Report No. PID11537 Project Name CROATIA-Croatia Science & Technology... Project Region Europe and Central Asia Region Sector General industry and trade sector (100%) Project ID P080258 Borrower(s) REPUBLIC OF CROATIA Implementing Agency Address MINISTRY OF SCIENCE AND TECHNOLOGY Address: Trg J.J. Strossmayera 4, 10000 Zagreb, Croatia Contact Person: Dr. Miroslav Cavlek/ Dr. Damir Vucina Tel: 385-1-4594-441/ 447 Fax: 385-1-4594-469/ 449 Email: miroslav.cavlek@science.hr/ vucina@fesb.hr Environment Category C Date PID Prepared December 10, 2002 Auth Appr/Negs Date April 15, 2003 Bank Approval Date June 19, 2003 1. Country and Sector Background The ultimate objective of Croatia's science and technology system should be to serve the needs of Croatian economy by achieving a better integration of the science and technology infrastructure with production needs, increasing private sector participation in technology development, and developing stronger linkages between industry, universities, and research institutions. Creating an environment that is conducive to investments is one of the top priorities and would include improving property rights, increasing quality of the products, improving R&D activities, developing new information technologies, etc. With Bank's assistance, the Ministry of Science and Technology (MOST) is preparing a Technology Development Program which aims to address the goals described above. The proposed Science and Technology Project would support the implementation of a part of this program where the World Bank has a comparative advantage. The strategy would aim to increase private sector participation in R&D and reduce the technological gap by further increasing the R&D use by the industry. 2. Objectives The major development objective of the project would be to improve the competitiveness of the Croatian industry both in the domestic and foreign markets. This would be achieved by reorienting Croatia's science and technology (S&T) infrastructure and in particular by focusing on (i) strengthening and restructuring of research and development institutions (RDIs) and promoting commercialization of the research outputs; and (ii) upgrading technological capabilities of enterprises. The creation of a sound business environment conducive to growth, increased technological base, and encouragement of practical application of technical skills will help companies compete more effectively and facilitate the Croatian economy's integration with the global markets. In particular, upgrading firms' R&D capabilities and helping them receive ISO certifications would be an important step for the Croatian industry's access to the European Union (EU). Background Croatia is making progress in its transition from a highly centralized economy within a larger federal system, to a self-sustaining market economy aiming for accession to the European Union within the next decade. The country is, however, struggling to complete structural reforms, and to reverse the negative trends in its fiscal and trade accounts, which over the past five years have caused an increase of the ratio of public debt to GDP of about 20%. Fiscal adjustment is, therefore, a priority for the country, to be achieved through an expansion of the tax base, further rationalization of the public administration and subsidies system, and targeted initiatives to spur the private sector-led growth and increase the overall competitiveness of the national productive system. The Government now perceives as critically important being able to leverage more effectively the stock of highly skilled human capital and the scientific/research know-how present in the country, through an upgrading of the business infrastractural environment and selective targeted assistance. Since Yugoslav times, Croatia has in fact specialized in research and high-tech industrial sectors, such as shipbuilding, pharmaceuticals, chemicals, and machinery. Its universities produced scientists and engineers sought after by other European countries while its research institutions did high quality fundamental research and former state enterprises carried out applied research and development (R&D). At independence, there were no institutions to support the development of private firms, let alone technology support programs. Likewise, basic infrastructure related to measurements, standards, testing and quality (MSTQ) was absent in Croatia as it used to be centralized for Yugoslavia. The Government has set up institutions and experimented with programs and activities in many related fields. In early 1990s, the State Office for Standardization and Metrology (SOSM) and the State Intellectual Property Office (SIPO) were set up. Each worked to some extent with its international, European and national sister institutions. They have made some progress, but need to now harmonize with the European norms and to strengthen significantly in many areas. With the break up of Yugoslavia, manufacturing experienced a significant decline: between 1990 and 2000, production fell by an annual rate of 3.3% and its weight on GDP shrunk from 28% to 23%. Much of the decline took place in large companies with high levels of R&D and consequently a sizable portion of the country's R&D capacity was dispersed. This situation notwithstanding, Croatia has continued to support basic scientific research albeit with decreasing resources. Total expenditure on R&D increased to 1.2% of GDP in year 2000 (from 0.9% in 1999). Based on an initial study, it was found that the quality of research across a range of areas maintained high standards (the promising areas which were -2 - studied, included environmental and marine sciences, life sciences, chemical related sciences and engineering, and physics and electronics). The results of the research in these areas could form a good basis for commercial enterprises. However, there is an absence of knowledge and experience about intellectual property, of the process of technology development and spinning off enterprises. Croatia's MSTQ is focused almost exclusively on supporting technical sciences in the traditional industrial sectors, particularly heavy industry. The MSTQ infrastructure must be expanded to support other sectors, including biomedical and natural sciences, and serve better the enterprises based on these sciences. Similarly current quality certification and accreditation initiatives also appear to be concentrated on laboratories and products almost exclusively within traditional low-tech manufacturing sectors. Industry awareness of the importance of meeting standards or certifying quality, or not violating intellectual property laws, also needs to be improved. On the technology and innovation side, the Ministry of Science and Technology has introduced pilot programs such as the Croatian Program for Innovative Technology Development (HITRA, adopted in April 2001). The primary goals of HITRA are to encourage (a) the transfer of knowledge from the sphere of science and technology into the business sector; and (b) the transfer of foreign knowledge and technology ('bridging a gap'), thus creating cooperation among entrepreneurs, scholars and industry to support economic development. At present, this program includes two complementary sub-programs: (i) competitive research program (TEST); and (ii) development of knowledge-based companies and commercialization of their R&D (RAZUM program). However, these programs lack focus and are too small to make a meaningfull impact. To become sustainable they will need to be reorganized and expanded, bringing in the private sector and make them more focused on supporting the industry. The country also needs to build a network of advisory and infrastructure support to facilitate the formation and gorwth of new companies formed by Croatia's competent technical manpower. 3. Rationale for Bank's Involvement The Bank has an important role to play particularly along the lines in supporting a number of industrial technology projects (Mexico, Indonesia, Turkey, Korea, Hungary, India, etc.). The Bank is already contributing substantial value added to developing the Technology Program in Croatia through the TAL-2 project. The Bank participation in the proposed project would catalyze private sector participation in technology development and shift the emphasis away from a public-sector driven and largely ineffectual approach to one that is driven by industry's needs. In the case of science and technology development, the Bank participation would speed up the reform process thus accelerating Croatia's integration into the EU. It would also be important to keep the momentum in the Borrower's willingness to restructure which may be lost, to some extent, if necessary funding is not available. Such project aspects as development of technology centers, venture capital and productivity and quality facility would require substantial assistance from the Bank to become sustainable in the long-run, ensuring that all activities are set up in the best possible way (the Bank has comparative advantage in providing such kind of advice on international best practices). -3 - On the institution building side, the Bank could contribute in its capacity of objective overseer of the S&T reform process which will ensure effectiveness in the design and delivery of current and future services, with a high degree of sustainability. With Bank involvement, prudent market tests would be carried out for components such as technoparks and venture capital, and fiscal discipline would be imposed on RDIs and other PAs. Drawing from experience in other countries, the Bank could provide the long term support, advice, and leverage needed during the difficult restructuring phase. 4. Description The project will support the reorientation of Croatia's science and technology infrastructure by focusing assistance on a package of elements critical for the commercialization of R&D for the benefit of the Croatian economy. The support would include restructuring of the existing R&D institutions, developing technology centers and technoparks, promoting venture capital system, upgrading technology capabilities of enterprises, and strengthening of the technology institutions. A. Restructuring of R&D Institutions The component aims to strengthen the capacity of selected Croatian R&D institutions broadly and to reorient their S&T infrastructure in order to make it useful to the economy. It would support the strengthening and restructuring of research institutes, such as Ruder Boskovic Institute, Brodorski Institute, Institute of Physics, and Institute of Immunology. Other R&D institutes may join the project later based on the criteria set forth for these purposes, which would include such items as viable business plan, demonstrated commitment of institute leadership to restructure, business orientation and usefulness to the economy, etc. Participating institutes would aim to turn into young and dynamic (and to some extent "practician") institutions with a view to carrying out applied research, thereby increasing contract income. The restructuring goals of RDIs would be supported through assistance in: (i) providing an operational and financial autonomy structure; (ii) strengthening strategic planning, change management, business and commercial management; (iii) human resource development through training for project management, quality systems, marketing and sales, intellectual property rights; (iv) introducing international standard accounting systems, cost accounting and management information systems; (v) establishing, where applicable, profit centers; (vi) introducing modern budgetary procedures; (vii) strengthening internal contract management and intellectual property management capacity; and (viii) upgrading laboratory infrastructure and facilities. B. Upgrading Technology Center Services This component would provide support to the development and expansion of local technology based businesses. It will assist entrepreneurs through Technology Centers, which will provide services to start-up and established SME (primarily focused on technology) in different locations. The TC component would support two activities: (i) restructuring existing TCs; and (ii) supporting establishment of new commercial R&D centers, Technoparks, and possibly TCs. The TCs would be built on local/institutional initiative, and would be selected based on criteria and focus on the local companies and industries. The main criteria for - 4 - TCs would include active link to a university or RDI, research commercialization opportunity, viable business plan, proper governance structure, private sector participation, appropriate funding structure, complementarity to local development priorities, etc. TCs may contain business incubators and provide a range of services (set of services would be selected for each Center based on the local demand). C. Promotion of Venture Capital The project would stimulate the creation of venture capital in Croatia. The emphasis would be to promote the commercialization of R&D outputs of research organizations as well as companies. Since there is little experience with VC in Croatia, the effort will need to be creative. The project would support development of venture capital funds that would be organized and managed on a commercial basis and primarily funded by the private sector. The government would not be involved in the operations of VCFs once they are formed. A private sector-led venture capital industry would encourage funds to be directed towards improving productivity, quality and the development of intellectual property management. This component would be managed by BICRO who would catalyze the formation of VCFs and promote the VC culture in Croatia. The assessment of business environment for VC in the country is currently underway and appropriate changes in the regulatory framework would be sought in order to address any issues coming out of this review. This component would support technical assistance, including appraisal, due diligence, training of appropriate staff, etc., for VCFs that are primarily technology focused. The Government has also requested that project provides funds for public investment in VCFs (minority shares, with private sector holding the majority) to support a Start-up Fund (seed capital, i.e. fund that concentrates on respectively early stage ventures) and a Technology Venture Capital Fund (concentrating primarily on technology focused companies). D. Supporting Technology Upgrading by Firms: This component aims to stimulate technology upgrading, development and application by industry. It attempts to rationalize existing programs by improving their management, limiting their scope and transferring some of their scope to the private sector. The technology upgrading at firms level would concentrate on the following two sub-programs: (i) Support to firms in carrying out R&D and commercializing it (RAZUM); and (ii) Productivity and Quality Facility (PQF). A special emphasis on promoting linkages between R&D institutions and Croatian industry would be pursued through the continued participation of researchers and scientists in the evaluation and monitoring of the program as well as in the provision of advice to entrepreneurs on technical matters. This component would also support a Competitive Research Program (TEST). The outputs of TEST would be made available to the private sector firms for commercialization. The current RAZUM program would be expanded and restructured to ensure broader developmental impact. It would continue to be implemented through BICRO and would focus largely on pre-commercial and early seed fund financing. -5- The Productivity and Quality Facility. The specific objective of the PQF is to offset learning costs for firms in the initial acquisition of technology services and to promote technology diffusion through strong demonstration effects that such acquisitions will have. PQF would be operated by BICRO and would support provision of the advisory services to firms in promoting technology upgrading with a view to improve their competitiveness. Actual services would be provided by the private sector and research community. The firms would receive technical assistance and training to improve productivity, quality, technical process, marketing, financial management systems, acquire clean technologies and diversify production, etc. The firms would concentrate on improving product quality (and if possible its standardization), production processes, drawing plans for product pre-commercialization and commercialization. TEST program would be implemented by TPRI and would focus on pre-commercial technology related R&D projects carried out in RDIs and universities, such as advanced and new technologies development, as well as strategic and generic research relevant for the development of a particular industry sector. The current program design, similar to RAZUM would need to be revisited to make the impact broader and selection more transparent. TPRI would work with the researchers, select projects based on a combination of criteria and commercial viability. E. Strengthening of Technology Institutions The component would provide support to strengthen a range of key technology institutions and to promote the review and improvement of policies associated with business creation and technology development. The main beneficiaries would be BICRO, Technology Policy Research Institute, National Quality Council (NQC), and the Patent Office (PO) of the University of Zagreb. The component would also include a public awareness campaign promoting technology development, and use of MSTQ and IPR systems. Other institutions to be supported under this component would include universities (technology and engineering faculties dealing with R&D with a potential for commercialization) and possibly metrology and patents offices (limited scope given their support by EC programs). The project would assist in the restructuring efforts of BICRO, which would focus on two broad tasks: (a) financing technology activities; and (b) project management, appraisal and technical assistance (including management of STP on a subcontract from MOST). To accomplish these tasks, BICRO would strengthen its institutional capabilities including management, marketing, financial management, planing, etc. The newly set-up TPRI would become the premier institute on S&T policy providing the Government with independent and professional advice. TPRI would carry out the following functions: (a) undertake technology policy studies and recommend policy changes; (b) perform foresight studies; (c) track technology development and carry out technology information surveys, and serve as the principal data bank and source for issues related to R&D and industrial technology development; (d) act as a liaison for international technology networks and cooperation; (e) administer TEST, a competitive research program. The project would also provide support for the establishment of a National - 6- Quality Council. The NQC, which should be led by private sector, would provide a forum where public and private stakeholders in MSTQ can work together to define and facilitate establishment of a sound national quality system, responsive to the needs of all stakeholders and addresses the strategic needs and objectives of the nation. The Council will handle such issues as developing a consensus on the needs, objectives, priorities and framework for MSTQ in Croatia and a plan for establishing a responsive, demand-driven system in a reasonable time-frame; facilitation of coordination among all MSTQ stakeholders; motivation of industry to adopt effective quality practices; assistance in establishing a framework of incentives to use good quality practices; etc. The Council would also be responsible for public awareness campaign to promote the role of quality, standards, calibration, certification (ISO certification), and accreditation. The project would finance such campaigns which would include publications, seminars, media coverage and other means of improving awareness among producers and consumers. The project would also support setting up a small Patent Office based in the University of Zagreb to help the university community and R&D companies exploit their inventions with commercial potential, providing assistance in obtaining patents as well as actively promoting IPR regime in the country. F. Project Implementation Support In addition to its role as a provider/catalyzer of technology related programs, BICRO also would manage the implementation of the proposed Science and Technology Project on a contract with MOST. For this purpose, a special unit would be set up in BICRO to deal with project management, supervision, monitoring, disbursements and financial management, as well as procurement. The project would finance related costs of running the Project Implementation Unit (PIU), such as staff costs, financial management system, some equipment, and staff training. The Government would co-finance the project implementation costs. 5. Financing Total ( US$m) BORROWER $1.00 IBRD $34.50 IDA BORROWING AGENCY $2.85 LOCAL COMMUNITIES $7.30 Total Project Cost $45.65 6. Implementation The Borrower is the Government of Croatia represented by the Ministry of Finance (MOF). The funds would be transferred to the Ministry of Science and Technology, who will sign an Implementation Agreement with BICRO to provide funding to the Project Agencies in accordance with the Project Implementation Plan (PIP) which would become a part of the official Loan documentation. MOST and/or BICRO will sign a Project Agreement with the Bank. Project Management. Overall responsibility for project management will be with the Ministry of Science and Technology, while the activities under - 7 - each component would be managed and implemented by the various institutions' concerned PAs. The PIU -- a unit of BICRO -- would handle the procurement, disbursements, accounting and financial reporting and monitoring. PIU's staff would be trained in World Bank procurement, disbursements and financial management procedures. The specialized staff would be engaged (or specifically trained) in project management and appraisals/evaluation techniques. In larger PAs, where significant investments are expected to take place, a Program Coordinator (PC) would be designated to ensure smooth implementation. PCs would be responsible for implementation and coordination of their components and liaison with BICRO-PIU. On-lending arrangements. MOF will pass on Bank funds to MOST for further provision to the PAs in the form of a mixture of grants and possibly soft loans. Appropriate regulations and/or amendment to existing laws may be needed to allow MOST/BICRO to collect in some cases Loan repayments from the Project Agencies. The exact terms and conditions of grants and loans would reflect the respective roles, including public good nature of services, of the institutions receiving the funds, reduction in dependence on the government funding. 7. Sustainability In view of Croatia's integration with the EU and the world markets, the demand for the technology services (certification, accreditation, calibration, patents, and R&D) is expected to expand, as competition becomes more fierce. The project will be designed to fill in the infrastractural gaps as well as provide technical assistance with strong private sector participation. The demand for technology services would be boosted and such services would be provided on a cost sharing basis to ensure the seriousness of the Project Agencies. The private sector focus of the project aims to promote the sustainability of the technology support infrastructure in Croatia. The project also builds upon an innovation culture that is taking root, and through awareness-raising and information dissemination campaigns, which would keep up the momentum. Careful attention would be paid to institutional capacity building in terms of strengthening management systems as well as staff quality to ensure that reform reaches all levels. RDIs and TCs supported by the project are expected to become less dependant on government budget support by a reorientation of their activities so as to become more industry-oriented and revenue generating, and, therefore, self-sustainable to a large extent in the long-run. TCs would reorient their services to become commercial and collecting appropriate fees from the participating companies. TCs would target to become self-sustainable in four to six years thus ensuring that they will continue to operate as commercial institutions after the project lifetime. The project would be structured in a way to encourage business-like thinking and fiscal discipline in the management and functioning of institutions. Each institution would phase investment on the basis of approved business plans, thus providing adequate attention to the issues of financial sustainability. Project Agencies would receive technical assistance, training, study tours and other appropriate forms of assistance so that the reform process can permeate and strengthen all levels of staff and institutions. - 8- 8. Lessons learned from past operations in the country/sector Lessons learnt are based on the experience in several Bank-supported industrial technology projects in India, Indonesia, Mexico, Brazil, Turkey (Industrial Technology Project, Technology Development Project I), Korea, Hungary, and OED Report on Technology Development. The project has been designed taking into account the lessons learnt, paying special attention to the difficult task of institution building and including appropriate measures/monitorable performance parameters. In order to keep the project manageable, some elements of the technology development program have not been included. The project scope has been determined striking a reasonable balance between the broader needs of technology development and the realistic absorptive capacity of the targeted Croatian institutions, and also the ability of a single Bank project to handle a number of activities. In all, the project strives to support a package for developing a core of services and policies that are essential for an effective technology development program in the country. Given the nature of the technology development efforts and the risks associated with some of these efforts, adequate flexibility is maintained to allow for certain initiatives to be piloted if the environment is right (technoparks, venture capital), rather than committing large funds up front. 9. Environment Aspects (including any public consultation) Issues The project is not expected to cause any environmental problems. 10. Contact Point: Albert Martinez Tel: 202-473-9287 & Vinod K. Goel The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-473-3156 Fax: 202-522-3687 11. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending January 10, 2003. 9