Private training providers are to be given the right to bid for Government cash for new buildings, prompting fears that funding may fall short for colleges.
Colleges may have to build more cheaply, wait longer for new buildings or borrow more cash in order to complete projects as they compete for funds with training companies and charities.
The Learning and Skills Council (LSC) said there have been bids for capital projects worth more than Pounds 2.9 billion from 70 colleges as part of the Building Colleges for the Future programme.
Its budget for the next three years is under Pounds 2.4bn, but colleges usually make up the shortfall by borrowing and using funds from other sources.
The National Audit Office has warned about rising levels of college debt, which is expected to reach Pounds 1bn in two years' time from Pounds 200 million in 2001. But the LSC said colleges may have to borrow more.
In its Capital Skills Prospectus, the LSC said: "As eligibility for capital funding is extended to new providers, we expect demand to exceed the available budget. This will require providers and partners to demonstrate clearly the value of proposals and to explore other funding sources."
If applications exceed the available funding, the LSC will ask colleges and providers to scale down their applications where possible. It could also prioritise some projects or phase in funding payments over a longer period of time.
Funding will be allocated to the projects that best address the priorities for apprenticeships and the work-based Train to Gain scheme, as well as other skills programmes.
Not all private providers will be eligible. They will usually have to earn half of their income through providing courses for the LSC and they must meet quality and financial performance requirements.
The LSC said expanding eligibility would ensure a wide range of skills needs could be addressed and that all providers could respond to the Government's priorities.
Julian Gravatt, director of funding and development for the Association of Colleges, said colleges were well-equipped to compete with training providers in bidding for the capital funds.
But he said: "There are a lot of good college capital projects and only a certain amount of money available. It comes down to priorities within the education budget: the universities' capital budget is bigger than the LSC's, although they are not planning an expansion in places but we are. Building Schools for the Future is about Pounds 7bn and there's no increase in school pupil places."
College debt needed to be put in context, he said. Even Pounds 1bn would result in only about Pounds 100 million-a-year servicing costs on a total college budget of Pounds 7bn.
Mr Gravatt said the global financial crisis could make it harder for colleges to obtain loans.
Graham Hoyle, chief executive of the Association of Learning Providers, said the decision was welcome for private training companies but "long overdue". It was "a significant move in the right direction, yet another step on the way to levelling the playing field".