Small and specialist higher education institutions are urging a rethink of "unfair" plans for third-stream funding that would leave them millions of pounds out of pocket.

Under proposals for the annual ?150 million Higher Education Innovation Fund (Heif), any university failing to generate income from knowledge exchange activities above a "threshold" level would no longer receive money from the scheme from next year.

The method being used to calculate the threshold means that small institutions could miss out simply because of their size, regardless of the impact they are making in proportion to resources, according to GuildHE, which represents many of those affected.

In total, GuildHE members stand to lose about ?5.5 million in annual funding.

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Small research-intensives outside GuildHE, such as the School of Pharmacy and the London School of Hygiene and Tropical Medicine, would also lose funding because they fall short of the threshold.

Heif money is used by universities to build partnerships with businesses to bring in extra income, but they are also encouraged to use the money for knowledge exchange with public and voluntary sector organisations.

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In its grant letter to the Higher Education Funding Council for England in December, the government said Heif grants until 2015 should be wholly based on performance; they are currently measured by income generated.

The letter said that only "the most effective performers" should be funded "through introducing a minimum qualifying level of external income necessary to gain an allocation".

In a consultation on the plans, which ends this week, Hefce has proposed a system under which any institution that fails to attract ?250,000, after applying its income formula, would receive nothing.

Any institution above the threshold, even by a few pounds, would receive help from Hefce if its allocation from Heif dropped by more than 50 per cent compared with this year. Those that miss the cut-off will lose all their funding in one fell swoop.

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Stuart Bartholomew, principal of the Arts University College at Bournemouth, which would lose more than ?200,000 under the plans, said the proposed formula failed to reward small institutions with a good return on Heif money. By contrast, he said, large universities could continue to receive funding purely because of their size.

"Compared with the extensive consultation and discussion which has taken place over the research excellence framework, this Hefce proposal is hasty, ill-conceived and does not meet its stated objective," he said.

Muriel Robinson, principal of Bishop Grosseteste University College Lincoln, said her institution had a return of ?5 for every pound of Heif money, much better than some large universities. "It must be right to seek better value for money from these funds, but the problem with the proposal as it stands is that it is a really crude approach," she said.

A GuildHE spokeswoman said the plans would hinder the ability of small institutions to work with local businesses and damage regional economies and specialist sectors.

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Andy Westwood, its chief executive, said: "We feel that the impact on small and specialist higher education institutions and the communities they serve is simply unfair. A revised threshold based on proportionality would demonstrate good value for public money, drive greater levels of economic growth and not unfairly disadvantage small institutions and their communities."

simon.baker@tsleducation.com.