Higher education institutions should be allowed to set their own tuition fees and be freed from government intervention and the financial "straitjacket of the state", a report backed by Downing Street says.
Institutions should not be forced into any banding system that would typecast them or restrict their autonomy. They should be able to pursue their chosen missions.
The higher education strategic review report, submitted to ministers today by the Council for Industry and Higher Education as an input into the government's higher education review, was compiled in consultation with No 10.
It argues that an extra £1.5 billion a year is urgently required to address chronic underfunding. Differential fees, a significant increase in state funding and more investment from businesses, charities and the public sector are needed to raise the additional money, it says.
The report suggests that even if a cap were initially imposed, top-up fees might rise to an average of £2,700 a year to bring in an additional £600 million a year.
Businesses, public bodies and charities should start paying the full £850 million cost of the research they place with universities. This would raise £200 million. Doubling the amount they spend in the sector on staff training and development would add £250 million more.
For the government's part, removing the state subsidy on student loans and reinvesting the savings would free up another £700 million a year.
The report says that allowing top-up fees would be one vital step to "a broader freeing of higher education from the straitjacket of the state".
The government should set the conditions under which the sector can be freed from the high level of state intervention.
"Institutions are not legally part of the public sector. They should be empowered to be more independent businesses serving their wide range of customers and partners," the report says.
The CIHE wants to see a phased shift in funding over a number of years, with the government initially imposing a cap on the maximum and minimum fees that could be charged.
To check the "reasonableness" of fees, those charged to overseas students might be used as a "reality check" for the upper limit, it suggests.
The government could use the £1,100 limit as a "marker price" for funding purposes. It might also subsidise some courses, such as those leading to the award of a foundation degree, to make them more financially attractive to students.
Some of the money raised by higher fees should be invested in an interlocking scheme of national and institutional bursaries and maintenance allowances.
Students should be allowed to defer repayment of loans to cover fees until their income has reached a threshold after graduation.
The CIHE wants business to be more closely involved in raising demand for higher education by recruiting from a wider range of institutions and offering more support in the form of better quality work placements for students.
Richard Brown, CIHE chief executive, said: "We believe higher education now needs to be freed from state intervention so that institutions are better able to meet the needs of their customers and fulfil their diverse missions."
The report says the expansion of higher education should focus on meeting the skills gap at advanced vocational level. This might mean a "controlled expansion" of higher education provision in further education colleges.
The CIHE calls for an enlarged collaboration fund to help the sector evolve through partnerships with further education and other higher education institutions, and strategic alliances with business.