Ofsted is likely to face these prioritisation challenges more often in the future, as the profile of further education providers changes in response to the apprenticeship levy, with new providers entering the market and some providers growing significantly or merging. 

Recommendation: Ofsted needs urgently to re-visit how it plans and prioritises its use of resources and the different type of risk attached to a private sector failure, in a way that takes account of risks to high numbers of learners and the changing provider-base in the further education sector.  

Ofsted’s policy for when it is prepared to defer an inspection risks putting providers’ business interests ahead of learners’ interests. Ofsted originally planned to re-inspect Learndirect Ltd at the start of November 2016, but agreed to defer its inspection when Learndirect Ltd claimed it was negotiating the sale of its apprenticeships business. Ofsted’s policy states that an inspection may be deferred if “the provision is due to merge, close or move, and it is decided that no useful purpose will be served in inspecting it.” The sale of part of Learndirect Ltd’s business did not ultimately take place, and Ofsted did not carry out the inspection until March 2017, over four months later. Learndirect requested a deferral in March 2017, on the same grounds as those that prompted Ofsted to defer its planned inspection on November 2016, but this time Ofsted did not defer the inspection. Given Learndirect Ltd’s importance to the sector and the number of learners affected, Ofsted should not have been so easily put off in November 2016, and should have resolved to conduct its inspection earlier. Ofsted needs to develop a clear and consistent approach which takes better account of potential gaming by commercial providers.

Recommendation: By June 2018, Ofsted should develop a specific deferral policy for commercial providers, to ensure that learners’ interests always take priority over the pursuit of profit.