What price freedom?

Patrick Dowling was looking a bit embarrassed. The headlines said that his university, Surrey, was seeking to escape state control. "I want to reassure you that this is media spin," he told academics in an e-mail in an attempt to smooth ruffled feathers.

Professor Dowling, the vice-chancellor of Surrey University, Guildford, would like the world to know that he has no plans to privatise or to opt out of the state system. But if circumstances were to change and the Government were actively to encourage universities to declare independence from the block funding system and give them lots of money to do this, Surrey would be lining up.

"Imagine that the Government said there was an opportunity to detach yourself totally from block funding and here is £750m for you to do it; we would be tempted," Professor Dowling says.

That is pretty fanciful stuff, but perhaps not totally fanciful. At the 2001 election the Conservatives had a policy to enable some universities to go private with endowments. That has been quietly dropped. But Labour is pursuing a policy of encouraging universities to become more financially independent of the state. Any university worth its salt has been trying to do so for some time. One of them is Surrey.

Like the other former colleges of advanced technology, such as Salford and Aston, Surrey's budget was slashed by the Thatcher government in 1981. Over a period of two years it lost 25 per cent of its recurrent grant. This was a huge shock. Student numbers were cut and optimism evaporated. "We resolved never again to depend on government funding in the way we had done," says Professor Dowling. "We decided to broaden our portfolio and we have been pursuing that idea relentlessly. That doesn't mean we abhor government funding, just that we try to reduce it."

The university claims to receive only 25 per cent of its income today from the Higher Education Funding Council (Hefce). Only the London Business School, the London School of Economics and City University receive less.

Surrey has reduced its dependence in a number of ways. It was one of the first universities to establish a science park to commercialise the scientific and technological ideas of its academics and to bring in extra revenue. This is wholly owned and managed by the university and contains 80 companies employing 2,500 staff. It brings in £4m a year in rents.

Second, the university began to recruit international students, who pay more in fees. It was so successful in this that it won a Queen's Award for Export in 1991. In the last academic year it earned £12.1m in fees from overseas students.

Third, it encouraged entrepreneurial activity within the university. On campus it has its own company, Surrey Satellite Technology Ltd, which makes satellites for Nasa and governments around the world, and has an order book of £35m.

At the same time the university has not neglected learning. Scholarship enables institutions to leverage more money for research. Professor Dowling has gone out of his way to burnish Surrey's research reputation by hiring top-flight academics. This policy has been risky because he had to dig into the university's reserves, but the gamble paid off, he says. Surrey did well in the 2001 research assessment exercise.

In the midst of all this Professor Dowling had been spending on new buildings. The campus is covered in modern structures, the snazziest designed by Nicholas Grimshaw. Several more are going up, including a new management centre.

After last week's publicity, Terence Kealey, the vice-chancellor of Buckingham, Britain's only private university, wrote to Surrey. "I see you are about to declare UDI," he wrote. "If I can be of help, let me know." Professor Dowling will not be seeking help, but he was tickled by the offer.

British universities tempted to put up two fingers to Hefce money and the control systems that go with it would do well to study how Buckingham has managed. Established in 1976 under the stewardship of Professor Max Beloff, it was a right-wing experiment in setting a higher-education institution free. The Institute of Economic Affairs embraced it, and Margaret Thatcher was its chancellor.

But it has not developed as envisaged. The idea was that it would be a liberal arts college on the American model. Students would study a broad curriculum across the arts and sciences. But the marketplace ruled otherwise; students wanted to study vocational subjects such as business and law, so the curriculum has been pruned. Biological sciences have been dropped. Today the university concentrates on business, law and the humanities; science subjects are information systems and psychology.

The majority of Buckingham's students come from overseas, mainly from African countries such as Nigeria, and from the Continent and the Far East. Only one-quarter of its students are from the United Kingdom. All pay the same fee of £10,500 a year and all undertake two-year degrees, working a much longer year than most students. Home students are eligible for a grant from the Student Loan Company, and the university does its best to increase the social mix through scholarships that reduce the fees. Research – such as into diabetes and obesity – is a small part of its work and is funded from commercial sources.

The glory of the place, according to Dr Kealey, is its teaching. The staff/student ratio is one to 10, and students are taught in groups of five or six. "We see our pioneering orientation as meeting the needs of students, so we put the quality of the learning experience very high up the agenda," says Robert Pearce, Professor of Law.

Very few universities are tempted to emulate either Buckingham or Professor Dowling. Sir Colin Campbell, the vice-chancellor of Nottingham University and an advocate of universities recouping more money from better-off students, says his university would not want to go free if it had the option.

"We're not breaking away and we have never contemplated it," he says. "It's not just that we don't want to or that it's not in our interests; it would be wrong. In our philosophy the state should continue to invest in the quality of teaching young people get."

Professor Nicholas Barr, the expert in higher-education funding at the LSE, agrees. "I would be strongly opposed to universities going private because it would create a divided system," he says.

At King's College London, David Potter, a member of the board and honorary treasurer, says the issue has never been discussed seriously. "The amount of money you would need to establish an endowment is so enormous that it is not a starter," he says.

But Dr Kealey at Buckingham praises the universities that are looking enviously at the American model. "The Russell group [of leading universities] want the best of all worlds," he says. "They want Hefce funding and the freedom to charge fees. That's the way they will go. If the Government is clever, it will let them do that."

education@independent.co.uk