1.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.
2.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.
3.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.
4.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.
5.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.
6.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.
7.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.