The further education sector is Pounds 119 million in debt and cannot endure its current cash pressures for more than a few years, funding chiefs have warned.
In its annual report to colleges this week, the Further Education Funding Council paints its grimmest picture yet of a sector suffering deteriorating financial health, with the "sick list" of colleges in deep crisis more than doubling.
FEFC chairman Sir Robert Gunn warns that continuing efficiency gains on the same scale as in the past three years would build up financial pressures on colleges and "put some further education facilities at risk".
Colleges already struggling to make books balance on day-to-day spending are having to divert revenue cash to pay for equipment and building projects because FEFC capital is dwindling, says the report.
But Sir William Stubbs, the former FEFC chief executive who was in charge during the period covered by the 1995-6 report, acknowledges that the private finance initiative - being promoted by the council because of "severe restraints" on its capital spending - is proving a slow means of completing projects.
Sir William also points out that colleges are facing new cash strains as they seek to attract students from non-traditional backgrounds. Their efforts are essential if the nation is to meet its education and training targets, but are costly in time and resources, he warns.
The annual report, which covers all aspects of the sector including finance, accountability and standards, finds colleges are meeting all reasonable needs for further education and are maintaining the quality of their work despite increasing financial pressures.
It reiterates the FEFC's claim that, in the majority of cases, governance and management weaknesses are at least partly to blame where colleges fall into financial trouble.
However, the report acknowledges that the key strain on the sector, and the most frequent cause of financial problems, is the scale of government-imposed efficiency gains since colleges left local authority control in 1993.
The estimated average gain was 9 per cent in 1995-96, while the total since incorporation is now 20 per cent.
The 1995-96 figures reveal the number of colleges with an operating deficit rose to 292 - almost two-thirds of the sector - compared with 243 in the previous year.
The proportion of colleges in severe difficulty rose alarmingly from 6 to 13 per cent - around 60 institutions. A total of 23 colleges needed special temporary concessions from the FEFC over payments - up from 10 the previous year and just one in 1993-94.
Meanwhile, the annual deficit incurred by the sector as a whole rose from Pounds 10 million in 1993-4 to Pounds 101 million in 1994-5 to Pounds 119 million last year. "A deficit of this order cannot be sustained for more than a few years," the report says.
Widespread cash problems among colleges are a double worry for the FEFC because cutbacks in its own funding will mean a reduction in its support and advice services.
Sir Robert Gunn acknowledges in the report that the council must choose "whether and how to concentrate its monitoring and advisory efforts on colleges which give cause for concern", while developing a lighter touch for the rest.
The report finds that, despite the cuts forced on colleges, there are "no significant gaps" in post-16 education and training opportunities, with colleges' plans falling broadly in line with labour market demands.
An analysis of inspection grades shows that the quality of teaching and management is holding steady. However, inspection has also revealed that quality assurance is the sector's Achilles heel.
It suggests most colleges will need to beef up their quality systems if they are to stand a chance of achieving the accredited status being considered by the FEFC as part of its review of inspection.