So, who wins the egghead prizes?

Research scores show academics have done better than ever. But the lack of government funding spells trouble, says Lucy Hodges

Tomorrow we hear how university departments perform in research in the five-yearly exercise, which traditionally has had the power to make or break the careers of academics and institutions. This time there is a real possibility of fireworks because so many departments have top ratings – yet there is no money to fund them.

Tomorrow we hear how university departments perform in research in the five-yearly exercise, which traditionally has had the power to make or break the careers of academics and institutions. This time there is a real possibility of fireworks because so many departments have top ratings – yet there is no money to fund them.

More than one-half of all the academics in the research assessment exercise (rae) have been awarded a world-class 5 or 5* grade. That may sound like good news but the problem is a lack of money. Better ratings are supposed to bring more cash, but the Higher Education Funding Council (Hefce) doesn't have any more. That means universities will be fighting over the £1bn pot currently available, and it will inevitably pit the old pre-1992 institutions against the new universities, the former polytechnics. Does it sound the death knell of the exercise?

"I think it demonstrates its bankruptcy," says Roger Brown, the director of Southampton Institute. "It's a busted flush because of grade inflation. This has happened with the teaching quality scores as well. It's a silly way of divvying up the money. Departments may have improved but it also shows that people know how to work the system."

Professor Gareth Williams, of the London Institute of Education, agrees there is a problem. One answer is to abolish the rae and hand the £1bn of funds over to the research councils and let individual researchers compete for it, he argues.

To outsiders, the exercise smacks of cosiness, if not worse. The departments are rated by panels of their peers in a system where everyone knows everyone else. Those doing the judging have more to gain by being lenient on their colleagues – and they don't have to live with the consequences financially.

Sir Howard Newby, the new chief executive of Hefce, will have a hard job explaining away charges of grade inflation. But he will try to do so. Hefce argues that research has genuinely improved because more money has been spent on it. That money comes from the Government as well as from external sources, which just shows how highly rated the research is. If it was no good, why should business bankroll it?

Moreover, says Hefce, an analysis of the citations received by United Kingdom academics shows that they are highly regarded. Their work is cited frequently – more frequently than academics' work from other countries. In addition, the assessments have been made more robust by using international experts and umbrella panels, whereby allied subjects meet to ensure consistency. And the whole process has been opened up.

Whether those arguments will be enough to persuade the Treasury to cough up more to fund the higher grades is debatable. Hefce is thought to need up to an extra £170m. The signs are that the issue is not a high enough priority for the Government; matters such as student funding and widening access come first.

Tomorrow, the Hefce board will consider two options: to freeze the system as it is hasbeen for the past five years in the hope that more money will come in next summer's spending review; or to change the formula so that departments receiving lower grades 3 and 4 are no longer rewarded financially, thereby releasing the cash for those that have done brilliantly. The latter would work against the new universities, which don't do as well as the old because they started from a lower base.

It would also create considerable turbulence. "It would be a savage blow to a significant minority of new universities," says Rick Trainor, vice chancellor of Greenwich University, which gets £4m through the rae at present.

"It would be a death blow to the research they have nurtured. It would risk wasting the money that has already been invested. That would have all sorts of negative consequences. Our research is valuable to industry and it benefits the students."

The old universities argue that the whole point of the rae is to be selective – to invest in those institutions that are good at research – and that it has got out of hand with the new universities demanding their share of the cake. There are signs Downing Street agrees. Tony Blair, the Prime Minister, is said to be looking at a proposal to create a very small elite tier of research universities.

Certainly, one result of this year's rae will be to increase the pressure on the Russell group of elite universities to break away and form a super league.

l.hodges@independent.co.uk