ESF Finance Public Meeting

Dec 9, 2010

Bradbury School

6:30pm

1

Topics to be Covered

• ESF Accounts

• School Funding

• ESF/ESL Relationship

• Private Independent Schools

• ESF Centre

2

ESF Accounts

• ESF prepares annual accounts in accordance with Hong Kong Financial Reporting Standards and The English Schools Foundation Ordinance.

• KPMG, one of the big four global accounting firms, is our external auditor and they express an opinion on the accounts every year.

3

ESF Accounts (2008-09)Income and Expenses

• Major income sources:

- Tuition fees: $943m (72%)

- Government grants: $269m (21%)

- Rental income from quarters and school facilities: $53m (4%)

• Major expenses:

– Salary related expenses: $945m (79%)

– Depreciation: $86m (7%)

– Repairs and maintenance: $60m (5%)

– Other operating expenses: $109m (9%)4

ESF Accounts (2008-09)Income and Expense

Balance sheet (Aug 09):

• Assets: Fixed assets - $806m Cash - $346m

• Liabilities: Advance fees - $137m

Accruals for major repairs - $106m Payables - $188m Hardship allowance - $35m

5

ESF Accounts (2008-09)Reserve

Reserve: $735m

ESF’s reserve is created from profit, that is the accumulation of accounting profits over the previous years. It represents the theoretical net value if we sell off all our assets and pay off all our debts. Hence, it is not the amount of cash ESF can spend.

6

School Funding

Financial resources for schools: A funding formula has been used to ensure the fair distribution of

funding to schools.

Controlled by schools:- Staff funding- Teaching and Learning Responsibilities Allowance (TLR) funding, e.g. Head of Department, Head of Year, etc.- Information and Communication Technology (ICT) funding- Others

Controlled by ESF Centre- Centrally held funding

7

School Funding

Staff Funding

Teaching staff funding:• a student number-based formula• target enrolments agreed with each school• amount determined based on median teacher salary

(MPG 9), contact time, and curriculum (e.g. IB)• learning support, English as an Additional Language,

Chinese, and Higher Education Counselor for secondary schools are given additional funding

• surplus from the staff funding budget will be accumulated at school level, to be used at school’s discretion, within the guidelines set

8

School Funding

Support staff funding:• base funding plus additional amount per student• some positions such as pool attendants, lab technicians and

workshop instructors are individually calculated• Chinese and Learning Support Centre Educational

Assistants are additional to the formula• Schools are free to plan their staffing within the budget

Schools can move funds between the teaching and support staff budget.

Supply teaching funding:• for leave of absence and CPD• calculated as a % of teaching funding

9

School Funding

TLR budget:• based on size of school• 4 levels of TLR (primary TLR 2-4, secondary TLR 1-4)• established models based on student number• schools are free to assign positions within budget, but no

more than 50% of teaching staff body can receive TLR

ICT:• based on a number of factors: number of students, staff,

departments, senior leadership, and classes

10

School Funding

Others:• Electricity supplement: student number based• Teachers training fund, e.g. Special IB Diploma teacher

training fund for secondary schools• Operating expenses for office supplies, books, etc. -

student number based

Centrally held funding:• Summer works• Major capital works• Provision of continuing professional development for

centrally held training11

ESF/ESL Relationship

ESF• ESF is a statutory body established pursuant to

the English Schools Foundation Ordinance.• The main object of ESF is to administer and

operate, within Hong Kong, schools offering a modern liberal education through the medium of the English language to boys and girls who are able to benefit from such an education.

12

ESF/ESL Relationship

ESL• ESL is a company limited by guarantee established

under the Companies Ordinance.• ESL is a registered charity and was originally set up to

provide kindergarten education, language classes and extra curricular activities. It also operates the two Private Independent Schools.

• The reasons for using such an arrangement are:– Tax exemption treatment under section 88 of the

Inland Revenue Ordinance, and– Ring-fencing the PIS schools and kindergartens from

the subvented ESF schools.

13

ESF/ESL Relationship

• The relationship between ESF and ESL was reviewed in detail by Mayer Brown JSM and KPMG at the request of the ESF Board on 11 May 2010.

• The review considered the relationship from operational, legal and accounting perspectives and concluded that the current structure is acceptable from a risk and control perspective, and that there would be no tangible benefit from changing the existing arrangements.

• The review opined that ESF has de facto control of ESL, making ESL effectively a subsidiary of ESF.

14

ESF/ESL Relationship

• ESF and ESL each keeps its own set of financial accounts.

• Budgeting process is dealt with separately.• ESL receives support services from services

from ESF.• ESF charges ESL an annual management and

administration fee for the provision of such services. The fee is set at $3.5 million for 2010/11 and is determined by the proportion of time employees at ESF Centre spend on ESL matters during the year.

15

Private Independent Schools

• The Government selected ESF as a qualifying sponsoring body in relation to Private Independent Schools.

• The applications for the construction of new schools under the Hong Kong Government’s Private Independent Schools policy was approved by the Government in 2000 and 2001 respectively.

• In 2000 and 2001, ESF and the Government agreed for ESL to take over from ESF the role as the qualified sponsoring body to avoid confusion with the part of ESF’s activities which was supported by Government subvention.

16

Private Independent Schools

• Two primary-cum-secondary private independent schools, Renaissance College and Discovery College, are currently operated by ESL.

• The two schools have a student capacity of 2,100 and 1,300, and enrolment of 1,872 and 901 respectively.

• The Development and Operating Agreement (DOA) between ESF and ESL included the below:– ESF builds and owns the school premises and all furniture and

equipment;– ESL undertake to operate and manage each of the schools; and– ESF has the right to receive fees from ESL.

17

Private Independent School

Total Capital CostsHK$

Renaissance College Discovery College Total

Total Capital Costs before subsidy 308,217,221 307,578,881 615,796,102

Less Gov't Subsidy (197,671,989) (139,824,973) (337,496,962)

Total capital costs net subsidy 110,545,232 167,753,908 278,299,140

18

Private Independent Schools• The costs of constructing the two schools, net the

Government grants, are included in the ESF accounts as Fixed Assets.

• Based on the DOA, ESL makes a repayment to ESF every year. Total repayment received up to 2009-10 is $41.6m ($32.5m from Renaissance College; $9.1m from Discovery College). In 2010-11, the repayment is set to be $15.6m.

• It was agreed that the funds ESF invested into the two PIS will be repaid within 20 years, including a 3 month HIBOR+1% return. 19

Private Independent Schools

20

        payback P+I fully

yr Fixed assetsBal b/f + capital

cost Interest DOA Payment Bal c/f year settled in      

1 2006/ 07 217,401,397 217,401,397 11,348,353 (3,908,148) 224,841,602 2 2007/ 08 243,120,993 250,561,198 10,122,672 (8,645,574) 252,038,296 3 2008/ 09 273,148,948 282,066,251 6,515,730 (13,498,856) 275,083,126 4 2009/ 10 278,237,508 280,171,686 3,418,095 (15,561,216) 268,028,564 5 2010/ 11 283,407,508 273,198,564 4,097,978 (15,561,216) 261,735,327 6 2011/ 12 288,607,508 266,935,327 5,338,707 (15,561,216) 256,712,817 7 2012/ 13 288,607,508 256,712,817 5,134,256 (18,911,216) 242,935,858 8 2013/ 14 288,607,508 242,935,858 4,858,717 (18,911,216) 228,883,359 9 2014/ 15 288,607,508 228,883,359 6,866,501 (18,911,216) 216,838,644 10 2015/ 16 288,607,508 216,838,644 6,505,159 (18,911,216) 204,432,587 11 2016/ 17 288,607,508 204,432,587 6,132,978 (18,911,216) 191,654,348 12 2017/ 18 288,607,508 191,654,348 7,666,174 (18,911,216) 180,409,306 13 2018/ 19 288,607,508 180,409,306 7,216,372 (18,911,216) 168,714,463 14 2019/ 20 288,607,508 168,714,463 6,748,579 (18,911,216) 156,551,825 15 2020/ 21 288,607,508 156,551,825 7,827,591 (34,891,487) 129,487,930 16 2021/ 22 288,607,508 129,487,930 6,474,396 (35,743,146) 100,219,180 payback 17 2022/ 23 288,607,508 100,219,180 5,010,959 (36,628,872) 68,601,267 18 2023/ 24 288,607,508 68,601,267 3,430,063 (37,550,027) 34,481,304 19 2024/ 25 288,607,508 34,481,304 1,724,065 (38,508,028) (2,302,659) fully repaid20 2025/ 26 288,607,508 (2,302,659) (39,504,349) (41,807,008)  

     (446,851,863)             

Private Independent Schools

• The tuition fees of the two private independent schools are set based on:– Market conditions– Cost structure– Overall profitability of ESL– Enrolment numbers

21

ESF Centre

ESFC provides the following services to our schools and ESL:

• Education (strategic planning, assessment, reporting, continuous professional development, admissions)

• HR management and support (recruitment, contracts, remuneration and benefits, systems support)

• Finance (budgeting, reporting, internal control and monitoring, billing, payroll, payments, banking, procurement, systems support)

• Facilities Development (major repairs and maintenance)• IT (planning, systems support, data management,

infrastructure)• Communications (website management, marketing and

fundraising, organisation wide communication)• Internal audit

22

ESF Centre

• Supporting 9 Primary, 5 Secondary, 1 SEN schools, 4 kindergartens and 2 PIS.

• Total staff in the organisation, including ESL is approximately 2,700.

• End of Sept 2010, ESF Centre has 104 staff member, representing 6.2% of total staff population in ESF, and 3.8% of total staff population including ESL.

• ESF Centre’s staff cost is approximately 4.4% of ESF total revenue, and ESF Centre’s costs is approximately 6.2% of ESF total revenue.

23

Appendix I – Fees Comparison (Primary Schools)

Note: Information on other schools were obtained by enquiry.24

Appendix II – Fees Comparison (Secondary Schools)

Note: Information on other schools were obtained by enquiry.25

Appendix III – Profitability of ESL (Draft 2009-10 numbers)

ESL:Kindergartens 9.1Lang/Sports 9.5ESL Admin (7.7)

Net surplus (ex PIS) 10.9

Renaisssance College (2.3)Discovery College (19.0)

Total deficit from PIS (21.3)

ESL deficit (10.4)

26

HK$M HK$M HK$M

Appendix IV – Analysis of Differential between ESF Foundation Schools and PIS Fees

27

Renaissance / Discovery

($21.3m deficit amongst 2,524 students)

Yr 1-6 Yr 7-11 Yr 12-13

PIS current fee 72,500 97,000 98,000

Notional additional fees to be self sustaining 8,400 8,400 8,400

Theoretical fee required to totally cover costs 80,900 105,400 106,400 (a)

ESF current fee 61,000 93,000 94,000

ESF surplus

($88m surplus amongst 12,800 students)

Notional reduction in fees if surplus is eliminated (6,800) (6,800) (6,800)

ESF government grant

($269m based on the current funding formula)

If there are no government grants 17,809 23,990 23,990

Theoretical fee if no surplus / no government grant 72,009 110,190 111,190 (b)

Differential: comparing a) and b) -12% 4% 4%

(Note: Analysis based on 2009-10 draft financial numbers.)