Balance and effectiveness of research and innovation spending Contents

Conclusions and recommendations

Level of ambition of the 2.4% target

1.Additional frontloaded funding will be key for reaching the 2.4% target, but it clearly is not sufficient. It is also important to ensure that the capacity of the UK economy and research system enables R&D expenditure to be used efficiently and effectively. Creating sufficient leverage of private sector investment will be crucial. The Government should consider whether a separate Government R&D spending target, either as a proportion of GDP or in real terms, would benefit the current national target. (Paragraph 27)

2.We welcome the Government’s target for R&D spending which, if achieved, would represent a significant increase in the research intensity of the UK economy. However, the difficulty in achieving the target should not be underestimated, and will require successful coordination of public spending and further increases in private investment. (Paragraph 33)

3.We welcome the commitments by UKRI and BEIS to make a strong case at the Spending Review, which we had expected to be this autumn, for the additional funding required to reach the 2.4% target by 2027. Given the stretch of the target, it is apparent that additional public spending is likely to gain greater traction if it is undertaken earlier, thus increasing the potential for leveraging private sector spending. (Paragraph 34)

4.Both UKRI and BEIS have committed to publishing roadmaps to show the path to 2.4%. It is our understanding that given the nature of both public and private investment required to reach the target, these roadmaps will address the landscape influencing R&D spending, including the wider Government policies and pillars of the Industrial Strategy (ideas, people, infrastructure, business environment, and places). (Paragraph 35)

5.It is not clear whether the Government’s recent commitment to “set out plans to significantly boost public R&D funding”, which it had promised this autumn, relate specifically to the roadmaps, high-level long-term funding plans, or simply greater clarification of the BEIS capital budget for next year, which was not fully set in the recent Spending Round. Assuming that a multi-year funding commitment is made, a “significant boost” should suitably reflect the frontloaded investment that we have established is required. We are pleased that such decisions will not be delayed until the 2020 Spending Review and urge UKRI and BEIS to make the ‘strong case’ we expect of them. (Paragraph 36)

6.We hope that the promise of providing “greater long-term certainty to the scientific community” indicates both a long-term funding commitment and the detailed plans we expect to be contained in the roadmaps. If not, we strongly recommend that both UKRI and BEIS publish their promised comprehensive roadmaps to illustrate the intended path to the 2.4% target as soon as possible, and no later than the end of 2019 following confirmation of Government funding plans. These should demonstrate an integrated approach between UKRI and BEIS that suitably reflects the strengths and prospects of the UK economy. These plans should also be developed beyond 2027 to ensure that travel towards the longer-term 3% target, indicating how momentum will be maintained and when more detailed plans for this target will be produced. (Paragraph 37)

UKRI and the R&D landscape

7.The complexity of the R&D ecosystem has been well documented and means that understanding the interaction of organisation, funding and policies is difficult. Some complexity may be inevitable given the diversity of policy goals and actors. (Paragraph 42)

8.UKRI and BEIS should ensure that their roadmaps on how the UK will reach the 2.4% target detail key areas of potential conflict or policy overlap resulting from their choice of policy mix in this complex environment. Unnecessary complexities should be identified and removed as part of the mapping process. In order to aid public understanding they should update the Dowling Review schematic, including details of the main R&D funding streams available through the Industrial Strategy and UKRI. (Paragraph 42)

9.The creation of UKRI created a significant opportunity for improving the strategy and coordination of research funding. However, there remain significant risks in introducing a new strategic oversight, and in gaining the support of the wide range of stakeholders, including the public, with whom UKRI will interact. The overall success of UKRI is dependent on overcoming these challenges at an early stage. (Paragraph 62)

10.We recognise the complexity of addressing the balance of funding of the dual support system and that this is a fundamental remit of UKRI. Creating a robust evidence base for this assessment will be crucial, and we recognise that UKRI strategy is to approach the task cautiously and without any sudden shifts in funding. (Paragraph 63)

11.In line with the approach taken in this Report, UKRI should also assess and report on other dimensions of balance such as the regional concentration of funding, the balance between research and innovation, and the balance between capital and current spending, in a similar manner to its analysis of the dual support system. We believe more immediate changes to funding are appropriate to influence the current balance in these areas. There are many possible ‘balances’ or policy mixes, and this political choice should be transparently set out. (Paragraph 64)

12.We support UKRI’s commitment to evaluation, and understand the inherent difficulties in analysing the impact of research and innovation and attributing it to wider outcomes, which may occur after a significant time-lag. We recognise that in some cases evaluation will be impossible and UKRI should be explicit that this is the case and explain why. Unfortunately the current focus appears too strongly to follow traditional metrics, measuring outputs such as publications and patents that should only be one element of evaluation. (Paragraph 71)

13.Research on research is an increasingly important field, and we recommend that UKRI consider a dedicated approach to supporting it, including how this research is incorporated into UKRI strategy and its assessment of the balance of R&D funding. Relatedly, UKRI should attempt to analyse the benefit gained by its creation through its enhanced ability to capture data across research councils and through cross-cutting funds. (Paragraph 72)

14.We recommend that UKRI also develops a ‘big data’ focus for evaluation. It should publish a plan for creating and investing in new data sources and analysis techniques beyond traditional measures of patents and publications. (Paragraph 73)

UKRI influence on the balance of R&D spending

15.Decisions about what balances to strike are essentially political. The current balance and concentration of funding is the result of previous policy choices, and this should be explicitly recognised. But the various balances discussed in this Report should take account of current goals and needs rather than reflecting those of past decades. (Paragraph 80)

16.Finding the correct balance in each area may be impossible, but it is the policy mix needed to best support R&D that is important rather than just the performance of individual policies. Although optimal balance might not be identifiable, in many cases where evidence recommended a need for increased funding, such increases might be more feasible and palatable in an environment with an increasing spending envelope as they will not necessitate reallocation of funding from elsewhere. (Paragraph 81)

17.We recognise that the dual funding system of block grants and project-based research council funding has been crucial to the success of UK universities, and that maintaining this system with ‘appropriate balance’ will be a key function of UKRI. There may be no optimal balance, but trying to reach an appropriate balance in the light of current policy goals is a key political choice and should be made in a transparent and accountable fashion. UKRI should continually monitor the appropriateness of balances struck in the operation of the dual support system and publish the advice given to the Government, alongside its analysis and commentary, at regular intervals. (Paragraph 89)

18.The flat profile of QR funding in recent years suggests it has not been prioritised in funding decisions. The announcement of a £45 million increase in mainstream QR funding by Research England in July 2019 indicates that there may be a change in this focus, and a recognition of the benefits of un-hypothecated budgets which allow universities to maintain agility and develop their own areas of expertise. We recommend that focus on QR funding is maintained in future considerations, and that QR should continue to be prioritised to address previous real-terms reductions in funding. (Paragraph 90)

19.UKRI should review the quality-related (QR) formula which has been responsible for increasing concentration of regional spending, paying attention to the formula used in Scotland which has been less geared towards driving concentration. (Paragraph 91)

20.Whilst QR funding provides a stability of funding over the course of the seven-year REF cycle, we also recognise that these timeframes create barriers for smaller but potentially fast-growing institutions or areas of excellence who receive lower QR allocations. We recommend that in UKRI’s ongoing evaluation work it reviews whether additional support for these institutions should be provided, possibly through specific gearing of investment across the REF period, through additional review periods for smaller bodies, or through separate QR stream for smaller and specialist institutions. (Paragraph 92)

21.Place is a key focus within both the Industrial Strategy and the UKRI strategic prospectus and development plan. In the context of the regional concentration of research funding, the aim should be to build further research excellence outside of its existing predominance in the South East of England. We strongly agree that additional regional funding should not be to the detriment of this ‘golden triangle’, and excellence in this area should continue to be rewarded, recognising that this is a tide that lifts all boats in terms of international recognition of the UK as a place of quality research. However, in order to contribute to the 2.4% R&D target, regional strengths will need to be harnessed and cultivated. (Paragraph 100)

22.For wider regional growth to succeed, expertise and infrastructure beyond universities will be required, as envisaged in the wider Industrial Strategy. For UKRI, the main lever with which to stimulate regional excellence is through the Strength in Places Fund (SIPF). The SIPF is still in its infancy, but its rationale and its goals remain somewhat opaque and it is too modest to drive any significant rebalancing of investment given the strength of existing drivers of increasing regional concentration in funding. Whilst the fund is still in its infancy, it appears to be a more innovation-orientated approach that appears too small to drive a significant re-balancing of investment given the current level of regional concentration in funding. (Paragraph 101)

23.We recommend that UKRI and BEIS substantially increase the size of the Strength in Places Fund given it appears to be the primary lever through which it is attempting to influence the regional concentration of funding and create new centres of excellence beyond the golden triangle. It should further clarify the rationale and expectations of this expanded programme. This should include the intended evaluation approach and key metrics for assessing the level of regional concentration of funding and the outcomes of this funding. (Paragraph 102)

24.We understand that the distinction between pure and applied research is a contested definition and as such it does not appear to be a dimension of balance on which funding decisions can usefully be made, whilst also understanding the importance of maintaining funding for pure research as a foundation of other benefits and dimensions of balance. (Paragraph 107)

25.Since the 1980s the UK has had a very different profile of scientific research spending versus technological development and innovation spending to other developed countries. As a result the public sector science base, and the dual support system, have been expected to do almost all the heavy lifting of driving and supporting innovation, together with an emphasis on commercialisation of academic science. This generic science-based innovation policy may explain the paradox that the research focused UK system has felt progressively more ‘applied’ and directed to many of the researchers working within it. (Paragraph 111)

26.Since the global financial crisis successive Governments have made tentative steps back towards more active support for technological development, with milestones including the establishment of Innovate UK and the Catapult Network. The Industrial Strategy and the Industrial Strategy Challenge Fund are the latest milestones in this direction of travel. Funding for the development of new technologies is not the only way Governments support innovation, but is an important part of any Industrial Strategy. Continued growth in technological development and innovation funding should also allow a rethinking of the ‘innovation focus’ of the ‘basic’ public sector science base. (Paragraph 112)

27.The balance across research disciplines should be easier to monitor and adjust under UKRI. Historic patterns clearly should not be maintained for their own sake. However, we are concerned that the Strategic Priorities Fund (SPF) may have not been established in a way that effectively addresses this issue. We recommend that UKRI review the SPF and ensure that individual research councils are not exerting excessive influence on what is intended to be a cross-council, multi-disciplinary focus. (Paragraph 117)

28.Future consideration of the balance between disciplines must include robust evaluation of research areas within each discipline. We find the case regarding entrenched concentration of research analysed in The Biomedical Bubble compelling. UKRI analysis should widen this approach and conduct relevant cost-benefit analysis of larger research areas within different disciplines to establish whether R&D spending remains productive. (Paragraph 118)

29.We welcome the opportunity to redress reductions in capital investment for research. The UKRI roadmap represents an opportunity to consider where investment can be focused and most effective in contributing to ongoing research excellence and to the wider goals of the 2.4% target. In order for UKRI to take ownership of the ‘batteries not included’ issue, we recommend that decisions for investment include consideration of the coordination of capital and revenue funding and the long-term requirements of new and existing investments. Major capital investment project plans should explicitly state assumptions regarding future QR or research council funding that may be required to staff or run them. (Paragraph 123)

30.There are concerns that ring-fencing of funds for specific goals such as overseas development assistance will further diminish the ability of universities to undertake responsive mode funding. This is related to wider concerns regarding quality-related funding and the implications for basic research from a perceived focus on application-led research. Whilst we do not currently see this as a pressing concern, UKRI should continue to monitor this balance and detail the proportion of ring-fenced funding on ODA in its publications. (Paragraph 127)

Beyond UKRI–wider balance

31.There are a myriad of funding sources for research and innovation, many of them provided by UKRI. However, Government departments outside of UKRI, notably the NHS and the Ministry of Defence, invest a significant amount in R&D. The Government needs to make it as easy as possible for businesses to locate and access these opportunities. (Paragraph 132)

32.The Government should conduct a review of all the funding streams and opportunities for R&D support advertised across Government. It should create a central linking point or web portal for access, and consider how this is advertised, particularly to SMEs. (Paragraph 133)

33.The Government strategy for reaching 2.4% R&D investment, which we hope will be illustrated in the promised roadmap, should highlight the cross-Government R&D investment that is undertaken, particularly by large departments such as the NHS and Defence. The roadmap should include detail on UKRI’s role in coordinating this investment. The creation of UKRI represents an opportunity for it to operate as the ultimate steward of this system. (Paragraph 136)

34.While departments should be free to invest in areas of individual importance, UKRI should maintain a strategic overview of potential synergies with UKRI funding and the impact on skills and infrastructure that this creates. It should also analyse the potential impact of this cross-Government funding on dimensions of balance such as regional concentration of spending that we have addressed in this inquiry. (Paragraph 137)

35.We agree with the Connell Review that the Small Business Research Initiative has a “unique and valuable role to play in the innovation and procurement landscape”, supporting UK businesses in developing innovative new products while enabling public sector bodies to source innovative solutions to the challenges they face. However, the Government’s response to the Connell Review so far is limited. (Paragraph 143)

36.The GovTech Catalyst only supports public bodies in sourcing digital technology solutions and the three-year, £20m GovTech Fund is significantly smaller than the £250m that the Connell Review recommended to be spent per annum through SBRI, or the £200m target the Government had for SBRI spending in 2014–15, and should not be viewed as a replacement. We recommend that the Government fully adopts the recommendations of the Connell Review, and establishes a central SBRI fund with a National Board to oversee its delivery as part of the 2020 Spending Review. (Paragraph 144)

37.The Government should consider using the SBRI to procure the web portal for innovation support detailed in the recommendation at paragraph 133, allowing external experts and potential users to create an intuitive directory and system for coordinating future innovation support schemes. (Paragraph 145)

38.The Industrial Strategy rightly recognises the power of public procurement as a demand-side driver of potential R&D spending. However, there does not appear to be any further development of the strategy to exploit this potential, despite it being a long-recognised issue. (Paragraph 151)

39.Alongside increasing the size and reach of SBRI, the Government should produce a procurement strategy and communications plan for addressing businesses that specifically identifies innovation opportunities and promotes innovation-friendly practices across all types of procurement. It should address barriers currently perceived by the business community, such as treatment of risk and intellectual property. The benefits of a central portal that collates procurement opportunities from across Government should be pursued. (Paragraph 152)

40.The Government has spent more than £20bn through the R&D tax credit scheme. It is popular and widely supported, but often this support is from those who have benefited from its generosity or focus on the quantity rather than quality of support. We welcome the Treasury consultation aimed at preventing abuse of the system. (Paragraph 159)

41.The Treasury and HMRC should undertake updated analysis of the tax credit system which addresses the issue of deadweight spending and reassesses current estimates of additionality of R&D spending by business. This analysis should also evaluate the benefit of other potential changes to the scheme to encourage additionality of spending, and methods of targeting credit for regional or sectoral priorities, to encourage alignment with the goals of the Industrial Strategy. (Paragraph 160)

42.The Patient Capital Review was a welcome step by the Government to identify important issues in the demand and supply of long-term capital. We welcome the subsequent work to help clarify the guidance for investors so as to make patient capital more accessible to pension funds, which we have previously also identified as a significant potential source of funding. However, such clarification may be insufficient to entice investors towards new assets and investments if they still perceive they are at a disadvantage due to information asymmetry and lack of experience. We hope that the launch of British Patient Capital and the work on pooled investment vehicles will address this issue. We also hope additional influence over dimensions of balance, such as regional concentration of funding, can further be addressed by this investment. (Paragraph 168)

43.We recommend that the Government act quickly on the recommendations of the FCA review of regulations relating to patient capital and permitted links, and publish a further update at Budget 2020 that details the additional pension fund investment that has been stimulated by these rule changes. Further review should be considered if there has not been a step change, maintaining a commitment to exploiting the considerable funding potentially available through both defined-contribution and defined benefit pension schemes. (Paragraph 169)

Published: 12 September 2019