37. Much of the Government's science budget (some
96.3% in 1997-98)
is allocated to the Research Councils who, after deducting their
own costs and amounts to support their own units and institutes,
allocate money to research projects (see para 16).
Originally the Research Councils made no explicit contribution
to the indirect costs of the research they funded in universities
but, following the dual support transfer from 1992 to 1995, Research
Council grants included a nationally applied figure of 40% of
the non-academic staff salary costs associated with that project.
This figure was subsequently increased to 45% and more recently
to 46% of salary costs. Nevertheless, it has been argued, and
the NCIHE were convinced, that the true level of indirect costs
are between 55% and 65%.
Consequently, the NCIHE recommended that the indirect costs element
of Research Council grants should be "increased to 60%, [of
staff salary costs] or such higher rate up to 100% as the institution
38. Traditionally it has been accepted that there
should be no need for Research Councils to pay the indirect costs
for research as the other leg of the dual support system provided
for the academic salaries and indirect costs. However, as we have
already seen, there has been a fundamental shift in the balance
of resources provided by each leg, based partly on an increased
recognition of the need to target research in priority areas.
As the Royal Society argued, the result of this shift has been
that the vast majority of R money from the HEFCs is consumed in
providing the salaries of academic staff carrying out basic research
and the facilities they require for it. This is the essential
foundation, the baseline, for speculative research which forms
the springboard from which these researchers can apply for funds
from other sources. Consequently, the block grant from the HEFCs
is no longer sufficient to meet even those indirect costs of Research
Council funded projects which are not already covered by Research
39. Each of the Research Councils has accepted in
principle that they should pay the indirect costs of the research
they that fund in universities.
The ESRC told us that "full funding of research by Research
Councils outside of academic staff salaries would be welcome";
the EPSRC said "it seems appropriate that the Research Councils
should provide the correct overhead for the work which they support.
It has a logic to it which is compelling".
We agree. We recommend that the Research Councils should pay
the full indirect costs, excluding academic staff salaries, of
the research which they fund in universities.
40. There are two ways in which this could be achieved:
either by the Research Councils negotiating a figure for indirect
costs with each institution, perhaps even for each research project
or subject discipline, or by the Research Councils and universities
agreeing a notional rate as an average reflection of genuine indirect
costs. The first option is certainly workable, as the US experience
demonstrates, but we accept that it has some disadvantages. The
BBSRC, for instance, told us that "a system of variable indirect
costs level ... would be expensive to manage".
The ESRC believe that it is "doubtful if the additional complexity
and administrative resources required for multiple rates are an
efficient and effective way of providing for public support of
Nevertheless we, like the BBSRC, could not accept "the imposition
of a 60% rate which is not based on any reliable analysis".
Such a system would lead to gross inequalities between research
projects where academic staff costs form a substantial proportion
of the overall costs, such as is often the case in the social
sciences, and research projects which require substantial non-staff
related expenditure. Unless robust procedures are introduced to
ensure that the indirect costs paid by the Research Councils are
a genuine reflection of the costs imposed on the university some
the inadequacies of the present system will persist. For these
reasons we recommend that the Research Councils agree with universities,
rates for indirect costs which recognise that such costs may vary
from one type of research to another.
41. The Dearing Report outlined the three options
for financing the additional costs that the Research Councils
would incur in paying a larger sum in respect of indirect costs,
- by reducing the volume of research funded;
- by transferring the shortfall from the Funding
Bodies to the Research Councils (ie further dual support transfer);
- by a real increase in Government funding.
As the NCIHE pointed out reducing the volume of research
funded by the Research Councils "would not be in the long
term interests of the UK given the economic, social and cultural
importance of research".
The MRC inter alia agreed, saying that it would cause "irreparable
damage to many research programmes". The ESRC quantified
the effect it would have on their research portfolio saying that
an increase in the indirect cost element of grants to 60% of non-academic
staff salaries would decrease the volume of research they could
fund by 8% and that an increase to 100% would reduce volume by
dual support transfer would increase the imbalance between the
two legs of, and therefore would serve to undermine further, the
dual support system itself. Nor would it, as the EPSRC argued,
"reinvigorate the research base-as the baseline funding for
research would not be increased by such a transfer".
The NCIHE was clear that the third option was preferable. We
are clear that it is the only acceptable or possible option. We
recommend that all increased expenditure incurred by the Research
Councils as a result of paying a higher rate for indirect costs
be matched by increased Government funding for the Research Councils.
Indirect Costs of Non-Dual Support Funded Research
42. The main emphasis of the research sections of
the Dearing Report was on the way the dual support system worked
and Government funding for research. However, the last decade
or so has seen a substantial increase in the volume of university
research funded from non-Governmental sources.
Indeed, the BBSRC argued that "the growth of ... non-research
council funding at less than full economic cost is the principle
source of the funding gap".
43. Table 3 shows the relative importance of the
different sources of university research income in comparison
to dual support and other Government funding in 1995-96.
University Research Income in Real Terms (£ million) (1996-97 = 100)
% in 1995-6
Sources: Derived from SET Statistics 1997, Table
5.1; Striking a Balance, Table 4.2; HESA, Resources
for Higher Education, 1995-96; Office of National Statistics.
Note: "Other" includes individuals, local
authorities and higher education institutions.
44. Whether research charities, industry and Government
departments do pay, or indeed should be paying, the full economic
costs of the research they fund by contract, or by grant, has
been debated without resolution for a number of years.
Nevertheless, as the significance of such funding has increased
and the pressures on public funding for research have risen, it
has become more important that the issue should be resolved satisfactorily.
As Sir John Cadogan put it "in some of those cases there
is perhaps a shortfall of overhead funding and this in turn puts
pressure on those who do pay overheads like the research councils".
One recent study estimated that the shortfall in 1994-95 amounted
to more that £500 million.
Another study, commissioned by the HEFCE and the CVCP, also concluded
that there was a shortfall and that it was growing.
It is not an area to which the NCIHE, unfortunately, devoted much
attention beyond commenting "that charities may be willing
to share more of the indirect costs of research with institutions
if there is greater clarity in how those costs arise".
45. In 1988, as it became increasingly clear that
universities were not recovering the full costs of externally
funded research, the CVCP issued guidance to universities which
pointed out that in some cases the indirect costs of research
would equal the direct costs.
In the early 1990s the Advisory Council on Science and Technology
(ACOST) recommended that universities should recover the full
costs of sponsored research and the then Government agreed that
universities should have a better idea of the costs of conducting
as others have noted before us, it is still the case that "the
indirect cost contribution from non-government sources has not
been sufficient to meet the full costs of research".
A number of reasons, which might explain why such a shortfall
has arisen, have been suggested, chiefly that:
- in an effort to be competitive universities have
understated the actual costs of doing the research;
- as the RAE rewards universities for obtaining
research income from non-dual support sources, universities have
a direct incentive to accept research projects below full economic
- universities have had difficulty in persuading
research funders to pay a higher rate towards indirect costs than
that paid by the Research Councils;
- in the case of research charities, there has
traditionally been an agreement with the HEFCs that the infrastructure
they provide should support charity-funded research.
46. We, like the NCIHE, believe that universities
have the solution to the first three of these in their own hands.
Universities have discretion over which research project grants,
either from Government or non-Government sources, to accept and
which to decline; they should not accept research contracts which
do not provide for the full economic costs of the research without
fully weighing the consequences of doing so.
47. The RAE (which we discussed more fully at paras
60-83) rewards universities for attracting non-dual support funding
for wholly justifiable reasons. It is right that universities
should be encouraged to develop external sources of funding and
that some recognition should be made of the additional costs this
imposes. However, we do not consider that this should lead universities
to accept research funding at other than full economic costs,
unless such research is undertaken in collaboration or partnership
with the funders and other benefits in kind flow to the university.
We recommend that the HEFCs examine the operation of the RAE
with a view to ensuring that it only rewards those institutions
which attract grants and commissions for research on terms which
provide for the meeting of the full economic costs either in cash
or in kind.
48. We consider the issues surrounding charity funding
for research below (see paras 52-4).