A new report by the Public Accounts Committee (PAC) has revealed that colleges in England are £2.7 billion short because of the Learning and Skills Council's (LSC) "catastrophic mismanagement" of funding.
"There has been a very serious failure in the management of the programme, with the Learning and Skills Council over-stimulating the demand for funding and mismanaging the approval process. The Council was reckless in allowing colleges' expectations of financial support to build to levels far in excess of what the Council could afford," the report said.
It added: "In March 2009, the Secretary of State announced that the Council had at that point built up approvals 'in principle' for 79 projects anticipating £2.7 billion of funding that it could not afford."
PAC's report clarifies the massive financial scale of the funding crisis for the first time.
The Department for Innovation, Universities and Skills, which merged last June to form the Department for Business, Innovation and Skills, was also accused of failing "to recognise that the Learning and Skills Council was no longer controlling the flow of projects" at an earlier stage.
LSC's chief executive, Geoff Russell, moved to reassure the sector that lessons had been taken on board from the report's revelations.
Mr Russell said: "We are confident that we have understood the lessons from the past and have adapted our working practices to the current funding environment. We are working together with the sector to explore alternative financing options to support more college projects to be built. We continue to work closely and transparently with the sector, our stakeholders and providers to focus on quality and improved operations. We are building on the firm foundations we have established, to ensure that the investments we make on behalf of the Government are directed to areas of a greatest need. As a result we are well placed to execute the transition to the new structures.
"The LSC continues to work with colleges whose projects will not be supported in the current round to explore private finance and other financing options to ensure that the efforts that colleges have made to develop projects are utilised. The LSC is working with a sector led task group to facilitate alternative financing streams. Where colleges are in financial difficulty the LSC is able to intervene through the Financial Intervention Policy to assist in re-establishing financial stability. Where capital related costs have been incurred inappropriately, we will take steps to address any failures in governance that led to public money and institutions being put at undue risk."
LSC chairman Chris Banks, added:
"This is a successful programme which has so far updated half of the FE estate up and down the country. In order to deal with the difficulties we have experienced in the management of the programme, and with demand for capital investment running very significantly ahead of available funds, we commissioned an independent review. We have acted swiftly and with determination to implement the recommendations from the review, which have been designed to get the programme back on track, to the extent that available budgets allow. That includes a robust prioritisation of projects for the next phase of the programme.
"We remain committed to ensuring the capital programme makes the maximum possible contribution to improving services to learners across the country."