Funding chiefs agreed this week to scrap the penalty system where cash is clawed back from colleges that fail to meet their targets.

From next year colleges will no longer have to pay back money to the Learning and Skills council if student numbers or achievement rates fall short of those forecast.

This means that, for the first time in more than a decade, principals will know they can spend all the money they receive in a year without the threat of having to return funds if expectations are not realised.

Clawback was first introduced by the government following the incorporation of colleges in 1993. It was initially a penalty for colleges that failed to introduce new tougher contracts of employment. It was then extended as a lever to make principals more accountable for their own budgets.

But the practice has caused severe budget shortfalls at some colleges - and often led to redundancies as they try to balance the books.

In 2003, Park Lane college in Leeds called for 70 job cuts because of a Pounds 2million clawback.

The LSC admits that the current funding process is “complex, bureaucratic, and provides difficulties for colleges”. Instead, it proposes to link funding explicitly to college plans and to move away from “micro-management” of funding.

New proposals for funding colleges are spelled out in the Agenda for Change prospectus which the LSC describes as “a dynamic programme of reform that will begin to transform the way the FE sector operates”.

Rob Wye, LSC strategy director, said: “At the moment we have a system where funding is based on student activity requiring colleges to have records which prove every single bit of learning that goes on.

“That creates a huge bureaucracy. We propose to sit down and have a discussion with colleges about the broad direction of travel, the size and mix of provision, and draw up a broad strategic plan.” If such a plan failed to materialise, it would not mean the withdrawal of funding, he said. “We will look at what alternative approach might be adopted,” he added.

Funding for colleges will be divided into “core” and “commissioning” elements, he said, with colleges guaranteed a “core” of between 90 and 95 per cent of their previous year’s allocation.

The remaining funds will be commissioned after discussion with colleges.

The LSC report says this commissioned element will give the LSC “the flexibility ... to meet its priorities”.

The LSC prospectus also proposes a new Quality Mark for colleges “that put employers at the heart of their business”. The decision to award Quality Marks will be taken by an independent panel chaired by an employer.

Mark Haysom, Chief Executive of the Learning and Skills Council said: “Our vision is of a network of colleges that put customers first, where the disincentives to collaborate fade away.”

The reforms were welcomed by the Association of Colleges. Sue Dutton, deputy chief executive, said the prospectus challenged the Government to address problems with college funding, data collection and bureaucracy.

Agenda for Change follows extensive consultations with college principals last summer. More than 100 senior college staff also worked with the LSC to develop the prospectus around six themes - skills, quality, funding, data, business excellence and reputation.

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