Loss-making intellectual activities must continue to be cross-subsidised by more profitable academic areas, the president of Universities UK has argued.

With undergraduates paying up to ?9,000 a year from September, the issue of using tuition fees to fund loss-making courses or academic research is set to become increasingly controversial, with students expected to ask more questions about how their money is spent.

However, Eric Thomas, vice-chancellor of the University of Bristol and head of UUK, has defended the practice of cross-subsidisation as an essential part of university life.

Speaking at the Universities Human Resources group's national conference in Ashford, Kent, on 16 May, Professor Thomas said that the sector had a "proud tradition" of cross-subsidising loss-making activity "in the name of intellectual endeavour and the greater public good". "Just look at our dogged insistence on continuing to offer undergraduate education to UK-domiciled students during the long period in which it was basically a loss-making activity," he said.

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"Despite the new focus on impact in the research excellence framework and grant application process, I imagine every major research institution funds one or two projects out of their own resources, which involve very clever people working on things that no one else really understands, simply out of a belief that they are a) very clever and b) may be on to something.

"That kind of unbusinesslike cross-subsidisation has been essential to the contribution our universities have made throughout the centuries of their existence," he concluded.

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Professor Thomas - an obstetrician - said that although he was not a humanities scholar, "I firmly believe that universities have to be about more than scientific discovery, medical advance and economic contribution."

"The future of universities relies on them understanding they are places of education. If we do not understand that, thereby lies the route to hell," he added.

However, Professor Thomas argued that "a relentless focus on the bottom line" and economic impact arguments that are "most likely to appeal to the Treasury" had allowed universities to access more state funding.

He said: "By being businesslike ... and by making the argument that universities have a central role in the economy, we do not ignore the other aspects of their contribution - we protect them. We create the space to cross-subsidise where it matters."

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Asked about the future of higher education over the next five years, Professor Thomas predicted that many universities in London would merge.

"There are 42 higher education institutions within the M25," he said. "My view is there will be substantially [fewer] than 42 separately governed institutions [within five years]."

Commenting on the risk that some institutions in the UK may fail financially, he added: "If you closed one institution in a city of 12 million people, that is one thing. But what if the [only] major institution in a city faced closure? It is not a social, political or economic option."

He also questioned the long-term sustainability of opening overseas campuses.

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"In 10 years, are we going to see [a number] of universities [that] are 'global corps' with international campuses in Dubai and Asia - [each] a kind of mini-Toshiba?

"Or will we have lots of PhD theses on the internationalisation bubble? I am not sure which of the two it will be."

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jack.grove@tsleducation.com.