Shape up or ship out. Make a difference with the money we are giving you or face reform.

This is the underlying message of last week’s grant letter to the Learning and Skills Council. The letter is now an annual ritual. The Education Secretary gives the LSC chairman a Christmas present, then spends six pages telling him what to do with it. The letter summarises the LSC budget for the next three years, but the main interest is the list of New Year resolutions that the Department for Education and Skills wants the LSC to adopt. This year the list is longer and tougher than ever.

The DfES tells the LSC twice that it must demonstrate results and effectiveness. The LSC must show it adds value. The DfES asks for an efficiency strategy to control administration costs. The LSC is told to employ the right staff with the right skills and to root out poor performance in its local offices. The LSC organisation should focus on outputs. Employers need to be engaged. The LSC needs to challenge colleges over poor-quality courses. The new system of area reviews should lead to real change.

The LSC is not alone in facing demands for action. Public service modernisation means change and reform in all parts of government. What puts post-16 education and training under particular pressure is the competition for influence between Numbers 10 and 11 Downing Street. In most areas of government, they have carved up the turf between them. The Treasury handles most home departments. The Prime Minister takes a leading role in foreign policy, health and schools.

Unusually, post-16 education gets attention from both parts of Downing Street. Policies rain down on the DfES. Trade and Industry and Work and Pensions chip away at the sidelines. Over the next six months, the DfES will attempt to regain control of the agenda through a cross-government skills strategy. To make this work, it needs the LSC to deliver.

The other thing driving reform in post-16 education and training is money. The grant letter talks about a huge amount of public money flowing to the LSC. Over a period of three years, the total LSC budget will increase by almost pound;2 billion. In 2002-3, the budget is pound;7.3 billion. By 2005-6, it will have pound;9.2bn, pound;5.6bn of which is earmarked for colleges.

The LSC grant is measured in billions. Its targets are measured in millions. The main targets were set in July 2002 as part of the Treasury’s spending review. The review doubled the basic skills target to 1.5 million and created a new target for workforce qualifications. One million working adults should gain level 2 qualifications by July 2006.

If these were not enough, Chancellor Gordon Brown announced a new target two weeks ago. By 2010, 90 per cent of young people by age 22 should have participated in a full-time programme fitting them for skilled work or university. It is easy to be cynical about government targets, but they drive budgets. Everyone in Whitehall assumes that the new money will guarantee hundreds of thousands of new learners.

We have been here before. Three years ago, the DfES made similar assumptions when handing out money to the Further Education Funding Council: pound;350m more a year; 700,000 extra students by 2002. It did not happen.

The targets made unrealistic assumptions. When franchising deals unravelled, student numbers fell. New initiatives like Curriculum 2000 absorbed the new money. At the end of three years, colleges had delivered real change but no increase in student numbers This time it might be different. The Government has been more realistic about efficiency gains and about what is achievable inside colleges. But the large targets betray an optimism about what can be delivered in the workplace.

Colleges, employers and training providers may deliver the targets by working in partnership. However, if the targets are missed for a second time, there may not be a third period of budget growth.

This is the importance of the grant letter for colleges. The letter has tough words for the LSC but the hardest challenges remain with colleges. Can they deliver a step-change in the involvement of employers to deliver the million-person target? Can they improve success rates? Can they eliminate poor-quality provision and satisfy targets while continuing to cater to the most disadvantaged?

Principals and managers are generally optimists about the ability of their colleges to complete difficult tasks. Colleges will draw up ambitious development plans to meet the new requirements. It may take more than optimism and an extra pound;2bn to deliver the challenges set out in the grant letter.

Julian Gravatt is finance director at the City Lit, London