Doubt was cast this week on the viability of around 100 colleges described as "struggling" or "vulnerable" in a report for the Learning and Skills Council (LSC).
Around 50 general further education (GFE) colleges are "currently designated as struggling", according to a paper produced by consultants KPMG for the LSC. The final draft arrived at the council this week, although work began last summer.
In almost all these cases, senior managers and governors admitted that their college was struggling, but only a fifth unanimously agreed on a remedy, according to key sections of an earlier draft, dated December last year, seen by FE Focus.
A further 50 colleges were classed as "breaking even" but deemed to be financially "vulnerable" over the next three years, with many predicted to become struggling.
Some 100 GFE colleges were described as "sound" and capable of withstanding cuts of 10 per cent. Another 45 were classed as good or outstanding - 15 of which had significant cash reserves and a "predatory" vision when it came to weaker providers, the draft paper said.
KMPG says colleges face funding cuts of 20 per cent in the next three years "unless overseas students or other sources can plug the gap".
The report says: "A large number of colleges will fail to remain viable in the next three years so the number of GFE colleges will decline - not necessarily a bad thing."
It adds that many colleges have "stagnated" because of rising levels of funding over the past seven years: "There is room for efficiency gains and quality uplift - lower levels of funding will be, to a degree, a positive influence."
However, cuts do not necessarily mean less provision or reduced quality, KPMG says.
The paper proposes three ways of restructuring while maintaining quality: "modern mergers" which will be college-funded and designed to improve access and quality; managed services, where high-quality providers help weaker providers improve performance; and a national "colleges efficiency tool" helping colleges deliver efficiencies.
The LSC, soon to be the Skills Funding Agency, is working with the Department for Business, Innovation and Skills, the Association of Colleges (AoC), the 157 Group and the Learning and Skills Improvement Service on ways to help colleges make efficiencies and restructure.
David Hughes, national projects director at the LSC, said: "What is clear is that there is a very challenging funding round for 201011. There are a number of colleges managing but I suspect there are some not facing up to this reality and we are keen to sit down with them to talk about it."
He said that no date had been set yet for the publication of the report.
Julian Gravatt, assistant chief executive at the AoC, said: "Clearly, if colleges have a decrease in income and do not change the way they manage themselves they will not be viable. But why would one assume that?
"Much will depend on what happens in the election, the extent to which Government gets involved in consolidating the sector and the extent to which colleges themselves manage a decline in income."
Editorial, page 6.