August 1999

"Creating knowledge creating wealth"
Realising the economic potentia of public sector research establishments

A report by John Baker to the Minister for Science and the Financial Secretary to the Treasury

Executive Summary
Introduction and Background to the Study
Current Practice, the Scale of the Knowledge Transfer Opportunity and Principles for this Study
Culture and Commitment: The Knowledge Transfer Mission
PSRE/Sponsor Relationships: Control of IP and Financial Freedoms
Incentives for PSRE Staff
Access to Commercialisation Expertise

1. Executive summary

Introduction and background

Remit

1.1. I have been tasked by the Treasury and DTI Ministers to:

investigate the commercialisation of research in the Government's public sector research establishments ("PSREs") - focussing in particular on issues of good practice, barriers to successful commercialisation, culture, management and the PSRE-sponsor body relationship.

make recommendations for increasing the rate at which their research is successfully commercialised, consistent with other Government objectives for PSREs.

The full terms of reference are at paragraph 2.4.

Context

1.2. PSREs are a diverse collection of public bodies carrying out research in pursuit of various Government objectives, including improving quality of life and economic development through advances in basic science and informing Government policy making and statutory and regulatory functions.

1.3. In machinery of Government terms, PSREs fall broadly into two groups: those that are part of, or directly sponsored by, Government departments; and those which are sponsored by the UK Research Councils. A list of PSREs considered in this study are at Annex 1.

1.4. This study is a contribution to the Government's policy objective of improving the contribution of publicly funded science to wealth creation, and of ensuring the productive use of Government assets. It fulfils a commitment made in last year's Competitiveness White Paper which addressed the importance of translating research from both the university and Government sectors into jobs and prosperity. PSREs generate large bodies of knowledge predominantly at the taxpayer's expense, and there is a moral and economic imperative to ensure not only the advancement of knowledge but, where possible, the exploitation of that knowledge for the benefit of the nation.

1.5. In carrying out the study I noted that many PSREs are already active in commercialisation, and that Government policy has for some time encouraged this. I therefore saw my role as helping to give fresh impetus to efforts already in train, rather than suggesting totally new departures for Government. I was also clear that my task was not to review the continuing status of PSREs as public sector bodies, which is the function of the Prior Options Reviews.

Methodology

1.6. Between February and June 1999 I gathered data for my study by means of questionnaires issued to over 40 PSREs and meetings with key individuals in PSREs, their sponsor Government departments and Research Councils, and other interested bodies. I also chaired a relevant conference. I was supported by a small team of officials from the Treasury and the Office of Science Technology ("OST") within DTI. There is a description of the data gathering process in chapter two. It is important to note that my coverage of PSREs was not exhaustive.

Current practice, the scale of the knowledge transfer opportunity and principles fot this study

The current state of play

1.7. Many PSREs are engaged in commercialising their research and expertise.

1.8. PSREs' commercialisation activities take a variety of forms. Common routes are collaboration with industry to solve problems (often in the context of contract research for industry), and the licensing of technology to industry users, either directly or through intermediaries like BTG. Many PSREs are also engaged in the sale of services, data and software to the business sector. The formation of joint ventures and spin-out companies is rarer, and where is does occur is usually associated with PSREs which have links with industry where there is a strong demand for the output of research, in particular the biosciences and defence industries. In some instances, PSREs see the free dissemination of their research outputs as the most effective means of knowledge transfer, with economic benefits accruing to an industry as a whole, rather than to individual players.

1.9. Collectively, I have adopted the term "knowledge transfer" to encompass these different routes for exploiting research outputs. I see no reason to doubt that all these routes, including free dissemination of research outputs, have their place, provided that there are systems in place for ensuring that the most appropriate is chosen.

The scale of the opportunity for knowledge transfer

1.10. It is generally perceived in Government and in PSREs, and it was a theme of the conference I chaired in April, that the Government sector taken as a whole is not as advanced in the knowledge transfer arena as the best of the university sector - or as the Government sector in the US. My study did not allow a direct comparison of these sectors. Nevertheless I was anxious to determine to what extent any under performance of PSREs was a reflection of the opportunities for commercialising PSRE research (as distinct from the capabilities for commercialising).

1.11. I found that the scale of the opportunity varies greatly depending on the size and mission of the PSRE, the kind of science it does and the nature of the industry sectors for which the science is most relevant. Only a minority of the intellectual property generated in PSREs is likely to have large commercial potential. Nonetheless, much more could economically be done to ensure that opportunities for translating research into jobs and prosperity are identified and exploited.

1.12. The strength of the demand from industry is probably the single biggest determinant of the commercialisation opportunity. An industry dominated by large successful companies, for example pharmaceuticals, has the resources to seek out and exploit PSRE research effectively. Small, fragmented, or low margin industries like sections of the UK engineering sector provides little "industry pull". If the Government wants to address PSRE commercialisation in the round, it will need to consider how to maximise industry pull, as well as "PSRE push".

1.13. I found that some PSREs questioned the relevance or appropriateness of the commercialisation agenda to their institution. I recognise that it will not be productive for all PSREs to engage with this agenda, and that the biggest advances are likely to be the result of existing players getting better at the knowledge transfer game. Nonetheless, I believe the presumption should be for all PSREs to engage.

Principles for the study

1.14. In seeking to frame recommendations for action, I found it necessary to be explicit about the principles or "ground rules" governing the form and extent of a sensible and effective Government agenda. These are as follows:

I take it as read that the first priority of each PSRE continues to be the advancement of knowledge in pursuit of the Government objectives which it serves. Commercialisation of research outputs is a second priority. Nothing I advocate in this report is intended to undermine the capacity of PSREs to deliver their primary outputs.

That said, the presumption should be in favour of pursuing knowledge transfer where possible. Government and PSREs should ask "why not?" not "why?". Where there are potential conflicts of interest (between different PSRE objectives, or for individual scientists) the aim should be to manage the conflict. The potential for conflict should not in itself be a reason not to engage in knowledge transfer.

I take it as read that the main reason for pursuing knowledge transfer is to create economic benefit for the nation, rather than generate additional revenue for the Government. Nonetheless, PSREs need the incentive to generate revenue in order to engage in wealth creation activities.

Knowledge transfer is a difficult and complex process. Government should be realistic about what is needed to do it properly: commitment, resources, skills and proper management systems. In particular, Government must recognise that effective knowledge transfer costs money. Even the proactive management of IP, a prerequisite to commercialisation, is expensive.

PSREs are not a homogeneous universe of bodies. They encompass a very broad diversity of size, mission, types of science and constitution. There can be no question of a "one size fits all" solution for boosting the level of knowledge transfer. Nor does central Government have the means of prescribing in detail the solution for each PSRE. It should concentrate on creating, and if necessary policing, a supportive framework of rules and incentives within which the right people can make sensible decisions about commercialisation

In particular, it seems to me impossible for central Government to favour particular routes to market over others. The best route to market will depend on a host of factors concerning the nature of the PSRE, its science and its potential markets. What Government must seek to ensure is a commitment to knowledge transfer, buttressed by systems for making the best choice of route to market, after a full consideration of the options.

If Government is keen to see industry demand for PSRE outputs maximised, it must accept that industry is global and that some commercialisation deals will entail the export of UK-generated intellectual property as well as the import of foreign generated IP. This is considered further in chapter 3.

Culture and commitment: the knowledge transfer mission

1.15. I found that technology transfer is most effectively pursued in those PSREs which see it as an explicit part of their mission and culture, and where it is enthusiastically led by senior management, and supported by the sponsor department or Research Council. These are critical success factors, but are far from universal. There is considerable scope for imbuing PSREs and their sponsors with a greater sense of mission in relation to technology transfer.

1.16. PSREs need not only commitment to knowledge transfer, but permission to pursue it whole-heartedly. Knowledge transfer is currently pursued in a public sector climate which is predominantly risk-averse. This culture is inimical to the robust pursuit of commercial opportunities and one that Government must tackle as a priority.

1.17. A more mature and less punitive attitude to risk is needed, which recognises the inevitability of failures and which promotes risk management, not risk avoidance. This is starting to be recognised in the wider context of the Modernising Government agenda, but more needs to be done, and specifically in relation to PSRE knowledge transfer. PSREs should not have to live in fear of punishment for failure after the event, but rather be obliged to have proper risk management systems before the event. The bodies who supervise and audit PSREs should be encouraged to take a portfolio approach to risk, recognising there will be winners and losers.

Recommendations

1.18. I welcome the movement in Government towards a more mature understanding and handling of risk. Treasury and OST should work with the NAO and the PAC to promulgate an accountability framework for commercialising public sector research which emphasises portfolio risk management and transparency of operation rather than incentivising risk avoidance.

1.19. A key challenge for Government is to ensure that leadership in the PSREs is committed to drive commercialisation as an explicit part of their mission. To that end and where such practice is not already current:

All Government purchasers of PSRE research should have as part of their research mission the explicit objective of transferring PSRE research outputs to the wider economy; this should be explicitly reflected in all contracts between sponsors (and other Government purchasers of research) and PSREs.

PSREs themselves should have knowledge transfer as an explicit part of their mission

The knowledge transfer objective should be embodied in the job description and personal objectives of the PSRE chief executive and be seen as his or her personal responsibility. It should be cascaded through the personal objectives of senior management and scientific staff.

PSRE chief executives should be required to develop, implement and secure staff support for a strategy for identifying and realising opportunities for translating research outputs into wealth creating products and processes. In particular these strategies must address the management systems that will support the commercialisation effort, acquisition of the necessary market knowledge and the management of conflicts of interest.

PSRE chief executives should develop performance measures and targets against which their knowledge transfer efforts can be assessed.

As and when vacancies for PSRE chief executive posts arise, the ability to lead and motivate a PSRE's knowledge transfer activities should be an explicit recruitment criterion.

PSRE/Sponsor relationships: Control of IP and financial freedoms

1.20. I found that a number of key barriers to knowledge transfer arose in the context of the relationship between PSREs on the one hand and their sponsor bodies and other Government funders of research.

Managing intellectual property

1.21. Managing intellectual property - identifying, protecting and exploiting it - is a difficult and complex process. Some PSREs choose to outsource much of this work. This may be an appropriate route particularly for smaller PSREs who cannot support internal expertise. But the responsibility for managing IP still clearly lies with the PSRE chief executive, who must have the ability to exercise that responsibility as effectively as possible. In several instances I have found that this ability is seriously compromised by the insistence of the parent body (or other Government funder) on retaining the ownership of the IP and the authority to assign it to third parties. The result can be critical delay in negotiating licensing deals, especially if the parent wishes to have case by case involvement in decisions about the assignment of IP. I was cited instances of deals falling through altogether because of this. Worse problems arise when the PSRE receives funding from several bodies all with different policies on IP ownership and control.

Financing problems

1.22. PSREs face problems finding:

development or pre-seed finance - typically for demonstrating the commercial feasibility of prototype products or processes. This is beyond the stage that is funded by research income, but usually before the stage at which business investors or venture capitalists are prepared to step in.
resources for administering knowledge transfer activities - for example the cost of the necessary advice, skills, expertise, patenting costs etc.

1.23. The problem is seriously exacerbated for those PSREs, mostly departmental PSREs, which lack the freedom to maintain and deploy surpluses. This arises when parent bodies maintain strict cash controls over their PSREs, preventing them carrying over end-year surpluses, or retaining the proceeds of commercialisation deals. The result is that the PSREs neither can afford nor have the incentive to engage in commercialisation. This is despite the Treasury's guidance on Wider Markets that public bodies should be allowed to retain their receipts from commercialisation activities.

1.24. Similar problems can arise for some Research Council institutes not all of which are content with the arrangements for dividing the proceeds of commercialisation between themselves and their parent Research Councils. Such arrangements should err on the side of generosity and provide proper incentives for the institutes. Research Councils should not and should not be seen to use these arrangements as a means of clawing back grant.

1.25. A number of PSREs also highlighted that they were not eligible to compete in their own right for Government funds available through various Government schemes aimed at promoting closer university/business links, for example University Challenge.

Recommendations

1.26. There is a pressing need to remove the bureaucratic hurdles relating to IP and financial controls. They are a particular problem for those departmental PSREs which do not have ownership and control of the IP they generate, and which are subject to tight financial and managerial controls by the parent department. These PSREs are further constrained by the civil service management code, discussed below. They are, in short, too close to central Government to have the freedoms necessary to pursue commercial objectives effectively. Their position is in contrast to that of the Research Council Institutes, which are more at arm's length from Government.

1.27. I strongly recommend that the departmental PSREs be put at greater arm's length from Government departments. Ministers should consider how this should best be done for each of these PSREs, with the presumption in favour of a move to less central control - except where there is an overwhelming case to the contrary.

1.28. Such a move would improve their capacity to engage in knowledge transfer, and by underlining the purchase/provider split might be expected to deliver wider benefits. At the same time it would not, as far as I can ascertain, undermine their capacity to deliver their primary outputs. Indeed, I have encountered no good reasons why any of the departmental PSREs should remain as such (except in the case of the very smallest, for which the administrative costs of such a change of status might be disproportionate). The Non-Departmental Public Bodies ("NDPB") model would seem to be a good one, but other options might be appropriate in some cases.

1.29. Whether or not Ministers wish to pursue this course of action, there is an overwhelming case for requiring that:

IP generated by a PSRE be owned by the PSRE and assigned by authority of the chief executive, unless effective alternative arrangements already exist (they do so in the case of the MRC, but in no other instances that I have been able to find). The case by case involvement by public sector funders of research in decisions about the assignation of intellectual property - unless they have specific expertise and support to bring to the table - does not generally seem to add value and can be harmful.

Parent organisations should allow their PSREs the full freedoms to carry forward surpluses and retain receipts and other financial freedoms which are available under the Treasury's recent Wider Markets guidance. Arrangements for dividing commercialisation receipts between sponsors/funders and PSREs should err on the side of generosity to the PSRE.

1.30. Other action is needed to address the difficulty of financing the costs of knowledge transfer

Ministers should examine the scope for extending the eligibility criteria of initiatives for promoting knowledge transfer, in particular University Challenge, to include PSREs, where these are not already eligible.

Given the importance of industry demand as a driver of knowledge transfer, Government should look at the scope for drawing PSREs into current schemes which incentivise business to participate in knowledge transfer.

In agreeing future income streams with parent bodies and other purchasers, PSREs should be explicit about the costs associated with implementing a knowledge transfer strategy. Government must be prepared to meet these costs if it wants to give parity of esteem to the knowledge transfer mission.

Government should consider earmarking some funds to meet the costs of knowledge transfer in the PSREs.

Incentives for PSRE staff

1.31. Scientists are predominantly motivated by the conduct of research and by the esteem that derives from publication and peer review. If greater emphasis is to be placed on knowledge transfer at the Governmental and institutional level, this needs to be reflected by a rebalancing of incentives for scientists, so that there are rewards not only for doing science but also for exploiting it. This need is increasingly being recognised. Schemes for rewarding and incentivising PSRE staff for participating in technology transfer are now widespread within the Research Council Institutes and are regarded as an integral part of the process of promoting commercialisation and an entrepreneurial culture. Government should support this trend, ensuring that such incentive schemes become universal and helping to promote best practice.

1.32. It should be a requirement for PSRE chief executives that they have in place effective schemes for encouraging and rewarding the participation of scientists in knowledge transfer activities.

1.33. OST should help to exemplify and promote best practice in this area including in respect of equity and share options.

1.34. But such schemes cannot be applied in those PSREs which are part of a Government department. Here staff are debarred from gaining personally from involvement in commercialisation as a result of the way the civil service management code is applied. So the ability of a public sector scientist to participate in incentive schemes is determined by a bureaucratic "accident of birth" ie whether the body he or she works for is an NDPB (for example Research Council institute's are not covered by the code) or part of the civil service. This is an illogical and indefensible anomaly. It inhibits the pursuit of the knowledge transfer objective, ensures an inconsistent approach across the public sector and incentivises entrepreneurial scientists to take their talents out of the Government sector. The best long-term way to remove this anomaly is to put PSREs at arm's length from Government, for example as NDPBs, so that they are no longer caught by the Code. But this will take time. Therefore:

1.35. As an immediate priority Ministers should review the application of the civil service management code to the special circumstances of science commercialisation. The effective bar on certain forms of direct participation by serving Government scientists in the commercial exploitation of their research - in particular receiving equity or share options - should be removed. The principles that apply should be the same as the business appointment rules for civil servants: personal gain should not be outlawed; rather it should be permitted subject to having proper systems in place for ensuring the probity of the proposed commercialisation arrangements.

Access to commercialisation expertise

1.36. The commercialisation of scientific research is a complex business, requiring the skills of those who understand business and finance, those who understand science, and those who can effectively bridge the gap between the two. PSREs don't just require advice and encouragement but also deep private sector skills associated with originating the prospects, helping to develop the business case for potential relationships and providing hands-on commercial support during the negotiating phase. This is not easy since the right combination of such people is generally hard to find, not just for PSREs but also for universities and the private sector itself.

1.37. Just as there is no one model of technology transfer, so there is no one approach for accessing and deploying the necessary range of skills to make it happen. This is a case of horses for courses. Some PSREs effectively contract out the entire process to a third party. Other bodies, most notably the MRC, seek to retain all necessary expertise in-house, but can have difficulty recruiting good talent. Larger PSREs (or consortia of PSREs) might be able to justify recruiting in-house specialist teams, but in most cases the costs of doing so are likely to be disproportionate to the scale of the commercialisation opportunities.

1.38. Government's main concern should be to ensure that PSREs are able to access the expertise they need. There is a particular need to ensure that PSREs are not reinventing the wheel and that those which are too small to engage specialist in-house teams or buy in expensive advice, are able to, and encouraged to, network effectively to learn about existing good practice. On the other hand the PSREs which need in-house expertise should have the flexibility to attract and retain the people they need. A number of PSREs find the current public sector pay arrangementsconstrain them in this regard.

Recommendations

1.39. Sponsors of PSREs should encourage the development of networks among PSREs for the sharing of best practice in knowledge transfer, and to promote synergies.

1.40. PSRE chief executives must ensure that they have access to the skills and experience they need for knowledge transfer.

1.41. Sponsor departments and Research Councils must where necessary support their PSREs in gaining access to relevant expertise, and they should promote a consortium approach to knowledge transfer where this is most likely to achieve critical mass of activity and economies of scale.

1.42. Ministers should consider creating a small expert unit within central Government to drive forward the knowledge transfer agenda - and provide advice, help and encouragement to PSREs and their sponsors on knowledge transfer - particularly in relation to larger and more complex deals. Such a unit could initially be given a life of say two years, after which time its value would be reviewed.

1.43. Government should seek to improve the flexibility of PSREs to pay market rates to attract and retain people with commercialisation expertise.

2. Introduction and background to the study

Background to the study

2.1. Treasury and DTI Ministers asked me to investigate the commercialisation of research in the Government's Public Sector Research Establishments ("PSREs") and to make recommendation for increasing the rate at which scientific knowledge is successfully transferred to the private sector.

2.2. This follows the DTI's Competitiveness White Paper published in December 1998 in which the Government announced its intention to analyse the potential of PSREs:

"The Government is determined that the Public Sector Research Establishments make the most of the commercial potential of their research outputs. The Government will investigate existing practice and make recommendations in 1999".

2.3. This study, and my leadership of it, was announced on 10th February by the Financial Secretary Barbara Roche and the Minister for Science Lord Sainsbury in a response to written questions asked in both Houses of Parliament.

2.4. The written answer also contained the following terms of reference for the study which were agreed by both the Treasury and the Office of Science and Technology. These are:

"To investigate the commercialisation of research in the Government's public sector research establishments ("PSRE"s) and make recommendations for increasing the rate at which PSRE research outputs are successfully commercialised, consistent with other Government objectives for PSREs, with reference in particular to:

the role of sponsor departments/Research Councils in promoting the exploitation of research in the PSREs;
progress in improving the culture of entrepreneurship within PSREs - particularly through the adoption of new guidance on exploiting Government assets;
the organisational capacity and expertise for managing and exploiting Government IP effectively;
specific institutional barriers, and possible new incentives;
spreading best practice;
the scope for closer co-operation with the private sector."

Public sector research establishments

2.5. Public Sector Research Establishments are a diverse range of public bodies that perform scientific research in pursuit of a range of Government objectives. The main objectives include:

Improving quality of life

For example, the MRC research establishments all have an objective to develop medical products and services which improve the quality of life for society.

Economic development through advances in basic science

For example, some of the developments at the Institute of Arable Crop Research have led to improvements in the efficiency of arable production in the UK and across the world.

Informing Government policy making

Perhaps the most topical example of this is the John Innes Centre's role in advising the Government on the impact of genetically modified crops.

Statutory scientific testing and regulatory functions

As an example the Veterinary Laboratory Agency is responsible for testing animals for BSE and Tuberculosis.

2.6. In the main each research establishment focuses on a fairly tightly defined aspect of science. The nature of the science undertaken ranges from basic and fundamental research to more applied work aimed at developing new and innovative products. It also covers a large range of scientific disciplines. These range from plant genetics and animal production to electronics and defence. Annex 1 has a list of all the PSREs considered in this study.

2.7. There is a huge range in the size of the research establishments. By far the largest PSRE is the Defence Evaluation and Research Agency ("DERA") which has over 10,000 employees and a budget of over £1 billion per year. At the other end of the scale several research establishments run by the Medical Research Council ("MRC") look into a specific aspect of medical science and have fewer than 20 people. Three quarters of the PSREs replying to our survey had between 100 and 1,000 employees and a research budget of between £5m and £28m.

2.8. There is also variety in how the PSREs are formally constituted in machinery of Government terms. The main distinction is between departmental bodies responsible to central Government Departments and research council institutes.

Departmental bodies

2.9. Excluding the very small MRC institutes, roughly half the PSREs are departmental bodies. Some of these are executive agencies of a department and some are part of the department. (A few, such as the Scottish Office's five agricultural PSREs, are Non Departmental Public Bodies ("NDPBs") which have more autonomy from Departmental control on issues relating to day to day activities but remain accountable to the relevant Secretary of State).

Research council institutes

2.10. These institutes are sponsored by and accountable to the Research Councils. Consequently, although each research council is accountable to the Office of Science and Technology, research council institutes are at more arms length. Here too there is some complexity. One PSRE (CCLRC) essentially comprises the whole of the research council, others (BBSRC & NERC) have institutes which are legally distinct entities and the MRC has research establishments which are internal departments of the council.

Charitable status

2.11. Several PSREs, including all the BBSRC institutes and many of the agricultural research institutes in Scotland, are registered charities. For most of these PSREs charitable status is a historical legacy which confers benefits, the main one being exemption from most forms of direct taxation.

2.12. Several PSREs we met during the study raised concerns that their charitable status inhibits their ability to commercialise research. Some PSREs also felt that they were at a disadvantage to universities which are exempt charities not regulated by the Charity Commission.

2.13. In general charities are unable to trade unless either the trade is for the public benefit consistent with their charitable objectives or exploiting a financial gain allows the charity to pursue its objectives. Charities can legitimately establish trading subsidiaries which are outside charity regulation and which therefore have commercial freedoms similar to conventional companies. However the additional time and effort required to establish and maintain these separate legal entities can be time and resource intensive. PSREs must determine whether the economic benefit of the commercialisation can support the resources and time required to establish a trading arm.

2.14. It is not clear that this is an issue on which I can assist further as part of my study. This is however a matter the new expert unit I recommend in chapter 7 could take forward with the Charity Commission involving the Treasury and the Office of Science and Technology as necessary.

Focus on high quality research

2.15. All PSREs have a common purpose to undertake high quality scientific research to meet the requirements of their sponsor department or research council ("sponsor"). It is important that this remains the primary goal of each of the PSREs. None of the conclusions or recommendations arising from this report seeks to detract or divert research establishments from seeking to fulfil the scientific objectives set by their respective sponsors and the goal of producing high quality scientific research.

2.16. In the course of fulfilling their primary objective, Government policy as outlined is the Treasury's guidance "Selling Services into Wider Markets", requires all research establishments to ensure that they maximise the economic benefit of their physical and non-physical assets. All PSREs have a duty to put measures in place to identify research with commercial potential, and to ensure the effective transfer of knowledge into the private sector.

2.17. The purpose of this study is to help PSREs to improve the contribution of publicly funded science to wealth creation and to ensure the productive use of Government assets. Given that PSREs predominantly generate their knowledge at the taxpayers expense, there is a moral and an economic imperative to ensure not only the advancement of knowledge but, where possible, the exploitation of that knowledge for the wider economic benefit of the nation.

2.18. It was immediately clear from my investigation that many PSREs are already active in knowledge transfer and seems to have achieved a degree of success. Given this success and the support the Government has already shown to in this area I saw my role as helping to provide fresh impetus to efforts already in train.

2.19. It is also worth emphasising that my task was not to consider the merits or value for money of the research undertaken by each of the PSREs nor was it to consider whether any of the PSREs should be transferred to the private sector; that is a function of other reviews such as the Prior Option Review and does not fall within the remit I have been set.

Methodology

2.20. During the course of this study I have been supported by a small team of officials from the Treasury and the Office of Science and Technology within the DTI. To establish a base of knowledge for my study I issued a questionnaire to all PSREs with over 50 employees, of which there are over forty. A blank copy of this questionnaire can be found in annex 3.

2.21. I followed up the issues raised in the returned questionnaires by holding a series of meetings with individuals in PSREs, their sponsor department or research council and other interested bodies. The study however does not claim to be comprehensive. It would not have been practical to have met all interested parties and I cannot claim to have done so. My study represents a snap shot of the situation between March and June 1999 based on the responses from questionnaires and meetings. A full list of the organisations met as part of this work is held in annex 2.

2.22. In April I also chaired a conference organised by the Treasury and Arthur Andersen called "Creating Knowledge: Creating Wealth" which looked at exploiting the commercial potential of Government Intellectual Property. This also helped to inform my findings.

2.23. To encourage a frank exchange of views I assured respondents to the questionnaire and those who I met personally that the information they provided me would be treated as confidential. As a result examples referred to in this report have been anonymised unless the information is available publicly already.

3. Current practice, the scale of exploitation opportunity and principles for this study

Current state of play

3.1. There are many forms in which establishments can transfer knowledge to the private sector. These include:

collaboration with industry to solve problems (often in the context of contract research for industry)
the free dissemination of information, normally by way of publication
licencing of technology to industry users
provision of paid consultancy advice
the sale of data
the creation and sale of software
the formation of spin out companies
joint ventures with industry
the interchange of staff between the public and private sector.

3.2. Licencing, including the licencing of computer software is by far the most common form of formal technology transfer amongst PSREs; over 80% of PSREs who responded to the questionnaire had experience of licencing new technology. Although there are several examples of informal collaborations with industry, formal joint ventures are less common with just under half of respondents registering experience of an industrial joint venture.

3.3. The formation of spin-out companies often grabs the headlines, but these are rarer than the publicity surrounding them would suggest. Spin-outs are commonly associated with industry sectors where the demand for the research outputs is large enough to sustain new companies, such as the biosciences and the defence industries.

3.4. On the other hand several PSREs see the free dissemination of their research outputs as the most effective means of knowledge transfer. This can be an effective way of transferring research knowledge with all the economic benefit accruing to an industry as a whole rather than captured by a small number of individual players. Free dissemination of information is particularly relevant for PSREs in industries where the demand pull is weak or where there is a strong public interest in the wide dissemination of results. For example the Health and Safety Executive firmly believes that the value to quality of life of its research on safety would be substantially reduced if the release of the information were controlled for commercial benefit.

3.5. I see no reason to question the role that each of these routes, including free dissemination of research outputs, can play in the exploitation of research. Moreover it is not difficult to envisage situations where each of these routes should be applied. What is important is that PSREs have the systems in place for ensuring that the most appropriate route is chosen in given circumstances.

The scale of the opportunity for knowledge transfer

3.6. It is generally perceived in Government and PSREs that the Government sector is not as advanced in the transfer of knowledge as the university sector, or Government sector in the US. Indeed this was a theme at the joint Arthur Andersen/HM Treasury conference that I chaired in April. My study did not allow a direct comparison of the two sectors. Nevertheless during the course of the study I was keen to determine the extent any relative under performance among PSREs was a reflection of the opportunities PSRE research provides for knowledge transfer rather than the capability and effort PSREs devote in this area.

3.7. From the questionnaire responses it is clear that significant efforts are already in place to increase knowledge transfer. Over sixty percent of respondents who are active in knowledge transfer anticipate growth of at least 20% from commercialisation activities over the next year.

3.8. Perhaps unsurprisingly, the wide variety of research undertaken by PSREs results in large disparities in the potential for commercialising research. Only a minority of the science generated by PSREs is likely to be highly valuable, although in my view a much greater percentage is likely to have the potential for knowledge transfer.

3.9. The scale of opportunity for commercialising research is determined in large part by the nature of the industry sector to which the research relates and the nature of the science being undertaken.

Nature of the relevant industry sectors.

3.10. The strength of the demand from an industry is probably the single biggest determinant of the commercial opportunity. Successful industries with large, innovative players will generate a strong demand for the results of the relevant science. Large players also help to forge pathways between scientists and companies and may ultimately acquire small spin out companies, providing an exit route for financiers such as venture capitalists.

3.11. This provides an explanation why those aspects of biomolecular science which have large pharmaceutical companies as the end-user, seems to offer large commercial potential. On the other hand, there are far fewer commercial opportunities for PSREs operating in more fragmented industries where the demand for research is weak. This is not a reflection on the quality of the research undertaken or the willingness of the PSREs to engage in knowledge transfer. Industries such as sections of the UK engineering industry are simply too small, too fragmented and too fragile to have the industry pull to generate large numbers of such exploitation opportunities.

Nature of the science being undertaken.

3.12. The nature of the science has an impact. Research which is results in revolutionary advances in products and processes, particularly biomolecular science, offers potentially large returns on investment. Meanwhile the commercial potential of research which results in incremental improvements in products is more limited. There is of course a strong relationship between the nature of the science and the level of industry demand.

3.13. As the study progressed I found that some PSREs questioned the relevance and appropriateness of commercialisation to their establishment. I recognise that for some PSREs the commercial potential may be more limited and for others their research outputs are closely tied to other Government objectives such as policy advice or the regulatory system. The biggest advances are therefore likely to be the result of existing players improving their ability to transfer knowledge. Nonetheless, I believe the presumption should be for all PSREs to engage.

Principles for this study

3.14. In seeking to frame recommendations for action, I found it necessary to be explicit about the principles or "ground rules" governing the form and extent of a sensible and effective Government agenda. These are as follows:

I take it as read that the main reason for pursuing knowledge transfer is to create economic benefit for the nation, rather than generate additional revenue for the Government. Nonetheless, in the majority of cases PSREs need the incentive to generate revenue in order to engage in wealth creation activities.

Conflicts of interest

3.15. Some PSREs have statutory or regulatory duties to fulfill. Examples include the John Innes Centre's role in advising on genetically modified organisms and the Veterinary Laboratory Agencies role in testing for diseases such as BSE and TB. For these organisations, commercialisation of research raises potential conflicts of interest with the PSREs duties.

3.16. In order to maintain their credibility and avoid their judgement being called into question, PSREs advising Government or fulfilling a regulatory role need to be, and to be seen to be, impartial. Therefore before entering into deals to commercialise research, PSREs must ensure that they have proper measures in place for identifying and addressing conflicts of interest. At the extreme, these measures may include identifying organisations a research establishment should not enter deals with where they result in economic benefit for the PSRE.

Benefits for the UK Economy

3.17. I have received suggestions that to reward the taxpayer for its investment in research, deals should be restricted to ensure that the UK receives the economic benefit from the commercialisation of research rather than international competitors. While I can appreciate the sentiment behind these suggestions I believe that they overlook the increasingly global nature of industry.

3.18. If the Government is keen to see industry led demand for PSRE research it must accept that industry is global. Some commercialisation deals will entail the export of UK-generated intellectual property but conversely many UK companies benefit from importing the results of research performed overseas. It seems to me that the Government cannot sensibly resist overseas industry demand for UK Government research. On the other hand it does seem legitimate for the Government to consider ways of protecting UK interests in such deals. In particular striving to ensure:

PSRE research capabilities are not weakened
proceeds to the tax payer are maximised and wherever possible ploughed back into research.

There is also scope for seeking to build measures to protect the UK's interests into contracts with overseas partners, for example, the rapid distribution of the final product in the UK and where possible manufacturing of the final product is in the UK.

4. Culture and commitment: the knowledge transfer mission

4.1. As I discussed in the previous chapter of this report there is a wide variation in the extent of PSREs involvement in and commitment to commercialisation of their research.

4.2. In those PSREs which make the most of their commercialisation opportunities senior management and scientists working at the bench share a belief in the knowledge transfer agenda. As an example, I was impressed by the determination and vision for knowledge transfer demonstrated by senior managers at the Roslin Institute. Although they have the advantage of working in an industry which is responsive to new development, the team at Roslin appear committed to ensuring that the benefits of their research reach the wider world.

4.3. At the other end of the scale, some PSREs recognise that their research should be commercialised wherever possible, but feel that their work lacks the potential for knowledge transfer.

4.4. Whilst I recognise the wide variation in the commercial potential of research undertaken by PSREs which I discussed in the previous chapter of this report, there is scope for a much more ambitious can do approach to knowledge transfer. This is fundamentally about embedding a knowledge transfer mission in PSRE's institutional culture.

4.5. Because of the tight constraints many funders have placed on their research budgets it is clear that some PSREs are highly motivated to seek opportunities to augment their research income. Several PSREs cited this as a key driver in their commercialisation activities. One body told me that vital areas of research have been saved through their ability to raise money from commercialisation of their research. The lesson I draw from this is that financial incentives cannot be overlooked as part of fostering a pro-knowledge transfer culture. This theme is developed in chapters 5 and 6.

The knowledge transfer mission

4.6. To create a clear mission for knowledge transfer and to ensure that scientists and PSREfunders clearly recognise the importance of this agenda, exploitation needs to become a transparent and integral part of the objectives of the establishment and it's sponsor.

4.7. Each of the Research Councils already have the commercialisation of research as one of their key objectives. But this objective needs to be applied across the PSRE universe to include departmental bodies. Therefore Government Departments need to ensure that as part of their mission statement they have an explicit objective of transferring PSRE research outputs to the wider economy.

4.8. This objective also needs to be passed down to become an integral part of each PSRE's mission. Sponsor departments and Research Councils should ensure that each PSRE has knowledge transfer as an explicit objective. Moreover knowledge transfer needs to be explicitly reflected in all research contracts between public sector funders of research and PSREs, whether or not those funders sponsor the PSRE in question.

All Government purchasers of PSRE research (whether or not from the sponsors of the PSRE) should have as part of their research mission the explicit objective of transferring PSRE research outputs to the wider economy; this should be explicitly reflected in all contracts with PSREs.

PSREs themselves should have knowledge transfer as an explicit part of their mission

The role of PSRE managers

4.9. As with all management challenges, the drive for greater knowledge transfer needs to be led from the top. Knowledge transfer is best pursued in an environment that encourages and supports scientists in their efforts to commercialise their research. PSRE managers have a crucial role here. They are in a unique position to lead by example, to instil in their organisation a strong culture that encourages and rewards commercialisation and to put formal processes in place to encourage knowledge transfer. Even where much of the effort is outsourced to a third party, responsibility must lie with PSRE Chief Executives.

4.10. The formal processes that PSRE management need to put in place include:

ensuring procedures are in place for identifying, proactively managing and protecting IP (which may include outsourcing these activities);
recognising commercialisation efforts in both the remuneration and the promotion processes;
recruiting individuals with commercialisation expertise into the organisation or ensuring PSRE staff have access to commercialisation expertise;
developing performance measures and targets against which their knowledge transfer efforts will be assessed; and
ensuring there is training on IP protection and commercial opportunities for PSRE staff.

4.11. PSRE managers are also the public face of the establishment. It is through the promotion of the PSRE to third parties that an institute can attract potential collaborators and identify potential areas for commercialisation. It is also management's responsibility to form the contacts with industry and other research establishments that form the building blocks for potential future collaboration.

A key challenge for Government is to ensure that leadership in the PSREs is committed to drive forward commercialisation as an explicit part of their mission.
The knowledge transfer objective should be embodied in the job description and personal objectives of the PSRE chief executive and be seen as his or her personal responsibility. It should be cascaded through the personal objectives of senior management and scientific staff.
PSRE chief executives should be required to develop, implement and secure staff support for a strategy for identifying and realising opportunities for translating research outputs into wealth creating products and processes. In particular these strategies must address the management systems that will support the commercialisation effort, acquisition of the necessary market knowledge and the management of conflicts of interest.
PSRE chief executives should develop performance measures and targets against which their knowledge transfer efforts can be assessed.
As and when vacancies for PSRE chief executive posts arise, the ability to lead and motivate a PSRE's knowledge transfer activities should be an explicit recruitment criterion.

Reduce risk aversion

4.12. PSREs need not only a commitment to knowledge transfer, but also permission to pursue it whole-heartedly. However, knowledge transfer is currently undertaken in a climate which is predominantly risk-averse. As not all attempts at commercialisation of research are going to be successful, this culture can inhibit the robust pursuit of commercial opportunities.

4.13. PSRE managers, their sponsors and funders need to be able to accept an element of risk in an attempt to transfer knowledge from the public to the private sector. Given the uncertainty of generating a return on the upfront costs of commercialisation, PSRE managers should carefully evaluate risk and balance this with the scale of the opportunity. This is difficult in the prevailing culture of accountability for public spending which incentivises risk avoidance rather than risk management.

4.14. The Government should encourage well thought through risk taking as an integral part of the knowledge transfer process. What is required is an environment that encourages PSRE managers to take decisions where the outcome, although uncertain, provides substantial potential upside for the wider economy and the possibility of significant returns to the PSRE itself whilst explicitly recognising that there is also a chance of failure.

Risk assessment and public expenditure

4.15. During the course of our study, several PSREs raised questions over the level of risk the public accountability framework permits them to take. At issue is a fear among some PSREs of falling foul of the National Audit Office and the Public Accounts Committee for investing public funds in projects to commercialise research where the outcome is uncertain. If a commercialisation project fails there is a fear of being criticised for misappropriating public funds in that particular case since auditing is not conducted against a portfolio of projects.

4.16. The problems of risk management in the public sector goes wider than the scope of this review. I was encouraged to see that in the Modernising Government White Paper, the Government has outlined a more positive approach to risk. It states:

"The Government is also determined to encourage innovation and share good practice. To do this;

we are working closely with the Public Audit Forum - which represents all the national audit agencies - to find ways of encouraging more modern and effective forms of service delivery at local as well as central level. Auditors are rightly interested in whether organisations obtain value for money. We want them to be critical of opportunities missed by sticking with the old ways, and to support innovation and risk-taking when it is well thought through. We welcome the Forum's statement that the national audit agencies will respond positively and constructively to our Modernising Government initiative. In future, people will no longer be able to use audit as an excuse for not delivering more co-ordinated and efficient services.

4.17. The Modernising Government White Paper also includes a useful statement from the Public Audit Forum on their approach to auditing risks incurred to advance innovation.

"Modernising Government represents a significant change in the public service environment, and its successful implementation will require new ways of working. The goal of achieving more efficient and effective delivery of public programmes is one that is shared between public sector managers and auditors, and the Public Audit Forum do not want fear of the risks of change to stifle worthwhile innovation designed to lead to improvements. So we encourage auditors to respond constructively and positively to Modernising Government initiatives and support worthwhile change.

"Public sector managers are of course responsible, as stewards of public resources, for assessing and managing the risks associated with innovation and increased flexibility, and for ensuring the proper conduct of public business and the honest handling of public money while pursuing innovative ways of securing improvements in public services. It remains important to ensure proper accountability but this must not be approached in a rigid way that might mean missing opportunities to deliver better value for money. And auditors will respond to this new environment positively and constructively by:

adopting an open-minded and supportive approach to innovation (including the use of techniques tried elsewhere), examining how the innovation has worked in practice and the extent to which value for money has been achieved.
in the process, supporting well thought through risk-taking and experimentation.
consistent with their independent role, providing advice and encouragement to managers implementing Modernising Government initiatives by drawing on their audit work in this area, seeking to identify and promote good practice so that experience can be shared and risks minimised.

"In these ways, we believe auditors can support and encourage worthwhile change, while providing independent scrutiny and assurance, and fulfilling effectively their statutory and professional responsibilities."

4.18. There is more to be done in developing a less risk-averse culture. The National Audit Office and the Public Accounts Committee are a key part of the risk culture. I welcome the statement of Government Policy Quoted above, but there is a clear need to develop these general principles in the specific case of knowledge transfer.

I welcome the movement in Government towards a more mature understanding and handling of risk. Treasury and OST should work with the NAO and the PAC to promulgate a accountability framework for commercialising public sector research that emphasises portfolio risk management and transparency of operation rather than incentivising risk avoidance.

5. PSRE/Sponsor relationships: management and control of IP and financial freedoms

Management of intellectual property

5.1. Given the large volume of knowledge generated by research establishments, and the rapid pace of technological development in the market place, it is clear that organisations seeking to maximise the economic potential of their research need to have an active policy for managing and controlling their intellectual property.

5.2. The value of the knowledge produced is heavily time dependent. The value of scientific discoveries, no matter how innovative or well protected, if left undeveloped for too long will be severely depleted and may be overtaken by the market.

5.3. The management of intellectual property is a complex task that can be broken down into three steps; identification of ideas with commercial potential; the protection and defence of these ideas and their exploitation..

Identification of ideas with commercial potential

5.4. All organisations need to have processes in place for identifying research that has commercial potential. During the study I came across telling instances in which research institutes had failed to identify innovative ideas as commercial opportunities which were subsequently exploited by other organisations. Amongst these are the liquid crystal display developed at what is now the Defence Evaluation and Research Agency and the monoclonal antibody technology developed in the MRC's Laboratory of Molecular Biology in Cambridge. I have no doubt there are also instances of potentially exploitable ideas the value of which has never been realised or even identified.

5.5. Highly motivated staff who recognise the importance of commercialisation are one, very effective, means of ensuring that research with exploitation potential is identified and brought to the attention of the PSRE's management. The need to motivate and incentivise research staff is considered in more detail in chapter 6 of this report. But, to support this effort PSREs also need formal procedures for identifying ideas with commercial potential.

5.6. It is for PSRE management to determine the most appropriate procedures for their establishments. I have encountered a range of possible mechanisms that have been adopted, these include:

ensuring scientists, when reporting on the progress of their research, evaluate its commercial potential
ensuring supervisors regularly review the commercial potential of their scientists' research
arranging for technology transfer experts or specialist external reviewers to consider applications for commercial exploitation
ensuring that all articles and presentations of research are submitted to research supervisors or the technology transfer section prior to being made public
outsourcing the identification of IP to a third party.

Protection and defence of intellectual property

5.7. It is well known that once research establishments have identified research which may have commercial potential they need to ensure that they have adequate protection for that innovation. All the research establishments visited during the course of our study were well aware of the importance of adequate IP protection.

5.8. IP protection is rarely straightforward. When determining how to protect their knowledge base, PSREs need to think strategically about current developments, potential competitors, and the potential the research provides for new products or services. PSREs often need to find a balance between protecting their rights over a discovery and maximising their flexibility to develop the technology into a range of products and services.

5.9. Protecting IP, and where necessary enforcing legal rights is also expensive. The costs of maintaining a patent are considerable, and once taken out a patent is only of value if the patent holder is prepared to defend their property through the courts. There is little benefit in protecting research outputs where there is no possibility of deriving revenues from the work streams either now or in the future. PSREs need to balance the costs and potential economic benefits to determine the most appropriate IP protection for their research outputs.

Exploiting IP - Control of intellectual property

5.10. There are several factors which favour PSRE managers to retain and control their PSREs IP:

They have a unique understanding of the scientific field in which the establishment works.
They have direct access to the establishment's employees, many of whom have experience of knowledge transfer in the relevant markets (albeit sometimes limited).
They usually have links to relevant industries through various stakeholder relationship, and in some cases their PSREs will be positioned as a research base responding to industry needs.

5.11. Most if not all PSREs contract out some or all of these functions. The use of private sector patent agents to advise on the technical legal matters is widespread but some PSREs manage everything else internally. At the other extreme some PSREs rely almost entirely on outside assistance from organisations such as BTG plc, while others have not found this approach satisfactory. Provided the reviewer takes all opportunities to transfer the PSRE's accumulated knowledge, I see no reason to recommend one approach over others, the choice depends very much on the three way fit between the PSRE, the commercial partners and the exploitation market. There are of course also financial considerations because these partners may be the most practical means of meeting the costs of managing and protecting IP. Whoever carried out this function responsibility for managing the IP must still rest with PSRE management.

5.12. Yet in several instances I have found that the ability to manage the IP is seriously compromised. Some PSRE sponsors and other funders of research stipulate that they should retain title of the intellectual property and require PSREs to seek their approval during negotiations with potential collaborators. This can severely hamper knowledge transfer activities, most notably by causing a delay in negotiating licensing deals especially if the parent wishes to have a case by case involvement. This can be further complicated where PSREs need to receive approval from two or more funding organisations.

5.13. During the study I uncovered at least once instance in which managers of a PSRE reported that the prolonged approval process had resulted in a commercial opportunity not going ahead. In another case a sponsor took so long to consider the licencing of a new technology that the management of a PSRE decided to proceed without approval to avoid jeopardising the project.

5.14. Negotiating terms for commercialising research is complex. A PSRE needs to ensure that the potential of the science is maximised, and that the establishment is adequately rewarded for its contribution. The possibility of a large number of potential partners or a wide choice of potential routes to collaboration mean an establishment needs to have maximum flexibility and the ability to react quickly to proposals from potential partners.

5.15. Yet the benefits of sponsors' intervention on each transaction are unclear. I was not convinced that in general sponsors have sufficient expertise or resources to add significant value in reviewing a PSRE's deal by deal commercialisation plans, or indeed to justify this degree of involvement.

5.16. In forming my recommendations in this area, I recognise that the Medical Research Council seems to be a case apart. The MRC has over 35 units researching into medical sciences, many of which have fewer than 20 employees. Given this diffuse structure, the MRC has formed a central team to lead and manage the knowledge transfer process. The technology transfer group in the MRC appears to fulfill this central role well, and provides its institutes with effective interventions in commercialisation cases.

5.17. I accept the need to ensure that PSREs remain aligned to their core objectives and to satisfy themselves that the requirements of accountability for public spending are properly met. But I question whether this requires detailed approval of each individual transaction during negotiations. There is an overwhelming case for sponsors to cede control of the intellectual property to their PSREs and forgo their power of veto over commercialisation decisions. Instead PSREs should be regularly asked to account for their performance against their commercialisation objectives. Sponsors have an important role in supporting PSRE commercialisation efforts and ensuring these are conducted properly. But this is entirely consistent with vesting control of IP with the PSRE itself.

There is an overwhelming case for requiring that IP generated by a PSRE be owned by the PSRE and assigned by authority of the chief executive - unless effective alternative arrangements already exist (they do in the case of the MRC - but in no other instances that I have been able to find). The case by case involvement by public sector funders of decisions about the assignation of intellectual property - unless they have specific expertise and support to bring to the table - does not generally seem to add value and can be harmful.

Financing knowledge transfer

5.18. The typical R&D cycle means that once research has been identified as having commercial potential it needs considerable effort to turn the ideas into marketable products and services. At this stage in the research cycle financing is often required to demonstrate the commercial feasibility of prototype products or processes.

5.19. If a research establishment is unable to raise the funds to invest the initial development then there is a risk that the economic benefit of the research will be lost. This gap in funding is sometimes called the "development gap". It is beyond the stage which is funded by research income, but usually before the point at which business inventors or venture capitalists are prepared to invest. The development gap is a general problem faced by all research organisations. For PSRE's however the problem can be more acute because of the tight budgetary constraints and operating rules under which they operate.

5.20. In addition to the development costs, a PSRE also has to face the administrative costs of protecting commercialisable research, negotiating deals, and monitoring the licencing once an agreement has been reached. As a result many PSREs see the financing of knowledge transfer as a key constraint. Clearly there is some scope for PSREs to lever more funds from private sector partners to meet these costs, but there is more the Government can do.

Financial flexibility

5.21. Although I recognise that the nature of science funding means that these budgets invariably allow little room for manoeuvre. It may be in an institute's interests to invest a small amount of their own money in ideas or research which thy believe have particular merit, rather than lose the commercial potential of the research.

5.22. Funders of research should also examine carefully the knowledge transfer strategy of the PSREs they support. To unlock the value of the research they have invested in may require funding to be explicitly directed at knowledge transfer.

5.23. The financing problem is seriously exacerbated for those PSREs, mostly departmental PSREs, which lack the freedom to maintain and deploy surpluses. This arises when parent bodies impose strict cash controls over their PSREs, preventing them carrying over end-year surpluses, or retaining the proceeds of commercialisation deals. As a result of such controls PSREs neither can afford nor have the incentive to engage in commercialisation.

5.24. I identified several PSREs whose financial controls meant they were effectively unable to benefit from receipts from their commercialisation activities. This is despite the Treasury's Wider Market guidance which allows departments and non-departmental public bodies to retain receipts from commercialisation projects. It is important that these freedoms are cascaded down to provide incentives to individual PSREs.

5.25. Method of dividing the proceeds from commercialisation between sponsors/funders and their PSRE should err on the side of generosity and provide a proper an incentive for the PSRE at all levels of income. Sponsors should not use these arrangements as a means of clawing back a grant.

5.26. Some of the most effective schemes for allocating proceeds have predetermined rates which allocate income between the PSRE and the sponsor according to the size of the income. These maximise the incentives for the PSREs by allowing them to retain the majority of - if not all - revenue for relatively modest projects, with the proportional falling as the size of the income increases. These strikes me as the right approach. Indeed I see no reason why, for moderate levels of income, a PSRE is not allowed to retain all the proceeds.

5.27. To avoid creating disincentives to commercialisation it is important to provide incentives at all levels of income. For example one research council maintain the right to retain all proceeds where they exceed 10% of a PSRE's recurring income. Although this rule has not yet been used in practice, it runs the risk of inhibiting very large commercialisation projects, despite these being the ones that can have the largest impact.

University Challenge Fund and other Government schemes

5.28. To help address the development gap in universities the Chancellor announced in the 1998 budget, a challenge fund called University Challenge. This provided £45m of development finance to be shared by competing universities who could demonstrate their potential to take their research closer to market. Funds for a further round were announced in the 1999 Budget.

5.29. In the first round Public Sector Research Establishments were able to bid in consortia led by a University, but they were unable to bid in their own right. I see no reason why PSREs should continue to be excluded from University Challenge as lead bidder. I believe that research institutes should be given the opportunity to compete on merit for access to development finance. The Government should also consider the scope for allowing PSREs access to other Government support schemes where this is not already possible. Similarly, given the importance of demand from industry in facilitating knowledge transfer, Government should look at plugging PSREs into current schemes which incentivise industry to exploit research.

Given the importance of industry demand as a driver of knowledge transfer, Government should look at the scope for drawing PSREs into schemes which incentivise business to participate in knowledge transfer.

5.30. It may be that issues on financing knowledge transfer can be addressed from within existing budgets based on the recommendations above. However I believe there is the potential for modest additional investment in this areas to reap greater rewards. Therefore I believe the Government should consider earmarking some additional funds to meet the costs of knowledge transfer in the PSREs.

The Government should consider earmarking some additional funds to meet the costs of knowledge transfer tin the PSREs.

The need for greater autonomy

5.31. In conducting this study I was struck by the contrast between the regimes governing departmental PSREs and Research Council Institutes. In the case of the former, the financial controls imposed by the department, coupled with constraining IP policies, seem to unduly limit the scope and motivation of the PSREs to engage fully in knowledge transfer. The rules on the civil service management code (see next chapter) create an additional barrier for departmental PSREs.

5.32. During my study I have encountered no good reason why departmental PSREs should remain under such close control of their departmental sponsors, except possibly for the very smallest ones. I firmly believe that if these PSREs were put a greater arm's length from Government departments it would remove them from unnecessary constrains and improve their capacity to engage in knowledge transfer.

5.33. Providing PSREs with greater autonomy, for example as NDPBs, would not inhibit their capacity to deliver their primary outputs since it would merely be putting them in an equivalent position to research council PSREs and might make create benefits by making the distinction between purchaser and provider clearer.

5.34. Giving departmental PSREs the status of Non Departmental Public Bodies ("NDPB") would provide PSREs with the necessary level of autonomy, however I accept that there are other options which might be appropriate in some cases.

I strongly recommend that the departmental PSREs be put at greater arm's length from Government departments. Ministers should consider how this should best be done for each of these PSREs, with the presumption in favour of a move to less central control - except where there is an overwhelming case to the contrary.

6. Incentives for PSRE staff

6.1. Many scientists enter the scientific profession motivated by their passion for science and their desire to push forward the boundaries of human understanding. I have been impressed by the commitment demonstrated by the scientists I have met during the course of my study. For most scientists the greatest reward comes from the prospect of their work leading to discoveries which benefit the public ( and from the peer recognition so derived).

6.2. Scientists' career progression is largely dependent on peer review and the prestige associated with publication. As already mentioned in this report, collaborating with the private sector doesn't always come naturally. The complexities and frustrations of working with the commercial sector can act as a deterrent to commercialisation, particularly if the potential rewards are perceived as being insignificant in comparison with the professional rewards attendant on advancing human knowledge.

6.3. In order to level the playing field and encourage scientists to overcome the frustrations of collaboration the Government needs to ensure that the emphasis it now places on knowledge transfer is translated into incentives for scientists to ensure that they are recognised not just for conducting excellent science but for exploiting it.

6.4. There is a broad range of rewards which PSREs can offer their employees. As well as highlighting and proclaiming strong performances internally, PSREs are able to provide tangible rewards for commercialisation by recognising it in their promotion processes and by providing financial incentives.

6.5. Rewarding and incentivising staff to commercialise research should be regarded as an integral part of the process of promoting commercialisation and an entrepreneurial culture. In the private sector and in many of the research council's institutes incentive schemes are now widespread.

It should be a requirement for PSRE chief executives that they have in place effective schemes for encouraging and rewarding the participation of scientists in knowledge transfer activities.

6.6. During the course of my review I found several examples of schemes in which the PSREs share with scientists the financial income from commercialisation work. Below is a table of an award to inventors scheme operated by one of the research councils which provides the inventor with a proportion of the receipts. The scheme operates on a sliding scale, designed so that the proportion paid to inventors falls as the level of income rises as shown below.

Income from commercialisation Proportion paid to inventor

Gross receipts - the first £1,000 100%

from £1k to £50k 20%

Net receipts - from £50k to £500k 10%

from £500k to £1m 5%
over £1m 2.5%

6.7. This scale cannot be universally applied to all PSREs as the income ranges and the incentives given to scientists would need to take account of each PSREs potential to commercialise research. But the key features of the scheme have broader applicability. It provides significant incentives, even for relatively small commercialisation projects, while ensuring, for highly lucrative commercialisation projects, that there is an incremental incentive for scientists to generate additional profit.

6.8. Selecting a financial incentive scheme for each PSRE is not straightforward. There is a balance to be struck between on the one hand providing scientists with insufficient reward to encourage knowledge transfer and on the other hand distorting PSRE's behaviour to the detriment of the PSRE's mission or research programme.

6.9. Central Government has a part to play in this. The Office of Science and Technology's oversight of science expenditure in the UK and its close contacts with the scientific community make it well placed to gather information on the incentive schemes currently operated in Universities, PSREs and the private sector and to develop an understanding of good practice.

OST should help to exemplify and promote best practice in providing scientists with incentives for knowledge transfer including in respect of equity and share options.

The civil service management guide

6.10. For staff of departmental PSREs, arrangements which offer financial incentives as a reward for commercialisation work can constitute a breach of their conditions of employment. At issue is clause 4.3.8 of the Civil Service Management Code which stipulates that civil servants "must not use information acquired in the course of their work to advance their private financial interests".

6.11. The current interpretation of the code tends more towards a position that civil servants must not under any circumstances make profit from private ventures deriving from their Government work while they remain in its employment. This effectively rules out certain forms of direct participation by serving Government scientists in the commercial exploitation of their research, in particular receiving equity or share options.

6.12. I believe the application of the code needs to be revised in the interests of furthering the Government's objective of encouraging knowledge transfer from PSREs to business. As currently applied, the code misunderstands the nature of intellectual property and perpetuates an inconsistent approach to knowledge transfer across the public sector.

The Nature of Intellectual Property

6.13. It is clearly important that civil service propriety is maintained and is seen to be maintained. Civil servants should not benefit privately by virtue of their position, by trading inside information for example. This is what the code, in my reading, seeks to prevent. But entrepreneurial scientists are not exploiting their position. They are exploiting their own skills, experience and know-how as applied to and gained from their work. Where this is the case, and where there are wider benefits to be secured, such activity should be encouraged. It seems to me that scientists exploiting their know-how are a distinct category that should be recognised by the code.

6.14. It seems to me that there is some precedent for this in legislation. The rights of employees to be compensated for inventions of outstanding benefit to their employer were recognised in the Patent Act 1977. Under section 40 of the Act, employees may appeal for compensation to be paid by the employer. In addition section 42 states that the rights for employees' apply equally to Crown employees and cannot be diminished by terms of a contract.

Inconsistency

6.15. Universities play a key role in innovation and technology transfer. Many now recognise academic freedom to exploit intellectual property and in some institutions, the individual ownership of IP. Now, because of the close links which exist between universities and agencies such as NHS Trusts and Research Council-funded institutes, these arrangements are being replicated to some extent in these public sector bodies.

6.16. Underpinning this development in policy is a recognition that creating incentives for knowledge transfer is beneficial both for the advancement of science and for the economy. The current position in departmentally funded institutes covered by the civil service management code is inconsistent with the approach permitted in PSREs (often pursuing similar kinds of science in furtherance of similar Government objectives) which are NDPBs. This anomaly is difficult to defend. It also seems unlikely to lend itself towards the retention, in the public sector, of the best and most commercially oriented scientists.

6.17. The Government has started to recognise the need for change. In the Modernising Government White Paper 1998 it refers to the need to take a "more creative approach to financial and other incentives for public service staff, including a commitment to explore the scope for financial reward for staff who identify financial savings or service improvements."

6.18. It goes on: "Government departments and agencies will introduce schemes which reward staff with a sliding scale percentage of any savings or improvements made as a result of their suggestions. We will create positive incentives for success at all organisational level too. So we will look for new ways of rewarding organisation performance and success-sharing, for example by using team bonuses or by linking pay, bonuses or other rewards to the achievement of performance or efficiency improvements."

6.19. For departmental PSREs putting this into practice in the knowledge transfer context requires clarification of the Civil Service Management Code.

Implementing Change

6.20. The current approach effectively rules out Government scientists' personal participation in commercialisation activities. A more mature approach would be one which allows such behaviour subject to defined conditions which protect the public interest. The Civil Service business appointments rules provide a good model here. These rules do not forbid civil servants to take business appointments - they provide guidance on the circumstances in which civil servants are required to obtain approval and how this should be sought. In a similar vein, civil servants should not be forbidden from making personal gain from commercialising research, but be able to gain approval subject to defined conditions being met, including the requirement for propriety.

6.21. The relaxation of the code need not compromise existing standards of propriety. On the contrary, it could help to clarify the required standards by putting a greater onus on research establishments to put in place active approval mechanisms. In universities and other public sector institutions not bound by the code, I already have practical examples of how this can be achieved.

Principles

6.22. Relaxing the Civil Service Management Code will be possible only if the important issues set out above can be squared with the requirements of propriety. It will require a set of workable rules or institutional arrangements. I suggest the following:

6.23. Serving Government scientists can participate in commercial activity provided that:

it is reasonably clear that the activity will contribute to the aim of developing and exploiting intellectual property, to the wider benefit of the economy;
the Crown has an appropriate share of the ownership of the IP, reflecting its investment in creating and developing the asset;
the scientist concerned had a key involvement in the underlying research and their continuing involvement is important to the likely success of the commercial venture;
others who played a significant role are appropriately rewarded;
an informed view has been taken on the most appropriate route to market for the product/process in question;
the PSRE has taken a collective view of the probity of the arrangements.

As an immediate priority Ministers should review the application of the civil service management code to the special circumstances of science commercialisation. The effective bar on certain forms of direct participation by serving Government scientists in the commercial exploitation of their research - in particular receiving equity or share options - should be removed. The principles that apply should be the same as the business appointment rules for civil servants: personal gain should not be outlawed; rather it should be permitted subject to having proper systems in place for ensuring the probity of the proposed commercialisation arrangements.

7. Access to commercialisation expertise

7.1. I have already recommended that PSREs be given ownership and control of their intellectual property and greater financial freedoms to commercialise their research. But PSREs also need expertise in commercialisation. Although there are several cases where PSREs have successfully managed to commercialise research without access to commercialisation expertise, such expertise can often prove invaluable. The benefit of experience can often help develop coherent strategies and avoid potentially costly mistakes. This was a clear theme that emerged in my study.

7.2. Lack of experience has meant several PSREs have had to learn lessons the hard way. Cases of publishing research findings before the potential for commercialisation had been explored are common, and most PSREs have learned from this. In a more recent case a PSRE licenced some of its technology, but regretted not taking a more strategic approach to technology transfer when it established a spin-out company in direct competition to the licence holder of its technology.

7.3. Commercial pressures from third parties increase the need to avoid mistakes. In recent negotiation over a consultancy agreement for a small proportion of a scientist's time, experience helped a PSRE identify and remove an unreasonable clause in the agreement. Had it not been spotted it would have resulted in the commercial partner having ownership rights to all the intellectual property produced during the lifetime of the scientist.

7.4. Organisations in the public and private sector are increasingly recognising the value of commercialisation expertise and there is strong demand for individuals who have a scientific background and practical experience in commercialising research. It isn't simply advice and encouragement that is required but also deep private sector skills associated with originating the prospects, helping to develop the business case for potential relationships and providing hands-on commercial support during the negotiating phase. Such individuals are however in short supply. For PSREs which tend to perform unique research in specialist scientific fields this skills shortage can be particularly acute.

7.5. The specialist nature of many research establishments and the considerable knowledge and experience of all PSRE managers means they are in the best position to determine the appropriate level and source of commercialisation expertise that their institute requires. I see the prime responsibility for ensuring that the PSREs have access to appropriate knowledge transfer expertise lies with the PSRE's CEO.

PSRE chief executives must ensure that they have access to the skills and experience they need for knowledge transfer.

7.6. This is not to say that PSREs have to do everything in-house. As noted in Chapter 5 there is no one approach for accessing and deploying the necessary range of skills for knowledge transfer. Some bodies, most notably the MRC, seek to retain all necessary expertise in-house, but have difficulty retaining staff once they have developed commercialisation expertise. Larger PSREs (or consortia of PSREs) might be able to justify recruiting in-house specialist teams, but in most cases the costs of doing are likely to be disproportionate to the scale of the commercialisation opportunities. Government's main concern should be to ensure that PSREs are able to get access to the expertise they need, whether or not this is retained in-house.

7.7. One consequence of the strong demand for commercialisation expertise is that individuals with relevant experience command high salaries. Public sector pay constraints, however, can mean that neither PSREs nor their sponsors are able to attract and retain the most skilled individuals. This is despite the considerable impact the expertise could have on those institutes with considerable potential to generate income from their research. As the costs of employing commercialisation expertise comes from within their budgets, PSREs already have a strong incentive to ensure that recruited expertise achieves value for money. Given the potential impact that such experience could provide the Government should consider improving flexibility of PSREs to attract and retain commercialisation expertise. This may include greater use of short term and part time contracts.

Government should seek to improve the flexibility of PSREs to pay market rates to attract and retain people with commercialisation expertise.

Partnerships

7.8. The shortage of relevant skills and the difficulties associated with recruiting and retaining expertise means there are substantial benefits to be achieved from partnerships which allow PSREs to share knowledge transfer resources. In particular where research establishments (including higher education institutes) have experience of commercialisation there is clearly scope for sharing skills which are common to most commercialisation activities such as legal advice, understanding of commercialisation routes and generic business and marketing advice. Where skills and experience are more specifically tailored to discrete areas of science or industry, partnerships are more difficult, but by no means impossible.

Support from sponsors and central Government

7.9. As the bodies coordinating several research organisations sponsor departments and research councils should where necessary ensure that PSREs have access as necessary to the commercialisation expertise they require. There is a broad range of measures that sponsors can take to ensure access to commercialisation expertise. These include:

establishing networks for their institutes and other research organisations to share experience and best practice on commercialisation activities
providing regular training courses to increase awareness and knowledge of the most appropriate commercialisation techniques for their institutes
where sponsors have several smaller research establishments, or where the nature of the skills required is common across many of the institutes it may be appropriate to establish a central commercialisation capability that is able to advise and support on issues which are generic to all their research institutes. As noted earlier, this model has worked in MRC. Elsewhere I have not been convinced that sponsors have the same degree of expertise to allow them to act other in the same way as MRC does. But nonetheless there is considerable scope for them to act in a broadly facilitating capacity.

Sponsor departments and research councils must where necessary support their PSREs in gaining access to relevant expertise, and they should promote a consortium approach to knowledge transfer where this is most likely to achieve critical mass of activity and economies of scale.

7.10. Central Government could also have a role to play in ensuring PSREs have access to relevant expertise. Clearly it would be impractical for the Government to attempt to provide detailed commercialisation expertise which is directly relevant to all the areas of science and industrial applications covered by the PSREs. But I see a role for a small central expert unit, perhaps located in the Treasury, which is capable of providing advice and expertise in defined circumstances for example for larger and more complex deals. This unit could help drive forward and monitor progress with PSRE knowledge transfer more generally. Such a unit could initially be given a life of say two years, after which time its value is reviewed.

Ministers should consider creating a small expert unit within central Government to drive forward the knowledge transfer agenda - and provide advice, help and encouragement to PSREs and their sponsors on knowledge transfer - particularly in relation to larger and more complex deals.

Networks

7.11. Networks are perhaps one of the most effective methods for establishing contacts and exchanging information. They bring together institutes and individuals with a common interest and provide an excellent forum for sharing best practice and making introductions to people who can be later called on for advice. A network may also provide the opportunity for two establishments to gain synergistic benefits from working together.

7.12. A strong example of this is the Biosciences Network which brings together on a regular basis the eight BBSRC institutes and the Horticultural Research Institute. This provides a good forum to learn the experiences of others and benefit from their expertise.

7.13. I would urge more networks to be established among PSREs and with the broader academic community. These could be based around industrial groups, organisations with similar science interests or common funders of their research. It seems to me that PSRE sponsors, particularly those which support a family of PSREs, are best placed to take the initiative here.

Sponsors of PSREs should encourage the development of networks among PSREs for sharing best practice in knowledge transfer and to promote synergies.

DTI´s Research and Development website

"Creating knowledge creating wealth" Realising the economic potentia of public sector research establishments

A report by John Baker to the Minister for Science and the Financial Secretary to the Treasury

Contents

1. Executive summary

Introduction and background

Remit

Context

Methodology

Current practice, the scale of the knowledge transfer opportunity and principles fot this study

The current state of play

The scale of the opportunity for knowledge transfer

Principles for the study

Culture and commitment: the knowledge transfer mission

Recommendations

PSRE/Sponsor relationships: Control of IP and financial freedoms

Managing intellectual property

Financing problems

Recommendations

Incentives for PSRE staff

Access to commercialisation expertise

Recommendations

2. Introduction and background to the study

Background to the study

Public sector research establishments

Departmental bodies

Research council institutes

Charitable status

Focus on high quality research

Methodology

3. Current practice, the scale of exploitation opportunity and principles for this study

Current state of play

The scale of the opportunity for knowledge transfer

Nature of the relevant industry sectors.

Nature of the science being undertaken.

Principles for this study

Conflicts of interest

Benefits for the UK Economy

4. Culture and commitment: the knowledge transfer mission

The knowledge transfer mission

Reduce risk aversion

Risk assessment and public expenditure

5. PSRE/Sponsor relationships: management and control of IP and financial freedoms

Management of intellectual property

Identification of ideas with commercial potential

Protection and defence of intellectual property

Exploiting IP - Control of intellectual property

Financing knowledge transfer

Financial flexibility

University Challenge Fund and other Government schemes

6. Incentives for PSRE staff

The civil service management guide

The Nature of Intellectual Property

Inconsistency

Implementing Change

Principles

7. Access to commercialisation expertise

Networks

"Creating knowledge creating wealth"
Realising the economic potentia of public sector research establishments