Mark E Smith is President and Vice-Chancellor of the University of Southampton

The financial sustainability of the UK’s research and innovation (R&I) system is essential for ensuring the UK can respond to new opportunities, deal with unexpected events, and fulfil our potential as one of the world’s leading scientific nations.

The Covid 19 pandemic demonstrated the resilience of universities in the face of a crisis, but it exposed vulnerabilities in the flow of funding through the system.

The Nurse Review published earlier this year highlighted longer-term financial concerns for research and the latest OfS annual report on UK higher education sector finances noted the impacts of high inflation and increasing deficits on university teaching and research.

From past to present

In the Science and Innovation Investment Framework 2004-2014, the government at the time set out an intention for research councils to move to paying “close to” 100 per cent of the full economic costs (FEC) of projects by the end of 2014, taking full account of capital funding streams. In a joint letter to higher education institutions in 2005, science minister Lord Sainsbury and then minister for higher education Kim Howells delighted in announcing that research councils would start paying 80 per cent FEC on projects, a marked increase on the 60-70 per cent it was estimated most universities were recovering.

Fast-forward to present day and while UKRI generally pays 80 per cent FEC on project grants, the latest TRAC data shows universities on aggregate have fallen back to recovering just 70 per cent FEC on research council grants. There are likely numerous factors contributing to this discrepancy which warrant a closer look, ideally with UKRI and universities working together to understand the drivers behind declining FEC rates and possible solutions to move to a higher level of cost recovery.

The autonomy and flexibility that universities have to draw on their different income streams to deliver teaching and research programmes is an efficient way to mitigate financial risk and the public gets a very good deal as universities reinvest their export earnings into supporting the costs of research. The downside is that this cross-subsidy is less stable and predictable than a system where research is fully funded by the public bodies, charities and companies which sponsor it.

What we see from the TRAC data is the gap that needs to be filled to cover the full costs of research across all funders has been increasing, rising to nearly £5bn across the sector in 2021-22. At what point does this become too much? How much risk should be taken in order to fund more worthwhile research and get a good deal on the price the public (and charities and others) pay for it? Also what of those research organisations – including some universities – which don’t have the funds to support loss-making research?

Cross-subsidising what?

One of the big shifts over the last few years is that the income to support publicly-funded teaching in higher education providers no longer covers the costs. As undergraduate tuition fees have been frozen while universities have increased investment in student support to maintain a high-quality student experience, deficits have been rising – reaching a total of £1bn across the sector in 2021/22. Universities can draw on other income streams to top up the costs of their teaching portfolios, but these same sources are also used to support investment in research and innovation. As a result, the scale of the cross-subsidy required across activities is becoming increasingly difficult.

To manage financial risks many universities are adopting conservative strategies, keeping borrowing and investment at manageable levels and banking on sometimes optimistic recruitment of international students. However, we know that the picture is very variable across the sector, with the high-level average data concealing some very different circumstances for individual universities.

Protecting the bottom line by cutting investment is not something any organisation can do forever, so there are real questions about the ability of universities to be financially sustainable and remain globally competitive in the long run.

Collective working

There are no easy solutions for these problems, but there are opportunities for all the different players across the system to enhance financial sustainability.

UKRI plays a particularly important role as the main investor of public R&I funding and its strategy for 2022-2027 includes an objective to improve the financial sustainability of research and innovation in organisations across the UK. It has a team to monitor financial sustainability, drawing on engagement with universities, research institutes, other funders and government to consider how the allocation of budgets and its funding policies can impact financial sustainability, with the aim to create the best possible environment for R&I to flourish.

In the time of the Higher Education Funding Council for England (HEFCE), all the key public funders of major activity within universities (including in those days Research Councils UK) convened an independent advisory group, the Financial Sustainability Strategy Group (FSSG), which I chaired from 2016. With HEFCE’s dissolution and the Office for Students formally becoming a regulator, having such an advisory body of this type became less favoured. The situation has been further complicated by the different funding streams involved now sitting within different government departments.

Advice needed

There are useful lessons from the FSSG model and UKRI has drawn on this in convening an independent group of experts in the form of the Financial Sustainability of Research Group (FSRG), of which I am the inaugural chair. The real value of this group is that it brings together funders (including representatives from the devolved nations) and recipients of funding to build a shared understanding of the financial picture across the sector and the implications of possible solutions. It is most definitely an advisory, not decision-making body, which allows for frank and open discussions.

I am keen for the FSRG to engage more widely across the sector and with government to help coalesce around a common vision for what a more resilient system could look like, and how it would deliver for the UK. We need a system that can withstand shocks and respond to exciting new priorities. We need to think creatively about how to resource research teams to work in innovative new ways within a changing research environment so that those engaged in research can pursue stable, fulfilling careers.

Making the UK the best place in the world to do research means rising to the challenge of not just doing more things, but doing things better and more sustainably (in all dimensions). We know there will be tough choices to make, but if we can all work together to put the UK’s R&I system on a more secure financial footing for the longer term, we will reap rewards across the whole country.

I hope FSRG produces some thinking of interest to UKRI and the sector, helps to improve understanding of the issues around financial and wider sustainability of the funding system and engages a wide range of people across the system to contribute to our work. As we develop our programme of work and thinking there will be opportunities for the whole community to contribute.

6 responses to “We can’t support everything with cross-subsidy

  1. This is a very important issue to get right and does require new thinking and greater clarity.
    It would help the public (and the government) if the sector could inform them, at a high level, what the sector are seeking to achieve and what the priorities are.

    Given the international cooperation with overseas universities this may be more difficult.

    Is the priority – solutions to global warming, the prevention of disease, world peace or a reduction in world deaths owing to lack of food?

    I believe there would be more support for academic research and innovation if the public were given a clearer picture of what the objectives were.

  2. One does not normally defecate on ones door-step, but Southampton has a lot of issues when it comes to research funding, not just teaching funding, and thus cross-funding support. Some of the worst comes from an institutional mindset visible on campus as I type, the (bulk of) undergrads have gone home for the summer, so support services for all departments including 24/365 research departments is effectively minimised if not completely closed down. Ordering tools and supplies to maintain research equipment is virtually impossible, it’s bad enough normally with many University ‘core’ staff (not departmental) still ‘working from home’. Clearing chemical waste is another problem, which is still needed even when the undergrads have gone home, where the E&F coordinator wants to compile a ‘full load’ from across the University, which stops research and adversely affects both EPSRC (& other research councils) and direct contract research as departments cannot operate until their backlog is cleared, it gets even worse when the penalty clauses kick in when direct commercial users, who pay handsomely to use the facilities, cannot operate.

    I’m sure the same is replicated across much of the sector, so we need to get our own house in order, before the UKRI and Government start asking difficult questions about just why these problems are being allowed to occur, and continue.

  3. An interesting development would be to publish TRAC data without the £4bn unaudited sustainability adjustment which takes an audited real sector surplus of £2bn, that governing bodies have approved, to a complex and unreal reported fEC deficit of £2bn which they no longer have to. This would show a better view of the real scale of cross subsidy across activities in an audited way that all other government departments or indeed businesses have to comply with. Governing bodies would then have the real dilemma of deciding how much of each activity they can actually afford. Which in reality they are doing, but based on different figures. It might also make the goal of 100% actual cost recovery for research projects more achievable. Until this sustainability adjustment is removed TRAC data will remain something of academic and occasional political value rather than of economic value as a clear insight into and tool to manage financial sustainability.

    1. If you are on about the Margin for Sustainability and Investment (MSI), that is a standard adjustment across the public sector.

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