Philip Hensher: Universities need cash – but not just anyone's

When an institution gains a gleaming new wing, we should ask what abasements have occurred

These are hard times for universities, and the Woolf Report into the conduct of the LSE over Saif Gaddafi's admission is not going to make things any easier. Funding is drying up from public sources, and they are going to have to get used to doing without the generous grants from taxpayers which have kept them coasting along. They are going to have to rely on the £9,000 a year payments from students from next year.

With that individually funded largesse comes a shift in attitudes. No one can seriously suppose that the numbers applying to university will remain the same, under the prospect of paying back £27,000 and upwards. This is already evident with a 15 per cent drop in applications for next year, although this figure may be distorted by this year's rush to apply before the rise in fees to £9,000. Universities will be competing in a market as never before. They will have to answer to their students as if they were customers, as well as to their real customers, the employers in the job market.

Fairly soon, I would say, some universities are going to go out of business because of the evident quality of their product compared with the shocking cost of their service. If a sandwich shop consistently serves you stale bread and poisoned prawns, then you don't accept it as an inferior lunch over a period of time. You throw it in the bin and go next door. If a university promises to land you with £27,000 worth of debt, fails to provide you with an education, and leaves you at an actual disadvantage to someone who had the nous – in many employers' eyes – to get a job straight from school, then they probably deserve to go out of business.

In this incredibly crowded market, there are a number of ways for a university to make itself known to customers. What they will tell you is that their primary aim is to maintain standards, and that is all they need to sustain their place in the market. That may be true of Oxford and Cambridge, but it is hard to see how it could apply to universities near the bottom of the feeding chain.

They make their mark in whatever way they can. The absurd racket of trying to get your institution's name in the paper by giving a random passing celebrity an honorary degree long since became a joke. The University of East London gave Graham Gooch and the woman who plays Dot Cotton honorary doctorates. Someone who plays Denzil in Only Fools and Horses got an honorary degree from Liverpool John Moores University.

But that obvious compromise with intellectual standards will only get you so far. Clearly, what universities need is money. If they can't be sure about public funding any longer, and the behaviour of the student market is unpredictable, then it is only natural for them to try to diversify the sources of income. And if the cost of such diversification is a lowering of ethical standards? Well, you can imagine universities saying quietly to themselves in the future that ethical standards are a luxury we can't afford any more.

In 2002, as the Woolf Report shows, Oxford had an interesting phone call from the Foreign and Commonwealth Office. The Blair government wanted to mount a diplomatic détente with the Gaddafi regime in Libya. As a minor contribution to that campaign, which would lead to a notorious meeting in a tent in the desert two years later, would Oxford care to be helpful? Would it care, for instance, to admit the dictator's son Saif as a student?

These events have been made public in an addendum to the Woolf Report written by Professor Valpy FitzGerald of the University. Now, anyone could see that the answer to this question ought to have been "No", and, from Professor FitzGerald, that it always would have been: his mother was that bracingly moral novelist Penelope Fitzgerald, and a great-uncle was Ronald Knox. There could be no lack of moral clarity from this source over whether it was right or not to admit Saif in exchange for favours, and the dictator's son went elsewhere.

To LSE, in fact, where the institution was perfectly happy to accept Saif, knowing that £1.5m was going to be donated from Saif's personal charity. Saif was given a doctorate for work which seems unlikely to be his own. A £2.2m contract was awarded to LSE Enterprises to work in Libya. The Director of the LSE, Sir Howard Davies, was appointed Blair's personal envoy to Libya.

No one, until Gaddafi started to look likely to fall, seems to have thought this nexus between dictator, donations, governments and the standards of learning the least bit questionable. The frightening thing is that all this has come out because Gaddafi was a dictator. How many compromises with commercial, political, financial interests have been quietly made at the top of the chain of learning?

Probably we will never know, exactly. But when a gleaming new wing is opened in a public intellectual institution, and given the name of an individual, not hitherto known for his interests in knowledge, everyone should ask this question: what humiliations, what abasements, what dinners, what obligations, have been incurred here? What payment has been made, and what payback has been required? If we can't expect our universities to uphold ethical and intellectual standards, quite separate from money, then we are finished as a society.