Abstract: Research and development (R&D) plays an important role in enhancing the productivity and competitiveness of Australia’s agriculture, fishing and forestry industries. It can also provide various other benefits, including better and lower priced food for consumers and improved environmental and animal welfare outcomes. Many of these benefits come from overseas research that is embodied in imported products and technologies used by primary producers. Also, while some of the rural R&D undertaken in Australia is ‘cutting edge’, the focus of much of this research is sensibly on the adaptation of global technologies to meet particular local requirements. Though the available data are far from comprehensive, it appears that current annual funding for rural R&D and related extension activity in Australia is around $1.5 billion, of which three-quarters is provided by the Australian and State and Territory Governments (see table 1). This public funding is delivered through an array of general and sector-specific programs, with the research in turn conducted by a mix of government and private research providers. A sizeable part of the Australian Government’s funding for rural R&D is provided to Rural Research and Development Corporations (RDCs). These corporations commission rural research on behalf of primary producers, some processors and the Government. Producers contribute to the cost of this research primarily through statutory and voluntary levies, with most of the Government’s contribution provided on a matching dollar for dollar basis. In 2008-09, expenditure by the RDCs on rural R&D and related extension was nearly $490 million, with the Government contributing a little under $220 million to that cost. The RDCs are also able to ‘leverage’ this expenditure with cash and in-kind contributions from other sources (including other government-funded programs). The RDC ‘model’ has a number of strengths (see below) and is generally held in high regard both in Australia and overseas. Nonetheless, concerns have been raised about aspects of the arrangements — particularly, the extent to which the Government’s funding contribution has helped to address unmet rural research needs, as opposed to subsidising R&D that producers would have had sound financial reasons to fund themselves. Against this backdrop, the Commission was asked to report on how well the RDC model has been working, whether it should be retained and, if so, how it might be modified to deliver better outcomes for the community. It was also asked to advise on how much Australia should be spending on rural R&D in total, and how much of that spending should be funded by governments. Key findings: Through the Rural Research and Development Corporations (RDCs), rural industries and the Australian Government together invest some $490 million a year in R&D. This co-investment model has important strengths, including: helping to ensure that public money is not spent on research of little practical value; and facilitating greater and faster uptake of research outputs. However, as currently configured, the model has some significant shortcomings. It does not cater well for broader rural R&D needs. The overall level of public support for industry-focused research is too high given the sound financial reasons that producers or industries would have to fully fund much of this research themselves. The basis for the Government's matching contribution to RDCs provides no incentive for producers to increase their investments in the model over time. While the broad model should be retained, significant changes to the way in which the Government contributes its funding are therefore called for. Specifically: The current cap on dollar for dollar matching of industry contributions by the Government should be halved over a ten-year period A new, uncapped, subsidy at the rate of 20 cents in the dollar should be immediately introduced for industry contributions above the level that attracts dollar for dollar matching A new, government-funded, RDC - Rural Research Australia (RRA) - should be created to sponsor broader rural research. With RRA in place, the other RDCs (except for the Fisheries RDC) should be left to focus predominantly on funding research of direct benefit to their industry constituents. These new arrangements would result in a modest reduction in total government funding for the RDC model - though with a similarly modest increase in private contributions, the overall amount of funding available to the RDCs could increase. More importantly, the redistribution of some public money to broader research would deliver better value for the community from its investment in the model. These funding changes should be supported by a new set of program principles, setting out the broad obligations on RDCs in return for their public funding and how the Government should discharge its responsibilities on behalf of the wider community. Some more specific changes should also be made, including to: enable (though not require) the appointment of a 'government director' to the board of an RDC improve the robustness and transparency of project evaluations, independent performance reviews, and the monitoring of program outcomes by the Government. There is also a need for better data on overall rural R&D funding and spending. However, overlaying the framework with a target level of total spending on rural R&D, or a target 'research intensity', would not be appropriate.