FE providers should be funded according to how much their learners go on to earn, a new report argues.
While the Skills Funding Agency (SFA) has already trialled outcome payments - in which a proportion of a provider's funding is dependent on learners gaining employment once they leave - the Social Market Foundation (SMF) thinktank has proposed a radical new approach.
The funding criteria for unemployed learners would be simply getting them into work. For those being trained on the job, however, the SMF believes that providers should be funded according to learners' "pay uplift": the increase in their salary as a result of their training.
This, according to an SMF report published today, would force providers to steer learners towards relevant qualifications that would help them stand the best chance of getting a job. However, colleges fear the move would lead to them being punished for factors outside their control.
"The state's investment in human capital would be far more efficient if an actor in the system was liable for the labour market value of the skills delivered," the report says. "Providers are the obvious candidate. They are embedded in local economies, so are in a position to understand, forecast and supply the skills local employers need, and steer candidates towards more profitable courses.
"Exposing providers to the demands of the labour market would also make them more accountable for how well they impart skills employers value: the quality of their teaching as defined by the labour market."
Payment by results would allow colleges to be funded according to "pay uplift" and employment rates, the report says. "This would incentivise providers to act upon the 'prices' set by the demand for skills - higher pay and employment rates arise for those skills that are in relatively short supply."
Last week, the Local Government Association revealed the huge mismatch in some parts of the country between the number of learners studying in particular fields and the number of related jobs available locally. In Nottingham, for instance, 1,140 people with qualifications in hospitality, travel and tourism were left to battle it out for the 61 jobs available.
At present, providers receive funding for every student they enrol, which - the SMF claims - makes them more concerned with attracting learners than ensuring learners are taking courses that will help them in the world of employment.
In a changed system, colleges would encourage students to take the courses that were most likely to lead to jobs, the report says. "Providers would have an incentive to seek out information from employers about what mix of skills they need and supply suitably trained workers."
In terms of the pay uplift, the SMF suggests calculating the proportional increase in a learner's wage from what they were earning before their period of study. This could also be tailored so providers in less prosperous parts of the country would receive a higher reward than their counterparts in wealthier regions.
Julian Gravatt, the Association of Colleges' assistant chief executive, welcomed the SMF's "interesting theory", but raised doubts about whether it could be put into practice. "It doesn't feel like we have a stable enough system or an IT set-up that is good enough to make it work," he said.
Even if just part of college funding was structured in this way, Mr Gravatt added that colleges could end up losing out on funding because of factors that were outside their control.
#163;80m - Amount set aside by the SFA in 2010 to be distributed between colleges that met a set target of getting students into employment.
Proportion of unemployed people who haven't found work for a year or more.
25% - 2009
32% - 2011
Proportion of unemployed people out of work for two years or more.
10% - 2009
16% - 2011.