Organisational Models for Management of Research and Extension: the Case of New Zealand

By

R. W. M. Johnson (New Zealand)

Abstract

In the last decade public agricultural research and extension have been reorganised in New Zealand. The reorganisation has been driven by fiscal austerity and efficiency goals as part of a wider reform of government services. In this reform process there has been a concentration on greater accountability, financial probity, principal/agent relationships, divided responsibility, and privatisation (in some cases). In the agricultural science sector the former state departments have been replaced by a new structure dividing the functions of funders, purchasers and providers into separate entities, while extension services have been transferred successively from a state department (Agriculture) to a stand-alone bureau, and then sold to a private company. This paper reviews and analyses the previous government structures that were found to be unacceptable for both agricultural science and extension, the structures that were put in their place, and the organisational models that were explicitly or implicitly employed in deriving the new structures.

Key words: agricultural science, extension, reform, organisational models

R.W.M.Johnson C/- MAF, Policy PO Box 2526, Wellington, New Zealand. Ph: 6444744100 Fax: 6444744163, E-mail johnsonr@policy.maf.govt.nz

Contributed Paper submitted to the XXIII Conference of the International Association of Agricultural Economists, Sacramento, California, August, 1997.

Organisational Models for Management of Research and Extension: the Case of New Zealand (science.wps)

Background

The organisation of government services in New Zealand were previously based on the British Westminster model with a centralised Parliament and cabinet system supplied by a large bureaucracy. From the 1930s the degree of government intervention in economic and social affairs was at an increasing level; necessitated in New Zealand's case by a dependence on agricultural exports and imports of manufactures. Economic institutions were protected from international fluctuations by tariffs and import controls and internal marketing schemes. At the same time a comprehensive welfare net was created based on tax-payer funds. Economic management was centralised and government services reached into the lives of most people.

Within this historic framework, the provision of science and extension services was also part of the accepted system. A Department of Agriculture was established in 1892 to manage and report on emerging problems of disease control, pests and quality assurance for the newly discovered refrigerated meat and butter trade. Over the years the Department expanded to include agricultural experimentation, export inspection systems, farm training and extension services. In 1926 a Department of Scientific and Industrial Research (DSIR) was established to organise science across all government departments (including some agricultural science functions previously managed by the Department of Agriculture-now Ministry of Agriculture (MAF)). These two departments were state funded, scientists were state employees, and the structure of command was centralised and autocratic. As part of the DSIR mandate, however, an additional funding provision was made to encourage industry research associations on a 50:50 support basis shared with the industry concerned. In this way relatively large post-harvest research organisations were established for dairy products, wool, leather and meat, and an input supply research organisation for fertiliser research.

Reforms in the science sector as a whole began in 1985 with instructions to the two departments to introduce charges for science and extension services and to achieve 2% savings per year in government funding for the next five years. The aim was to encourage alternative funding ('commercial revenue targets') (MRST 1992a). In 1989, it was decided to create a Ministry of Research, Science and Technology (MRST) to take over science policy functions, and a Foundation for Research, Science and Technology (FRST) to select and fund research projects which deserved public support (science purchasers). The operation of science remained in the old departments temporarily but the existing administrative funding was divided between the new policy Ministry and the Foundation. Finally on 1 July 1992, it was decided to reform the operational or provider side of science as well, and sector research institutes were established to take over these functions from the former departments (science providers). Five agricultural research institutes were created for the pastoral, crop, horticultural, landcare and water subject areas. The FRST was to administer a public good science fund (PGSF) with specific criteria for identifying projects worth funding in the national interest.

Old Organisational Models

The system of science organisation was characterised by public control, departmental bureaucracy, large scale, multi purpose, vertically integrated, administratively pluralistic, and long chains of command (Boston et al 1996) as far the two major departments were concerned. The research associations were, by contrast, self-contained, specialised and self governing, and partially privately funded.

There was a degree of duplication between the two largest organisations involved, the staff of the two organisations were dominated by the public service ethic of working hours, holidays, and retirement provisions, and the results of their efforts were not sufficiently publicly visible. Departments were funded on a cash flow and annual appropriation basis with weak reporting systems to central government (Upton 1995). Accounting systems emphasised the cost of inputs (wages, salaries and overheads), and not the cost of results or outputs. Objectives were blurred between private good and public good science and success was often measured on the appropriable private good side. Operational research (support for a department's objectives) was not separately funded or identified from proper public good research [fundamental or basic research] and policy advice functions were delivered to government from within the bureaucracy that provided the science and extension services (provider capture).

Another perception was that the departments and agencies made their own priority-setting decisions independently of each other (MRST 1992a, p.9). There was no common framework for reporting science activity and expenditure. A common framework was only introduced in 1990-91 when all the individual science budgets were amalgamated. Within departments and agencies peer review systems and publication incentives were said to work well.

From a public choice viewpoint, the science departments, in common with other departments, were considered to be beset by self-interest philosophies particularly with regard to working conditions and lack of public accountability. They also suffered, in common with others, from long control hierarchies, and specific to science and extension, dispersed units of service provision. The long hierarchy generated high overhead costs to all science provider activities which technically made the science service more expensive than it need be. Finally, the public service system of financial management (based on cash flows alone) lead to poor understanding of relevant costs and benefits of different activities.

The Philosophy of Reform

Public service reform was part of a general plan to reduce the involvement of government in commerce, and to introduce market driven methods for the provision of government services (Schwartz 1996, p.l). Some departments with large trading enterprises lent themselves to privatisation. Other departments were subject to separation of policy and delivery services, while others were given less resources to achieve the objectives laid down by Ministers. All departments were subject to financial reform (Public Finance Act 1989) which mimic private enterprise disciplines through accrual accounting methods and demands for positive rates of return on capital. All departments were also put on arms-length terms with their Ministers by the imposition of formal contracts between Minister and CEO, and between CEO and department (State Sector Act 1988).

From a public choice point of view, the reforms can be seen as endorsing a conservative political agenda (minimising the role of the state, selling the state's commercial assets, curbing the functions of government agencies, and maximising liberty-understood in the limited sense of freedom from state coercion) (Boston et al 1996, p.18). Further, because politicians can be expected to abuse their power, it is argued that they should be prevented, if necessary by constitutional changes, from running budget deficits or imposing taxes beyond a certain level (Brennan and Buchanan 1985). Similarly, because departments have a vested interest in their own survival, they should not tender advice and implement policy (Treasury 1987, p.75). Otherwise, their advice will be biased and bureaucratic capture might occur. Finally all services provided by the state should be made as contestable as possible (Boston et al 1996, p.18).

The problem of improving performance in a public service is central to the reforms. The route taken was to introduce contractual obligations between Minister and CEO that could be monitored and indeed enforced on occasion. CEOs were employed on limited period contracts subject to review. This can be seen as an application of agency theory where the interests of principal and agent are bound to conflict. Although originally applied to problems arising from the separation of ownership and control in firms, it has been much more widely applied. Boston quotes Jensen and Meckling (1976, p. 309) as follows:

The problem of inducing an agent to behave as if he [or she] were maximising the principal's welfare is quite general. It exists in all organisations and in all cooperative efforts, at every level of management in firms, in universities, in mutual companies, in co-operatives, in governmental authorities and bureaus, and in relationships normally classified as agency relationships such as are common in the performing arts and the market for real estate.

In the political realm voters can be regarded as principals who contract with politicians (their agents) to undertake a range of tasks and activities on their behalf (Boston et al, p.19, Moe 1984, p.765):

... the whole of politics can be seen as a chain of principal-agent relationships, from citizen to politician to bureaucratic superior to bureaucratic subordinate and on down the hierarchy of government to the lowest level bureaucrats who actually deliver services directly to citizens. Aside from the ultimate principal and the ultimate agent, each actor in the hierarchy occupies a dual role in which he [or she] serves both as principal and agent.

Now agency theory explains why organisations have difficulty in meeting their obligations in the real world. Where agents are prone to shirking, deception, cheating and collusion, obligations are not met and efficiency is reduced. In bureaucracies, organisations are slow to respond to political change. As is well known, adverse selection describes the case where the principal does not have sufficient information about an agent before agreement is reached. Moral hazard is the case where the agent's behaviour after agreement cannot be monitored or anticipated. These deficiencies lead to incomplete information in a relationship, asymmetrical information and greater uncertainty. The application to bureaucracy lies in better specification of what is to be achieved, output-based reward systems, more direct incentives and better monitoring systems.(Boston et al 1996, p.19).

A related problem concerns the comparative costs of planning, adapting and monitoring task completion under alternative governance structures (Williamson 1985, p.2). Rational agents should select governance structures that minimise their aggregate production and transaction costs. The application of this transaction cost theory is to the practice of contracting out particular services. External contracting is best when behavioural uncertainty is low, and the risks of adverse selection are minimised; when the quantity of the desired goods and services can be easily measured and thus monitored; and when the number of potential suppliers is large (Boston et al 1996, p. 24).

An organisational theory that pertains more to science organisations is the administrative doctrine concerning inclusive versus divided responsibility. Inclusive or ‘single roof organisations’ favour horizontal and/or vertical integration of activities so as to facilitate unified political responsibility, better policy coordination, and lower transaction costs. Divided responsibility organisations minimise conflicts of interest, minimise bureaucratic capture, reduce the concentration of power, enhance the clarity of the organisational mission and facilitate contestable provision (Boston et al 1996, p.75).

Managerialism (Hood 1990, Aucoin 1990) embraces the ideas that the public sector can be managed like the private sector; that results are more important than the process; that the disaggregation of large bureaucratic structures into quasi-autonomous agencies improves accountability and efficiency; that public services should be contracted out; that tightly specified contracts and time scales produce better results; and that the use of private sector management practices such as strategic plans, performance agreements, mission statements, performance-linked remuneration systems, and corporate management information systems are preferable.

Science Reform

The objective of reform was increased accountability, fiscal savings, and better outcomes for society. This was to be achieved by privatisation (extension), or by organisational forms that avoided bureaucratic capture and set tighter goals for performance (agricultural science). Performance could be enhanced by contestability for public science contracts, tighter organisational structures, tighter remuneration systems, and removal of the vast load of bureaucratic overheads including layers of administrators. As state-owned enterprises, research institutes became subject to private sector financial disciplines including returning a dividend to their owners. Needless to say, these changes involved a considerable degree of hardship and adjustment particularly in the number of total jobs available in the short term. Fiscal savings were also seen as an incentive to gain greater private investment in research. This objective was aided by stricter monitoring of public good spending through FRST criteria for selection of public good projects and programmes.

One observer has stated that science represented perhaps the strictest application of the functional model in all the reforms (Boston et al 1996, p.83). There is a formal split between the roles of funder, purchaser, and provider; MRST is essentially a single purpose policy ministry; FRST purchases scientific research via a competitive bidding process from a series of CRIs, tertiary institutions, and private providers and monitors the performance of providers; the monitoring of the Crown's ownership interest in the CRrs is carried out by the Crown Company Monitoring Advisory Unit (CCMAU); and only FRST has a dual policy advice [limited], purchasing and monitoring role. Strictly speaking, FRST allocates a fixed annual fund, but operational research within remaining departments is often contracted out by them in a purchase framework also (King 1996).

Performance

Objectives. There is agreement that the new system has provided better focus for the whole science system (Upton 1995, Devine 1995).

The science reforms have encouraged a cultural change among scientists and end- users. The highly mission-oriented business culture of the 1990s, coupled with growing end-user focus of the research community, have given research a significant role in underpinning international competitiveness (Devine 1995).

The public good emphasis has given a better understanding of where the public interest lies. Clear, well thought out policy guide-lines are needed ... relevance only has meaning within the ideas of public returns to New Zealand ... higher priority should be given to programmes which, as presented, and at envisaged funding levels, are expected to give the best marginal return measured in appropriate social, environmental or economic value systems (Devine 1995).

Funding: By 1994, some significant shifts in the distribution of research expenditure had occurred. Compared with the position in 1986, private sector expenditure barely increased in nominal terms and public expenditure only increased by 22% in 7 years (Table I). Public funding for agricultural research increased by 27%. Data for universities is not comparable (see note to table).

Crowding Out: The public/private split varies widely across output classes (Table 2). Private funding is dominant in primary product processing [the research associations], materials and engineering, and infrastructural areas. The Universities dominate social science, health and fundamental research; and the public sector dominates primary production and the environment. These allocations reflect the teaching and training role of the universities and the particular output classes where public funding is needed because appropriability is lower.

The main implication of the tables is that overall private sector funding had not increased to the extent that the reforms desired in the period covered. There appears to be no greater involvement of business in research funding and rather less support for theories of' crowding out' by excessive public involvement (MRST 1992b, p.15). In terms of GDP growth, total funding levels had also fallen behind, and in real terms there was an absolute decline in resources made available. These trends appear to confirm the long term decline in support for science activities noted in one public report (MRST 1992a, p.9).

There are difficulties in getting greater private involvement. One agricultural research institute reports: While revenue [in 1995] remained almost static, it increased slightly from new and expanded relationships with commercial interests .... non-PGSF sources represent the greatest long term opportunities for the growth of AgResearch. Revenue from commercial sources is expected to increase significantly in the years ahead, as commercial organisations, seek new agri-technologies and bio-technologies to exploit the opportunities offered under GATT and other liberal trade agreements (AgResearch Annual Report 1995). In looking to the future, Devine (1995) observes the ultimate test is whether end-users and government become sufficiently convinced of the value of research benefits, [that] they increase their level of commitment.

Down-sizing: Since 1992, there have been widespread redundancies in some specialised areas in the CRIs. In 1995- 96, it is estimated that staff losses were 4% of total staff numbers but other recruitment was taking place. This has serious implications for the loss of experienced staff and the corporate memory (King 1996). The PGSF has only been increased by small nominal amounts since 1992 hence this trend is likely to continue.

Efficiency: The pastoral CRI reported modest profits in 1995, but noted that its investment of $48m in freehold land and buildings was substantially greater than is appropriate for a technology based organisation (AgResearch 1995). Most CRIs had the advantage of shedding layers of head office staff and offices located in urban real estate areas. Some could making savings from the removal of low quality and ill-directed projects which did not suit their new missions (Devine). Savings were not achieved in the transfer of priority setting from a departmental basis to a funder/purchaser/provider basis. The transaction costs of these activities have actually increased particularly with regard to providers' (scientists) time and energy (Upton 1995, p.4. )(King 1996).

Some reform would be desirable in the way bidding costs are shared (Pearce 1995). He suggests a more equitable sharing between purchaser and provider. Reconsideration of the process could reduce transaction costs. 'An integrated package of process changes is needed to move the science purchasing and delivery system from what can be thought of as a quality control mode to a quality management mode'.

Autonomy: In anticipation of transition problems, and in recognition of the need to give CRIs some autonomy in funding, Government arranged for some of the previous public funding [about 10%] to be allocated to the CRIs outside the PGSF system (CRI report, ch. 22). This is called non-specific output funding (NSOF). This would allow a CRI to work independently of the priorities set by FRST and could include preparatory research to establish the viability of an idea, support for research teams without public funding provision, and fellowships and the like.

This can be seen as an exception to the purchaser/provider model and recognises the uncertain nature of the scientific process and mind (Upton 1995, p.4.). 'In the absence of large alternative research funders ... [like philanthropic trusts] it seemed to me prudent to leave some funding in the hands of research providers as an insurance policy against purchaser/government failure'. Another special fund was established to provide research opportunities to extremely capable scientists whose retention was in the national interest but whose interests did not fit in with any established funding category [the Marsden Fund]. As the Minister states 'it is a response to the particular nature of the process of scientific enquiry rather than an application of institutional theory'! The universities particularly welcomed this development (McCutcheon 1995, p.19).

Universities: The universities are an important part of the science sector (Table 1). They dominate basic research and social science research expenditure (Table 2). Initially they were left out of the PGSF discussions because of disagreement over the share of funds they would have to give up out of V ote:Education, their main source of funding. University research is funded implicitly by a component of the Vote: Education block grant, by grants and contracts obtained from government departments, funding agencies and industry, by commercial activities and by scholarships awarded to research students (CRI report, ch. 28).

A small contribution to the PGSF was agreed in 1993, and this opened access to public good funding for university research. Nevertheless, one writer says that this only represents 10% of research funding in his university (McCutcheon 1995, p.18). There are problems for universities in this kind of organisation of research. If research is undertaken for the primary purpose of completing a degree, it is seen as teaching-related research which should be funded out of Vote: Education; if the primary purpose of the research is to produce a public good science output then it is classified as public good research or non-teaching research with consequent access to PGSF (McCutcheon, p.18). The latter is an obvious source of support for PhD candidates if they can survive the bidding process! Since public good funding covers professional time, university staff awarded contracts find themselves in conflict with their employers who think that they are paid to teach. If the best researchers concentrate on research, the burden of teaching falls on less qualified staff and so on. Further, some support for research in universities is on a direct cost basis, with the University covering the overheads; the PGSF system undermines these donors. McCutcheon believes that user pays system is inimical to true university research objectives based on intellectual curiosity, training and disciplinary research (ibid, p.19).

Aricultural Research and Extension: The extension activity was always the responsibility of the Department of Agriculture. There was no sharing with the universities as in other countries. In 1987, the Ministry (as it then was) amalgamated its research and extension bureaus, both to save costs and overheads and to seek possible synergies (Ritchie 1995, p.3). Then in 1991, the two were separated again: research services to be split among the CRIs, and extension services to be formed into a publicly-owned trading enterprise. In 1995, this enterprise was sold to a private firm. On the 4-year synergy experiment, Ritchie says

"strong regional autonomy helped establish local initiatives early in the commercialisation process, but at the time prevented the development of a national business ethic ... the culture of a research organisation is different from a truly commercial organisation ... research culture is driven by innovation and product development while the consultancy culture is market driven and one of client service" (ibid, p.3).

On the commercialisation issue, the government took the view (under Treasury advice) that extension services were not public goods at all, and government has no need to support such a service. This is a debatable issue especially where the public good content of information services, field demonstrations and policy servicing are concerned, As Ritchie reports, his commercial organisation has had to down-size and concentrate its activities on one-to-one extension advice, sub-contracting to the science providers, training services and advice to agribusiness (Ritchie, p.5). Sub-contracting to the science providers involves field experimentation and technology transfer. This kind of interaction has considerable potential (King). The new divided responsibilities for technology transfer have left a gap compared with the old public service system. New ideas and organisational skills are needed in this area (King 1996, Ritchie 1995). The status of technology transfer could be enhanced by identifying it as a separate outcome in the PGSF, instead of disguising it as part of an individual output (King).

References

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