Consultations on the report continue until next month, but already it is becoming clear that FE colleges will have to fight hard if they wish to retain their role as significant HE providers.
The past decade has seen almost non-stop growth in access and foundation courses as well as HE courses which are franchised through universities or funded directly by the HEFC. But spending curbs linked to a Government review of HE are threatening to call a halt to such expansion.
Desperate pleas are increasingly being heard from both sectors. On one hand HE institutions are worried by the drift towards HE provision by FE colleges. "HE institutions will be very aware that overall resources for higher education are diminishing," said Tim Cox, executive secretary of the Standing Conference of Principals. "They wish to make sure that they are catered for adequately in financial terms."
At the same time FE colleges fear that they have already become victims of HE cuts. A recent Association for Colleges survey showed that universities are reducing the number of courses provided under franchise agreements. Higher National Diploma courses, which are typically franchised through HE institutions, were cut back by nearly 10 per cent last year.
AFC chief executive Ruth Gee was pleased that the HEFC report recognised the distinctive contribution that colleges make towards overall HE provision. "Colleges are not in competition with universities. They are meeting a different need," she said. "Higher education in FE colleges is mainly vocational. It's not just some 'johnny-come-lately', it has been around for a long time."
The HEFC may decide to concentrate on funding HE courses in about a dozen "mixed economy" colleges which, although defined as FE colleges, are also large HE providers. About half the 32,000 HE students taught in FE colleges whose courses are directly funded by the council are based in this small group of colleges. A further 42,000 HE students in FE colleges are funded by the HEFC through franchising.
Ms Gee believes that a rationalisation in favour of mixed-economy colleges would threaten neighbourhood HE. "Students are under increasing pressure not to move away from home. If the HEFC reduced the number of local outlets, it would be cutting off its nose to spite its face."
Franchising is particularly popular among the newer universities which, as polytechnics, were often part of associate college networks which allowed FE colleges to receive grants for HE work through local authorities.
Dr Michael Goldstein, vice-chancellor of Coventry University, believes the system of funding higher education in FE colleges should be pretty much left alone. The university has franchising arrangements with about 30 "partner" colleges, mainly in the West Midlands, which run degree courses for more than 2,000 students. "The funding arrangements may want a little bit of tweaking here and there," he said. "But I don't think that major change is needed. "
In addition to franchising courses, Coventry has drawn on the specialist expertise available in colleges and set up joint degree courses. A degree course in equine studies offered with Warwickshire College of Agriculture allows the college to teach students about caring for horses while the university provides tuition in business studies. "Neither institution could provide this kind of combined course separately," he said.
Research by the university showed that franchising increases the likelihood of enrolments by women and students from ethnic minorities. "If it was controlled centrally we wouldn't have made the progress we have."
Like many universities, Coventry is consolidating existing franchised courses rather than planning to set up new ones. Where cuts had to be made, they would be determined locally, said Dr Goldstein.
The Business and Technology Education Council, which validates many Higher National Diploma and Certificate courses, also wants to see FE colleges continue as local HE providers. Although there might be cases where it was not feasible for a college to run an HE course because of low numbers, BTEC was opposed to restricting overall HE provision.
"People do not naturally divide themselves into FE and HE ability-ranges at 18," said a spokesman for the awarding body. "This is an artificial divide; funding should be used to bridge it not widen it."
According to the HEFC report, there is no evidence that the quality of HE courses run by FE colleges is any better or worse than courses provided in HE institutions. Costs are also often lower in FE colleges.
Cliff Allan of the HEFC policy division said the report, drawn up with the support of the Further Education Funding Council, had highlighted certain areas but had not intended to be too prescriptive. "We are open to various ideas and suggestions," he said.
Forty-eight per cent of HE courses in FE colleges are funded by the HEFC either directly or through franchising. Yet colleges find it confusing that HND courses are funded by the HEFC while many HNC courses, which were once local authority funded, are FEFC funded. Further income comes from LEA tuition fees and training and enterprise councils.
Ruth Gee suggested it might be better if the FEFC funded all HE courses in FE colleges. "One of the dangers in all this is that the two funding councils will allow the concept of HE to fall between two stools."
The situation in Wales is quite different. HE courses are only directly funded by the HEFC for Wales in two FE colleges, Camarthenshire College of Technology and Art, and Llandrillo College in Clwyd.
"We inherited a totally different situation from the one in England," said Roger Carter of the HEFC for Wales. "The council decided it did not want to enter into direct-funding relationships with other FE colleges."
Wales had one polytechnic, now the University of Glamorgan, which is the largest franchiser of HE courses in the principality. "It's a much smaller market," said Mr Carter. "There is not the same population to draw from, but there are some extensive franchising arrangements."
The HEFC for Wales, which does not plan to produce a similar report to the HEFC for England, is keen to see a growth in franchising or outreach arrangements, particularly to help students in rural communities.
But the council is keeping a close watch on a small number of courses which are franchised by Welsh HE institutions to FE colleges in England. Such courses open up the possibility of the "double counting" of students in England and Wales.
* Higher Education in Further Education Colleges:Funding the Relationship,Pounds 5 from HEFC Publications, Northavon House, ColdharbourLane, Bristol BS16 1QD.