The National Audit Office report on the financial health of higher education institutions in England makes fascinating reading. It shows how they have navigated policy changes resulting in a 44 per cent increase in student numbers between 1988/89 and 1992/93 and a reduction in the public funding per student of 26 per cent over the five years to 1993/94.

It was published at the same time as the Higher Education Student Early Statistics, the mechanism for comparing institutional performance against recruitment targets, a critical element in financial contacts between institutions and the Higher Education Funding Council for England.

Rumour suggests that the 1994/95 exercise has proved to be hugely embarrassing for HEFCE, which may have to claw back substantial teaching funds because of alleged under-recruitment. Unless HEFCE can find some plausible way of giving it back to universities before the end of the financial year, the council's position will be seriously weakened in the next public expenditure survey round.

What went wrong? Scarcity of data, given institutional reticence, makes postmortem difficult. Selected leaks suggest that a number of universities have been caught by the double whammy of under-recruitment to their MASN (target for mandatory award holders) and their overall contract student numbers, inflated by "over-recruitment" the previous year.

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Some of the blame lies with the institutions which cried "wolf' once too often. As the pages of unfilled course places in the quality newspapers last August demonstrated, many students, convinced that places would be rationed, took their bats away. But most of the blame lies with HEFCE. It committed the cardinal error of inventing a funding method too clever by half. This is partly because the funding model was designed to promote expansion of the newly unified sector. When the brakes were put on in November 1992, the model had to be modified. "Add-ons" needed to turn the funding model into a planning tool seemed a problem. The rules, rewards and penalties to underpin this exercise in spurious manpower planning are so complex a PhD in maths is needed to work out the winning strategy.

HEFCE is currently considering the 1995/96 allocations. May I suggest that it learns from the 1994/95 fiasco and meets its responsibilities for funding teaching in a simpler and more transparent way.

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What might a simple model look like? My advice to HEFCE would be to opt for one that: * Gives maximum freedom to institutions to vary the patterns of recruitment by subject and mode within a contract student number target, reflecting the reality of modularity and part-time study; * Restricts "planning" to those areas where Government policy requires it (for example mandatory award holders); * Restricts sanctions to under-performance of contract plus over-recruitment against specified targets; * Progressively reduces the historical anomalies by a "core and margin" approach to funding built around a contractual baseline; * Rewards success!

HEFCE should remember that "funding" is not an end in itself but a mechanism to steer policy delivery. Let us hope it is not too late for a rethink. That way we might all win.

Diana Green is pro vice chancellor at the University of Central England, Birmingham.