Ministers are to rely on students paying higher fees to force lowly rated research departments to concentrate on teaching.
This month's higher education strategy document will force universities to provide the level and quality of tuition demanded by students who are likely to be paying thousands of pounds more in fees after the next general election.
Government sources said that universities and students will be thrust into a near-contractual relationship where institutions must set out, and come up with, the educational provision being bought by students, or face the financial and possibly legal consequences of not doing so.
Ministers see empowered student consumers as fundamental to diversifying the sector, forcing institutions to play to their strengths. The document will propose other carrots and sticks, financial and otherwise, to encourage diversity.
The aim is to prioritise teaching. This will put pressure on research in many universities, particularly in those that have a poor research record and get little research funding from the state.
Many research departments will close unless money is found from private sources other than cross-subsidies from student tuition fees. Some universities may continue research activity in partnership with other institutions. Others may pull out of research.
The role of the state, which pays roughly 75 per cent of average higher education tuition costs, will diminish over time as students pay more, thereby increasing institutional autonomy.
Top research universities will benefit from fees differentiated by course as they have more higher rated departments for which they will be able to charge premium rates. They could eventually become independent of the state for teaching income.
The strategy paper is certain to recommend higher tuition fees, repaid by graduates through an income-contingent repayment system. Top-up fees have been ruled out in the Labour Party manifesto during this parliament.
But delaying the introduction of higher fees until after the next election will cause a problem for universities, which, according to vice-chancellors' group Universities UK, will need nearly £10 billion more in 2003-06.
One idea, reported by The THES last month, is for universities to borrow money, commercially or through a government-brokered scheme, against future income from fees.
Government sources said that universities already borrowed money commercially for specific projects and that borrowing against fee income, which will be much higher in future, can only increase the size of the loans available to them.