2000 ANNUAL REPORT - Contents Page

Returns on Investment
Stakeholders in any investment want to know what the rates of return are to their investment. In recognition of this RIRDC has identified quantitative rate-of-return targets as one of its performance indicators.

Having specified these targets, during the last four years RIRDC has been developing and implementing a consistent, systematic process for evaluating whether it has been meeting them.
Our Evaluation Process
In 1997 RIRDC joined with the Grains R&D Corporation (GRDC) to develop a consistent approach for evaluation of the impact of their R&D and quantifying the rates of return on invested funds.
Together we commissioned the Centre for International Economics to develop this approach.
A workshop, which included all Australian experts in this research evaluation area, was held to provide input to development of the approach.
The result was production of ‘Guidelines for Economic Evaluation of R&D’.
RIRDC has used these guidelines as the basis for a systematic program for regular quantification of the returns to the funds it invests on behalf of the Government and industries.
Timetable and Approach
The evaluation program involves a four-year cycle, each year one of RIRDC’s four program groupings are evaluated. Each annual evaluation incorporates two stages.
The first stage develops a systematic overview of all projects and a preliminary assessment of their impact.
This overview is important for identifying groups of projects which make up a research effort, all of which need to be evaluated together to avoid underestimating the research costs.
The second stage involves evaluation of a sample of completed projects in one of the four major R&D programs each year.
As well as providing an important indication of whether our investments are meeting target rates of return, the evaluation process also provides us with lessons, which are used to improve our investment decision-making.
Three Years of Evaluation Results
During the past three years evaluation of the three industry based programs has been completed. The emerging industries program was undertaken in 1997/1998, established industries in 1998/1999 and new industries in 1999/2000. Stage one activities involved detailed reviews of 267 completed projects in 1997/1998, 431 in 1998/1999 and 306 in 1999/2000.
All projects were categorised to provide a good overview of the direction each sub-program has taken. In particular projects were grouped according to related research efforts and also according to the stage in the production to marketing chain and research process which is their focus.
Figure 1 shows the type of information generated for the established and new industries (similar patterns were found for emerging industries). For the established industries’ sub-programs it is seen that there has been significant diversity in the R&D focus with respect to the point in the production chain, although primary focus has been on on-farm issues.
This diversity can be explained by the different nature of these industries.
The first part of Figure 1 provides similar information for the new industries – new plants and new animals. It is seen that although the R&D patterns are similar there are some differences due especially to the nature of the two types of industries.
For example, many of the new animals are Australian species where processing and marketing pose more important constraints, while for new plants most are recently introduced so industry development and production issues are more important.
Figure 1: Summary of R&D Funding by Stage in the Production Chain - Established and New Industries

Figure 2 provides summary information for R&D funding by the stage in the research process, that is, problem identification, applied and extension. Again a significant diversity was found. The detailed reports discuss these trends in some detail and show that they can be explained by a range of factors largely to do with the maturity of the particular R&D programs.
The stage one results were used to select the sets of projects for detailed impact evaluation. A selective rather than random sample was used to keep within the evaluation budget and ensure a good sub-program mix. In all 35 projects were evaluated in 1997/1998, 14 in 1998/1999 and 21 in 1999/2000. This represents about 7% of projects evaluated from these three programs during this first evaluation cycle. From these projects 25 detailed benefit/cost evaluations were conducted, that is, in many cases each evaluation covered a set of individual projects which combined to produce a technology.
The rates of return on investment found for each of the programs are summarised in Figure 3. Several points can be highlighted. First, as we would expect, because of the relative size of the industries in each program, the established industries have been found to have higher rates of return than the emerging and then the new industries. However, the new industries program has had the highest rate of return of all for one project. This highlights that this area can provide some opportunities with real potential for Australian agriculture. Second, in all programs the rates of return are very high with most well above an internal rates of return of 20%. There were only a few projects in all those evaluated where the rates of return were below the target average rates of 15%, 20% and 25% respectively for new, emerging and established industries.
For all programs the average rates of return for the sets of projects evaluated were above these target average levels.
Figure 2: Funding by R&D Stage – Established and New Industries

Figure 3: Summary of rates of return for individual projects – results for three years plus some earlier evaluations

Some Lessons from the Evaluations
In addition to providing RIRDC with estimates of the rates of return the evaluation studies also provided some useful lessons by looking in detail at past projects. Lessons from new and emerging industries included:

Where new industries offer high returns, adoption is rapid.

Research for new industries can be a ‘make or break’ issue as the industry may face a single impediment that prevents the industry gaining sufficient size to attain economies of scale and scope (including market awareness).

Productivity improvements at the farm level may not prove to provide large gains to farmers if there are volume constraints at the processing level.

The capacity of producers to form an industry with common goals influences both the success of the industry and the returns to R&D. The emphasis on industry development in the prospective new industry program is not misplaced, with higher returns to R&D where producers in an industry cooperate.

Resistance to R&D may arise when it is seen as identifying and informing producers about best practice that some in the industry are already following. If volumes influence price, this can erode the more productive producer’s profit margin.

RIRDC’s task is to stimulate and undertake R&D that would not otherwise have been undertaken by the private sector. However, there may be situations where similar R&D is undertaken, but the results are not widely disseminated, or access comes with conditions that reduce the likelihood of adoption. Issues such as access to the R&D and the overall impact on the industry need to be considered.

Established industry lessons included:

High levels of adoption bring higher benefits. Adoption levels depend on applicability — for example, the Eimeria vaccine development may only be of use in the broiler breeder and free-range layer industries. With this target, the returns are much lower than if the target is the much larger broiler industry.

Rapid adoption brings much higher benefits. Effective dissemination of information on the merits of discovery is one key to rapid adoption. For example, the immediate switch to digestible amino acid formulas in the broiler industry brought large benefits, while the difficulty of disseminating the results on the tests of treatments for maintaining pregnancy in mares to all but elite veterinary practitioners (through conference papers) limits the benefits from this research.

Research that targets a high value part of the production chain tends to provide higher returns. Small improvements in high value areas have bigger pay-offs. This was demonstrated in the chicken meat and egg industry research on digestible amino acids in diets, as feed costs are a major cost for producers. Similarly, the high share of harvesting costs in grower costs for rice meant that a small improvement in efficiency provided a large pay-off.

A return profile that brings greatest returns earlier rather than later has a higher pay-off. The sensitivity of the pay-off to the timing of returns depends on the discount rate. With high discount rates the greater the early benefit flow, the greater the pay-off. For example, while the vaccines being developed for Eimeria infection in chickens may prove highly valuable in the future as resistance to standard treatments increases, such an increasing return profile does not perform as well in benefit–cost estimates.

The Future
During 2000/2001 we will be evaluating the Future Agricultural Systems program. This program creates an additional challenge since it covers R&D issues that are often generic to all parts of the agricultural sector.
Also, once the first four-year cycle has been completed and stage 1 reviews are completed for all programs, we will be in a better position to under take a larger set of evaluations. This will expand the coverage of this activity and therefore provide a richer source of rate of return information.

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