ECONOMICS Contestability or Certainty?

News about changes to the way scientists and their work are publicly funded was buried early in May by the announcement that Telecom would be forced to open its network to competitors, or “unbundle its local loop” (the copper wire between local exchanges and domestic and business consumers).
This Government intervention in the telecommunications market, which aims to encourage the provision of rival internet services, attracted heavy media attention because it involved politically damning Budget leak. What was to have been one of the jewels in the 2006 Budget was knocked prematurely into the hands of Telecom where it proceeded to wreak havoc on the company’s value. Heavy selling reduced the company’s capitalisation by cool $1 billion or so within 24 hours.
This was not surprising given the planned legislation does have the potential to seriously erode Telecom’s long-term revenues, although important details of the Government’s regulatory intentions as yet remain unknown.
“The problem is there is no information. It’s like, here is the plan but we don’t know what the new players will rent those lines off Telecom for… there is lot of uncertainty,” Paul Robertshawe, equities manager at Tower Asset Management, told Reuters.
The impact of the telecommunications regime on the health and growth prospects of our economy is certainly vital. So is the science regime, although proposed changes there earned only cursory media treatment.
Essentially, these involve shift from largely contestable funding system to one with greater emphasis on negotiated long-term grants. The announcement was made by Research, Science and Technology Minister Steve Maharey who said the Clark Government intended to provide greater certainty for longer-term research and science because “an investment in science and innovation is key to lifting New Zealand’s prosperity”.
Contestability was introduced with the restructuring of the science sector early in the 1990s, when clutch of newly established crown research institutes had to compete with each other for public funding while trying to generate greater incomes from commercial contacts.
As Maharey now recognises, “too much contestability can affect the ability of our scientists and science organisations to carry out research and apply their ideas over longer period”.
The changes aim to put greater trust in scientists and science organisations, reduce the costs and complexity of the funding system and will mean more consistent support for long-term research.
Its immediate effect, however, was to split the science sector. Universities said there was no evidence of need for change and characterised moves away from contestability as retrograde. The Association of Crown Research Institutes on the other hand welcomed the proposal and said the contestable system caused instability and did not serve the country’s longer-term research needs.
But bigger issue is where the money finishes up, regardless of the extent of contestability. For example, if the annual rate of return from investment in agricultural research and development is handsome 17 percent, how come the Government isn’t pumping much more money into agricultural R&D?
That figure is an estimate from Treasury researchers. It deserves closer inspection and, if it stands up to closer analysis, should help to guide government R&D investments.
The researchers, Julia Hall and Grant M Scobie, have published working paper entitled The Role of R&D in Productivity Growth: The Case of Agriculture in New Zealand: 1927 to 2001. Although they acknowledge their results were sensitive to the type of model used and specification of the variables, they estimate that, based on their preferred model, “investment in domestic R&D has generated an annual rate of return of 17 percent.”
The paper reminds us that the primary sector continues to play an important role in the New Zealand economy. It directly contributed $8 billion (to the year ended March 2005 in 1995/96 prices), or 6.6 percent, to the country’s real GDP. Primary sector average annual growth for the period 1988-2004 has been similar in New Zealand to that in Australia.
While the overall rate of growth of the primary sector in New Zealand has matched that of the economy as whole, its productivity performance has been “impressive”. However, multi-factor productivity in the primary sector (agriculture, forestry, hunting and fishing) grew at an annual average rate of 1.5 percent from 1988 to 2004 compared with 3.8 percent across the Tasman.
How come? The Treasury paper notes the higher productivity growth in Australia’s primary sector was accompanied by “a higher public R&D intensity” in Australian agriculture. The public providers of science funding should take note of this, along with the magnitude of the return on investment calculated by the Treasury twosome.

• Bob Edlin is regular contributor to Management.

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