Colleges have been told to cut back on next year's planned Pounds 660 million expansion because only half the cash is available from the Further Education Funding Council.
Hardest hit are likely to be those hoping to expand franchise schemes, where colleges pay for courses run by schools, industry and voluntary organisations off the premises. The council has hinted that it will give preference to courses run directly by colleges.
But there is also a clear indication from the FEFC this week that it may not be able to maintain the funding levels for higher-spending colleges, even though they may hit their efficiency targets.
Under the council's complex funding formula, all colleges are guaranteed 95 per cent of this year's budget. The rest is in a pool which is bid for as the FEFC attempts to balance expansion with Treasury demands for savings. By the closing date for bids at the end of February, colleges had asked for almost twice the Pounds 334 million available.
A spokeswoman for the FEFC said: "Colleges had agreed to the spending formula. They must see that there is considerable over-bidding and so there must be rationing."
But the colleges have condemned the constraints - imposed for the second year running - as an attack on expansion. John Brennan, policy director for the Association for Colleges, said: "We have made it clear that we are unhappy with the settlement reached this year. There is simply not enough money in the kitty in total."
However, he was more cautious in commenting on the FEFC's method of sharing out the limited cash. "This is the third year of the formula colleges had agreed to. We are advocating a full review for 1997-98. This must reflect the Government's global strategy for FE and training."
The AFC is urging the FEFC to take a tough line on franchising. "There is a lot of resentment in the sector about the funding of industrial training through franchising. It is sensible and cost-effective only if it adds to the quality of training companies would otherwise give. If it merely displaces a company's expenditure, it should not be allowed."
The FEFC set up a committee of inquiry into franchising after complaints that colleges were using public cash for private training. A report of that committee is now understood to have been completed and will be considered by the full FEFC council later this month.
In a newsletter this week the council says: "It will decide in the light of this information whether, in agreeing provisional funding allocations, it will give preference to provision made directly to colleges."
The newsletter also says the FEFC will review the financing of colleges with higher-than-average levels of funding. The council has come in for constant criticism from the lower-than-average spenders for failing to redistribute the limited annual pot of Government cash fast enough.
The council admits there is an urgent need to speed up plans to reduce high spending. It will review its policy at its next meeting in the light of growth bids.