The UHI Millennium Institute says it is suffering a shortfall of at least £2 million compared with the grant it would win if it were funded on the same basis as other Scottish higher education institutions.
UHI is urging the Scottish Higher Education Funding Council to rethink a delay of at least a year before bringing it into its formula funding system.
UHI was designated a higher education institution a year ago, and was put on transitional funding for two years. But Shefc is unlikely to decide whether to bring it alongside other institutions until it is audited by the Quality Assurance Agency. This is not due until next spring, too late for Shefc's 2003-04 funding round.
Shefc has praised UHI's progress and says it has been given a higher than average increase than other institutions, with £3.8 million of extra funding this year, compared with what it received before entering the sector.
But UHI is dismayed that transitional funding is to continue beyond the two years initially agreed.
Robert Cormack, UHI's director and chief executive, said: "We are happy to meet the challenges that have been laid before us. However, it is only reasonable to expect that we be given the resources required for the task, rather than expecting us to deliver first and, perhaps, be rewarded later."
A Shefc spokesperson said Shefc outlined the intention of putting UHI on the same funding footing as other higher education institutions last year. "However, because its development remains at an early stage, we have decided to defer the decision on this until 2004-05. With a new, developing institution, we need to examine its quality track record to reassure ourselves that there will be an appropriate return for the significant public resources concerned."
UHI would next year see a grant increase of £806,000, bringing its total funding to more than £13 million, she said. "For the first time, it includes nearly £500,000 of funding for research and knowledge transfer, which is to the institute's credit. We will continue to work with UHI Millennium Institute to help them develop," she said.