The Scottish Office funding system could be hindering the development of the University of the Highlands and Islands, one of the Secretary of State's cherished projects.
Seven FE colleges and six other institutions are part of the UHI project. A study of funding arrangements within the UHI institutions, commissioned by the Scottish office from management consultants Pieda, says major changes to the funding formula are necessary if the colleges are to build up enough higher education work to win the university title in five years' time.
Funding from the Millennium Commission and the Scottish Office is mostly for capital rather than recurrent funding where the key problems lie, the report states.
Although the Highland colleges have had the capping limit on full-time advanced HE courses lifted, they are still subject to the funding regime, which rewards the number of students on FE courses more generously than those at HE level.
The system of "student units of measurement" has created a "funding trap" for Highland colleges, the report says, because accelerating their HE provision means they receive less money under the formula.
HE courses should be treated separately for UHI institutions and given a higher weighting to attract more funds in line with the way university courses are financed, the report proposes.
The Government's criteria for granting university status requires at least 3,000 full-time students to be on degree-level courses. The UHI institutions have just 101 undergraduates and postgraduates. There are, however, more than 3,000 students on "degree-equivalent" courses, against a target of 4,000.
Only three subjects have more than the stipulated 300 full-time HE students which the Government expects in five subjects. HE student numbers would have to grow by 10 per cent a year in the next four years and 50 new degrees would have to be developed, the report estimates.