Benefit Cost Analysis of Wine Australia R&D Investments 2016-17
Abstract
To evaluate the value of Wine Australia’s R&D investments, AgEconPlus was commissioned to undertake an ex-post benefit-cost analysis of five randomly selected projects. The resulting areas of analysis were phylloxera, root zone salinity, lees, extension and market access, through the following projects:
- PGI 1201 Sampling strategies for sensitive, accurate and cost-effective detections of phylloxera for quantifying area freedom status;
- SAR 0902 Managing vineyards root zone salinity and maximising water saving by sub-surface irrigation techniques;
- AWR 1307 Removal of lees from underneath wine to reduce wine movements and tank cleaning;
- AWRI 4.1.1 The staging and conduct of extension programs; and
- AWRI 2.2.4 Increasing Australia’s influence in market access, safety, regulatory and technical trade issues
Overall, the estimated benefits and costs of the projects show that the returns on the grower, Commonwealth Government and co-investor monies have been significant. There were mixed results, with benefit-cost ratios ranging from 0.83 to 4.21 and the Internal Rates of Return well in excess of 5% (the discount rate used) for three out of the five projects. Two of the projects, lees and market access, had Benefit Cost Ratios of less than one, meaning the benefits were not greater than the costs.
The aggregated Benefit-Cost Ratio on the selected projects was 2.6 to 1.
Summary
Economic analyses of five programs of selected research and development (R&D) investments funded by Wine Australia were undertaken by AgEconPlus. The main purpose of undertaking the analyses was to demonstrate the outcomes and benefits that have emerged or are likely to emerge from investment. This forms part of the process for the Council of Rural Research & Development Corporations (CRRDC) that aims to demonstrate the impact, effectiveness and return on investment from the Rural Research and Development Corporations.
Each of the five analyses provides a description of the constituent projects including objectives, outputs, activities, costs, outcomes, and benefits. Benefits are described qualitatively according to their contribution to the triple bottom line of economic, environmental and social benefits. While a range of potential benefits of each program is identified, the analysis focused on the most likely and most significant benefit stream. A number of potential benefits therefore remained unquantified and hence the estimated net benefits of some programs may be considered conservative. The analyses were undertaken for total benefits and Wine Australia benefits, including those expected in the future as a result of the investment.
Investments in phylloxera soil sampling strategies, managing root zone salinity, and extension all yielded positive results at a 5% discount rate, with benefit cost ratios ranging from 1.8 to 4.2. Investment in the lees project did not achieve its principal objective and a relatively minor secondary benefit was quantified. The lees project yielded a cost benefit ratio of 0.8 (costs exceeded benefits). This was a relatively high
risk project that aimed to develop a novel method to remove lees from the bottom of a fermentation tank and thus reduce production costs. The project developed fundamental knowledge on the properties and physical characteristics of various lees but was not successful in engineering a novel solution to their removal. The market access project achieved its objectives but a low attribution of benefit to project investment was agreed with Wine Australia. This project yielded a cost benefit ratio of 0.8 (costs exceeded benefits). Success in maintaining market access for Australian wine results from activities across several fronts, not just this project. The quantified benefits from this project also rely in part from there being serious issues to solve; and this is an aspect over which Wine Australia has no control.
Comparisons between project results should be made with caution due to uncertainties involved with assumptions and differing frameworks for each of the five analyses.
Comparisons with analyses of previous investments should also be made with caution as the latest CRRDC guidelines require practitioners to take a conservative approach to the estimation of costs and benefits. This will result in lower benefit cost ratios than for analyses of research and development projects in previous years.