Subsidies for industrial research: the economic benefits of the support remain far below expectations, the MoIT also reimbursed disproportionately high personnel costs

Press release on audit No 21/30 - 17 October 2022

The SAO examined how the state budget money intended for targeted support of industrial research, development and innovation was distributed. During the audit of three national programmes managed by the Ministry of Industry and Trade (MoIT), of which approximately CZK 10 billion was spent between 2016 and 2022, the SAO found deficiencies that reduced the effectiveness and efficiency of the subsidies provided. As demonstrated by the audit of 19 selected projects of the TRIO programmes (for the years 2016 to 2022), although the projects mostly achieved the expected results of research and development, in most cases they did not deliver economic benefits in practice. In the audited projects, the SAO found that two or three years after the completion of the projects, sales reached an average of only 10.2% and profit 7.6% of the volume that the beneficiaries expected in their support applications. This is also why more than 63% of the 19 audited projects were evaluated by the SAO as limitedly effective and limitedly efficient or completely ineffective and inefficient. Due to the fact that the MoIT did not specify the criteria for the adequacy of personal costs, the hourly rate reached up to CZK 4,000 in one case. Thus, the MoIT did not prevent the risk of wasteful spending.

MoIT considers a project successful that has achieved, for example, the planned number of patents, utility models, industrial designs, prototypes or functional samples. However, it does not take into account whether the anticipated economic benefits resulting from the implementation of research results into practice have also been achieved. The SAO considers such an assessment by the MoIT to be insufficient, as the economic assumptions had to be stated in the application for support and were part of the evaluation process. In addition, this data was used by the MoIT in 2018 to estimate the expected sales in the interim report to the government. At that time, the MoIT estimated an increase in beneficiaries’ sales as a result of the support provided from the TRIO programme in an amount exceeding CZK 100 billion in five years after the end of the projects (between 2019 and 2026). Considering the results of the audit sample, according to the SAO, it is likely that the reality will remain far below expectations.

An example of an ineffective and inefficient project is a project for research and development of a new generation of special types of industrial sewing machines. Although the beneficiary of the subsidy amounting to CZK 19.7 million achieved all planned project results, the actual economic benefits in terms of increased sales, profit and exports in 2020 and 2021 were significantly lower than expected. In addition, none of the six planned jobs were created. An improvement in economic benefits cannot be expected as the beneficiary has been in bankruptcy since December 2021. Between 2007 and 2021, this beneficiary repeatedly benefited from several research, development and innovation support programmes in the total amount of CZK 454,5 million.

The SAO also found that the evaluation system set up by the MoIT for selecting projects did not exclude support for inefficient projects. The MoIT also supported projects that did not demonstrate sufficient ability to implement research results in practice. For example, the SAO auditors detected a beneficiary who had not himself expected any economic benefits of his project. Nevertheless, he received a subsidy of CZK 19.4 million to create a prototype robot intended for the Radioactive Waste Repository Administration. According to the SAO’s findings, the prototype model was completely unused and stored in the beneficiary’s production hall more than two years after the end of the project.

As already mentioned, the MoIT did not effectively assess the adequacy of personnel costs for project management, thereby increasing the risk of uneconomic spending of funds from the state budget. This was confirmed in three audited projects. In one of them, in 2016, the personnel costs of the principal project manager amounted to around CZK 4,000 per hour. His total average hourly rate for the entire duration of the project was CZK 1,835 per hour. The SAO found that for the other audited projects, the median hourly rate for the position of the principal project manager was approximately CZK 545 per hour. The personnel costs made up a significant part of the total costs of projects. The share of personnel costs in the total costs ranged from 38.2% to 75.6% for the selected projects.

For the subsequent two CFF and TREND programmes (for the period 2020 to 2027), the SAO identified a number of persistent shortcomings in the system for evaluating the objectives and impacts of the programmes and in the system for evaluating projects for the purpose of selecting them for support, and thus also the risk of ineffective and inefficient spending of funds.

Comparison of expected and actually achieved economic benefits for audited TRIO projects in two to three years after the end of the project (in CZK million)

Chart - Comparison of expected and actually achieved economic benefits for audited TRIO projects