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Time for a few home truths in current agriculture levy debate

- Wednesday, February 11, 2015

The current debate about the future of compulsory agricultural levies for R&D and marketing in Australia seems to be in danger of 'throwing the baby out with the bathwater' in relation to rural research and development corporations in Australia, resulting in changes that would reduce R&D investment effectiveness and efficiency, all in the name of giving greater 'control' to levy payers.

The starting point for any discussion about R&D levies in Australian agriculture must be the need for continual productivity growth in Australian agriculture, if the sector is to continue to attract investors, to be profitable for participants, and to be a career that attracts some of the best and brightest young minds. Much as it might be comforting to think that productivity growth is not essential, the facts are that Australian agriculture is fully exposed to international competition in both domestic and international markets, and the intensity of that competition is increasing. The starkest evidence of this lies in the fact that in both domestic and international markets, Australian agriculture is steadily losing market share, as the following graphs highlight.

There are a lot of factors, both within the agriculture sector itself and in the wider economy that can contribute to improved agricultural productivity. The economy-wide factors include better regional road and rail services, better telecommunications, more efficient transport and ports, and good quality health and education systems. These factors are all important, but it is inside the farm fence where some of the most important productivity gains are able to be made, and these depend heavily on the adoption of innovations that are the result of high-quality and sustained research and development activities. 

Australia's levy-funded rural research and development corporations play a critical role in sustaining agricultural R&D activities, accounting for almost $500 million (of which 50% is matching funding from the Australian Government) of the total $1 billion in annual national agricultural R&D expenditure that occurs in Australia. A number of these organisations also have responsibility for the expenditure of marketing levies also contributed by levy payers.

There is no doubt that these organisations should be accountable to their farmer/levypayers on a regular basis, and that they need to develop good consultation processes to guide R&D investment strategies and decisions. But the current debate - and much of the discussion at the current senate hearings - seems to be about who should control these organisations. Various groups seem to be proposing that if farmers had more direct control of RDCs, then the profitability of farming would improve.

Claims such as these are either deliberately or ignorantly misleading. 

The benefits of R&D investment are realised over timeframes of between fifteen and thirty years, and even simple innovations such as the development of a new crop variety take between 8 and twelve years from the time of the initial research to the release of a commercial variety. As a consequence, decisions about the makeup of an R&D portfolio require very careful consideration, with a focus on projects that have the potential to deliver the biggest long-term gains, while at the same time retaining the flexibility to direct resources towards short-term problem solving. Getting these decisions right is a major challenge, and one into which RDCs put considerable resources. 

The skills that are needed by Boards making these decisions include farming and agribusiness experience, but also skill and experience in research and development management, financial management, scientific research, human resources management and experience with commercialisation and related legal issues. Achieving the right mix of these skills around a boardtable is highly unlikely to occur in a situation where boardmembers are elected by a popular vote of levypayers.

That is not to say that these bodies should not be accountable to levypayers (and the Government, noting that 50% of the funding for R&D is contributed by Government). Levypayers should have the capacity to regularly review levies (ideally every five years so there is some continuity and certainty for staff and researchers), to elect some Boardmembers who have appropriate skills and experience, and to endorse or reject the appointment of all boardmembers nominated via a selection process. This is exactly the same as the accountability arrangements that are common for listed companies. 

A critical difference between an organisation such as an RDC and a listed shareholder company is that the RDC does not have a requirement to deliver a profit - which is the ultimate performance measure for a listed shareholder company.

In the absence of profit as a key performance measure, there is clearly a need for other accountability processes to be implemented by RDCs. The most common accountability process is a requirement for the RDC and its Board to establish and publish performance measures, and to regularly report against these to levypayers. 

In this regard there is an important role for organisations that represent levypayers in considering the appropriateness of the RDC's performance measures, and then subsequently assessing whether the performance has been adequate. This is, however, a distinctly different role to that exercised by members of the board of an RDC, and the two need to be kept quite separate. 

Unfortunately, much of the current debate about the future of levy organisations, and much of the discussion during the current senate inquiry process seems to be confusing these two different roles. This is creating the risk that RDCs will become much more politicised, and it is almost certain that the end result would be less, rather than more effective management of levypayer funds.

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