Successful colleges will have three-year funding agreements while those that fail face merger, under proposals spelled out by the Education Secretary Estelle Morris this week.
Colleges must commit themselves to "stretching targets for minimum performance" and raise their completion rates if they are to reap the benefits of Chancellor Gordon Brown's spending spree.
He promised a 1 per cent real-terms growth in core funding every year to 20056 for colleges. But in return they must improve their performance, raise standards and become even more accountable.
But colleges were left unclear as to what new demands were being made and what would happen if they failed to meet them.
While welcoming most of the plans contained in Mr Brown's comprehensive spending review, John Brennan, director of funding and development at the Association of Colleges, said many questions remained unanswered.
"What are these new targets? If you commit to them, you get the money, but if you don't, you won't. I have no idea what this means.
"We want to talk to the Government about how these targets will be measured, how institutions will be monitored. We want to know how demanding the targets are going to be and whether the they are feasible."
If colleges get a pro-rata share of the 5.8 per cent education budget increase, it means an extra pound;1.2 billion by 20056. The 1 per cent promised by ministers equals pound;400 million, leaving pound;800m for other spending. But it is not yet clear how much is for growth, the Standards Fund, pay or other improvements.
John Harwood, chief executive of the Learning and Skills Council, said the new targets would combine proposals in the Green Paper, Success for All, and the council's own plans to improve participation and quality. Plans to increase core funding had sent "a tremendously strong signal" to the sector, he said.
Education maintenance allowances for 16 to 18-year-olds will be extended nationwide in 2004. Schemes in pilot areas have raised retention rates by almost 6 per cent.
Modern Apprenticeship schemes will be expanded to include 28 per cent of young people, and measures will be introduced to reduce by 40 per cent the number of adults lacking national vocational qualification level 2 by 2010.
A new basic skills target has also been set to reach 1.5 million adults with literacy and numeracy problems by 2007.
Opposition MPs said the package was fraught with contradictions. Phil Willis, Liberal Democrat education spokesman, said: "While I welcome the national roll-out of EMAs, almost half those staying on for allowances were switching from work-based training options. EMAs should cover all options."
Stephen Twigg, the minister for young people, confirmed this week that it was still government policy to equalise funding between school sixth forms and colleges.
Barry Sheerman, chair of the education select committee, said: "The disparity in salaries and conditions is appalling. You say FE must deliver but you are not giving it the resources to do so."
Julian Gravatt, 31