The UK's world-leading specialist institutions may have to prove that they deserve the extra public funding they receive following a review of their special status.

About 40 institutions classed as "small or specialist" by the ÖйúAƬ Funding Council for England, including household names such as the Courtauld Institute, the Royal College of Art and the Royal Academy of Music, currently receive a special funding premium. This is to recognise their contribution to diversity in the sector.

For some small and ultra-specialist institutions, such as the conservatoires, the subsidy is essential to their survival. But others that fall into the category, such as the London Business School, are large and wealthy institutions.

The London Business School currently receives a premium of 25 per cent of its teaching grant.

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Now a Hefce review led by Dame Janet Ritterman, a former director of the Royal College of Music, has recommended an overhaul of the system, saying that premiums should be more closely tied to the "public interest".

Although no cuts are suggested, institutions have been warned to expect "funding turbulence", and it is possible that the review may pave the way for a market test to determine which institutions should benefit.

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The report recommends that Hefce "continues to develop the initial work on public interest and public value" to produce a model applicable across the sector by 2010.

The way premiums are allocated is also facing a more immediate shake-up. The review proposes splitting recipients into two groups: those receiving up to 10 per cent and those receiving more.

The latter group of 20 institutions receive premiums ranging from 20 to 305 per cent, totalling ?46 million a year of additional funding.

The report says that it "understands and accepts" how important these institutions are and acknowledges that they incur "substantial" costs because of their specialist status.

However, it also hints that some are less deserving of subsidies than others.

Making short-term stability a priority, it advises Hefce to convert the premiums into targeted allocations for 2008-09, pending further analysis. It adds: "Changes in the external environment can be more easily reflected in these allocations. This could lead to more funding turbulence."

The second group, the 20 institutions receiving premiums of up to 10 per cent, are also recognised as being key to ÖйúAƬ diversity, and the report recommends that funding of ?12.2 million is moved from premiums to the mainstream grant.

A third strand to the funding stream is the small-institution premium, received by eight institutions including the universities of Oxford and Cambridge.

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The universities, which already have the UK's largest endowments, receive ?7.28 million of a total of ?9.1 million allocated for small institutions to support their college systems.

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The Hefce report accepts that this extra funding is warranted but says that it should be reconsidered in light of any review of tuition fees.

john.gill@tsleducation.com

SPECIAL TREATMENT: London Business School AND THE Royal College of Art

The London Business School generates the vast majority of its income itself.

It received ?60.5 million from student fees last year, while donations, research grants and investments contributed to a total annual income of over ?85 million.

By contrast, its recurrent teaching grant from Hefce was just ?764,000, including a specialist institution premium of 25 per cent.

Given the school's relative wealth - its academic staff are paid an average of ?132,000 - this premium is considered by some in the sector to be inappropriate.

One senior academic, who asked to remain anonymous, said: "It's completely ridiculous. The London Business School can charge whatever fees it wants. It's in an unregulated postgraduate marketplace - it only teaches business, but so what?"

The London Business School declined to comment.

The Royal College of Art received a teaching grant of just over ?11 million last year, including a specialist institution premium of 260 per cent.

It has 870 students and about 100 full-time staff. Its income last year was ?25.5 million, while total spending was ?26.6 million, leaving it ?1.1 million in deficit.

Sir Christopher Frayling, the rector, said the premium was crucial. "We may be small but we are good value, and the review seems to have accepted that because of our track record in punching above our weight in our cultural impact," he said.

"Art education spreads its net wide socially. If we had astronomical fees it would defeat the purpose," he said, adding that artists from working-class backgrounds, such as David Hockney, are the college's local heroes. "I've always said you should celebrate these small-scale institutions. They do a lot for ÖйúAƬ in terms of its international reputation."

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