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A framework for establishing energy research and development policy in developing countries

Mohan Munasinghe

 

Overview

Energy R&D has become a big business, especially since the price crises of 1973 and 1979. Therefore, it is essential, especially when national financial and human resources are scarce, to establish a logical and sensible approach to allocating funds and effort to energy R&D. This approach is facilitated in most developing countries because the impetus for R&D is the responsibility of the central government. This paper develops a rational and systematic framework, as well as relevant criteria, that can be used to help determine policies and priorities for R&D in any developing country.

Analysis

The process for the development of an R&D policy for energy is straightforward and consists of five steps.

Step 1

From a comprehensive list of energy R&D topics, select a subset that is most pertinent to the immediate needs, medium-term development goals, and long-term aspirations of the nation (in that order of priority). This step is guided by a thorough assessment of the country's resource endowment, its fiscal position and outlook, financial characteristics, and the technologies and options available.

Step 2

Evaluate the topics in this subset using a simple formula that is designed to calculate the net expected benefits (or economic efficiency) of each topic:

NB = B(R&D) - C(R&D) + B(IMPLEM) - C(IMPLEM)

where NB is the calculated net benefit of the R&D undertaking, B(R&D) is the present discounted value (or present value, PV) (see endnote 1) of the stream of benefits accruing from the R&D undertaking, C(R&D) is the PV of the costs of the undertaking, B(IMPLEM) is the PV of the benefits derived from implementing the results of the R&D project, and C(IMPLEM) is the PV of the costs of implementation.

All costs and benefits are expressed in terms of their economic, not market, value. The "price" of a cost or benefit is its highest value when used for some purpose other than for the project in question. Care must be taken in the selection of appropriate values (often called "shadow prices") because costs are usually more readily identified than benefits and long times are involved.

Step 3

Rank each R&D option according to its net expected benefit to the nation (economic efficiency). Because of the uncertainties inherent in each option, it is prudent to test the results of the efficiency calculation by altering an assumption on which a cost(s) or benefit(s) is based and then redoing the calculation. The most robust option over the range of scenarios should rank first.

Step 4

Consider, in advance, the constraints to implementation of the R&D program. These can include any combination of

· Lack of financial, physical, or human (skills and training) resources,

· Institutional barriers (for example, a lack of specialized knowledge on the part of decision-makers or their advisors, an absence of coordination among the various levels of government or between the relevant government agents and the private sector, and inadequate links between the nation's policymakers and foreign or international sources of funds or expertise), and

· Policy constraints, engendered by a weak or nonexistent national energy plan or planning process.

Step 5

Set in motion processes that can overcome these obstacles. Increase local contributions where potentially available (for example, from power utilities and oil, gas, and coal extraction companies, especially if these are government owned). Consider taxes on energy imports and allocate the proceeds to a fund for energy R&D. Appraise domestic and foreign financial institutions of the potential for short-term investment gains from preferential loans for R&D purposes. Investigate the availability of export assistance, grants, and loans from countries that possess some of the technology that is necessary to undertake the R&D or to implement the technology that is likely to be produced. Human resources must be protected by offering attractive salaries or other perquisites. As well, skilled personnel require access to information and equipment to carry out their work. Providing these inputs may be more efficient in the long run than purchasing the skills and resources of foreign consultants.

A lack of understanding of the relevant energy issues can be overcome with education campaigns aimed at both decision-makers and members of the energy-consuming public. Interactions of the national government with foreign governments, international aid institutions, and multinational enterprises and organizations must be established, strengthened, and stabilized.

The coordination of policy and planning must begin with a conscious effort to bring together the various levels of government that are involved in energy planning and related areas (the environment, financial institutions, and fiscal, monetary, and budget policy).

Notes

1. Calculated as follows:




where B(R&D) represents the benefits of the R&D activity in year t, T is the overall time horizon in number of years, and r is the selected discount rate.