The next government must maintain progress from a "planner-captive" employment and skills system to a "more dynamic" arrangement driven by employer customers and students, the Association of Learning Providers (ALP) said.
Graham Hoyle, chief executive, said: "The Skills Funding Agency has the capacity to deliver a demand-led system, but whether it does remains to be seen.
"What it needs to be doing is to agree an overall budget and some outcome figures and then allowing employers and learners to operate within that."
The association supports skills accounts as a means to achieving a demand- led system.
These should allow students to choose to study at a "quality approved learning provider" whether that is a college, private or a third sector supplier.
But it says that a demand-led system will only work if all providers are equally eligible for all aspects of FE funding.
Currently, private providers are excluded from Adult Learner Responsive funding which goes to colleges.
The ALP manifesto also calls for the strengthening of apprenticeships by extending them to include level 4 or foundation degree level.
Mr Hoyle said: "If you can move through the apprenticeship brand into higher education then you can reposition the apprenticeship. There should be an HE level of apprenticeship."
News, pages 4-5