Academics should bid for all research cash rather than expect money to be dished out according to scores achieved in a "flawed" research assessment exercise, according to a think-tank report.

The report, from the Institute for Public Policy Research, said that the RAE should be scrapped in favour of allocating research money through a bidding process run by the research councils.

Under the dual-funding model, cash to support research infrastructure - mainly staffing, laboratories and equipment - is allocated on the basis of the grades scored in the most recent RAE, with 5* departments receiving the most and departments rated less than 4 receiving next to nothing.

The report, written by Wendy Piatt, who is a former senior research fellow at the IPPR and is now a member of the Prime Minister's Strategy Unit, says this is an outmoded system based on the performance of individual researchers and how often their work has been published in recognised journals.

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What is needed, says the report, is a fairer system that recognises and rewards research excellence and talent wherever it is found, even if this is in a department that would otherwise score poorly overall in the RAE.

With less focus on the performance of research stars, such a system would better fit the more modern, collaborative approach to higher education that the Government would like to see develop, according to Dr Piatt.

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The IPPR paper supports the creation of teaching-only universities but says that lecturers in those institutions should have the opportunity to take part in research at new regional centres.

Further education colleges should be encouraged to develop business research, the report says. To establish this research mission, colleges should have access to third-leg funding from the Higher Education Innovation Fund. This is restricted to higher education institutions.

All universities should be engaged in business-related activities and some should specialise in business-related research and encourage secondments for people from industry.

The report argues that diverse institutions can together provide choice and equality of access for all students while at the same time ensuring educational standards are maintained.

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Dr Piatt, whose earlier works influenced the decision to introduce top-up fees, recommends increasing the ?3,000 cap on fees if the Government's review of the impact of fees, planned for 2009, shows that they do not put poor people off higher education.