THE Scottish Government is to exert greater control over universities as part of a deal that significantly increases their funding at a time of severe cuts elsewhere in the public sector.

Institutions welcomed the extra investment while recognising ministers would have more say than ever before over what they do.

Meanwhile, there were concerns last night that one aspect of the deal would create a system where some universities are funded to do research and others are not.

Under the moves, universities will be held to account on a range of measures including greater graduate employability, closer links with industry and reform of the traditional four-year degree to allow fast-track entry into second year.

Universities will also be expected to widen access to pupils from deprived areas and improve drop-out rates under outcome agreements negotiated with the Scottish Funding Council (SFC), which administers public money for higher education on behalf of the Government.

Those institutions that fail to reach expected targets in these – and other areas – could face fines or have funding withheld.

John Field, professor of lifelong learning at Stirling University, said the move was a radical departure from the way previous administrations had dealt with universities. "This is a significant shift in the way universities are going to be managed by the Government in future," he said.

"I am very sympathetic to the aims of the Government and their focus on aspects such as widening access, but a different government of a different political hue might be much less welcome and this sets a very significant precedent."

Mary Senior, Scottish official for the UCU lecturers' union, which represents academics, added: "It is fair the Government expects certain standards to follow this settlement, but it must be very careful not to be overly prescriptive about the learning, research and teaching that goes on in universities. This does raise the prospect of too much political interference."

The concerns were voiced after the SFC announced a 14% increase in teaching and research grants for universities for 2012/13.

The SFC said the settlement of more than £1 billion would allow Scottish universities to remain competitive.

Mark Batho, chief executive of the SFC, said: "It allows universities to plan with the confidence they will be financially competitive with universities in the UK and internationally. However, universities recognise resources come with obligations and they should be able to demonstrate they have used the money wisely in ways that take forward the Government's intentions.

"We will negotiate with individual universities to set the requirements on a case-by-case basis, but we would expect delivery ... and we will need to have compliance."

Mr Batho said the exact nature of penalties for universities – such as fines – were yet to be discussed, but insisted the agreements would have "teeth".

Michael Russell, the Education Secretary, said Scotland's universities made a vital contribution to the economy. "That is why I am pleased the budget set by the Scottish Government has allowed for a generous funding settlement that reflects this important role," he said. "This funding comes with the agreement that universities will work with us to take forward reforms."

Professor Seamus McDaid, convener of Universities Scotland, which represents university principals, said the investment marked a "very significant commitment".

"This funding will enable us to remain competitive on the world stage, offer a first-rate student experience and play a major role as the mainstay of Scotland's knowledge economy," he said. "Though we are proud of what we have achieved we can always do more and we will work constructively with the funding council on the demonstration of outcomes so the Scottish Government can be confident in its investment."

Next year, universities will receive £1.02bn of funding, of which £614 million is for teaching and £258m for research and knowledge exchange.

Research funding will be concentrated on institutions where departments are ranked as either "world-leading" and "internationally excellent" following independent scrutiny. That means several institutions, including Abertay in Dundee, Queen Margaret in Edinburgh, and Robert Gordon in Aberdeen, will see a decline, prompting concerns of a two-tier system.

Ms Senior said: "This will create a system where some universities are funded to do research and others are not."

As part of the settlement, smaller institutions providing specialist education such as the Royal Conservatoire of Scotland and Glasgow School of Art have been given extra funding.

Some 300 student places will also be provided in science, technology, engineering and maths subjects at a cost of an additional £1.9m which will be increased to 1200 places by 2015/16.

The University of the Highlands and Islands will also be expanded.