My presentation at the 2013 Agricultural Biotechnology International Conference (ABIC) in Calgary Canada, September 2013. Here I discuss the issues related to recuperating an investment in agricultural biotechnologies' return over time and recuperating such investment with increases in cost of regulatory compliance or delays on the onset of benefits of a potential GM biotechnology. I also discuss the regulatory and knowledge cost/benefit tradeoffs and potential implications especially for public sector research in developing countries.

1. Program for Biosafety Systems – http://pbs.ifpri.info/
Implications of Biosafety Regulatory Costs
and Time Delays on R&D
José Falck Zepeda
Senior Research Fellow
International Food Policy Research Institute - Program
for Biosafety Systems (IFPRI - PBS)

2. Three basic issues related to investments
and regulatory costs and benefits
1. Recuperating an amount of investment
return over time
2. Recuperating an investment with increases in
cost of regulatory compliance or delays on
the onset of benefits
3. Regulatory and knowledge cost/benefit
tradeoffs

3. Issue #1. Recuperating a fixed amount
of return over time

4. Model 1. A simplified “typical”
biotechnology developer
• Invests US$ 136 million in a new GM crop
• Endures an average time for regulatory
approval of 48 months (Phillips McDougall
2011)
• Financial implications of a 20% rate of return
– Require a total NPV of US$ 27.2 million
– Each year of delay represents an NPV of US$ 22.7
million
Source: Smyth, McDonald and Falck-Zepeda, 2013

5. Marginal loss of net cash flow from delays in
regulatory approval process (IRR = 20%)
0.0
10.0
20.0
30.0
40.0
50.0
1 2 3 4 5 6 7 8 9 10 11 12 13
Marginal Loss (%)
Years
Source: Smyth, McDonald and Falck-Zepeda, 2013
Threshold
If IRR is 50% then
threshold closer to
4 years!!!

6. Issues and Implications
• Regulatory delays have a negative impact on
returns to investments
• With a 20% rate of return, expect year 6 of
regulatory delay to be the trigger point for
suspending investment in new R&D projects
• Current regulatory approvals taking 48 months
implies that the upper boundary has likely
been reached
Source: Smyth, McDonald and Falck-Zepeda, 2013

7. Issue #2. Recuperating an investment
with increases in cost of compliance or
delays in the onset of benefits

8. Case study 1. Model investor case
study (continued)
• Investor conducts investment of 136 million US$
with a desired period of recovery of 10 years
• Investor requires a 20% rate of return on
investment in real terms
– NPV of the investment is 27.2 million dollars
– Require a stream of nominal payments of 38.9 million
per year
• Allow same number of payments and value of
each payment, but increase time to onset of the
benefits

9. NPV with increasing time to onset of
benefits
(120,000,000)
(100,000,000)
(80,000,000)
(60,000,000)
(40,000,000)
(20,000,000)
-
20,000,000
40,000,000
0 1 2 3 4 5 6 7 8 9
NPV(US$)
Year after onset of benefits
NPV
Keeping same number of payments + rate or return (20%)

10. Impact of risk and uncertainty on the
stream of benefits over time
• What happens to the riskiness of
investments as the onset of benefits is
pushed over time?
• Repeat NPV calculation for the “model”
investor using @RISK to conduct simulation
through repeated iterations

11. Risk impacts and the stream of
benefits
-120
-100
-80
-60
-40
-20
0
20
40
1 2 3 4 5 6 7 8
ValuesinMillions
Years after the onset of benefits
5% - 95% +/- 1 Std. Dev. Mean

12. Impact of risk and uncertainty in the
stream of benefits
• Dispersion around net benefits increases over
time => Investment returns become riskier
• Note that we have the ability to characterize
recovery path and its parameters…
• What happens if investor cannot make a
determination of the NPV?
– Likelihood that an investment will not be made
increases due to uncertainty

13. Case study 2. Net benefits from the
adoption of GE crops in the Philippines
Bt
eggplant
MVR tomato Bt rice PRSV resistant
papaya
Net Benefits
baseline
(NPV in US$)
20,466,196 16,748,347 220,373,603 90,765,793
Effect of increasing
cost or time of
compliance
Source: Bayer, Norton and Falck Zepeda (2008)

14. Contrasting baseline net benefit levels from GE
crop adoption with higher costs in the Philippines
Notes: 1) Source: Bayer, Norton and Falck Zepeda (2008), 2) Baseline values for each technology expressed in millions US$ using a
discount rate for the estimation of Net Present Value = 5%, 3) Change in Net benefits defined as the total benefits estimated using the
economic surplus minus total regulatory costs.

15. Contrasting benefit levels from GE crop adoption
with larger regulatory lags in the Philippines
Notes: 1) Source: Bayer, Norton and Falck Zepeda (2008), 2) Baseline values for each technology expressed in millions US$ using a
discount rate for the estimation of Net Present Value = 5%, 3) Change in Net benefits defined as the total benefits estimated using the
economic surplus minus total regulatory costs.

16. Issues and implications
• Regulatory costs are not likely to have a significant impact
on the returns to investment
• Exception are organizations that have budget/financial
constraints
– National research organizations in developing countries
– International research systems developing public good products
– Small private firms in developing countries
• Regulatory delays have a significant negative impact on
net returns
– Impact on the number and type of technologies
– More “higher return” products and less public good products?

17. Issue #3. Regulatory and knowledge
cost/benefit tradeoffs

18. Cost and benefit tradeoffs
• Learning process - gains in knowledge through
increased experimentation and/or inclusion of
socioeconomic in decision making are possible
• Delays may have a positive impact if it helps avoid
potential negative impacts
• Face the issue of irreversibility
– Costs and benefits that may not be ever reversed
– One foundation of the precautionary
principle/approach and regulatory protocols such as
the Cartagena Protocol on Biosafety

19. Case study 3. The case of fungal
resistant bananas in Uganda
• Ex ante study – used the real
options approach
• Conclusions
– If approval delayed, forego
potential annual (social) benefits
of +/- US$200 million
– Maximum total development
costs cannot exceed US$108
million.
– Even considering irreversibility,
adoption still benefits Uganda
Citation: Kikulwe, E., J. Wesseler and J. Falck-Zepeda. 2008. Introducing a Genetically Modified
Banana in Uganda: Social Benefits, Costs, and Consumer Perceptions. IFPRI Discussion Paper
767, Environment and Production Technology Division, International Food Policy Research
Institute, Washington, D. C. USA.
Copyright Kikulwe © 2009

20. Potential implications for decision
making (1)
• Gain more and/or better information about
technology impacts for decision making - may
support valuable technologies
• Need to balance gains in information,
additional costs & effort, and impacts on
innovation
• Potential for introducing uncertainty that can
lead to an unworkable system

21. Potential implications for decision
making (2)
• Additional requirements will increase the cost of
regulatory compliance
• Potentially regulatory delays will likely cause a
– reduction in the number of technologies especially
those released by the public sector and crops/traits of
a public good nature
– some public sector institutions may not be able to
deploy technologies due to fixed costs necessary to
enter market

22. Time to change and develop functional
biosafety and decision making systems
“To continue making things as we have done until now is
not an option: we must develop a shared vision between
agriculture and environment agendas and move towards
a paradigm shift”
“We must face the challenges with technology, not
ideology…including developing proper governance and
regulatory processes that work”
From a declaration of scientists at the 2012 Central
American Conference on Agriculture and Environment
(CIAA)

23. SOCIO-ECONOMIC CONSIDERATIONS IN BIOTECHNOLOGY
REGULATION
Edited by:
• Karinne Ludlow, Monash University, Australia
• Stuart J. Smyth, University of Saskatchewan, Canada, and
• José Falck-Zepeda, International Food Policy Research Institute,
USA
Discusses 15 methodological areas ranging from impacts on
producers and society and environment to trade, indigenous
knowledge and ethical/equity. Includes also discussions on
background and issues related to decision making.
Springer Editors
Spring 2014

24. José Benjamin Falck-Zepeda,
Ph.D.
Senior Research Fellow / Leader Policy Team Program for
Biosafety Systems
IFPRI
2033 K Street NW
Washington, DC 20006-1002
USA
j.falck-zepeda@cgiar.org
Brief bio/pubs: http://www.ifpri.org/staffprofile/jose-falck-zepeda
Blog: http://socioeconomicbiosafety.wordpress.com/
Follow me on Twitter: @josefalck

25. Food safety issue RISK scientific RISK socially constructed RISK modern RISK political
High cholesterol foods High Moderate Moderate Low - moderate
Foods high in sugar High Moderate Moderate - high Moderate
High sodium foods Moderate Low Moderate Low
Dead mouse in beverage
bottle
Low – high High High Low
Dead frog in package of
frozen vegetables
Low –
moderate
High High Low
E-coli in hamburgers High Low Moderate Low
Salmonella High Low Moderate Low
Mycotoxins High Moderate High - moderate Low
Filth and extraneous
materials (insect
fragments, stones, twigs,
rodent manure)
High High High Low
GM foods Low High High High