SD: Knowledge : Funding of Agricultural Research: Traditional Private Sector and Non-Conventional Alternatives

Posted March 1996

Funding of Agricultural Research: Traditional Private Sector and Non-Conventional Alternatives

by Melvin G. Blase
Professor and Director of Graduate Studies
Department of Agricultural Economics
University of Missouri, USA

(extracted from a paper prepared for the Research and Technology Development Service, FAO Research, Extension and Training Division)

Given the relatively small scale of the private agribusiness sector in many African countries, private sector agricultural research efforts are not great. However, as economic development occurs, increased activity can be anticipated. In the meanwhile, much of this work is likely to be done in the "home" countries of multinational firms. A greater potential for funding public sector research from private firms lies in mixed models of private-public ventures.

A number of dramatic possibilities are emerging for innovative funding of public sector research. All have implications for African public research institutions in agriculture. They include check-off programmes, debt-for-research conversions (swaps), development foundations, and joint research-commercialization ventures.

Check-off programmes

These are the most familiar of the non-conventional funding alternatives in Africa. They are somewhat similar to the levy or cess programmes. The latter are used in some African countries, e.g. Uganda, to assess a charge on a commodity at the point of first sale. In turn, these charges can be earmarked to fund research on the commodity in question.

Check-off programmes are the latest major new funding source in the USA. These programmes have been initiated for a variety of commodities at both state and national levels. A referendum can be held of registered producers of a given commodity under government auspices. If it passes, a small amount of the sales receipts from that commodity is withheld at the point of first sale. Table 1 provides data, as of April 1992, concerning check-offs in force in the USA.

**Active National Check-Off Programmes as of April 1992 in the USA**
Commodity	Year started	Rate	Total collected annually ($ millions)
Beef	1986	$1 per head	79.90
Cotton	1966-67	$1 per bale plus up to 1% of bale value	43.00
Dairy	1984	15c /cwt of milk	219.59
Eggs	1976	5c /30 dz. crates	7.64
Honey	1987	1c/lb	2.89
Mohair	1966	Pro-rata deductions from incentive payments	0.70
Pork	1986	.35 of 1% of market value	29.90
Potatoes	1972	2c /cwt or up to 1/2 of 1% of past 10 year average price	6.39
Soya beans	1991	1/2 of 1% net market value	50.00
Watermelons	1990	Not to exceed 2c /cwt for producers and handlers	0.89
Wool	1955	Pro-rata deductions from incentive payments	6.20

Source: "Farm Journal", April 1993

Not all of the check-off funds are allocated to research. Research must compete with promotion uses for funds. Nevertheless, some industries, e.g. cotton, have used check-off funds to change the technology associated with their product. If funds are used for research, there is a tendency of the elected farmer boards that control the funds to spend them for utilization rather than production research.

The dependability of this source of research resources is not absolute. Under legislation passed by the Federal Government, in the case of soya beans for example, the USDA (Department of Agriculture) must poll producers if 10% of them request a "re-vote". In any event, while the programmes are in effect, they are operated under the oversight of USDA. As African agriculture moves increasingly from semi-subsistence to commercial agriculture, the potential for implementation of levy or check-off programmes will grow.

Debt-for-research exchanges

This fascinating alternative is modelled after debt-equity conversions that have been made in the recent past. A number of debt-for-nature swaps have also occurred recently. These conversions are financial transactions in which an investor purchases a debtor country's hard-currency-denominated debt at a discount, which the investor will then use in a development programme. Since donors are now providing substantial support for African research institutions, this alternative offers the potential to leverage these funds to expand agricultural research efforts.

Depending on the organization formed to facilitate debt-for-development transactions, four preconditions are crucial to the success of debt conversions. As reported by Ruttan (1982) these preconditions are:

the host country must have debt which is sold at a discount;
the country must be willing to convert the debt on favourable terms for a specified programme;
a project must be developed that is acceptable to both an external and the indigenous research institutions as well as to the host country; and,
the external research organization must have hard currency to purchase the debt.

Obviously, this programme requires an external research organization, for instance one that may already be providing technical assistance, to participate in the transaction in order to expand the total research funds available. Besides for debt, this type of exchange may be used for "blocked" currencies. In either case, the transaction can yield benefits from 10% to 300% higher than the usual foreign exchange transaction, depending upon the condition of the market and the terms of the conversion.

In addition to an external research organization, there need to be several other parties to this agreement. All must be satisfied in order for it to be consummated. The African research institution must be willing to undertake research in collaboration with the external research organization. In addition, there must be a financial institution that is willing to sell debt of the host country at a discount. Although some type of broker (usually a bank) may be needed to identify a specific seller, the market for these securities has been established for a number of countries. The host government (usually the country's Central Bank) must be willing to make payment for the discounted amount of debt in local currency. Many central bankers would prefer to service outstanding debt in local currency than hold hard currency denominated debt which is in arrears. Clearly, because agreements must be multi-party, they must be carefully negotiated. A suggested sequence of negotiations follows.

The debt-for-research transaction would commence with the two research institutions (for example, one in Africa and one in a hard-currency country) developing a programme of work and budget on which they agree. Since currencies of both countries are likely to be involved, their use and control should be included in the agreement. Jointly the two institutions should determine whether:

debt can be purchased at a discount and
the African country's government is willing to participate in a debt-for-research conversion transaction.

The external research institution then needs to identify a donor who would be willing to permit the use of donated funds for such a transaction. Formal host governmental approval for the conversion would need to be obtained before the transaction is consummated.

While this non-conventional funding alternative would require careful and time-consuming negotiating, the benefits could be considerable. A number of donors are familiar with this alternative, e.g., the World Bank and USAID. In fact, the US. government will allow tax advantages for financial institutions willing to donate the debt they hold rather than sell it at a discount. Further, a legal precedent has been established since several debt-for-education transactions have been made, one of the first being between Ecuador and Harvard University. Hence, a precedent has been established that makes it clear that this is a viable funding alternative.

Development foundations

In order to deal with both variability of funding and untapped but potential funding sources, development foundations have been created in some countries. Many public sector agricultural research institutions in Africa are plagued not only by inadequate funding but also by variability of funding. The variability of funding occurs both over time within a fiscal year, and from year to year, especially when inflation is taken into consideration. When funds arrive late in the fiscal year rather than at the beginning, an entire cropping season may be missed. Variability in the level of the research budget from year to year, due to such things as variation in government tax receipts, makes efficient management of a research system almost impossible. This is due to the inability to use fixed resources, such as laboratory equipment, and semi-fixed resources, such as highly trained scientists, to their maximum effectiveness.

Some funding sources are untappable by research systems due to their funding cycles. That is to say, spending cycles that are keyed to fiscal years make some research institutions unable to compete for funds that might become available in large lump sums. Occasionally, firms are prepared to make charitable contributions in large amounts for tax or other reasons. Similarly, donor governments have available at particular times local currencies from the sale of donated grain or other relief foodstuffs. Even individuals, e.g. citizens working abroad, are at certain times able to make lump sum charitable contributions.

Worldwide there are many foundations that fund agricultural research, in addition to FUNDAGRO in Ecuador mentioned above. In Africa, the Agricultural Fund in the Kenyan Agricultural Research Institute (KARI) is much like this type of institution. Among others, such institutions are located in Jamaica, Honduras and Chile. The experience of the latter two in acquiring resources is worthy of discussion.

Much of the initiative for the Honduran foundation came from the incidence of a major disease problem which essentially wiped out banana production in the country. Hence, a large banana research installation in the country owned by a multi-national corporation was of little value to it. Assisted by resources from USAID a development foundation was created to take advantage of the availability of this "lump" of resources and initial funds from donors.

Fundación Chile has a considerable "track record". Like the Honduran foundation, it was initiated to receive contributed assets from a multi-national firm. Its programme has concentrated on two areas. First, it facilitates research and extension functions in agriculture. Second, it stimulates R & D in such areas as new products, new markets and agribusiness in general. It is involved also with joint ventures and the spinning off of new profitable enterprises. Illustrative of the foundation's new markets-new products related activities, it co-sponsored a recent conference, the 1992 "International Winter Fruit Congress", jointly with the Chilean Exporters Association.

Development foundations function as funding sources only if they have entrepreneurial leadership. Creating a foundation does not automatically mean that it will be funded. But with creative leadership, resources may be attracted and subsequently made available to public research institutions that those institutions could not attract themselves. The creation and management of a corpus of funds by the foundation is the key distinguishing difference between it and the funding of most public sector research institutions. For example, it may be able to negotiate favourable arrangements to obtain blocked currencies and, in turn, make them available for agricultural research over time. Clearly, this type of entrepreneurial leadership is not normally in the position description of agricultural research administrators.

Combining commercialization with research and development

As suggested earlier in this paper, one of the constraints limiting investment in research is the low and slow rate of commercialization of the end products. To be sure, not all research projects produce commercializable products, e.g. a date of planting study undertaken by agronomists. But many projects do. Two current examples from the field of veterinary medicine will illustrate the point. A vaccine for pneumonia in goats in Kenya and several products from heartwater research in Zimbabwe appear to have commercial possibilities. However, they will have to be commercialized before the research effort will have significant impact. There appears to be a considerable profit potential for firms or individuals who invest in them now, a long time after the research efforts were initiated.

Risk is among the more important constraints to the commercialization of products coming out of research and development. Many of these products carry high risks but also have high profit potentials. Transition laboratories in some countries and business "incubators" in others are set up to reduce the risk of commercialization. In still other cases semi-public investment entities are established. These investment entities are worthy of additional consideration. A good illustration is provided by the British Technology Group.

The British Technology Group (BTG) was created about forty years ago to stimulate the commercialization of the products of research in a number of industries, not just agriculture. Most specifically, it was empowered to take equity positions in the firms undertaking the new activity. Since these were high risk ventures, not all could be expected to succeed. But some did. By taking equity rather than debt positions in the firms, BTG has been able to participate in this success. Today BTG is the world leader in technology transfer with more than 8,000 patents under management, with some 500 licenses issued and annual revenue of around $50 million.

This approach can provide funding for research in one of two ways. If the technology transfer agency enters into a joint venture with a commercializing firm, a proportion of the joint venture firm's dividend income could be earmarked for the research institution originating the patent. The other way would be for the technology transfer agency to license the patent to an independent company so that the agency, the originating research institution and the scientist who developed the technology could share the license income.

Over a longer period of time the probability is quite high that some of the output of African agricultural research institutions will have commercial possibilities. Also, as the continent's agriculture shifts further from semi-subsistence to being a commercial sector, effective demand will increase for research generated new products. Hence, the opportunity exists to create a new institution to take advantage of these trends and, in the process, to generate funds for agricultural research institutions.