Stewart Sutherland: These are new times

IMMEDIATELY after the Second World War, less than 3 per cent of the relevant age cohort went to university. Now, the stated aspiration of politicians north and south of the Border is that 50 per cent of the age cohort should go to university. In the same period of time, the number of universities in Scotland has risen from four to 15. The affordability and sustainability of this in future, on current terms, is in question.

There have been attempts from time to time to think about the financial and other consequences of such expansion (the Dearing Report of 1997, whose recommendations were brutally and virtually immediately rejected by the first Blair government), and even about why there should be such an expansion (the Robbins Report of 1967, which led to the creation of the then so-called "new" universities). In fact, the most recent determining fact of the shape of and direction of the current system was the creation of a large number of new universities in 1992 by the granting of university status to former technology colleges.

One common assumption in these changes was that, on the whole, universities were a good thing and that more of them would be beneficial. Beneficial for whom, has been a question that has sharpened as the related questions of affordability and funding have thrust themselves increasingly to the forefront.

In 2005, the Westminster government introduced student fees, initially at the rate of 3,000 per annum. Fees of up to 9,000 per annum are in the process of being introduced in England - albeit that the age participation rate in England is still significantly below that of Scotland, and that the standard degree length in England is three years as opposed to the four-year honours system in Scotland.

The previous Westminster government and the Browne Report both concluded that the then current university system in England was unaffordable and therefore unsustainable. The suggestion that the situation is different in Scotland was pre-election whistling in the dark.

This means that the Scottish universities believe the extra funding which will be available to English universities will give the latter significant advantages over their Scottish counterparts. This will show in the reduction of the competitiveness of Scottish universities in UK and international contexts.

The most recent relevant fact is the return to Holyrood of a government in which the four-letter "f" word - fees - is forbidden. What's to be done?

My proposal is that the relationship between government and the universities should move to a contractual basis. Some form of agency would be required to act for the government, but it would no longer be a funding or grant-making body. It would require the government to do what successive governments have lamentably failed to do: governments should set out what they and the taxpayers might reasonably expect of universities. This would at one time have seemed to be a heretical suggestion within the academic world but, in view of the very large investment which the government makes on behalf of the taxpayer, it is not unreasonable to expect the government to reflect on what it gets and what it expects as a result of this. Had this been done at the point of creation of the "new" universities in 1992, the current sector which "just growed" would look rather different now.

I am advocating a much clearer set of expectation between government and individual universities. This would be the basis of a set of negotiated contracts between individual universities and the government, on the basis of which the "University of Lower Largo" would be funded to recruit students into different faculties, according to agreed contractual terms. To ensure sensible planning horizons, most contracts should be on a ten-year rolling basis. This is not wholly new territory, for there are similarities here to some current practices in relation to specific professions - eg, medicine, dentistry, nursing and teaching. One difference is that reducing numbers at short notice, as occasionally happens in teacher education, would carry contractual penalties.

The government would make available to all students filling places under this scheme student support and loan facilities. (The ease with which this can be done is shown in current Westminster government support for UK students at the private University of Buckingham.)

On the other hand, individual universities would negotiate with the government such funds as are available to support teaching in each relevant faculty. There are two important qualifications to this: the first is that it would be a negotiation, and either side would be free to decline the contract if it was not in their judgment adequately costed and priced. The second is that universities would be free to add top-up charges in the light of particular local circumstances. But they would be bound by contract to recruit to the levels of the contract.

This would change the relationship between universities and the government into a negotiation between specialist providers and taxpayers/governments with needs to be met. No longer would universities be cast as supine supplicants! Students would know far more clearly what the commitment of government was to their course, and what charges, if any, were additionally levied by a university. They would therefore be able to assess much more accurately the "cost" of the private benefit of education in this or that university. All of this would help a university or a student seek additional sponsorship for a particular course. They would not be subject to veiled government threats, whether from Westminster or Holyrood.

In the event of universities making additional charges for particular courses, government negotiators could require as a condition of contract that universities allocate a proportion of any additional income from students whom the government funds to be set aside for scholarships on a means-tested basis. The university would be free either to accept such a condition, or to refuse the contract.Universities would be free, and indeed encouraged, to negotiate with banks arrangements for students who might need loans for subsistence and other costs. The benefits to a bank of access to such a population group are obvious enough to make this a potentially worthwhile scenario for it.

Most importantly, universities would not be constrained in the recruitment of any other students for these and other courses, and in setting fees for such students. This applies to overseas non-EU students, EU students and home students. Indeed, careful drafting of the statutory basis of any such arrangements between universities and government may allow proper charging to be applied to EU students in Scotland. (In my estimate, the taxpayer currently subsidises EU students by about 85 million per annum.)

A university would be genuinely autonomous in a real sense, backing its own judgments and able to balance its portfolio of courses to fit its academic judgment and priorities, and its attractiveness in these areas to future students. Under this system, universities would learn to play to their strengths. (Indeed, in some cases, for the first time to learn what their real strengths are.)

Government would, in the immediate future, avoid a damaging public row with universities about whether to use or find a synonym for the four-letter "f" word.

Finally, taxpayer and university system would, simultaneously, have the benefit of a long-overdue discussion of what the taxpayer may reasonably expect of the university system. Our biggest failing as a society, in this area, is that the momentum of growth in higher education has taken place in the absence of answers to the question: Why such growth?

• Lord Sutherland of Houndwood is a former principal of Edinburgh University. For more information, see www.david humeinstitute.com.

Stewart Sutherland: These are new times - we need a new deal