Further education institutions are calling for a radical cure for their financial ills.

A top-level working group looking at the way colleges are funded has failed to come up with anything better than the present system.

The fundamental review group was set up to see whether a better funding methodology could be established for colleges. Its critics say the present system is too unit-based, and not sufficiently sensitive to the college environment, history, or regional variation.

The group, which held its second meeting this week, will put out a draft consultation to colleges and ask for views before Christmas.

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But the consultation will disappoint many as it does not offer many solutions. Inner city colleges, especially in London, estimate they will lose up to a third of their funding allocations under the present system and want a thorough overhaul.

Confidential evidence from the Widening Participation Committee, presented to the review group, concluded that the basic structure of the Further Education Funding Council's methodology was sound.

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The group, chaired by Helena Kennedy QC, has so far identified no suitable alternatives. But Adrian Perry, principal of Lambeth College, said: "The existing funding methodology makes insufficient concessions to the costs and problems of inner city working."

He demanded an increase in the weighting given to childcare, a premium for recruiting and teaching unqualified and long-term unemployed adults and free examination entry for all students qualifying for fee remission.

There should also be some recognition of the higher security and insurance costs of working in tough areas, he said. Ken Ruddiman, principal of Sheffield College, said: "I think the methodology is unfair. Why should we be compared with a college in the south, which doesn't have high inherited deficits or old buildings and doesn't provide expensive courses like engineering?" Alternatives considered by the funding review include:

* calculating each college's allocation afresh each year from a zero base with a safety net mitigating the affects of severe changes

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* attaching funding to actual or planned student enrolments, student achievements or value added

* a voucher or credit system based on student choice to determine the volume of activity to be funded at each college

* colleges proposing their own rates of funding for various categories of provision

The Widening Participation Committee was set up in May 1995 by the Further Education Funding Council and will make its final report in May next year.

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A spokesman for the Further Education Funding Council declined to comment until the reports were published.