Friday 17 July 2015

The apprenticeship levy: employers’ reluctance to contribute to apprentice training costs leaves government little choice

CVER's Hilary Steedman looks at how the UK government is tackling the issue of employers' contributions towards the cost of apprenticeship training.

In his summer budget presented to Parliament on 8 July, the Chancellor George Osborne announced the introduction of a levy on large employers that is intended to provide an employer contribution to supplement government funding for apprenticeship training.

Funds raised by the levy would provide apprenticeship employers with an electronic voucher that could be used to purchase training from recognised providers. Further details of the apprenticeship levy were then provided by the Treasury in their productivity plan.

Co-funding of apprenticeship by all the parties that benefit – the employer, the apprentice and the government – is the accepted financing model in all modern economies. But in England it has proved especially difficult to find a way of ensuring that employers make a contribution to the costs of apprentice training. The introduction of Modern Apprenticeships in 1994 committed the government to contributing to the financing of apprenticeship training. But these funds were routed exclusively to training providers, many of which then sold‘cut-price’ apprenticeships to employers without requiring the employer contribution that government expected. Employers’ expectations of ‘free’ apprenticeship training became firmly established over the 25-year period that this system operated.

A survey of employers by the Department for Business Innovation and Skills (BIS) in 2012 found that if asked to co-fund apprenticeship training, nearly 60 per cent of employers would no longer train. A 2013 consultation on new arrangements requiring an employer cash contribution to apprenticeship training effectively rejected the government’s proposals.

Employer intransigence has created a serious dilemma for the Conservative government.

Driven by their productivity agenda, the government is committed to pressing ahead with the introduction of more rigorous apprenticeship standards (The Trailblazer Initiative). Financing this commitment to a step change in the quality and standards of apprenticeship training would alone have been challenging enough. But it comes coupled with a high-profile Conservative manifesto commitment to provide three million apprenticeships over a five-year term of government – which would be 30 per cent more than were provided in the previous five years. As Alison Wolf points out (Wolf, 2015) in an environment of static budgets, the sums just do not add up and employers must accept that they too must make a larger contribution. The apprenticeship levy is, she argues, the logical solution.

An earlier levy/grant requirement covered most ofBritish industry in the 1970s and was administered by tripartite bodies. It was greatly resented by large employers and – with the exception of two sectors that opted to retain the levy (Construction and Engineering Construction) – it was progressively legislated out of existence during the 1980s by the Thatcher government.

France has a long-standing apprenticeship levy and a recent history of doubling the number of under 25s in apprenticeship to 400,000. But the increase in apprenticeship numbers has resulted from government legislation opening up the apprenticeship route to young people studying for qualifications at Baccalaureate level and above. While the apprenticeship levy has undoubtedly played a part, employers have been motivated to offer apprenticeships by the demand for apprenticeship from young people with higher levels of education.

Germany, the country with the largest number of apprentices in Europe, does not operate a levy/grant system specifically in respect of apprenticeship. The employer contribution to apprenticeship funding is made in kind. Employers bear the cost of the occupational element of the apprenticeship training programme which, as a rule, is provided by the firm’s staff and on the firm’s premises.

But apprenticeship benefits from a wider payment from all firms in the shape of compulsory membership subscription to the local Chamber of Commerce. The Chamber of Commerce provides a wide range of business services to the local business community, which include finding apprenticeship places, contract administration and, most important of all, independent end-point assessment of apprentices’ skills and knowledge.

In principle, a levy can contribute to increasing training volumes by reducing the effect of some of the problems facing employers and potential trainees, namely “poaching” externalities (the fear of losing training investment to other firms) and information imperfections (the lack of understanding of costs and benefits of training). It can also promote between-firm intra-sectoral coordination in important areas such as cost-sharing and the revision of training standards.

Whether or not the levy will have a positive effect on employer participation in training will depend on several factors. First, whether the revenues raised from the levy are to complement the current apprenticeship budget or to substitute it will determine whether there will be more or indeed less funds available for apprenticeship than is currently the case. If the levy simply substitutes the current level of funds, then it is nothing but a change from funding apprenticeship training with one type of tax to another type of tax. If it is to complement it, then indeed the additional revenue from the levy will help secure apprenticeship funding in the long run.

Second, if firms are to open up more apprenticeship places the value these bring must increase, for instance by raising the quality of the out of workplace training provided within apprenticeship and possibly by increasing the minimum length of apprenticeships to two or three years, so that firms can reap the benefits of a more productive worker towards the end of the apprenticeship.

The Treasury’s productivity plan promises to put control of the funding raised by the levy in the hands of employers. This poses big questions. Will employers be willing to work to the government’s productivity agenda and distribute funding accordingly? Will the large firms contributing to the levy turn out to be the main beneficiaries at the expense of smaller firms? Will large employers lobby to have training that is very specific to their needs paid for by the fund? And it is not clear that the levy alone can encourage employers to offer enough apprenticeships to meet the government’s three million target. Given the size of skill shortages in key areas, the levy is unlikely to diminish ‘poaching’ externalities in the short and medium term. These make it difficult to ‘sell’ apprenticeship to employers as an investment in workforce skills that will repay apprenticeship costs after a few years. Nor is it likely that the grant can be set at a level that can fully compensate employers for the net cost of training during the period of apprenticeship, especially high-cost STEM apprenticeships – we are merely told that employers will get back more in grant than they put in.

Yet the levy does have the potential to improve quality and standards. Greater employer ownership of apprenticeship – which has so long been the goal of government – should be easier to achieve once the levy is in place. And inter-firm co-ordination of skills provision (Group Training Associations) and forward-looking sectoral skills planning could be the big winners from the introduction of the levy/grant in England.

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