ASTI/IFPRI-FARA Conference

Cost-Benefit Analysis of Restructuring NARS in Kenya

Chris Ackello-Ogutu and John MburuDepartment of Agricultural Economics, University of Nairobi

Background

• Moving the national economy forward – Vision 2030 pillars

• Without mineral and other natural resources such as oil, agriculture is the foundation for achieving Kenya’s Vision 2030 – GoK policy reforms especially since 2004 signify a renewed commitment to the sector

• Main challenges and opportunities to agricultural growth – the need to do things differently

• Technological innovation and commercialization as the main drivers of agricultural transformation – role of NARS

Structure of the current NARS• NARIs coordinated and regulated under the Agriculture Act

(Cap 316) and the Science and Technology Act (Cap 250); KARI is the main one but others focus on forestry (KEFRI), fisheries (KEMFRI), coffee (CRF), tea (TRF) and sugar (KESREF), etc

• System-wide problems: budgetary allocation and utilization; staff training and retention; resource mobilization and use of physical infrastructure

• Efficiency issues: technology generation; impact on crop and livestock productivity; pressure to cover more research fields; coordination of outreach programs; small sizes limit mounting multi-disciplinary teams to tackle problems thro commodity value chains

The proposed structure-KARO

• Key organs of Kenya Agricultural Research Organization (KARO) will be: Council (policy making body); Secretariat (executive arm) will have 8 operational units supporting 6 new semi-autonomous institutes organized along commodities and value chain lines (food crops, livestock, forestry, fisheries, horticulture and industrial crops)

• Advantages of KARO: more effective collaboration with universities, private research institutes and CGIAR; lower transactions costs; a uniform mission and vision; attract more funds from government, private sector and donors; is expected to be more vibrant and responsive to policy issues and agric sector problems

Objectives

• Assess costs and benefits of the organizational reform of the existing National Agricultural Research System (NARS) and compare them with those of the proposed NARS

• Assess economic feasibility/viability of implementing the proposed NARS as an alternative to the existing NARS in Kenya

Methodology

• Net benefit values (NBV) are calculated for ‘with’ and ‘without’ the proposed NARS scenarios and the net present value (NPV) of the difference in the two, referred to as the Incremental Net Benefit (INB), calculated

• INB = NBV (with policy) – NBV (without policy)• Positive NPV for INB means the roposed NARS policy

is economically feasible as alternative to the existing struucture

• Internal rate of return (IRR) is also generated

• Sensitivity analysis for selected assumptions

Assumptions for the CBA

• A discounting period of 30 years• A discount rate of 9.7% per annum • Both investment and recurrent costs for KARO; but

recurrent costs of the existing NARS cease after the first two years of implementation of the new NARS policy

• KARO will be 100% more efficient in producing benefits of research and in service delivery than the current NARS – economies of scale and improved collaboration with universities

• GDP will pick up in 2010 and maintain a steady growth to attain an average growth rate of 10% per annum during the period 2030- 2040

• Non-diminishing global funds for agriculture, generally and for agricultural research in particular – to facilitate resource mobilization (KARI example)

• Economic stability for the entire period of analysis

Costs (Ksh million) of KARO and proposed semi-autonomous Institutes

OrganizationsPeriod (actual years)

2011 2012 2013 2014 2015 ...……… 2040

KARO Secretariat 1,064 536 275 274 310 .........… 1,619

Water Resource Management Institute 785 527 600 684 780 …….…. 5,568

KIRDI 105 121 140 163 188 ……….. 1,972

ASAL Research Institute 665 574 654 746 850 ….……. 6,068

Industrial Crops Institute 828 944 1,076 1,226 1,398 ……….. 9,978

Horticulture Institute 453 516 589 671 765 ……….. 5,461

Marine & Fisheries Institute 424 477 537 604 679 ……….. 3,955

Forestry Institute 687 756 833 918 1011 ……….. 4,317

Livestock Institute 591 673 767 875 997 ………. 7,119

Food Crops Institute 866 987 1,125 1,282 1,462 ……….. 10,435

Public and Private Universities 2,716 3,096 3,529 4,023 4,587 ……….. 32,740

Private Research Organizations 295 309 325 341 358 ………. 862

Total costs 8,202 7,949 8,542 9,502 10,619 ……….. 61,980

Total Costs – million US$ 113.9 114.3 125.6 141.9 160.8 ……….. 90,246

Costs (Ksh million) of current research institutes

 Organization  2011  2012  2013  2014  2015  2016  -------- 2040 

KARI 4,091 4,663 5,316 6,060 6,909 7,876 -------- 56,220

KEFRI 895 986 1,086 1,196 1,318 1,452 6,198

KMFRI 554 623 701 788 886 997 -------- 5,808

KIRDI 70 81 94 108 125 145 -------- 1,315

KESREF 308 338 372 409 449 493 -------- 2,028

TRF 177 205 239 278 323 376 -------- 3,640

CRF 292 320 350 384 420 460 -------- 1,795

Universities 1,810 2,064 2,353 2,682 3,058 3,486 -------- 21,827

Private organizations 97 102 107 113 118 124 -------- 259

Total costs 8,294 9,383 10,618 12,019 13,608 15,410 -------- 99,090

Total costs million US$ 99.7 112.7 127.6 144.4 163.5 185.2 -------- 1,190.6

Research productivity due to increased efficiency

Benefits (Ksh million) of the proposed NARS system

• Research productivity due to increased efficiency– Currently technology generation and adoption in Kenya

are mainly attributed to operations of KARI and collaboration with CGIAR – returns are about 0.2% of GDP

– KARO is likely to double the current research returns to 0.4% of the GDP by the year 2021

– The returns are about Ksh 5.6 billion in the third year of KARO’s existence

• Increased funding – KARI used as the point of reference– Ksh 2.7 billion likely to be generated by the year 2013

(increases by 12% every year) • Sharing of facilities: KARO to save about Ksh 240 million by

2013, the time it becomes fully operational

Research productivity due to increased efficiency

Benefits (Ksh million) of the current NARS system

• Research productivity – Assuming a rate of return of 47% to agricultural

productivity monetary benefits are 0.2% of GDP annually

– This is about Ksh 4.447 billion in 2011– Magnitude of benefits depends on growth of

GDP– assumed to be an average of 6% over the investment period (grows to 10% by 2030 and maintained at this level thereafter)

Is the proposed NARS Policy economically viable?

Year

 2011  2012  2013  2014  2015  2016  --- 2040 

Net benefits of ‘with policy scenario’

-9,476 -9,516 -1,849 -2,009 -2,205 2,368 ---- 33,683

Net benefits of ‘without policy scenario’

-3,847 -4,647 -5,512 -6,606 -7,822 -9,190 ---- -47,304

Incremental net benefit

-5,629 -4,870 3,663 4,598 5,617 6,822 ---- 80,988

Decision Criteria

NPV = 142,584 (US$ 1,713 million); IRR = 47.4 percent

Conclusions

• Implications for capital flows into agriculture: - impetus for government funding under

CAADP- KARO will be more credit worthy

• Increased efficiency arising from integration of NARIs with universities

• But rolling out KARO is likely to face initial challenges: funds disbursement delays, logistics, vested interests and political commitment