Data

Research financial sustainability: issues paper

From:
UKRI
Published:
Last updated:
22 November 2023

Introduction

UK Research and Innovation (UKRI) recognises that the long-term financial sustainability of the research and innovation system is critical to maintaining the UK’s global leadership and leveraging our competitive advantage. As set out in the UKRI strategy 2022 to 2027, our resilience principle for change demonstrates that we are committed to improving the financial resilience of the UK’s research and innovation system.

UKRI’s Research Financial Sustainability programme seeks to build evidence and understanding around the issues and factors affecting the financial sustainability of research activities and the resilience of the UK’s research and innovation system.

This paper presents some of the data and analysis we have built up through the Research Financial Sustainability programme. We have also published an accompanying set of data visualisations, the UKRI data pack on research financial sustainability.

Maintaining a world-leading position

The UK has a world-leading research and innovation system, and we need to keep it world-leading in the future. To maintain our position as a science and technology superpower, the public money we invest must help ensure the long-term financial sustainability of our research and innovation activities.

A sustainable research and innovation system is one that is not only able to meet present research and development needs but will also enable us to meet the needs of the future. By investing for the future as well as the present, we can build a resilient system that has the capability, flexibility and capacity to:

  • withstand shocks
  • take risks
  • deliver long-term goals
  • pivot to capture new opportunities

A financially sustainable research and innovation system should include:

  • a culture of sustainable financial management and efficient operations
  • funding that covers the full costs of that research, with funding and costs balanced through different streams to incentivise appropriate behaviours
  • public contributions to co-funded research activities sufficient to incentivise co-investment and long-term collaboration
  • resilience to major fluctuations in a single non-public income stream

Research takes place across a diverse landscape

The UK’s research and innovation landscape is made up of a range of different organisations across the public, higher education, and private and non-profit sectors. The diversity of organisations across these sectors is a strength of the system, as is the connectivity between them.

To remain strong, the system and the organisations within it need to be resilient and financially sustainable. This is why UKRI is committed to working with government and other funders, to use our investments, policies and convening power to improve the financial sustainability and resilience of the UK’s research and innovation system.

Funding UK research

Research activities are primarily funded by:

  • public funders like UKRI
  • government departments
  • universities
  • businesses
  • charities and philanthropists

In 2021, public funding accounted for £9.5 billion (approximately half) of research and development funding performed by the public, higher education and non-profit sectors. This figure includes funding from government, UKRI (including Research England) and the three devolved higher education funding bodies.

The higher education sector itself was the second-largest investor, spending £5.6 billion of its own money on research and development.

Research activity in the UK Research and innovation activities take place in:

  • universities
  • research facilities and institutes
  • companies

The distribution of UK research activity (excluding business activity) is:

  • 77% in higher education institutions
  • 17% in the public sector (government and UKRI)
  • 5% in the private non-profit sector

In the 2022 to 2023 academic year, UKRI supported 3,661 organisations to conduct research and innovation, including 142 universities and our 59 institutes, centres and Catapults.

Financial sustainability issues

The UK’s research and innovation system faces several sustainability issues, each of which is a financial pressure. The cumulative effect of these issues is reducing our ability to mitigate their impacts.

Over the past decade, the amount of funding going into the system has increasingly fallen short of the costs of undertaking world-leading research and innovation activities.

The COVID-19 pandemic severely disrupted research and teaching activities. Between 2018 and 2021, there was an estimated 29% fall in medical research charity spending, equating to a £270 million drop in research investment.

In October 2022, consumer price inflation reached 11.1% in the UK, a 41-year high, and is currently higher than increases in funding for research. In addition, increases to interest rates by the Bank of England to lower inflation have made borrowing more expensive.

Financial sustainability in universities

Universities play an important role. They:

  • provide higher education across the full range of disciplines
  • undertake cutting-edge research
  • carry out knowledge exchange activities and engagement with sectors beyond academia

According to data published by the Higher Education Statistics Agency, the UK’s university sector receives 53% of its income from tuition fees and education contracts. Research grants and contracts make up just 15% of its income, although this proportion is typically much higher for research-intensive universities.

However, across the sector, the full economic cost of research and publicly funded teaching activities in universities is increasing and exceeding the dedicated income for those activities.

The deficit on research reached almost £5 billion in the 2021 to 2022 academic year, having risen 14% over five years. The estimated deficit in public teaching is currently over £1 billion.

It is worth noting that the public funding of teaching is a devolved matter, with different approaches across the four UK nations. In England, the tuition fee for domestic students has been capped at £9,250 since 2017, with no planned change until at least the end of the 2024 to 2025 academic year.

As highlighted by the Russell Group in its university business model explainer, the higher education sector relies on internal cross-subsidies from surplus-generating activities to cover the costs of deficits on research and teaching. In particular, this cross-subsidy comes from tuition fees for non-public teaching, paid primarily by international students, and from other commercial income streams.

Data published by the Higher Education Statistics Agency shows that international (non-EU) student fee income rose from around £4.5 billion in the 2016 to 2017 academic year to around £8.3 billion in the 2021 to 2022 academic year. In the 2021 to 2022 academic year 29% of non-EU first-year enrolments were from China (around 100,000 students), and 25% from India. After consistently increasing in the 2010s, the number of Chinese student enrolments has flattened over recent years, while those from India, Nigeria and other parts of Asia have increased rapidly.

Funding flows within universities

UKRI has developed a series of Sankey diagrams to illustrate the cross-flows of funding in the higher education sector, which you can view in the UKRI data pack on research financial sustainability. These diagrams use TRansparent Approach to Costing (TRAC) data to show the income levels for research, teaching and other activities and the full economic costs of delivering these activities. They represent an approximation of how income streams relate to costs, though in practice the precise funding flows vary between individual universities.

Universities may receive research funding from:

  • research councils
  • postgraduate funders
  • industry
  • other government departments
  • UK charities
  • EU research grants and contracts
  • quality-related or equivalent funding from one of the devolved higher education funding bodies

Universities may receive teaching income from:

  • publicly funded sources, including domestic student tuition fees and teaching grants
  • non-publicly funded sources, including international student tuition fees

Universities may also receive income from other commercial and non-commercial activities.

Some of these income streams cover or exceed the full economic cost of the activities they support, generating a surplus that can be used to cross-subsidise other activities where income does not cover the full economic cost. For example, non-publicly funded teaching income consistently generates a surplus that can cross-subsidise publicly funded teaching and research.

However, at the sector level, the surpluses generated are not enough. In the 2021 to 2022 academic year, the full economic cost of teaching, research and other activities across UK universities exceeded the sector’s income by £2.2 billion.

It is worth noting that the £2.2 billion ‘sustainability gap’ does not by itself mean that the UK higher education sector, or individual universities within it, is in financial trouble. This is because TRAC accounting methodology does not include activities like borrowing or drawing down reserves, which universities may use to cover deficits.

But as the deficits on publicly funded teaching and research increase, there is greater reliance on surplus-generating income streams such as non-publicly funded teaching.

Detailed analysis of funding flows for the 2021 to 2022 academic year is available in the UKRI data pack on research financial sustainability. This shows how funding flows vary between peer groups of universities (PDF, 104KB) at different levels of research intensity.

Financial sustainability in UKRI institutes

Fifty-nine research institutes receive long-term funding from UKRI. In the 2022 to 2023 academic year, UKRI provided £1.1 billion in funding to these institutes.

Given the diversity of the institute landscape, each institute may face specific sustainability issues unique to its circumstances. Many institutes receive a form of core funding similar to quality-related (QR) funding. However, most institutes do not have access to the surplus-generating activities available to universities, such as international student fee income, that contribute towards the full economic cost of research. Long-term, relatively flat core budgets for many institutes have resulted in a steady real-terms decline in funding. More information about UKRI’s institutes is available in our explainer: how UKRI’s institutes support research and innovation.

Research activity deficit

Research performed in universities resulted in a deficit of over £5 billion across the sector in the 2021 to 2022 academic year. This equates to a cost recovery ratio, (the proportion of research costs covered by research income) of around 69%.

There are two main reasons for this:

  • most funders do not pay the full economic costs of the activity funded by their grants
  • universities invest money from other income sources into research activity

Since 2007, research council-funded grants have been typically awarded 80% of the full economic cost of the activity being funded. Funding at 80% of the full economic cost ensures that the organisations we fund are strategically invested in the awards they win, meaning that they are maintaining a grant portfolio that aligns with their strategic missions and is affordable. This system is designed so that research-performing organisations are partners in publicly funded research; they demonstrate their commitment through co-investment in research activities. This is called the dual support system.

Quality-related (QR) and equivalent funding supports universities with their choices around co-investment and allows them to pursue broader research interests outside project-specific funding, in line with their strategic visions and missions. QR funding can be used to support research and knowledge exchange activities.

However, TRAC data has shown that the overall cost recovery on research activities has fallen over the past decade. For research council project funding it has fallen to under 70% in the 2021 to 2022 academic year. This fall in cost recovery may mean that universities have to use a greater proportion of their strategic block grants (QR and equivalent funding) or their income to cover the full economic costs of project grants.

As a result, universities may invest less in longer-term priorities such as:

  • exploring new opportunities
  • capital and infrastructure
  • sustaining and training their research workforce
  • collaborating with business and international partners
  • commercialising their research

This challenge will increase if the availability of cross-subsidy for research is reduced due to the need to cover deficits on teaching, or if the flow of international students slows or falls.

The impact of the deficit on the UK’s research and innovation system

The UK’s success as a global research nation and our ability to sustain strategic advantage depends on the resilience of our research and innovation system to:

  • deliver long-term goals
  • withstand shocks
  • pivot to capture new opportunities
  • take risks

A lack of financial sustainability could lead organisations in the system to:

  • reduce the volume of research they undertake or lower the quality and outputs of their research activities
  • delay projects or alter the scope of research programmes
  • invest less money into long-term research and innovation capability, including attracting and retaining a talented workforce and investing in new and replacement infrastructure

Working together on financial sustainability

To support the financial sustainability of our research and innovation endeavour, everyone in the system needs to work together to create the right incentives, recognise interdependencies and look for unintended consequences.

The financial sustainability of our research and innovation system is a responsibility shared by government, funders, research organisations and researchers.

Government

Government has a role to play in setting an overarching ambition for research and innovation in the UK. This includes the overall level of public funding for research and development and ensuring it is used to meet strategic priorities.

UKRI and other funders

UKRI (as the largest public funder of research) has a role to play in balancing funding across organisations, disciplines, strategic priorities and investment types while setting incentives and conditions for the system. Other funders have a similar role, although on a smaller scale.

Research-performing organisations

Research organisations have autonomy for their strategies, securing income and using their money to meet their charitable missions and respond to government and funder priorities.

Individual researchers and innovators

Individual researchers and innovators choose the grants and funders they apply to and take responsibility for ensuring the funding they receive is costed and spent appropriately to deliver outputs and outcomes.

UKRI’s role in supporting research financial sustainability

UKRI’s impact on the sustainability of the research and innovation system results from the strategic and operational choices we make when funding research activities.

There are many ways that we can support financial sustainability, both in terms of what and how we fund but also the incentives we create in the system, including:

  • at the portfolio level:
    • the balance of strategic block grant funding and project funding across the dual support system
    • the proportion and types of costs we will fund on research grants
    • the composition of our portfolio
    • the mechanisms we use to assess research grants
    • the mechanisms we use to assess research excellence
  • at the programme level:
    • size and length of project grants
    • modes of funding (for example, for doctoral training)
    • requirements for matched and leveraged funding
    • the funding mechanisms we use
  • at the policy level:
    • the terms and conditions of our grants
    • the operational mechanisms for our funding

As a funder, we make choices within the organisational and financial frameworks available to us, and we recognise that our choices may influence other participants in the research and innovation system. We believe that collective action across all funders, research organisations, researchers and policymakers will be needed to address the issues of financial sustainability and build a more resilient research and innovation system for the future. By publishing this data and our analysis we want to share information with the sector and open a conversation with our partners, stakeholders and participants in the research and innovation system. By working together to make informed decisions we can co-create a more resilient and sustainable system for the future.

UKRI’s Research Financial Sustainability programme will continue to analyse data on the financial sustainability of the UK’s research and innovation sector, and publish future insight into how these inform choices and incentives in the system. To find out more about our programme of work, or get in touch with the Research Financial Sustainability Team, visit the Research financial sustainability pages.

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