Forecast CRI performance trends

This section provides an overview of the general trends identified in the CRIs’ 2007/10 strategic plans. These trends are general only and do not necessarily apply across all of the nine CRIs.

Strategic trends

Sustainability as an emerging area of research

Almost all strategic plans identify sustainability as an emerging theme in terms of research effort and the development of new products and technologies.

For example, Landcare Research has a key focus on sustainable development with nearly all of the company’s research programmes now contributing to this area. An emerging related area is an increase in capability in social and economic research to better understand barriers to achieving sustainable development and to assist communities and businesses to achieve the necessary changes.

Scion also has a key focus on sustainability. The company’s biomaterials futures strategy focuses on the utilisation of renewable plant material to provide economic, environmental, social, and cultural benefits. For example, Scion’s energy group aims to be the lead R&D provider of bioenergy in New Zealand. Its core focus will be on developing tools and processes to increase the commercial implementation of energy solutions based on bio-derived feedstock for heat and power products.

HortResearch has identified achieving a carbon-neutral horticultural industry as one of its four value propositions and aims to achieve reductions in greenhouse gas emissions from the New Zealand horticultural industry through a combination of lowering emissions and protecting and enhancing carbon reserves stored in soils and vegetation.

Other CRIs are involved in diverse activities such as biofuels and sustainable energy research
 

Broader community participation

The CRIs continue to engage in activities to support the broader community. Examples include helping to position Māori as early movers in the area of sustainability, informing schools about the importance of science, sponsoring science events, and assisting Māori and Pasifika people interested in science careers

Commercial work

Securing and growing commercial revenue is a key element in all CRIs’ strategic plans, and all forecast an increase in this area.

In this respect, the CRIs generally recognise the need to move beyond simple transactional relationships to form strategic partnerships as an avenue for growth.  For example, this could involve improving relationships with companies and leveraging those relationships to secure FRST and industry funding.  It could also involve adopting a key accounts initiative or defining and implementing best practice to support the management and growth of key company relationships.

Commercial work is not all work for the private sector, however.  For many CRIs, local and central government agencies are an important source of revenue, particularly in areas related to sustainability.

Collaboration with universities

As identified as a trend in our analysis of the CRIs’ 2006/07 strategic plans, the CRIs are expecting to increase their collaboration with universities.  Examples include the co-location of CRI and university scientists, joint research programmes, participation in joint research centres, assistance with teaching programmes, and supervision of PhD students.

Financial trends

The following analysis of financial trends excludes IRL. As at the date of writing, IRL was still completing its 2007/10 forecasts.

Increasing commercial revenue

The CRIs forecast cumulative growth in total revenue by 17.6% over the three-year period from 2007/08 to 2007/10 compared with 2006/07. This compares with 14.4% total revenue growth during the previous three-year period (from 2004/05 to 2006/07 compared with 2003/04).

In terms of revenue breakdown, the proportion of income from FRST and the CRI Capability Fund is expected to reduce to approximately 41% by 2009/10, as the CRIs’ other revenue grows at a higher rate. Other revenue includes mostly commercial fee-for-service work for public and private sector clients but also includes some revenue from commercialisation activities (for example, royalty income and the sale of goods and services) and income from the sale of assets.
 

Returns at viable levels

The average return on equity (RoE) in the CRI sector is expected to rise from 6% in 2006/07 to 8% in 2007/08, 10% in 2009/10, and then to fall to 5% in 2010/11. The higher forecast RoE figures for 2007/08 and 2008/09 are influenced by asset sales at a number of CRIs. While asset sales are a genuine source of return, the lower average return in 2009/10 more accurately reflects the CRIs’ underlying operating results. This 5% return is comparable with returns in past years.

Of the eight CRIs included in our analysis, three are forecasting an average return on equity that meets or exceeds the 9% target over the three-year period. All other CRIs have adopted or are developing strategies that will see them reach that target over the longer term, while maintaining their financial viability.
 

Dividends

The CRIs forecast total dividend payments of $5.4 million over the three-year period from 2007/08 to 2009/10.  Most of the dividends forecast are special dividends to pay for CRI user tariffs for KAREN, the advanced network operated by REANNZ .  This reflects the fact that dividend flows do not represent the primary purpose for Crown ownership of the CRIs.

Stable debt levels

Most CRIs are expecting to retain generally stable debt levels, although two will raise their levels to finance building projects and equipment purchases.  All CRIs have adopted individual net gearing targets which relate to each company’s risk profile.  Forecast debt levels will generally remain below these target for the CRIs.    

Most CRIs have headroom to take on more debt to reach their net gearing targets: the average forecast level of just over 10% in 2009/10 compares with net gearing ratio targets which generally fall within the 15-20% range.  It is not expected, however, that the CRIs will take on debt simply for the purposes of reaching their optimal target.  Nevertheless, we expect that debt levels will generally rise over time as the CRIs take on debt to replace or upgrade buildings and other equipment, while remaining within their net gearing target levels and retaining appropriate interest cover levels.

Investment programmes

Several CRIs have developed plans for new buildings or refurbishment of existing buildings over the next three years.  These programmes respond to CRI growth and the need for infrastructure to meet scientific requirements (for example containment facilities) and to offer an attractive working environment.

Besides building programmes, some CRIs are forecasting a significant increase in investment to upgrade their research and IT capabilities.