Ministers are backing the development of pilots which could provide the first steps towards a level playing field for all education and training for 16 to 19-year-olds.

Three authorities, Wandsworth, Tower Hamlets and Sefton, have expressed interest in the scheme following a meeting with officials.

There have been bitter and protracted disputes between schools and colleges over the cost of teaching A-levels and their equivalents, with colleges claiming to be underfunded by around 30 per cent. Department for Education and Employment studies, hotly disputed in the FE sector, claim the costs are much closer.

Conservative ministers published plans for “common funding principles” across the 16 to 19 age group last year, and promised to test new ways of funding school sixth forms, including payment by results, a concept familiar to colleges but alien to the school sector.

The original proposals involved pilots in 1998-99, with a national scheme being introduced by the millennium. It is not known whether Labour will stick to that timetable, but it emerged this week that David Blunkett, Education and Employment Secretary, and Baroness Blackstone, minister for further and higher education, will press ahead with the pilots, to the delight of colleges.

A DFEE spokeswoman said: “The Government will look with interest at the way the pilots in the local education authorities are running on a voluntary basis. ”

John Brennan, FE development director at the Association of Colleges, said: “We welcome moves to harmonise funding, both in terms of method and funding levels, so the steps being taken are ones we would support.” While local management schemes for schools could be rewritten, it was more difficult to achieve common funding levels between schools and colleges, he said.

Meanwhile, the threat of a Pounds 69 million “black hole” in Labour’s plans for colleges has been been solved. Officials at the DFEE have written to the Further Education Funding Council reassuring them that “they will have the money.” The crisis was brought about by the Tories’ decision to freeze cash for growth after colleges had already committed cash for recruitment.

Colleges had been promised a central role in the welfare-to-work programme launched this week to get 250,000 young people off benefit and trained for work. Mr Blunkett said he expected the colleges to find innovative techniques for teaching and training disaffected young people. Officials are understood to have shifted unused reserves from within the Pounds 12 billion DFEE budget, not only to cover immediate demands but longer-term recruitment commitments.

Andrew Smith, employment minister, pledged “early action to get young people away from benefits and into jobs.” He will be expected to ensure that the same rules for funding apply to colleges and the training and enterprise councils involved.

A Cabinet Committee to shape the details includes Mr Blunkett, Chancellor Gordon Brown, Mr Smith and Chief Secretary to the Treasury Alistair Darling.

Lecturers’ union NATFHE’s general secretary John Akker was still concerned that Labour’s Welfare to Work programme could be threatened by the financial crisis in colleges. He met Mr Blunkett this week.

“It’s very difficult to see how the FE colleges could respond in a positive way and the same with staff, unless additional money is made available. The alternative is redundancies and further industrial action,” he said.