SCOTLAND'S colleges face major challenges as they struggle to cope with cuts of £74 million while going through a period of reorganisation that will see more than one-third merged, the public spending watchdog has said.

A report by Audit Scotland into the sector says that while its current financial position is sound, a cut in funding from the Scottish Government will add increasing pressure to the ability of colleges to offer educational services to their students.

It also calls on ministers to outline the costs and benefits of the planned reorganisation, which will see new college regions created across Scotland.

The study found that the further education sector was running at a 4% loss last year, with an operating deficit of £29m.

In 2010/11, there were 37 independent colleges, with 306,000 students and 12,600 full-time staff.

Overall, 24 colleges reported operating surpluses for the year.

Caroline Gardner, Auditor General for Scotland, said: "The Scottish Government needs to clarify the costs and benefits of regionalisation, including structural reform, how these benefits contribute to its reform objectives, and how the costs will be funded."

A spokesman for the Educational Institute of Scotland union said: "Scotland's FE colleges are operating in an increasingly difficult financial situation, with deep cuts to budgets over the past two years and with at least two more years of cuts ahead."

Scottish Labour's Shadow Minister for Learning and Skills, Neil Findlay, called on Education Secretary Michael Russell to rethink the cuts, which he said had seen college funding slashed by 20%, locking out at least 10,000 Scots courses.

Liz Smith, for the Scottish Conservatives, said: "This report by Audit Scotland highlights the very raw deal that colleges have received from the SNP."