Victorian Auditor-General’s report
26 October 2011
 
TAFE Governance 
Audit summary
In Victoria, Technical and Further Education (TAFE) institutes offer vocational programs to meet the needs of industry, individual students and the general community. Each TAFE institute has a high degree of autonomy and is governed by a board which is accountable to the Minister for Higher Education and Skills for its educational and financial performance. 
The Victorian Skills Commission (VSC) has a role to oversee the Victorian training system and it delegates many of its functions to Skills Victoria, a business unit in the Department of Education and Early Childhood Development (DEECD). Skills Victoria supports TAFE institutes to meet government goals and targets and also manages the government’s relationship with the institutes. 
There have been major policy changes affecting TAFE institutes over the past ten years. This has seen a shift away from a traditional model of TAFE institutes using block funding from government to provide services to their local community. Today, institutes operate in a contestable market where they are required to compete with other Registered Training Organisations (RTO), both public and private, for a share of the student market. Institutes are now encouraged to attract revenue in domestic and international markets. 
The Holmesglen Institute of TAFE (Holmesglen) is one of Victoria’s 14 stand-alone TAFE institutes. It has been successful in expanding into overseas markets, developing new and innovative courses, and taking on other troubled TAFE operations, turning them into viable campuses.
In the course of the annual audit of Holmesglen’s 2010 financial statements, a financially material loan of $6.5 million made by the institute to an RTO in financial distress, as the first step in an acquisition strategy, was identified. Holmesglen’s board lacked the critical information necessary to make an informed decision on the wisdom of this transaction.
In early 2011 the Holmesglen board resolved not to proceed with the acquisition, and began negotiations with a new buyer to recover its loan. Skills Victoria intervened and sought assistance from the Department of Treasury and Finance to negotiate the loan repayment. This was finalised in May 2011 and Holmesglen’s accounts were impaired by $3 million. 
This audit examined the legal authority and financial prudence of Holmesglen’s decision to enter into this arrangement as well as broader, systemic questions about the effectiveness of oversight of the sector. 
Conclusions
There was inadequate and ineffective engagement between Holmesglen and Skills Victoria over a number of years leading up to, and during, the failed acquisition strategy. This was symptomatic of Skills Victoria’s general failure to provide sound oversight and leadership of the TAFE sector during a period of significant strategic repositioning. Leadership was needed to ensure that expectations of TAFE institutes were consistent with public sector accountability frameworks and to provide assurance on the efficient and transparent use of public resources. 
Holmesglen’s acquisition strategy and provision of the loan to the RTO did not adhere to a Standing Direction set by the Minister for Finance and was outside the Victorian government’s policy on the management of public funds. The board was aware of this Standing Direction and made the decision that the Direction did not apply to it without obtaining clarity from Skills Victoria as the oversight body, its responsible minister or the Minister for Finance. 
Although the board acted in good faith during its deliberations, it did not proactively engage with Skills Victoria during the transaction, and by failing to do so it fell short of the expectations of propriety for a public entity. 
The board did not demonstrate financial prudence in entering into this arrangement. It lacked significant information on the RTO when making its decision to provide a loan, and as such it was unable to sufficiently analyse risk against return. It sought to protect Holmesglen’s funds through initiating a fixed and floating charge over the RTO. However, sufficient regard was not given to the effectiveness of this charge as a mitigation strategy and it ultimately proved to be ineffective.
The VSC has no processes in place to gain assurance that Skills Victoria is exercising its functions effectively or efficiently. There were significant gaps in Skills Victoria’s knowledge of Holmesglen’s strategies and actions, and poor communication between these agencies exacerbated the situation. 
Although overarching strategic polices have been documented and communicated to the sector, comprehensive lower level operational policies have not been developed or appropriately promoted to the sector. 
In the absence of predetermined policies, Holmesglen sought guidance from Skills Victoria on several issues, however, clear and timely direction was not provided. When Skills Victoria identified concerns with Holmesglen’s prior commercial undertakings, definitive action was not taken. Similarly, emerging issues affecting the whole TAFE sector were not identified or resolved in a timely manner. The ad hoc communication prior to and during the financial transaction, and its lack of clearly documented policies means that Skills Victoria cannot provide assurance that similar situations have not occurred. 
Skills Victoria has not demonstrated that it has adapted its oversight role to respond to the contestable market model. This transition was always going to be challenging, for both TAFE institutes and for Skills Victoria. However, as the key oversight body, Skills Victoria needed to drive the change. 
These oversight and leadership deficiencies by Skills Victoria need to be addressed as a priority if the TAFE sector is to move forward and play the role envisioned in the contestable vocational education and training market policy.
Findings
Holmesglen
All public entities, such as TAFE institutes, have a responsibility to ensure that public funds are being used economically, efficiently and effectively. Public entities are accountable for the manner in which they exercise the authority given to them by government. 
Holmesglen’s strategy to acquire an RTO raised a number of new issues but Holmesglen did not make Skills Victoria aware of its decision to loan money as part of an acquisition strategy. This lack of engagement with Skills Victoria resulted in Holmesglen undertaking a strategy that was not supported by government or government financial management policy and did not adhere to a Standing Direction from the Minister for Finance. This Standing Direction constrains investment of public entities to only low-risk transactions by requiring all investments and financial arrangements to be made with state entities, or with entities that have a credit rating the same or better than the state’s. The RTO did not meet this criterion.
Holmesglen provided the $6.5 million loan to the RTO as part of an acquisition strategy before undertaking due diligence. In deciding to make the loan before due diligence was completed, the Holmesglen board put public money at risk by inadequately considering the likely need of repayment should the acquisition not proceed, which was the eventual outcome. Holmesglen lacked crucial information to inform its decisions, including an understanding of the value of the RTO, the likely income return and timing of the return, and the liquidity and marketability of the investment. Without this information the board’s analysis of the risk versus the potential return was limited. Although the board appreciated this investment was high risk, the financial arrangement by Holmesglen was not prudent and resulted in an impairment of $3 million of public money.
The new contestable model of vocational education and training provision requires TAFE institutes to combine private sector behaviour, such as entrepreneurial pursuits, with public sector requirements for accountability. Exactly how this was to be achieved was never clearly outlined by Skills Victoria. Holmesglen determined its own approach for balancing entrepreneurship against accountability and, up until this transaction, had been operating successfully on this basis for some time. This operating style did not include effective communication with Skills Victoria.
Oversight of the sector
As part of DEECD, Skills Victoria has policy responsibility for the TAFE sector and specific functions delegated to it by the VSC. This includes negotiating performance agreements and advising the minister on issuing guidelines or Ministerial Directions to TAFE institutes. 
The case study of the Holmesglen financial transaction has demonstrated that Skills Victoria has failed to provide effective oversight of the TAFE sector. 
Skills Victoria has not developed the new skills required to oversee TAFE institutes that now operate as more autonomous bodies competing with other training providers. The reforms required clarity about changed roles and responsibilities, yet, despite repeated reviews finding the need for greater role clarity, the problem has not been addressed. Confusion about roles and boundaries is evident in Skills Victoria’s belated involvement in the events that led to the loan repayment arrangement.
As a result of the Holmesglen financial transaction, Skills Victoria sought legal advice from the Victorian Government Solicitor’s Office about the loan and acquisition powers of TAFE institutes. This advice revealed a fundamental mismatch between the new policy, which encourages TAFE institutes to be entrepreneurial and seek opportunities interstate and overseas, and current legislation, which requires their function to be providing education and training to Victorians.
The relationship between Skills Victoria and Holmesglen is poor and characterised by limited communication and mutual distrust. Communication by Skills Victoria has typically been undocumented, including crucial information such as policy intentions, feedback on Holmesglen’s actions, expectations regarding information flow, and minutes from key meetings. 
The VSC receives regular reports from Skills Victoria about the performance of the TAFE sector but has inadequate processes in place to assure itself that the functions delegated to Skills Victoria have been effectively performed. 
Implications for the TAFE sector
Holmesglen has a history of being the TAFE institute to implement successful new and innovative strategies that are subsequently adopted by other TAFE institutes. Despite the legal authority and financial prudence issues, Holmesglen’s acquisition strategy was another attempt to adapt to the changing vocational education and training environment. Other TAFE institutes may also wish to pursue innovative strategies in the future that may take them into untested areas of activity.
Skills Victoria has not provided the leadership necessary to resolve its position on a number of key commercial issues central to how TAFE institutes can compete effectively with private training providers. The absence of defined parameters around commercial activity creates confusion and results in limited freedom for institutes to react and respond in a competitive way to each other and to the private sector. The lack of guidance is an even greater issue for TAFE institutes with smaller surpluses and less commercial knowledge than Holmesglen.
Recommendations
Number	Recommendation	Page	
1.	Skills Victoria should:
·	actively engage with TAFE institutes during the preparation of their strategic plans
·	critically review strategic plans and provide feedback to TAFE institutes
·	where appropriate, inform the Victorian Skills Commission and the Minister for Higher Education and Skills of any conflicts with government policy or accountability issues.	14	
2.	Holmesglen should review its investment policy to ensure that investment decisions are consistent with its authority to invest, instructions from government and government policy, and that it embodies better practice prudential consideration.	14	
3.	The Department of Treasury and Finance should review the intended application of Standing Direction 4.5.6 and consider whether the exemption should be based on effective investment powers rather than the legal source of powers.	14	
4.	Skills Victoria should:
·	clarify the roles and responsibilities of all entities in the TAFE sector
·	develop its workforce capabilities in contemporary business practices and business acumen to meet the demands of TAFE sector governance
·	set clear guidelines for commercial activity and state when TAFE institutes must notify government of specific types of decisions
·	address, as a priority, the legislation and policy conflict created by TAFE institutes expanding interstate and overseas 
·	develop and implement a strategy for communicating with TAFE institutes effectively
·	examine the ability of TAFE institutes to create and use trusts.	26	
5.	The Victorian Skills Commission should develop and implement a mechanism to regularly test whether Skills Victoria is exercising its delegated functions effectively and efficiently.	26	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report was provided to the Department of Education and Early Childhood Development, the Department of Treasury and Finance, the Holmesglen Institute of TAFE and the Victorian Skills Commission with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments, however, are included in Appendix B.