Since incorporation college funding has followed a simple market model. However, the need to balance the market approach with some planning is increasingly being recognised. There has been little overall planning of FE courses. The council has deliberately held back from using funding to steer colleges.

Other distorting effects of the pure market approach have not been challenged. There is a fundamental problem with the current method. It focuses on students as individuals and neglects the fact that education is in large part a social activity. This focus has led the sector to believe that funding colleges on the basis of their enrolment is student-centred and fair. In practice it can have consequences which are very unfair to students.

The issue is best illustrated by a single example. Consider two colleges, each of which has only one class. If one college recruits 20 students and the other 10 the first group will receive twice the funds of the second. This hardly seems fair to the individual student.

The bigger group may require twice as many books and twice as many chairs. But it is difficult to argue that they need twice as many teaching hours. The real resources available under the present system are determined not by the student’s needs but by how many others choose to turn up. Indeed, since college funding reflects retention, the resources available for one student are critically influenced by whether someone else chooses to drop out.

Another weakness of current arrangements is that nowhere do they make reference to the actual cost of a learning programme. The FEFC’s tariff committee, which sets the rate for different types of courses, only looks at relative costs. The actual level of resourcing has been set in the market-place. This makes planning of FE programmes very difficult. We currently have a sophisticated way of dividing an arbitrarily-sized cake.

Current funding arrangements enshrine a deeply ingrained belief that the only proper way to fund colleges is by counting their enrolments - a sort of payment by results. It is linked with the view that the only effective way to make things happen is to give financial incentives.

Applying this view to social exclusion means that we cannot fund colleges to develop programmes for those who are currently outside. All we can do is promise colleges that if they do enrol such students they will get a reward. We cannot yet say how big the reward will be. Although a recent step forward means that the reward for recruiting some students will be relatively bigger than recruiting others. (Helena Kennedy’s report on widening participation recommends extra funding for those with particular postcodes).

These concerns are not just theoretical. They connect directly with real practical problems which colleges, particularly those in inner cities, are grappling to deal with. At the moment FE finds it difficult to see beyond the free market model which underpins current funding arrangements. The inability to articulate alternatives may well prevent the sector playing its full part in the Government’s agenda.

Mick Fletcher is head of business planning and resources at the Further Education Development Association, and leads their research on funding