Further education colleges could be rewarded according to the number of their students who progress to higher education if performance targets drawn up by the Learning and Skills Council are implemented.
Under the proposed regime, which the LSC wants to introduce to determine colleges' funding from 2004-05, institutions that deliver higher education or work in partnership with universities may be expected to show improvements in student progression rates into higher education.
After local negotiations, this measure of success could be written into three-year plans that will form a funding contract between colleges and the LSC.
Launching a 78-page circular and consultation on implementing proposals in the government's Success for All blueprint for reform, Rob Wye, the LSC's Success for All programme director, said some colleges would be expected to work with local LSCs on how they could help achieve the government's 50 per cent expansion target for higher education.
He said: "Because we are planning to use our new system for joint planning between colleges and local LSCs, we will be able to talk to them about the amount of level three activity we want to see as well as student progression. We will be looking at that as one measure of success."
The LSC system would require colleges to aim for a range of targets including student numbers, students' success rates, working with employers and improving the qualifications of staff.
Colleges that perform well could earn up to 3.5 per cent more a year in real-terms funding. Those who miss targets could get just an inflation-linked increase.
New "floor targets" for student achievement will also be set. By 2005-06, 45 per cent of all long qualifications attempted - those requiring more than 24 weeks' study - and 55 per cent of shorter qualifications, must be achieved in general further education colleges. Mr Wye said about one in ten colleges was below this level.
The government's previous system for calculating student achievement counted only students who achieved all their qualification aims as a success. It was replaced with one that expressed total qualifications gained as a percentage of the total number attempted.
College leaders have warned that the proposed system could lead to a decrease in the number of students progressing into higher education.
John Brennan, director of further education development for the Association of Colleges, said: "It creates a disincentive for colleges to take risks and puts lecturers under pressure to advise students to go for lower-level courses. That will not be helpful in expanding the pool of individuals prepared to enter higher education."
The AoC has also complained that the regime will create more bureaucracy, rather than reduce red tape, as promised by the LSC.
Learning and Skills Council chief executive John Harwood will answer questions about Success for All at www.lsc.gov.uk , between 12.30pm and 2.30pm on February 13, and respond to messages sent via the website by February 6.