The initiative is proving particularly successful for small businesses which cannot afford traditional in-service staff training and often go to the wall because of local skills shortages.

Small companies that linked with colleges in a pilot project to train their employees have reported average profit increases of pound;16,000 and created new jobs.

Alan Johnson, minister for competitiveness at the Department of Trade and Industry, said the pilot phase of the college-business partnership scheme had shown the value of firms getting access to the technology and knowledge in FE.

Under the scheme, individuals who have recently gained level 4 national vocational qualifications are employed as associate partners or trainers to lead 12-month projects designed to boost the competitive edge of small companies.

Of 48 projects completed, 20 associate partners have since taken up jobs with their host company. Partly as a result of increased profits, after an initial outlay of pound;6,000 per firm, the companies employed a total of 16 extra staff. The scheme is expected to mean extra annual benefits of about pound;30,000 per firm.

The Government is to decide the future of the scheme within the next few months. A further 43 projects are still in progress.

“Early results indicate substantial benefits to the companies,individuals and colleges,” Mr Johnson said in his maiden speech as minister for competitiveness at a conference organised by the Further Education Development Agency and the National Training Organisation’s council.

Leaders of the two bodies saw last week’s event as a sign that the DTI wants colleges to play a key role in tackling skill shortages and encouraging enterprise, particularly among smaller firms.

FEDA chief executive Chris Hughes said it was time the skills agenda received the same attention as other government priorities, such as widening participation and raising achievement.

Colleges such as Bishop Auckland, which are based in rural counties, rely heavily on custom from smaller companies. During the past nine months the Durham college has provided training for more than 100 firms through its business services arm Optimum.

Principal Joanna Tait said colleges should understand the pressures small firms face, including the fact that they cannot always release staff to attend courses.

“One of the biggest problems we face in the local community is one of credibility,” she said.

Mr Johnson also urged colleges to support the DTI’s new Learning Through Business Networks initiative, which encourages companies and training providers to spread learning through supply chains.

Robert Challis, principal of Abingdon College in Oxfordshire, said it was often easier for a college to reach small firms through larger suppliers or via trade associations, than by going in “cold”.