Are the RDCs still relevant?

 

Garry Goucher
Principal Consultant
Garry Goucher & Associates


David McKeon
Chief Executive Officer
GrainGrowers

Q1.  Is the Primary Industries Research and Development Act 1989 (which established the Rural Research and Development Corporations) still relevant in 2018?

 

Garry Goucher

The PIRD Act remains an elegant response to the persistent commercial disincentive that causes agricultural producers to under-invest in valuable research and development (R&D). Producers are discouraged from investing in research when it would lead to new knowledge or innovations that cannot be restricted to only those who contribute to the research or pay for information (eg biological controls such as calici virus to control rabbits, or knowledge that in a given soil type deep ripping will improve crop yields).

Under the PIRD Act, compulsory levies compel agricultural producers to contribute to R&D for the industry, and in return the community also contributes an equal amount (up to a specified limit) as a payment for the research benefits that spill over to the wider community, for example more non-farm jobs, cheaper and safer food and improved environmental outcomes. These two fundamentals of the PIRD Act – compelling producers to contribute to R&D and matching levy payments with a community contribution – are as relevant today as they were in 1989.

However, while the fundamentals are sound, there are matters of governance, structure, transparency and administration where there is room for revision and improvement.

 

David McKeon

The importance of strong R&D and its widespread adoption into farming practices remains crucial to agriculture and the broader community to achieve sustainable economic, social and environmental outcomes.

The PIRD Act still provides the regulatory framework for five Research and Development Corporations (RDCs) and is therefore vitally necessary in the short term. It has provided a strong base for research, development and extension (RD&E) which is the envy of the world. Australia needs to ensure its RD&E model continues to deliver excellence and drive innovation. Looking to the future, the strategic imperative for agricultural innovation and sustainable production systems should set the agenda and be the driving force when considering the most appropriate future RD&E delivery model. However, we must be open-minded and consider a variety of delivery modes – changing structures will deliver little unless there is a clear overarching strategy.

Alongside the future direction of the agricultural innovation system, the PIRD Act must also evolve to allow for efficient operation of contemporary RDCs.

While the PIRD Act helped provide the base framework for the early establishment of the RDCs almost 30 years ago, we have since seen most of the corporations transition to an industry-owned company (IOC) model, guided by industry specific legislation instead of the PIRD Act. While the PIRD Act has undergone a few amendments since this time to allow greater flexibility, many of these changes came after major industries (wool, meat, dairy, horticulture) moved to an IOC model. We must continue to look at how to provide greater flexibility to allow RDCs to deliver more value for industry.

It is also important to note that many of the current challenges that constrain operations of the statutory RDCs are due to the Public Governance Performance and Accountability (PGPA) Act, or government directives, rather than the PIRD Act.


Q2.  Levy payers have oversight of the way levies are spent through the legislated RDC/Representative Organisations relationships. Is this system of checks and balances adequate to ensure the RDCs meet farmers’ needs?


Garry Goucher

From the outset the role of representative organisations (ROs) and the arrangements for oversight of RDCs was a pragmatic compromise that does not stand up as a model of good governance.

Rightly, many producers question why an RDC is required to consult with and to report an RO rather than directly to levy payers. Worse, some ROs are peak councils that do not have direct farmer membership at all. Under current arrangements both for IOCs and RDCs, a producer’s voting strength and oversight is unrelated to the amount of their R&D levy payments.

On each occasion when governments have reviewed the RDCs the response has been to paternalistically introduce more requirements for RDCs to report to government or respond to government directives.

It is high time that governance and oversight arrangements for RDCs and the research functions of IOCs were revised to redress the initial exclusion of levy payers from governance arrangements, and to reflect changes that have occurred since their creation including:

  • Since 1989 governments have sanctioned the transfer of RDC functions in several industries to larger, more diversified IOCs.
  • Recent experiences elsewhere in the economy have shone a spotlight on the importance of good governance structures.
  • Producers are now more aware of the importance of R&D and how it contributes to their business.

David McKeon

To establish or amend a levy, the role of industry representative bodies is comprehensive and has significant control within the Levy Principles and Guidelines. However, once a levy is established, the role of the RO drops away significantly. This does raise legitimate questions around whether adequate checks and balances are in place.

It is important to remember that the role of an RO within the PIRD Act is not actually one of oversight but one of consultation. This does differ for the IOCs, which have a variety of oversight and consultation mechanisms from legislation through to Memoranda of Understanding. Given the significant contribution of levy funds, with around a 60:40 split of industry levies to government contributions, it is reasonable that the farmers paying the levies have adequate engagement mechanisms to ensure they have a fair say about how their levies are spent. However, this can be done in a number of ways, and farmer input into project funding (through such mechanisms as the Grains Research and Development Corporation Panels and Regional Cropping Solutions Networks) is also of critical importance, in addition to the strategic RO and RDC relationship.

Of more concern is the Statutory Funding Agreement (SFA) between the government and the RDC, which is developed to the exclusion of the RO. The development of such an instrument to the exclusion of the major funding partner does seem inconsistent with the partnership approach of the model. It would be reasonable for active engagement between the government and the RO in the development of SFAs.


Q3.  The Productivity Commission Review of 2011 recommended changes to ensure ‘better value for the community’ is delivered from government contributions to RDCs. Do you agree, and does the current RDC model facilitate that outcome?


Garry Goucher

It is too easy to take the Productivity Commission’s recommendations out of context. The Commission reiterated that returns from rural R&D are very high – from 48% to 68% per annum on the Commission’s own estimates – and also acknowledged the spillover of benefits to other industries and the wider community. Recommendations directed at achieving ‘better value for the community’ have to be considered against a background in which the community is already obtaining exceptionally good value from its investment and that improvement in the value to the community will necessarily be marginal.

Some of the Commission’s recommendations would likely be positive, others less so. The proposal for a new RDC (Rural Research Australia) to undertake non-industry specific, productivity-enhancing rural R&D was an implicit acknowledgement of the gap left by the government’s abolition of Land and Water Australia (LWA) in 2011. LWA was heavily focussed on non-industry specific R&D that delivered high community benefits.

On the other hand, the proposal to halve the limit on matching public funding to 0.25% of GVP and reduce public funding above that level to 20 cents per dollar of grower funds would likely result in reduced levy contributions and less research. The proposal would likely lead to non-agricultural industries and the wider community ‘free-riding’ on rural R&D by contributing proportionally less to the cost of the R&D than the share of the benefits that spill over to other industries and consumers.

The suggestion that an ‘additionally’ criteria be applied to selection of R&D projects would be hard for RDCs to interpret, and even harder to assess the degree of compliance.


David McKeon

Can the current RDC model facilitate more outcomes for community? Yes.

Should this see a separation of objectives and come at the expense of farm performance? No.

RDCs work as an integrated funding arrangement between industry and government because rural industries deliver activities which are socially, environmentally and economically intertwined, and deliver public and private benefits. Trying to separate the direction and management of industry and government funds into silos is a misconception of the operating environment and will lead to suboptimal outcomes for both. A reductionist approach which suggests the economic, environment and social elements can be dealt with separately as individual components will fail. Pursuing aligned industry performance and community outcomes through a systems approach, which is achievable within the current model, will most certainly lead to a more progressive outcome and limit the perverse effects of silo operations.

Further, we also need to consider where investment will drive the future success of Australian agriculture. A successful Australian agricultural sector is underpinned by strong individual farm businesses. While these businesses (many of which are mixed farming with both cropping and livestock enterprises) need to have a sound structure and be able to make sound enterprise selection decisions for their business. The bulk of the innovations that will accelerate performance and profitability into the future are commodity – and even management – system specific. We must continue to allocate sufficient investment to drive both incrementally and to step-change enhancements to these farming businesses.

Rather than establishing new entities to undertake cross-sectoral and public good RD&E (as proposed by the Productivity Commission), we should look at a variety of carrots (eg Rural R&D for Profit) and sticks (eg reporting obligations in line with rural R&D priorities) to encourage a greater level of dual industry and public good outcomes from RDCs. Getting the balance right between funding sources and beneficiaries is an ongoing task which requires regular adjustment alongside industry evolution.

The RDC model has the capacity to cope and can deliver because the issue is strategic and not structural. The questions that need to be answered are ‘what is community value?’ and ‘how is achieving this different to what is being delivered now?’


Q4.  Does the current level of collaboration between the RDCs and private enterprise deliver the best possible outcomes for farmers?


Garry Goucher

In my opinion there is no strong evidence for a view that RDCs are missing out on worthwhile opportunities to collaborate with the private sector. In my experience RDCs are not shy about looking for additional investment dollars to stretch their funding budget, but the scope for private companies to undertake R&D is constrained to where the investor can obtain a commercial return. There are relatively few opportunities where there is a mix of public and private returns that warrant shared public and private investment. Then, obtaining agreement with a private contributor on how the commercial returns will be shared is also far from easy.

It must also be considered that collaboration with private investors often requires a degree of commercial confidentiality. This raises difficulties with governance and transparency in how an RDC is investing both grower and public funds.

Collaboration among RDCs has also had a chequered past, so much so that government inserted specific directions in the RDC funding agreements and an additional direct government funding injection to encourage RDCs to collaborate more broadly with each other on fields of obvious cross-industry R&D interest, such as irrigation management, pasture productivity and weed management.


David McKeon

For many years, policy-makers have discussed the need to increase private R&D investment in Australian agriculture. While there have been some major breakthroughs in recent years, such as GRDC’s $45 million partnership with Bayer to tackle the problem of herbicide-resistant weeds, we must continue to explore further ways to enhance collaboration and investment in Australian R&D. If we are not more proactive in this space, we risk being left behind in favour of the larger agricultural markets with lower barriers to participation.

When compared globally, Australia is not a large market for agricultural inputs and services. We must therefore be smarter and more innovative in the way we attract capital and knowledge into our rural RD&E system. Our systems must evolve to attract and remove barriers for key elements such as blue-sky research, applied research and commercialisation. Through careful application of the RDC model, which harnesses the collective effort of farmers and government, we have a real opportunity to enhance collaboration with RDCs and private enterprise. If we are not active in this space, Australian farmers will be left behind on the global innovation curve, compounding the effects of heavily subsidised competitors who operate in relatively rich environmental and climatic conditions.

The Australian rural RDC model is the envy of our global farming competitors and peers – we must continue to enhance it in a way that keeps Australian farmers ahead of the curve. These enhancements must be driven by an open-minded and forward-thinking farm sector, not government officials looking to save a penny at the expense of a strong contemporary Australian farm sector and successful Australian economy.


About the Authors

Garry Goucher is the principal consultant of Garry Goucher & Associates, with 30 years’ experience in corporate strategy, economic analysis and government policy with a strong emphasis on the agribusiness sector. Garry has a Bachelor of Agricultural Science and postgraduate qualifications in Agricultural Economics and Corporate Management. 

GrainGrowers CEO David McKeon has a background in farm management and agricultural policy. He has previously held senior positions in the National Farmers’ Federation and worked for the Australian Government Department of Agriculture on a variety of national policy issues.