32Sheep CRC renewal proposal: economic evaluation of the proposed scientific themes

Griffith GR, Vere DT and Jones RE (2006) Sheep CRC Renewal Proposal: Economic Evaluation of the Proposed Scientific Themes, Economic Research Report No.32, NSW Department of Primary Industries, Armidale, September.

Executive Summary

The Australian sheep industry and its associated research and development agencies have developed a proposal for submission to the Commonwealth government for the refunding of the Australian Sheep Industry Cooperative Research Centre (Sheep CRC1). This new CRC is referred to as the CRC for Sheep Industry Innovation (or Sheep CRC2). There are three proposed research programs: Productive Sheep and their Management, Wool Quality, and Meat Quality. There are also a Communication and Utilisation program, an Education and Training program, an Administration program, and an industry-based sheep resource known as the Information Nucleus. Funding is sought for a second seven-year term to commence in 2007/08, overlapping by one year the completion of the term of Sheep CRC1.

The main accountability criteria on which the Commonwealth will assess the funding proposal for Sheep CRC2 are: (a) that Sheep CRC2 has the potential to generate sound returns to all stakeholders from the public and private funding that is being sought relative to the costs, and, (b) that the research outcomes of Sheep CRC2 will contribute substantially to Australia's industrial, commercial and economic growth. In this Report we provide an assessment of this impact.

Following successful applications to other CRC renewal bids, a ‘top-down’ method was initially proposed to evaluate the research themes of Sheep CRC2. The basic requirements are to examine the overall rates of productivity growth in the sheep industry, to assess the role of technological change in generating this growth and to estimate the likely improvements in this growth due to the activities of Sheep CRC2. That is, the initial plan was to evaluate the Sheep CRC2’s proposed research as an overall investment package, since most of the production-based projects are grouped into program themes or clusters of projects and thus have similar objectives. Subsequently, once the structure of the various research themes became clear, it was decided to treat Theme 2 separately since this was now defined more like a very specific research project that had little interaction with Themes 1 and 3. Theme 3 was also treated as an individual project given that there was a particularly detailed biological justification for the proposed research which suggested that this Theme could be modelled separately. The various sub-themes within Theme 1 were still evaluated using the “topdown” methodology.

Formal “with-CRC” and “without-CRC” scenarios were defined for each product and each research theme with the assistance of Sheep CRC research managers, research staff and advisory staff in a workshop situation. Relevant costs were similarly defined.

The economic welfare change and benefit-cost analysis calculations were made using the DREAM model (Wood et al. 2001) that is based on the economic principles for research evaluation that are detailed in Alston et al. (1995). DREAM is an internationally respected model that has been widely used for research evaluation by major world and Australian agricultural research funding agencies. The required parameter values include equilibrium prices and quantities, supply and demand elasticities, supply and/or demand shifts, probabilities of success, R&D lags, adoption rates and adoption lags. In implementing the DREAM model for this assessment, the national Australian market was considered as one region and China, the European Union, New Zealand, the United States and the rest of the world (ROW) were defined as the international regions to represent Australia’s main customers and competitors in the world wool and sheep-meats markets.

In the benefit-cost analyses, the fixed costs of the Communication and Utilisation program, the Administration program, and the Information Nucleus were allocated pro-rata across the three R&D programs.

Under the with-Sheep CRC2 scenario, the total PV of the estimated benefits from the three research themes is about $1.3 billion over the 25-year period of the BCA simulation. The corresponding NPV is $1.2 billion and the BCR is 15:1 where the present value of the full costs of the investments in these Sheep CRC2 programs, plus the pro-rata allocation of the full costs of Programs 4, 5 and 7, (nominally $100 million) is $89 million when discounted over the simulation period. Without funding of Sheep CRC2, the present value of the total estimated benefit is $820 million over 25 years. Total costs have a present value of around $55 million (including the total costs of Programs 4, 6 and 7 under the without scenario), so the NPV is $765 million and the BCR is just under 15:1.

The main concern in this evaluation is the difference in the BCA results between the withand without-Sheep CRC2 scenarios, i.e., the marginal returns from the marginal investment. Under the assumptions made in this evaluation, the investment by the Commonwealth and the Australian sheep industry in Sheep CRC2 is relative to a scenario where an alternative, lower cost research program into this industry is implemented. These extra resources have a discounted value of about $34 million over the 25-year period of this evaluation. These resources are sufficient to allow some new research components to be added to the portfolio, some existing components to produce better outcomes, and a more targeted approach to development and extension that speeds up and increases the adoption of the new technologies that are generated by the research program. The benefit from this extra investment and consequent research effort is estimated to be worth about $518 million in present value terms, which is far in excess of the marginal investment. Thus every $1 of these extra resources brought into the Australian sheep industry through funding the proposed Sheep CRC2 is expected to return around $15.30 to the industry in present value terms. Investing in the CRC brings forth a higher return than if the investment was not made.

Disaggregating the estimates by region and market group shows that almost two-thirds of the anticipated benefits from Sheep CRC2 will be claimed by Australian sheep producers and Australian consumers of sheep products. These benefits are valued at $824 million at the anticipated maximum adoption levels for the Sheep CRC2 technologies, indicating significant potential payoffs to Australia from the investment in Sheep CRC2. Sheep producers will receive most of this, some $796 million, because they have direct access to the new technologies. Australian wool and lamb consumers and consumers in Australia’s sheep export markets also benefit to varying proportions from being able to access more product at lower prices resulting from supply-increasing technologies.

Disaggregating the estimates by type of impact shows that more than $300 million can be attributed to the proposed accelerated adoption program of Sheep CRC2. This is some 22 per cent of the total estimated benefit.