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The apprenticeship levy may not be as sweet as it first appears

At a time of significant political uncertainty, the funding boost recently announced by the UK Government for the apprenticeship system was well-received. It is part of the Government's continued drive to create 3 million apprenticeships by 2020.

The Government had been planning to cut funding for 16-18 year old training by up to 30% as part of the new apprenticeship levy regime, but heeded warnings from businesses and campaigners and changed course. It has released details of the new system, including ear-marking £60m to help those in the most disadvantaged areas in the UK.

The Apprenticeship Levy

The levy will be paid by all employers with a wage bill in excess of £3m from April 2017. The top 2% of employers will contribute 0.5% of wages to the levy. The Government estimate this will help double the size of the apprenticeship market to £2.5bn by 2020. Given these employers will now be paying for training, it will encourage them to go out and procure it directly, as opposed to training providers leading the charge to draw down on SFA funding.

Given employers will negotiate pricing with the provider, results, value for money and quality will be chief concerns. In this context, providers with a track record of delivery, which specialise in employer-centric, high quality courses are likely to benefit enormously. Those with rigid cost bases or which deliver less sought-after relevant apprenticeships may suffer. No longer will providers be able to offer courses of marginal utility backed by a steady stream of SFA funding.

While the scheme is touted as good news for the sector, it is not clear whether this revamp will increase or decrease volume in the market. Providers with a significant proportion of large employers may see demand increase, if those employers currently employ fewer apprentices than the cost of the levy would now cover. This won't apply to all, as some employers are already active users of apprentices, and this change will simply represent a funding shift, and is unlikely to affect supply.

Reduction in SFA Funding Bands

Any volume increase in the market may be offset by employer-led price pressure and the change in funding tariffs for individual courses. The SFA's funding bands have been reduced by over £1,000 on average, with a number of high skilled courses (mainly those that previously attracted up to £27,000 of SFA funding) having been cut by £9,000-12,000 as part of the move from frameworks to standards.

Initially, some of this shortfall will be compensated for by a payment from the Government of 20% of the funding band for 16-18 year old training, but will probably reduce over time. Employer-led procurement is likely to drive down costs, given these employers will want to maximise their levy contribution or, in the case of small employers, the 10% contribution they will have to make for each course, a dynamic that only ever simmered under the wholly SFA-funded regime much to the SFA's frustration.

Gone are the days when providers could offer level 3 and 4 technical apprenticeships and be assured of the top level of funding. It is likely that, in opening up the system in this way, market forces will result in a thinning of the provider base and the range and number of courses is likely to decrease as corporate training spend becomes focused on the best and most relevant courses.

The dynamics of demand and pricing will vary from employer to employer, and providers will therefore need to analyse their customer base carefully to understand the likely impact. This will make those providers with a reputation for high quality, content and courses paired with a well-focused sales force ideally positioned to succeed.

M&A within the Training Services sector

The upshot of this is likely be a busy period of consolidation in the Training Services sector both amongst primary providers and sub-contractors. Margins will be squeezed, so marginal and loss-making courses and businesses will be slimmed down. To provide a consistent service to large employers, it is also likely we will see many of the providers looking to expand across the country to develop a nationwide footprint and increase their share of employer training spend. Good quality providers could become both acquirers and targets depending on their scale, and sub-contractors may well find themselves vertically integrated.

The winners out of all of this will be providers with a well-established track record of delivery and niche providers which excel in specific sectors, both will need to be nimble enough to offer attractive courses at a keen price.

Harsha Wickremasinghe

Head of Business Intelligence

Phone: +44 20 7484 4748

Mobile: +44 7919 368409