Academies given permission to borrow from DfE capital funds

Academies and colleges will be allowed to borrow money from government capital funds for the first time, it has been announced.

The Department for Education (DfE) will loan academies funding at low rates of interest through its condition improvement fund (CIF) and paid back through a reduction in revenue grant funding.

Academies, unlike colleges, will still not be able to borrow on the open market unless they are given express permission by Education Secretary Nicky Morgan.

However, the move to allow loans from the CIF budget represents a significant shift in policy from the current position.

In a briefing paper on the policy, the DfE said: “This year, through the CIF, academies and colleges can take out a loan for all or part of the project costs to demonstrate their commitment to the proposed scheme. Academies and colleges can choose the size of loan they want to take, and the timescale (up to a maximum of 10 years) over which they want to repay it.

“Repayments – made through a reduction of the revenue funding paid to the academy or college – will be recycled back into capital budgets to maximise the impact of the available funding in the long run.

“There is no obligation to take out a loan as part of the overall funding package; applicants should consider carefully what is most appropriate for their academy or college, and the consequences and affordability of any loan.

“However, academies and colleges choosing to take a loan will score higher under the costs and funding criterion (worth 20 per cent of the overall score) than if they had applied for their project to be funded through grant alone.”

It said the increase to providers’ scores under the criterion would be based on:

  • the ratio of loan to grant – e.g. a project funded 100 per cent through a loan will see a greater increase in score than a project funded 50 per cent through a loan and 50 per cent through a grant
  • the length of time over which the loan will be repaid – e.g. a project requesting a loan to be repaid over two years will get a higher score than a loan to be repaid over 10 years
  • the nature of the project – the score increase will be bigger for an expansion project than for a condition project.”

Rates of interest will range from 1.55 per cent to 2.55 per cent, depending on the length of time of the loan.

The new DfE policy on loans from the CIF budget comes with seven academy specific ‘affordability tests’:

1.) the annual loan repayment must be less than 4% of the revenue grant (‘GAG’) that the academy received in 2014 to 2015
2.) the academy trust must not be under a Financial Notice to Improve or ‘minded to’ Financial Notice to Improve
3.) the trust’s last audited financial statements must show that the trust was in cumulative revenue surplus
4.) the trust’s latest budget forecast shows a forecast cumulative revenue surplus to the end of the forecast period
5.) the trust’s last audited financial statements must show that the trust has a current ratio of at least 1.25:1 (the ‘current ratio’ is the ratio of an organisation’s current assets to its current liabilities)
6.) the trust must have submitted all their key financial returns (in the last 12 months) on time
7.) neither the trust’s last audited accounts nor its regularity statement were qualified

For more, see edition 8 of Schools Week, dated Friday, November 7.