Many colleges are pulling out of European Union-funded courses worth an estimated Pounds 42 million because of a "bureaucratic nightmare" which leads to late payment and has plunged some colleges into debt.
Urban recovery programmes and courses to get the jobless back into work are still awaiting final approval from the EU, even though they were due to start six months ago.
One Scottish college which went ahead with work worth Pounds 1.5 million, on the nod from officials, is understood to have been told courses will not be approved for European Social Fund cash.
Many colleges say the benefits of bidding for ESF cash rather than applying to the Further Education Funding Council for the money are not worth the headache.
The ESF pays 55 per cent of the estimated costs of courses which should act as an incentive as the FEFC only pays 45 per cent. But many of the advantages are lost under the complex FEFC arrangements for working out unit costs. Those which have high per capita costs lose out considerably under ESF funding.
Typically, a large Hertfordshire college would be paid Pounds 36,500 through the ESF and Pounds 36,000 from the FEFC for running the same course.
"The hidden costs and uncertainties make us wonder whether the European route is worthwhile," said the vice-principal.
Also, if colleges achieve Government student-growth targets, they win a substantial cash bonus. But only those students funded by the FEFC count towards the targets.
Colleges have now drawn up plans for expansion in 1995-96. A substantial minority say they will be pressed to meet the targets. This has made them think again about ESF funding.
David Gibson, president of the Association of Principals of Colleges, said: "This bureaucratic nightmare must be sorted out. If everyone switched from the ESF to FEFC when planning these programmes, it would mean a Pounds 42 million cut to the sector as a whole and less of the FEFC cake to share out.
"It would not be real growth but simply shifting students from one areas of funding to another."
City College Manchester, where he is principal, is one of the few to make substantial bids for ESF cash, setting up a department to manage almost Pounds 2.5 million from the Social Fund. The FEFC has also asked it to monitor the progress of other bids.
Philip Severs, finance officer in charge of the City College department, said problems and delays were particularly acute this year because of ministerial wrangling over the Maastricht Treaty and the UK's opt-out clause in the Social Contract.
"But the problem of not getting approval for courses until the end of the year - when colleges want to start them earlier - will still be with us next year."
City College does lose out marginally - for every Pounds 20 it spends, it recoups only Pounds 19 from the FEFC. "But our overriding concern is to pull more new money down into the sector from Europe. It saves Government and FEFC money for other colleges."