As they absorbed prediction of college bankruptcies and shattered relations with businesses questions were being asked about how the whole system of college expansion could be thrown into doubt.

More than six months of frantic negotiations by funding chiefs lie behind the Treasury’s threat to axe cash for college growth.

Alarm bells first rang in July when early estimates of the cost of college expansion were passed to officials at the Department for Education and Employment.

It was the first time the Further Education Funding Council had tapped into its specially negotiated budget for college expansion - a budget secured with no cash limits.

A string of meetings followed as increasingly fraught negotiators from the Funding Council and in recent days the Association of Colleges fought to save the so-called demand-led element of college funding - the money available to support colleges which have expanded beyond their agreed targets.

Demand-led (DLE) funding is part of every college’s funding formula and is designed to promote growth.

But on top of that is an extra source of funding - known as “super-DLE” - which pays colleges #163;6.50 for every unit of work carried out over their targets.

During 1993-94, the first year of super-DLE funding, the extra growth was paid for by clawing back funds from colleges which failed to meet recruitment targets.

But by the next year the cost of expansion had overtaken the clawback money to the tune of #163;8m.

The 1995-96 academic year produced a #163;60m bill for expansion over FEFC budgets and the autumn term of 1996 alone brought a bill to the Treasury of #163;14m worth of extra demands.

The purse strings finally pulled tight last week with a promise from the DFEE to meet the #163;84m bill for expansion from the 1994-95 academic year up to Christmas - but no firm commitment to continue.

A letter from Roger Dawe, the DFEE director general for further education, to FEFC chief executive David Melville said the “unprecedented rate of expansion” in colleges was “far in excess of that envisaged by the department or the funding council and raises questions about how much is additional and about the maintenance of standards.

“It also raises questions about affordability, the appropriate balance of costs between taxpayers, employers and private individuals, and the potential impact upon other departmental priorities.”

He wrote: “Ministers therefore now look to the council to consider what steps are consistent with the containment of total expenditure on FE, while allowing the sector to achieve reasonable and well-managed growth. ”

The news came as a bombshell in the central Coventry offices of the FEFC. Senior officials pronounced themselves “gobsmacked” that the funding which has been the engine of some of the most innovative and controversial college expansion plans could be withdrawn.

Professor Melville issued an immediate warning that super-DLE funding, which the AOC estimates to be worth anything up to #163;100m a year, could be withdrawn immediately. He told principals to freeze new commitments at once, warning they may not be funded.

An emergency consultation exercise asked colleges what the council should do if the Government withdraws the cash. Its options are to pay for the extra courses this year, but slash all college budgets to meet the shortfall; or fund this year’s budgets in full, and effectively borrow from next year’s accounts to make ends meet.

The advice was greeted with horror and some panic in many colleges as principals struggled with the possibility of a huge and unannounced cut in a sector already squeezed by efficiency gains.

Some of the most vulnerable areas will be franchised courses run in collaboration with business and other groups which have swelled the FE sector and contributed much to the Treasury’s bill for FE expansion. Officials at the FEFC swiftly defended franchising, under which colleges contract out work to third parties, from what they saw as an implicit attack from the DFEE.

Soon-to-be-published research on franchised courses shows the extent to which some of the fastest growing colleges - and some of the largest recipients of super-DLE funding - are involved in franchising.

Estimates suggest that as many as 480, 000 students, 50,000 of whom are full-time, are taught through franchise deals.

Franchises have drawn criticism for using public money to fund training which is the responsibility of the private sector. In some cases franchised classes have been found not to exist, and inspectors have expressed concern that some colleges are too remote from the training their partners provide.

The FEFC this week launched a spirited defence of the arrangements, insisting “the arrangements are subject to detailed and open scrutiny unparalleled in the public sector.”

Principals insist they have done all that was asked of them - expanded above all expectations. They are asking whether they will now have to turn students away.