Universities are creaming off up to half of the public funding they receive under deals to allow their courses to be delivered by further education colleges.
In a report that raises serious questions about the government's move to expand higher education primarily through the college sector, the Higher Education Funding Council for England warns that universities are failing to account for the amount of money they retain in franchise deals.
Partner colleges reported that "it is unclear what is provided in return" for the cash universities keep, which can amount to up to £1,750 of the total £3,500 funding per student.
The report, which examined hundreds of partnerships across the sector, says: "Franchise agreements were generally uneven in their coverage, with the least satisfactory sections relating to funding, collaborative working and the quality of the learning experience.
"On funding, the missing or least transparent information usually related to the proportion of funding retained by the lead institution."
The report was written for Hefce by the universities of Warwick and Sheffield, City College, Manchester and the National Institute of Adult Continuing Education.
It found that in the vast majority of partnerships, colleges delivered the universities' higher education courses under a franchise agreement, with the funding for the courses given to the university. The university then passed on a proportion to the college to deliver the teaching - so-called "indirect" funding.
The government's higher education white paper, published in January, made clear that most of the expansion of higher education needed to meet its 50 per cent participation target would come through such indirect funding arrangements, whereby colleges deliver two-year foundation degrees under the auspices of a partner university.
The report found massive variation in the amounts of money universities top-sliced under the deals, with universities reporting that they kept sums ranging from just 2.75 per cent of the total funding to 42 per cent.
Colleges said the universities were keeping anything between 8 and 50 per cent of the cash. Although many universities could not say how much was retained, the majority said they kept about 20 to 30 per cent.
The survey says: "Higher education institutions admitted to having some difficulty in accurately costing the services they provided.
"Whatever the percentage they retained, to many colleges it is unclear what is provided in return, while on the other hand the HEIs believe that the figure does not cover their true costs."
The report says that colleges "expressed a strong preference for direct funding", but in many cases had little choice other than to accept indirect funding if they wanted to deliver higher education courses.
It says: "Colleges prefer direct funding but recognise that indirectly funded provision has been signalled as the primary way of expanding their higher education.
"If this remains government policy, the council should consider ways by which indirect funding is made more attractive to further education colleges, not least by ensuring that the arrangements in place result in a greater degree of stability and more equal partnerships than hitherto."
The Association of Colleges said: "The concerns that AoC has expressed in the past, including those about variation in the funds withheld by higher education institutions and the lack of transparency about what those withheld fees pay for, are endorsed in the research.
"AoC therefore questions the continuing steer towards indirect funding and in particular in relation to foundation degrees.
"If, as the white paper asserted, further education colleges are key to foundation degree delivery, then they should have the option of securing direct funding for them."