House of Commons - Defence

Select Committee on Defence Eighth Report

6 Exploiting Intellectual Property

67. One of Dstl's top-level objectives is to

exploit its intellectual property (IP), in line with MoD and Government policy for technology transfer, in order to generate value for money for the taxpayer. This should be done for example, by generating a financial return for the taxpayer through developing equity by Joint Ventures and income through licensing.[112]

The MoD's memorandum states that all public sector research establishments are required by Government to ensure that, wherever possible, their Intellectual Property (knowledge and technologies developed with public funding) is exploited within the wider economy. This policy applies fully to Dstl. The aim

is not that Dstl itself expands into wider markets and undertakes commercial work, but that, where appropriate, its technology is safely transferred to independent companies (by licensing or through spin-outs and Joint Ventures) for them to develop into products and services for the greater public good.[113]

Ploughshare Innovations Ltd

68. When Dstl was formed in 2001, it inherited from DERA "a successful early track record in IP exploitation". This included three spin-out companies and "a portfolio of income generating licence agreements with third parties for the right to use patented Dstl knowledge". Dstl has formed a further three spin-out companies with outside investors.[114]

69. While Dstl has a clear remit to exploit IP, the MoD's memorandum acknowledges that there has "been some ambiguity surrounding Dstl's role", given that its primary purpose was undertaking work that had to be done in Government. The challenge for Dstl is to find a way to exploit its IP role without compromising its integrity or its ability to provide impartial advice to the UK Government.[115] In response to the challenge, the MoD's memorandum states that

Ministers agreed that the best way for Dstl to meet its technology transfer obligations was through an MoD wholly-owned GovCo whose sole purpose was to pursue the Dstl's (and therefore the Government's) technology transfer and exploitation agenda with professional expertise.[116]

70. Ploughshare Innovations Ltd (Ploughshare) was created on 6 April 2005 and acts as Dstl's technology management company with a remit to exploit in non-defence fields the intellectual property that Dstl selects to license to it.[117] The MoD's memorandum sets out the Ploughshare business model. Ploughshare has access to Dstl's broad range of patented IP in a wide range of technologies. The company reviews and assesses the potential value of individual patents and clusters of patents and develops exploitation plans for transferring those patents and technologies to commercial exploitation plans in civil sectors. The two main income streams for Ploughshare are income from IP licences and from sales of equity in technology spin-outs and Joint Ventures.[118] Dr Saunders told us that

Ploughshare….act as our agents for exploiting the intellectual property that we generate as part of our research….the two main ways are: to license that technology to companies that might already have products and would need a licence or could develop their product further to enhance it and would take a licence on our technology to make that happen. The other thing they can do, if there is no existing industry out there and no existing companies, is to look at developing a start-up company using the IP and taking it to a point where they, maybe, have a product to market or they have developed a prototype, at which point that start-up company could be sold or it could develop into a fully fledged company downstream.[119]

71. The MoD's memorandum states that the current (Years 1 to 3) licence revenue is insufficient to cover Ploughshare's short-term operating costs. The shortfall is to be covered from a "draw-down" loan from Dstl, up to a maximum of £750,000 over three years. Ploughshare is expected to repay the loan in 2007-08 and aims to do so from the proceeds of the first projected equity sale.[120]

LICENSING INTELLECTUAL PROPERTY

72. We asked how much revenue Dstl received from exploiting its IPR and who retained this revenue. The MoD told us that the direct exploitation of Dstl's IPR by Ploughshare was in its early stages. In its first year of operation, Ploughshare collected over £200,000 of exploitation revenue. Income for 2006-07 was expected to be closer to £300,000 and further income growth was expected. All the income from such exploitation activity was collected and retained by Ploughshare, not by Dstl.[121]

73. We were concerned there might be technology that had been lost to the public good because the price being asked was too high. Dr Saunders said that Dstl was sensitive to this issue and Ploughshare was set some objectives which were not "purely financial". She said that Dstl tried "to maximise some of the benefit to the public", and took note of the number of jobs created.[122] Dstl did not get involved in the pricing of IPR. Ploughshare did that and its Board included non-executive directors who had worked in the "licensing and entrepreneurial areas".[123]

JOINT VENTURES

74. Dstl was involved in seven Joint Ventures.[124] We asked whether the exploitation of its intellectual property was diverting Dstl from core activities. Dr Saunders said that the oversight of these Joint Ventures was done by Ploughshare. Dstl had employed Ploughshare to do that on Dstl's behalf.[125]

75. Dr Saunders told us that in order for technology to be released from Dstl to Ploughshare and then to Joint Ventures, Dstl had to get agreement from the Intellectual Property Group in the DPA.[126]

GOVERNANCE ARRANGEMENTS

76. In our report on The work of the Met Office in 2006, we highlighted the losses incurred by the weatherXchange joint venture.[127] Mindful of this experience, we asked about the governance arrangements on Ploughshare and Dstl's joint ventures. Dr Saunders told us that Dstl had considered the experience of the Met Office.[128] The Ploughshare Board included Dstl's Acting Chief Executive and its Finance Director, but it was "dominated by non-executives" and it was chaired by a non-executive.[129] We asked how Dstl guarded against any potential conflicts of interest. Dr Saunders told us that "the important thing here is that Ploughshare is 100% owned by MoD and Dstl on behalf of MoD". There was no investment from external organisations into Ploughshare itself.[130] When consideration was given to ways of funding Ploughshare, it was concluded that it would not be "a wise move to bring investment into Ploughshare itself".[131]

77. Dstl had been gradually moving away from having Dstl directors on the Boards of the joint ventures. Ploughshare was now required to provide directors. Dr Saunders considered that this helped "put these things more at arm's length" and got "rid of any chance of conflict of interest".[132] The MoD's memorandum states that Dstl-nominated directors receive no additional remuneration for their work as non-executive directors of joint ventures. Dstl staff are not permitted to receive equity shares in newly formed joint ventures "as this could present staff with a conflict of interest or a distraction from their core work" for the MoD.[133]

78. One of Dstl's top-level objectives is to generate a financial return for the taxpayer by exploiting its Intellectual Property. Ploughshare Innovations Ltd, a wholly owned Government Company, has been created to act as Dstl's technology management company. We note that the aim of such an arrangement is to prevent Dstl from being distracted from undertaking its core work and to draw in staff with expertise in exploiting intellectual property.

79. In the first two years of its operation, 2005-06 to 2006-07, Ploughshare is expected to raise some £500,000 and further income growth is expected in the future. This is to be welcomed, but we are unclear why Ploughshare will retain this income if the aim is to generate a return for the taxpayer. In addition to financial objectives, Ploughshare has been set non-financial objectives. We look to the MoD and Dstl to track performance against these non-financial objectives as well as its financial performance, and to provide full details in Dstl's Annual Report and Accounts.

80. For companies such as Ploughshare, which are either wholly or partly owned by Government Departments, it is important that arrangements are in place to minimise risk and potential conflicts of interest. The MoD has recognised these risks and put in place governance arrangements to address them. We look to the MoD to keep these arrangements under review to ensure they remain appropriate.

Defence Diversification Agency

81. The Defence Diversification Agency (DDA) was established in 1999 to facilitate defence technology transfer into the civil sector and to broker civil technology insertion back into defence.[134] During our inquiry into the MoD Annual Report and Accounts 2005-06, the MoD told us that the "strategic landscape for technology transfer" had changed significantly since the DDA was established, with new organisations such as QinetiQ emerging and subsequently "spinning out their technology and intellectual property directly into the civil market". The MoD also told us that

Ministers are minded to support the 2004 recommendation to disband the Defence Diversification Agency…. We are exploring whether industry or the relevant Trade Associations have an interest in acquiring the intellectual property and expertise at present sitting within the Agency. A final decision will not be taken until the consultation process has concluded later this year. Parliament will be informed of any decision to change the status of the Agency.[135]

82. We asked how the role of the DDA differed from Ploughshare. Dr Saunders said that the DDA's remit was rather different: it was not there to license Dstl technology to companies nor to manage joint ventures or start-ups. The DDA's main remit had been to work with Small and Medium-size Enterprises and "to look at spinning in technology into MoD".[136] When Ploughshare was set up, a review was undertaken to examine any overlap between the DDA and Ploughshare. This review concluded that the two organisations were "doing very separate tasks".[137] Dr Saunders told us that Dstl had not been reliant on the DDA to bring in any particular technologies which it was looking for, nor had the DDA exploited any of Dstl's IP.[138]

83. Mr Woolley, MoD's Finance Director, told us that there was not a clear requirement from customers within the MoD for the services that the DDA provided nor an evident requirement in the defence industrial community. He said that "we had to ask the question whether this is the best way of spending defence money".[139] The CSA considered it sensible to review the "track record" of organisations such as the DDA, particularly when a "government department is under a lot of stress financially".[140]

84. We asked about the status of the DDA. Mr Woolley said that it had never been a formal defence agency.[141] The DDA was part of the MoD and comprised some 55 staff. It had its own headquarters and budget.[142]

85. The MoD has told us that the Defence Diversification Agency (DDA) has a different role from Dstl, but we are unclear about what exactly it does or why—if the MoD thinks there is no clear requirement for the service the DDA offers—it still exists. We look to the MoD to make a swift decision on the future of the DDA.

112 Dstl Framework Document, November 2006, p 7 Back

113 Ev 27 Back

114 Ev 28 Back

115 Ibid. Back

116 Ibid. Back

117 Ibid. Back

118 Ev 28 Back

119 Q 58 Back

120 Ev 28 Back

121 Ev 38 Back

122 Q 66 Back

123 Q 74 Back