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Why the Chancellor needs to address the loss of the European Regional Development Fund (ERDF) in his Budget tomorrow

  • 14 March 2023
  • By Ellie Russell

This blog is by Ellie Russell, Deputy Head of Policy at University Alliance @UniAlliance

  • Q: ‘How did the Brexit chicken cross the road?’
  • A: ‘I never said there was a road. Or a chicken.

There have been several ‘Brexit chickens’ over the last few years and one that is occupying the minds of many small-and-medium-sized enterprises (SMEs) as well as universities is the unfulfilled 2019 Conservative manifesto pledge to ‘at a minimum match the size’ of former EU funding in each nation of the UK. 

Earlier this month, 300+ SMEs joined University Alliance members in writing to the Chancellor, asking him to take urgent action in the Spring Budget tomorrow to address the impact of the loss of the European Regional Development Fund (ERDF).

‘Innovation and research’ and ‘support for SMEs’ were two of just a handful of ERDF priority areas. The domestic replacement for EU structural funds, the UK Shared Prosperity Fund (UKSPF) has a much wider focus, with 41 interventions listed across three broad investment priorities: community and place; supporting local businesses; and people and skills. 

As a result, as ERDF comes to an end this year, university-led research and innovation projects (R&I) across the UK are at risk, including the many programmes which Alliance universities deliver to support the growth of local SMEs. Universities UK have proposed that 6% (or £170 million) of the UKSPF should be ring-fenced to provide funding for the continuation of university-led R&I projects to 2024/25. Our letter supports this as a sensible short-term solution to the funding cliff-edge, allowing time for a more sustainable approach to be found. 

Horizon Europe association has, understandably, been the post-Brexit cliff-edge that much of the research and innovation community has been focused on. In coming weeks, we need to widen our focus. It’s vital that we don’t turn away from highlighting the time-limited opportunity the Government has to address the ERDF challenge. 

University Alliance members and other similar institutions specialise in supporting SMEs to innovate, commercialise and help expand the UK economy. SMEs account for over 99% of the UK business population and 61% of UK employment. 

Many Alliance universities utilise ERDF to help SMEs through the innovation ‘valley of death’, where businesses lack the minimum level of funding for the development of a solution to continue and they run out of money before their product or service can be delivered at scale. Many ERDF funded R&I projects are helping businesses scale-up by swiftly connecting them to everything they need to get their ideas from paper to prototype. 

Some universities may be able to retain ERDF funded programmes and services by operating them on a purely commercial basis. This will at least provide medium-sized enterprises with access to specialist innovation support if they can afford it, but it would still leave small and micro businesses out.  

The inputs that are being lost are clear – in the UK, £3.7 billion was invested through EU structural funds in R&I projects between 2014 and 2020 and, of this, £576 million was for university-led R&I projects in England and £376 million in Wales. There are also plenty of examples of local outcomes and impact. 

In our letter to the Chancellor, you can read over 200 testimonials from SMEs across the UK. Birmingham City University have supported over 3,000 SMEs since 2014 and their innovation centre, STEAMhouse, has an ERDF funded programme that generated £2.69 million in Gross Value Added (the project ends this month due to a cessation of funding). ERDF finances between 50% and 85% of a project depending on the region and it has been successfully leveraged to attract significant co-investment – at the University of Derby, ERDF was used to generate additional funds with a combined value of over £24 million that were reinvested into local businesses.

However, aggregating these outcomes and impacts at a pan-regional level or across the UK is challenging due to the way ERDF is allocated into silos and it is not clear who has the capacity to take on this analysis. Individual universities do not have the capacity to gather the information needed across a complex ecosystem and there are too many competing priorities for local authorities. 

Not only has the government not given a clear steer on the role of innovation in place, but UKSPF has arrived at a time when many local authorities are struggling to cover core services and some are in a state of flux as they transition through devolution deals. In these conditions, innovation is being de-prioritised. Greater Manchester Combined Authority currently seem to be an outlier in reflecting on what this would mean in real-terms, and they have prioritised UKSPF interventions for local businesses on investment in research and development, strengthening local entrepreneurial ecosystems and enterprise infrastructure. 

When our letter was covered on Newsnight, the programme included a somewhat feeble statement from a government spokesperson that began with: ‘Universities can apply to the £280 million Higher Education Innovation Fund (HEIF) to support research projects’. Not only does this misrepresent how HEIF is allocated and fails to mention that it is only available in England, but it seems to assume an element of special pleading from universities. This could be the latest example of a view held in parts of Whitehall that universities are capable of significant largesse and absorbing frozen tuition fees and additional economic shocks in perpetuity – an increasingly damaging misconception that anyone seeking to influence policy on behalf of universities will have encountered regularly. 

Of course, universities don’t relish the inevitable loss of staff that comes from closing or radically restructuring well-established services, but the crux of the issue is the impact the loss of this expertise and infrastructure will have on local businesses. 

At the risk of testing your patience by closing with another tenuous bird reference, there has been an ostrich approach to this issue across government for too long and UK SMEs need help pulling Ministers heads out of the sand!  

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