College managers have admitted using public cash to undercut private competitors in the race for lucrative contracts for training people at work.
They argue that the move is justified and necessary if the high-calibre workplace education and training schemes offered by the colleges are to survive.
The extent to which it is right for the taxpayer to subsidise this training is at the heart of a national inquiry by the Further Education Funding Council into the franchising of college courses.
The FEFC is examining to what extent colleges are funding training schemes which companies should pay for themselves.
Alan Jamieson, managing director of West Herts Ventures - linked to West Hertfordshire College - warned that if the FEFC pulls the plug on support for such enterprise work, they are unlikely to survive in the market-place.
"Those enterprise units in colleges who do not use FEFC resources may find they have a very limited life, as they will be prevented from being able to offer differential pricing to clients and undercut competitors," he said.
His views were shared by many at the first national conference of the newly-formed College Business Managers Association last week. More than 150 delegates attended, representing enterprise companies linked to colleges and selling training and consultancy to employers.
Such operations have become highly profitable. Many including West Herts, Chippenham College, Weston-super-Mare College and the Sheffield College are currently turning over more than Pounds 1 million each a year from activities such as retraining for the armed services and in-company training leading to national vocational qualifications Activities such as these may make the difference between insolvency and survival, the managers insisted.
Half the Pounds 1.4 million annual income generated by West Herts comes from the FEFC. Other sources include Hertfordshire TEC, the Higher Education Funding Council, the European Union and fees charged to clients.
Derek Tilley, training services manager at Somerset College of Arts and Technology, said: "The key player will always be the FEFC." Colleges drew on a wide range of sources, mainly from different elements of public funding.
Roger Ward, chief executive of the Colleges' Employers' Forum, said colleges must drive down staffing costs still further to get to grips with the new business culture. "Unless colleges cut their staffing costs - currently averaging at around 80 per cent of their total expenditure - down to a more realistic level, they may be heading towards bankruptcy. I know at least six colleges which are trading successfully with the pay bill reduced to less than 50 per cent of expenditure."