"Customers will drive quality up and, through competition, prices down," said Mr Russell.

Funding reforms due to be rolled out over the next few years aim to put public and private training providers on a more equal footing; put money and therefore choice in students' hands; and reward institutions whose students find jobs.

Mr Russell said: "[Institutions] will have to think not, 'What do I do to get funding from Geoff?' but 'What do I do to attract customers through my door, because otherwise they are going to go to the guy down the road'."

Among the changes he singled out was the Outcome Incentive Payments. The scheme will be piloted in the next academic year with a planned £80m going to colleges and training groups whose students have moved from collecting unemployment benefits into jobs.

He said: "This system will incentivise providers and colleges to ask themselves the question, 'What do I need to do to this person to help them do better?' Qualifications by themselves won't do that anymore."

Institutions will also have to raise their game, according to Mr Russell, because government funds will increasingly be delivered via student loans.

"[This] changes the dynamic dramatically," he said. "Instead of providers competing for funding from me and other funding organisations, they've got to compete to delight customers."

And competition will further be fostered, he said, by the opening of the Adult Skills Budget, which will be $2.8 billion next year, to certain independent providers.

"This is quite a significant change for them," said Mr Russell. "In a sense it should enable them to compete more directly with colleges who traditionally have had access to a broader range of funding."

AELP, which represents more than 600 employment and training groups, has welcomed the budget change, calling it an "unprecedented opening up of the FE market to all quality providers."

Rachel Millard