Publication of a report on the FEDA research this week coincides with a new Cabinet row over plans to use the coming Competitiveness White Paper to highlight deficiencies in the ability of the education system to provide Britain with the basic skills needed for commercial success.

The report shows that many colleges have become more responsive to local businesses. But researchers say further work is needed to reveal untapped demand for training and devise courses to meet it.

The research shows that establishing procedures for working with industry, professional bodies and the Government to identify training needs tends to be seen as a “marginal” activity. The report makes gloomy reading for ministers responsible for setting national targets for education and training.

It calls for more dialogue between colleges and industry, and greater commitment by senior college managers to developing innovative and flexible training. It will revive concern over the recent slide in industry’s uptake of day-release and block college courses for company trainees.

Deputy Prime Minister, Michael Heseltine, and the Education and Employment Secretary, Gillian Shephard, are said to be at loggerheads over the content of the forthcoming White Paper, planned for June 13.

Mr Heseltine wants a “skills audit” to highlight and tackle perceived weaknesses of school, colleges and universities. As President of the Board of Trade he was responsible for the Government’s competitiveness unit which moved with him to the Cabinet Office.

Education and employment officials believe his plans would backfire and highlight apparent education underachievement in 17 years of Conservative rule.

The FEDA report chimes with Mr Heseltine’s thinking in part. It sets out how FE colleges can undertake an “industry links audit” to assess the effectiveness of their course provision, and the steps required to improve it.

“It is not enough for colleges to be responsive,” FEDA chief executive Stephen Crowne said. “They need to take the lead in stimulating demand for the training they can provide.”

However, the report, Colleges Working with Industry - the third in a series by the FEDA for college managers - partially deflects the Further Education Funding Council inspectors’ claim that colleges give insufficient consideration to the needs of industry.

It highlights good practice at 17 colleges around the country, and argues that they are “generally trying hard to meet the demands of their business communities”.

Report author Maria Hughes of FEDA Northern Region, said: “Our research demonstrates that, on a large or modest scale, colleges can provide relevant and cost-effective training to meet new demands for firms in the business community.”

Many of the 17 courses praised were chosen for their flexibility and innovative approach to the changing demands of the labour market.

They included an initiative between Hull College and Hull City Council to tackle skills shortages in the building industry in which supervised apprentices built new homes on 85 acres of prime development land. Of those not taken on by the city council, 85 per cent found full-time work in the construction industry. The houses were sold on the private market.

A project by Deeside College and Clywd Care Training Consortium to provide flexible training in childminding and nursery care was said to demonstrate how opportunities existed outside the “traditional” FE market.

The report recognises that meeting training needs has become more complicated as a result of the dramatic growth in small firms and self-employment. It says 96 per cent of firms employ fewer than 20 people, and often lack the resources to develop training.

It says colleges should try to anticipate change, and adapt to meet it. Flexibility is particularly important if the needs of small firms are to be met.

An industry links audit, usually carried out across the college with specific input from relevant departments such as marketing, was a proven way of identifying possible improvements.

These might include the creation of a college sales team, the introduction of system to record all contacts between staff and industry, or the formation of a dedicated business unit.