Written Evidence Submitted by the National Audit Office
The House of Commons' Science and Technology Committee has launched an inquiry into the nature and purpose of the proposed new funding agency for UK research, the Advanced Research Projects Agency.
To support the inquiry this note draws upon the National Audit Office's work examining the use made of taxpayers' money by public bodies. It sets out the basic principles established by HM Treasury governing the creation of new bodies and some of the questions that we regularly ask when assessing whether an organisation is set up to deliver value for money.
To foster innovation the government may want ARPA to be different to previous government innovation programmes, with greater freedom given to managers to take decisions and a recognition that success may not be guaranteed. We encourage the government, in consultation with Parliament, to consider from the outset what would constitute value for money in this context, how the organisation should be held to account, and to what standards. We would be happy to support that discussion.
The Comptroller and Auditor General (C&AG), an officer of the House of Commons, is responsible for the independent audit of public bodies. He is supported by the work of the National Audit Office (NAO).
The C&AG, and the NAO, provide an independent audit opinion on some 370 individual accounts across the public sector, including all government departments, executive agencies, arm’s-length bodies, companies and some charities. The commercial entities include bodies such as Network Rail, the BBC and UK Asset Resolution Ltd. The audits are conducted in accordance with international auditing standards.
We also undertake value for money audits looking at the economy, efficiency and effectiveness with which public bodies have used public money. The results of these audits are reported to Parliament and often form the basis of inquiries by the Committee of Public Accounts in holding senior public officials to account and are often used by select committees.
In March 2020, the government announced its plans to establish a new organisation, the Advanced Research Projects Agency (ARPA). This forms part of the government's push to 'support world leading research in the regions and the nations'. ARPA is described by the government as a 'new blue‑skies funding agency' and is intended to operate with reduced bureaucracy and innovative funding mechanisms. The government has said that it would invest at least £800 million in this new body.
In establishing ARPA the sponsoring department will need to have regard to the framework for establishing new public bodies. HM Treasury's Managing Public Money sets out guidance to central government on how to manage public funds. It includes guidance to sponsor departments on the establishment of a new arm's length body.
Key points for consideration raised in the guidance include:
In establishing a new body, a department cannot
The guidance also sets out expectations for oversight, stating the sponsor department should plan carefully to make sure that its oversight arrangements and the internal governance of any new arm's-length body are designed to work together harmoniously without unnecessary intrusion. The arm's-length body also needs effective internal controls and budgetary discipline so that it can live within its budget allocation and deliver its objectives.
Each organisation in central government – including arm's-length bodies - must have an accounting officer, usually the organisation's most senior official. This principle lies at the core of accountability of officials to Parliament for how public money is used. The responsibilities of accounting officers in departments and in arm's-length bodies are essentially similar. Formally the accounting officer is the person Parliament calls to account for stewardship of the organisation's resources. An accounting officer is expected make sure the organisation operates effectively and to a high standard of probity. Managing Public Money highlights some key areas where an accounting officer should take personal responsibility - such as ensuring the regularity and propriety of expenditure and its value for money.
ARPA is intended to fund "visionary high risk, high reward science, engineering and technology". In our view, it is not unique for public money to be spent on programmes where the pay-back may be highly uncertain and where ultimate success may not be known for some years, for example funding for international development projects which may have to operate in difficult and dangerous environments; programmes supporting seed corn investment for start-up businesses; and existing government support for the whole gamut of research and innovation activities.
The detailed proposals for the new ARPA are not yet known. We encourage government to consider from the outset what value for money would look like for the new organisation. Based on our experience, we would normally look for:
In the Annex to this paper we have drawn further from our back catalogue to identify lessons from our work looking at government's approach to innovation and to the oversight of long-term programmes and investments.
We are also currently undertaking a value for money review of UKRI's management of the Industrial Strategy Challenge Fund. The Fund is central to government's commitment to increase funding in research and development over the next four years. It is investing in what it describes as 'highly-innovative businesses to address the biggest industrial and societal challenges today'. We expect to publish a report to Parliament at the turn of the year.
One of the biggest challenges in setting up any new public body is getting the balance between independence and control right. This will be an importance consideration is establishing ARPA. Previous NAO reports have commented on departments' oversight of arm's length bodies and on approaches to accountability more generally.
In our 2016 report on the oversight of arms-length bodies we concluded:
"Getting the best from arm's-length bodies means balancing assurance and control with an appropriate degree of independence consistent with an arm's-length body's function, for example freedom to form impartial judgements and apply technical or operational expertise. This is, in itself, not an easy balance to strike. But there are other contextual pressures on departments, such as the need to reduce costs, which may encourage departments to make decisions that are based on factors other than balancing necessary independence and control. And if independence reduces too far, the benefits which arm's-length bodies are intended to bring might be restricted, and the very point of having an arm's-length body compromised. Effective and proportionate oversight arrangements are therefore critical in enabling arm's-length bodies to deliver value for money."
This report also identified a set of principles for effective oversight of arm's-length bodies.
Depending on the nature and focus of any review we completed on an arm's-length body, we would look to report on the extent of adherence to these principles in practice. Our work in this area has identified weaknesses in, amongst other things, the oversight of financial and non-financial performance, an absence of or weaknesses in evaluations, and the lack of a perspective on the progress and performance of the portfolio of programmes.
Our work on innovation across government has looked at the factors which lead to organisations being well placed to support innovation. While this work has focused on innovation within public bodies rather than sponsoring successful innovation some of the principles are likely to be still relevant. Our 2009 report on innovation identified the following attributes:
In our report Cross-government funding for research and development we developed a set of principles which brought together the features of well-coordinated funding of research and development. - leadership and coordination, priority setting, informed decision making, and evaluation.
Amongst other things we identified examples of well-coordinated research and development, some areas of science lacked sufficiently developed leadership. We also emphasised the need for effective coordination of research and development - requiring the involvement of the right participants, clarity around their objectives, production of tangible outputs, clear roles and responsibilities and effective incentives for staying involved.
Our value for money work frequently looks at departments' oversight of long-term programmes. This work highlights the challenges to securing value for money in these circumstances, examples of which are set out below.
 Budget 2020. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/871802/Budget_2020_Print.pdf. Page 60 set out the proposal for a new body.
 UK Research and Development Roadmap (July 2020). Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/896799/UK_Research_and_Development_Roadmap.pdf.
 The Budget did not set out what this funding covers.
 Managing Public Money (updated September 2019). Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/835558/Managing_Public_Money__MPM__with_annexes_2019.pdf
 Annex 7.1 of Managing Public Money provides detailed guidance on this matter to help a department determine what form a body might take in particular circumstances.
 C&AG's report Innovation across central government (March 2009). Available at: https://www.nao.org.uk/wp-content/uploads/2009/03/080912.pdf.
 C&AG's report The Nuclear Decommissioning Authority: progress with reducing risk at Sellafield (June 2018). Available at: https://www.nao.org.uk/wp-content/uploads/2018/06/The-Nuclear-Decommissioning-Authority-progress-with-reducing-risk-at-Sellafield.pdf.
 C&AG's report The Equipment Plan 2019 to 2029 (February 2020). Available at: https://www.nao.org.uk/wp-content/uploads/2020/02/The-Equipment-Plan-2019-to-2029.pdf
 C&AG's report Progress with the Road Investment Strategy (March 2017). Available at: https://www.nao.org.uk/wp-content/uploads/2017/03/Progress-with-the-Road-Investment-Strategy.pdf.
 C&AG's report Venture capital support to small businesses. Available at: https://www.nao.org.uk/wp-content/uploads/2009/12/091023.pdf.