, Chair of the Public Accounts Committee, said:
“The message on the ISCF is a recurring one for too many
programmes across Government - they are too focussed on inputs,
on ticking boxes and distributing funds, rather than on outcomes.
Throwing more taxpayers’ money at the UK’s notorious, long term
productivity and opportunity problems, yet again without a clear,
integrated plan or measures of proof that it’s working,
reinforces the strong and unfortunate impression of ‘government
by announcement’. Show us the government by results.”
The Industrial Strategy Challenge Fund (ISCF) was set up to help
“address some of the complex issues” the UK economy faces,
including long-term low productivity and living standards.
Managed by UK Research and Innovation (UKRI) under the Business
department (BEIS), it is designed around four ‘grand challenges’:
future mobility; clean growth; artificial intelligence and data;
and the ageing society.
The ISCF is a key element in achieving the government’s ambitious
target for the UK to spend 2.4% of GDP on R&D by 2027, but
“this was challenging before the outbreak of COVID-19 and is more
so now”. BEIS has not yet made clear how it will meet the target,
and is “insufficiently focused on what it is expected to deliver
in terms of benefit to the UK”.
The Committee has “concerns about the Fund’s clarity of purpose
including the multiple projects now being funded”. By January
2021 over 1,600 projects had benefited from funding of £1.2
billion to support innovation in some of the most complex issues
faced by the UK. Businesses and other bodies have contributed
almost £600 million in “co-investment”, but the Committee says
the financial support “is currently concentrated in certain parts
of the country and larger organisations have recently received an
increasing proportion of funding”. The Committee is concerned
this risks undermining future performance by overlooking ideas
from elsewhere and smaller businesses.
Although UKRI can point to good performance in beginning to
tackle the various chosen challenges and in involving industry in
the selection of challenges to support, its objectives for the
Fund overall are input focused. Government must “track the number
of jobs delivered over time against job creation ambitions if it
is to properly demonstrate its economic impact”.
Structural issues in the Fund’s design - such as a lengthy
approvals processes and the industry ‘co-investment’ requirements
- similarly “need an overhaul if it is to play an important role
in helping re-build the UK economy post-pandemic”.
In 2018, the latest year for which data are available, the UK
spent £37 billion on R&D: the equivalent of 1.7% of its GDP.
This is well below the OECD average of 2.4% and the level
achieved by other OECD countries. Germany for example spent 2.9%
of its GDP on R&D in 2018.
In 2019, BEIS announced that to achieve government’s target of
2.4%, both public and private R&D investment would need to
rise to around £60 billion each year. The government has
committed to increasing public investment in R&D to £22
billion by 2021-25. UKRI asserts that meeting the target is
challenging but “plausible”.
PAC report conclusions and recommendations
-
UKRI’s Challenge Fund is insufficiently focused on what
it is expected to deliver in terms of benefit to the
UK. The Department set up UKRI with five objectives,
including increasing UK businesses’ investment in research and
development (R&D), while also improving R&D capability,
capacity and technology adoption and increasing multi- and
inter-disciplinary research. But these objectives are focused
on inputs, which the Department acknowledges are ‘second order’
measures. They do not give an indication of whether the Fund as
a whole is making a difference, for example, by creating high
quality, high productivity jobs. Difficulties in assessing what
the Fund is achieving overall are exacerbated by the number and
diversity of the challenges the Fund is currently supporting
and the growth in the number of initiatives to which it is
looking to contribute, such as the move towards net zero and
the levelling up agenda. Any increase in the number of
challenges supported in the future could make the assessment of
performance more difficult. While recognising there are
difficulties in making this assessment, it is imperative that
UKRI and the Department understand what benefits the Fund is
delivering for the UK and the taxpayer.
Recommendation: UKRI, working with the Department, should
clearly set out, by October 2021, what it expects the Fund to
deliver. This should include its impact on jobs and economic
impact in the short, medium and long term.
-
We are not convinced that UKRI’s and the Department’s
approach to intellectual property generated by the Fund
adequately protects taxpayers’ interests. Taxpayer
funding invested through the Fund creates a ‘bridge’ between
pure research investment and commercial development. There will
potentially be value in the intellectual property associated
with the projects that are funded. As we have seen with
previous reports, it is important that intellectual properly
produced as a result of taxpayer investment is exploited to
maximise the value of the investment. However, UKRI has not
ensured that any intellectual property generated as a result of
the Fund is used to the benefit of the UK. The Department
asserts that the Fund’s purpose is to accelerate R&D
investment generally, not to capture any potential benefits in
this way. We are not convinced by its view that retaining a say
over intellectual property rights is not necessary to recoup
the benefits of the Fund for the UK. A better understanding of
what benefits the Fund is expected to deliver to the UK economy
would provide UKRI and the Department with a stronger basis for
considering the best way to protect taxpayers’ interests. The
Committee is highly sceptical about the Department’s response
after the hearing that “IP rights, should be owned by the party
best placed to exploit them” because UK Academia does not have
a strong record of protecting IP rights.
Recommendation: UKRI should re-examine its current
approach of not holding a claim on intellectual property
generated through the Fund. It should write to the Committee by
July 2021 setting out the results of its review and explain how
it intends to best protect the taxpayers’ interests and maximise
the value from taxpayer investment in the future.
-
The Department has not yet made clear how it will make
sure the UK will meet the target to spend 2.4% of its GDP on
R&D by 2027.The government has a target to
increase the UK’s public and private investment in R&D to
2.4% of GDP by 2027. In 2018, the latest year for which data
are available, the UK spent £37 billion on R&D, the
equivalent of 1.7% of its GDP. This is well
below the Organisation for Economic Cooperation and
Development’s average of 2.4%, and the level achieved by other
OECD countries. Germany for example spent 2.9% of its GDP on
R&D in 2018. In 2019, the Department announced that to
achieve government’s target of 2.4%, both public and private
R&D investment would need to rise to around £60 billion
each year. The government has committed to increasing public
investment in R&D to £22 billion by 2021-25. UKRI asserts
that meeting the target is challenging but plausible. The
recent impact of COVID-19 on the economy may make prioritising
the public investment required to meet the target even more
challenging.
Recommendation: The Department should develop, and then
publish, by October 2021, its plan setting out the steps it will
take to meet the 2.4% spending target by 2027.
-
Despite its focus on collaboration between companies of
different sizes, the proportion of smaller companies benefiting
from the Fund has declined. One of the Fund’s
objectives is to increase collaboration between new small
companies and those that are established, putting an emphasis
on funding micro-, small- and medium-sized enterprises. In the
most recent wave of funding, the proportion of projects awarded
to large companies increased from 20% of the total number of
projects in the second wave to 29%. This has taken place at the
expense of micro and small-sized enterprises, whose
participation in the Fund has fallen from 44% to 31% of the
total number of projects receiving funding over the same
period. The reduction in smaller businesses involvement could
be down to a number of factors – such as an increase in
co-investment requirements, poor communication with SMEs about
the Fund, SMEs’ limited resources to participate in
collaborative bids, and lengthy approvals
processes. The Department recognises that,
while it is not possible to say that the increase in
co-investment was the sole reason for drop in the proportion of
smaller companies receiving funding, it is nonetheless a
factor.
Recommendation: UKRI should, by October 2021, set out how
it will increase SMEs involvement in the next wave of support
from the Fund.
-
UKRI is not doing enough to make sure the Fund is
attracting successful bids from across the country.
Funding awarded by the Fund is distributed unevenly across the
regions of the United Kingdom. By October 2020, just over 63%
of the Fund had been awarded to organisations registered in
London, the South East and West Midlands. UKRI does not assess
the regional balance of bids in assessing awards. In part, this
distribution of funding probably reflects to a degree the
location of existing centres of R&D activity, for example
the advanced manufacturing base in the West Midlands. The
nature of the challenges selected could also have an impact on
the location of projects funded, skewing project selection to
existing areas of activity. The geographical distribution of
funding, however, is not necessarily explained by the
distribution of businesses undertaking R&D activities in
the economy. UKRI asserts that activity can take place outside
of the regions where the company in receipt of funding is
registered, but does not have additional analysis to show that
this was the case.
Recommendation: The Department and UKRI should, by October
2021, set out: the factors that are inhibiting more widespread
participation in the Fund; and the steps they are taking to
attract more interest in the Fund from across the UK.
-
The elongated time taken by the Department and UKRI to
provide funding to successful bidders risks putting off
businesses from applying for the programme. It took
UKRI, the Department and HM Treasury 72 weeks to select and
approve the challenges that were given funding in 2019-20. It
took UKRI on average a further 31 weeks to assess applications
for project funding and approve individual projects. The
lengthy time taken to agree challenges and approve projects
leads to delays in funding projects. For example, we heard from
one organisation that meaningful work has yet to start on some
projects for which those responsible had started to bid for
funding as early as 2018. Taking too long to approve challenges
and then select projects to fund risks delaying the impact from
the projects which are supported. This prolonged process may
also potentially deter some organisations from applying for
funding and delay the impact of UKRI’s investments. We are
concerned that this could particularly affect smaller
businesses which may not have the financial and staffing
resources to wait for funding.
Recommendation: The Department, HM Treasury and UKRI
should set out by October 2021 how they intend to speed up the
time taken to approve challenges and projects.
-
Powers currently delegated by the Department and HM
Treasury to UKRI do not strike the right balance between the
governance necessary to support efficient decision making and
unnecessary bureaucracy. The Department and HM
Treasury set the governance arrangements for UKRI’s oversight
of the Fund, including the requirements for approving new
challenges. UKRI, the Department and HM Treasury each approve
business cases for challenges in turn – as a result business
cases can take over a year to approve. One consequence of this
delay is that funding is slow to be allocated. In addition to
delaying getting funding to those delivering approved projects,
this could create extra financial pressures in the later years
of the programme as funded activity builds up. The Departments’
approach to the appointment of senior civil service positions
has led to delays in appointing Challenge Directors, which have
taken an average of over 37 weeks. Challenge Directors are
fundamental in setting the direction for, and then overseeing
delivery against, the objectives for each challenge. UKRI would
like to be able to appoint these senior staff earlier, but to
do so depends on its delegated powers from the Department.
Recommendation: The Department and HM Treasury
should, by July 2021, review the conditions they place on UKRI to
manage the Fund with a view to supporting more efficient decision
making.
The Department and HM Treasury should write to the Committee to
explain the changes they have introduced together with their
intended impact.
