John O'Leary hopes that legendary German efficiency matches its ambition to turn higher education on its head

Imagine introducing simultaneously many of the main reforms that have reshaped UK higher education over the past 20 years, stir in an alien pattern of courses and then alter the basic philosophy of the system. You have the scale of the challenge facing German universities. Once condemned as complacent and inflexible, they are now being shaken to their roots.

The unexpected agreement between Chancellor Gerhard Schroder and the 16 l?nder , or states, which run higher education, on an "Excellence Initiative" designed to create an ivy league of universities, is the culmination of Europe's most ambitious reform programme. Other elements include the introduction of tuition fees, selection of undergraduates for the first time, a switch to bachelors and masters degrees, the beginnings of freedom from political control and an expansion target that impinges on a much-vaunted system of vocational education.

Not surprisingly, this higher education revolution has its detractors. An 18-month stand-off over relatively modest tuition fees is still not entirely resolved, the move to bachelors degrees is being accepted reluctantly in places and there is no consensus on the Government's plans to expand higher education. More fundamentally perhaps, the basis of a largely local university system was that all institutions were of broadly similar quality; the famously lengthy student experience in any case allowed for periods of study elsewhere in Germany or abroad. The Excellence Initiative will shatter this illusion of equality for ever.

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Something had to change: the German Academic Exchange Service has helped overseas student numbers rise by two thirds in less than a decade, to a total exceeded only by Britain and the US. But, at a time of dramatic change in rival systems, German higher education seemed to be left behind. The Times Higher's world rankings have been among the evidence used to convince first the politicians and then the voters of the damage caused by this paralysis, although much of the reform programme began long before they were published. The rankings placed only one German university - Heidelberg - among the world's top 50. And, while language might place them at a disadvantage, so did a chronic lack of investment and antiquated structures.

The Rectors' Conference, the German counterpart of Universities UK, estimates that universities experience a funding gap of between €5 billion (?3.45 billion) and €8 billion. Growing numbers of students, who are legally entitled to a place if they pass A-level equivalent the Abitur , wait an average of two years to start at an understaffed and often poorly maintained university. They are often approaching 30 by the time they graduate. In most l?nder , universities cannot choose their own professors, but have to present a list of three candidates to the minister responsible for higher education. Political allegiance does sometimes take precedence over academic qualities.

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Inevitably, the 16 l?nder vary considerably in their stewardship of higher education, although all have been resistant to further federal involvement. Baden-Wurttemberg has been investing 4 per cent of gross domestic product in research and development and has introduced governance structures that allow its universities far more autonomy than in most of the country. Other l?nder put less than half this amount into R&D, while clinging to suffocating control of their prized academic possessions.

For J¨¹rgen Mlynek, president of Berlin's Humboldt University and one of the bright lights of German higher education, freedom to manage is key - more important even than the funding questions that obsess his colleagues. "There is huge potential here," he says, "but the system amounts to organised non-responsibility. Some people prefer not to be able to compete because it is more comfortable that way. We cannot go on as we have for the past 20 to 30 years."

Humboldt is one of the great names of German higher education, with a position in the centre of Berlin that helps to attract 25,000 applications for 4,000 places. Half the courses have already converted to the bachelor-master model - about twice the national average - and attempts have been made to raise funding from the private sector. But the city is cutting its contribution by another 2 per cent. The buildings, which were neglected under East German control, have still not fully recovered.

Across the city, in the affluent Western suburbs, the Free University of Berlin is in better physical condition, but no more certain of the future. There is more resistance to course structure changes and the university is wrestling with a problem familiar to oversubscribed UK universities: how to select students effectively and fairly. Dieter Lenzen, the president, would like to introduce SATs to supplement Abitur scores, but the priority is to avoid the litigation that universities expect to flow from this foray into selection.

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Neither university expects financial salvation to arrive in the form of tuition fees - finally made possible by a constitutional court ruling after the federal Government had blocked plans by some of the l?nder to charge students up to €500 per semester.

Peter Gaehtgens, president of the Rectors' Conference, acknowledges the risk that state funding will shrink as fee income begins to flow, but he believes the change will still be beneficial. "The psychological aspect is more important than the financial," he says. "Students and universities will take higher education more seriously. The ideology of the 1960s - that universities are all the same - will disappear; we need more competition if we are going to improve."

And if fees were not about to induce that competition, the Excellence Initiative certainly will. The €1.9 billion initiative has three strands: one facilitating the development of 40 graduate schools and another helping to promote research clusters among universities and the powerful research institutes. About 30 clusters in a range of disciplines will each receive €6.5 million a year to break down barriers that are seen as one of the obstacles to greater international recognition. Individuals from prestigious institutes, such as the Max Planck Society, do hold posts in universities, but the different funding systems mean that mergers are out of the question.

Many of the 300-plus higher education institutions will hope to benefit from these two strands, but it is the identification of a group of elite universities that has captured the headlines. The l?nder and the federal Government are still arguing about how many elite institutions will be selected but each is expected to receive an annual supplement of €21 million for at least five years. Three quarters of the money will come from the previously uninvolved federal Government.

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The original proposal was for five elite universities - a number that many observers see as more realistic if the aim is to compete with top research centres on either side of the Atlantic. But the l?nder , most of which could not have hoped to have an institution in such a select group, opposed the plan with the backing of the Christian Democrat opposition. The success of the compromise formula, with cross-party agreement, surprised most higher education leaders.

Now plans for limited research assessment have been brought forward, with the German Research Association and Science Council selecting candidates for the first year of the initiative over the summer. A first meeting to lay the groundwork for the competition took place last week.

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A second competition will be held next year for funding starting in 2007, a tight timescale for such momentous change. The combination of reforms should leave German higher education better able to compete internationally. But such shock treatment may leave institutional casualties along the way.