More than 200 colleges are under-performing and being funded at too high a level for the amount of business they generate, according to Learning and Skills Council chief executive, Mark Haysom.
He has warned regional directors that in some cases consistent under-performance has not resulted in local LSCs reducing allocations.
Originally 225 institutions were put into this category, but the figure has now been revised downwards to 212. Colleges will have to return funds, or there will be a "reconciliation" process at the end of the year.
Meanwhile, local LSCs are concerned that their discretionary budgets are being cut. These are the funds which help them to achieve the Government's targets for wider participation. Mr Haysom has offered to send top officials to regional meetings to explain the loss of flexibility for discretionary budgets, caused he says, by the "increasingly tight" overall settlement for 2004-5.
The budget cuts come at a time when councils are having to cope with big staffing cuts, to reduce costs. Julian Gravatt, director of funding and development at the Association of Colleges, said: "There is a lot of heat around the sector, with pressure from the LSC to squeeze funding on the ground. The LSC is saying there is not enough money to meet targets."
Wales also has its problems. Fforwm, the Association of Welsh Colleges, has warned that 13 of its 25 institutions are predicting an operating deficit for 2003-4.
There is no funding for growth and there are higher employers'
contributions to teachers' pensions and national insurance.
John Graystone, the association's chief executive, said colleges were having to turn away students at a time when the Welsh Assembly was promoting widening participation. "Budgets have been frozen. It is ironic that at a time when the minister is making more money available for pay, colleges may have to reduce staff."
* David Way, executive director of LSC Black Country, has been named as the quango's national director of skills, in charge of vocational training. He previously worked for the Department of Employment and helped to set up the National Council for Vocational Qualifications.