Infrastructure services for private sector development (P) Project

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Updated Project Information Document () Report No: Project Name CROATIA - Croatia Science & Technology Project Region Europe and Central Asia Region Sector General industry and trade sector (100%) Theme Infrastructure services for private sector development (P) Project P Borrower(s) REPUBLIC OF CROATIA Implementing Agency(ies) MINISTRY OF SCIENCE, EDUCATION AND SPORT Address: Trg J.J. Strossmayera 4, Zagreb, Croatia Contact Person: Mr. Dragan Soljan, PMU Director Tel: / 447 Fax: / Dragan.Soljan@mzos.hr Environment Category C (Not Required) Date Prepared May 17, 2004 Auth Appr/Negs Date June 17, 2003 Bank Approval Date October 26, Country and Sector Background Croatia is making progress in its transition from its place within a larger federal system to a self-sustaining market economy with a goal of EU accession within the next decade. Within its reform agenda and targeted initiatives to spur the private sector-led growth and increase the overall competitiveness of the national production system, the Government perceives that it is critically important to develop Croatia into a knowledge-based economy to better integrate with the rest of the World. As is being recognized in most of the countries, the capacity of a society to produce, adapt, and commercialize knowledge is critical for trade, competitiveness, and for the sustained growth of the economy. Knowledge is transferred into goods and services through a country's National Innovation System (NIS) that normally would include knowledge producing organizations (universities and research and development institutions), offices of intellectual property rights, offices for standardization and quality certification, metrology institutions, as well as functional information access infrastructure. The objective of a well functioning NIS, is to serve the needs of the economy by achieving a better integration of the technology and innovation infrastructure with production needs, increasing private sector participation in technology development, and developing stronger linkages between industry, universities, and research institutions. Within this framework, the Government of Croatia has moved to the implementation stage of its ambitious agenda in developing its National Innovation System through leveraging the stock of highly skilled human capital, improving efficiency of use of the scientific/research know-how present in the country, creating appropriate mechanisms to share the information among the society, and developing a conducive environment for upgrading firms capabilities in order to increase their value added for the economy. The general outline of the country development strategy is given in the "Croatia in 21st Century" - a development strategy of Croatia adopted in June "Croatia in 21st Century" covers such areas as the real sector of the economy, macroeconomics, science development, and information and communications technology. Under this strategic note, 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 and developing new information technologies.

2 2 The proposed Science and Technology Project would support the government s priorities in the areas where the World Bank has a comparative advantage. STP is an integral part of an overall Knowledge Economy umbrella and support the major portion of the overall Technology Program. STP will help improving sustainability of the Government's efforts and programs in this area by reorganizing and expanding them, including the private sector, and shifting their focus toward meeting industry needs. 2. Objectives The primary development objective of the project is to contribute to the reorientation of Croatia's science and technology (S&T) infrastructure, in particular to (i) strengthen and restructure research and development institutions (RDIs) and promote commercialization of research outputs; and (ii) upgrade technological capabilities of enterprises. The reorientation of S&T toward industry needs would contribute to improving the competitiveness of the Croatian industry both in the domestic and foreign markets. In particular, upgrading the technological capabilities of firms would be an important step for Croatia s access to the European Union (EU). 3. Rationale for Bank's Involvement The OED reviews suggest that the Bank has an important role to play in the area of science and technology facilitation; particularly in supporting industrial technology projects (as has been completed in Spain, Israel, Mexico, Turkey, Korea, India, etc.). The Bank participation in the proposed project would promote necessary policy reform, catalyze private sector participation in technology development and shift the emphasis away from a public sector driven approach to one that is driven by industry's needs. The Bank participation in the development of the science and technology area would speed up the reform process thus accelerating Croatia's integration into the EU. Specific project elements, such as development of technology centers, venture capital and productivity and quality facility, would benefit substantially from Bank assistance in the long-run. The Bank has a comparative advantage in providing leveraging experiences and international best practices to ensure that activities are modeled in the most successful manner. On the institution building side, the Bank could contribute in its capacity of facilitator of the S&T reform process which will increase the likelihood of effective 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 venture capital, and fiscal discipline would be imposed on RDIs and other Project Agencies. 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 would comprise three major components: (i) Restructuring R&D Institutions (RDI Component); (ii) Upgrading Firms Technological Capabilities (BICRO Component); and (iii) Unity Through Knowledge Fund. The project would also fund implementation costs, including audit, financial management, and monitoring and evaluation (M&E). The project would: (i) Help create infrastructure for contractual R&D in Croatia in order to promote innovations and improve quality of services and products by the industry, as well as promote synergies between the research community and industry. This will be achieved through support the restructuring needs of the two largest Research and Development Institutions in Croatia (Ruder Boskovic Institute and Brodarski Institute) to assist them in reorienting themselves towards applied research and reduce the burden on the government budget and become partially self-sustainable. These efforts are expected to provide demonstration effect

3 3 among other RDIs in Croatia who would be able to join the project at a later phase of project implementation. (ii) Provide means and build appropriate financial mechanisms to support the development, adaptation, and use of new technologies by the industry, promote growth of technology and hi-tech companies, improve quality and diversity of the products by industry, which, ultimately, will contribute to improvement of the competitiveness of Croatian firms. Within this task, the Project will support the upgrading of the Business Innovation Center of Croatia (BICRO) to enable it to provide a wide range of technology support services to private knowledge-based firms in Croatia. The project will also fund (in some cases co-fund with the Government and/or private sector) the following BICRO programs: technology financing programs to support R&D in knowledge-based firms, grants for technical assistance to help firms improve their productivity and quality of their products and services, venture capital financing, and support of Technology and R&D Centers support in the regions. (iii) Engage Croatian Diaspora in the development of the Croatian National Innovation System. The Unity Through Knowledge Fund would aim to attract promising scientists and researchers from the Croatian international community to transfer knowledge and skills back to Croatia through a variety of initiatives including seminars, visits, technical advice, joint projects with local RDIs and industry, and the setting up of knowledge-based companies. 5. Financing Source (Total ( US$m)) BORROWER ($8.00) IBRD ($40.00) Total Project Cost: $ Implementation The Borrower is the Republic of Croatia represented by the Ministry of Finance (MOF). Overall responsibility for the implementation and coordination of the project is delegated by MOF to the Ministry of Science, Education and Sport (MSES). The Project Management Unit (PMU), established at MSES, will be responsible for day-to-day project management and coordination on behalf of MSES. The Republic of Croatia represented by MSES would enter into the Subsidiary Finance Agreements with Project Agencies (institutions that will implement the Project: Ruder Boskovic Institute, Brodarski Institute, and BICRO) which will define the terms and conditions of financing from the Government to each Project Agency, as well as relationship between the parties in the project implementation process. Additional RDIs that will join the project during the project implementation would be selected based on criteria acceptable to the Bank. The activities planned under the project would be implemented by the PAs for their respective components in accordance with the Project Implementation Plan. PMU Responsibilities: The PMU will carry out day-to-day project management including procurement, disbursement, financial management and monitoring and evaluation for the entire project. The PMU will ensure that the appropriate Bank guidelines and procedures are followed. The PMU will also be responsible for joint project activities, including but not restricted to audit, M&E activities, training, study tours, and a promotion campaign. The PMU will assist the Project Agencies in all aspects related to project implementation. Project Agencies Responsibilities: RDIs will be responsible for the implementation of activities related to the RDIs' Component, BICRO for the BICRO s Component, and MSES for Unity Through Knowledge Fund. Project implementation of the components would be organized on the basis of Annual Business Plans

4 4 (BPs) to be prepared by the participating PAs subject to the Bank s approval. PAs would prepare the BPs (for rolling three-year periods) and will update them each year. 7. Sustainability In view of Croatia's need for greater 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 stronger. The major policy reforms, such as reforming governance structures of RDIs and BICRO, adopting necessary regulations and creating incentives for public and private sector use and benefit from the project activities, will be carried out to ensure effective project implementation. The project will be designed to fill in the infrastractural gaps, provide technical assistance with strong private sector participation, and build a service provider market. The demand for technology services is expected to grow and such services would be provided on a cost-sharing basis to ensure the full involvement and 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 skills to ensure that reform reaches all levels. 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. 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, and the OED Report on Technology Development. Project Scope and Complexity. Technology projects normally include a wide spectrum of interventions, all of which are complementary in nature and would not function well without one another. On the supply side, the reforms can tackle the restructuring of R&D Institutions to reorient them toward industry; build up a functioning measurements, standards, testing and quality system to improve competitiveness of products domestically and internationally; and provide the necessary protection to the industry in the form of a healthy intellectual property rights regime. On the demand side, the reforms can support the use and adaptation by the industry of innovations and new technologies developed by the research community. It should also be noted that the technology sector cannot function to its full unless appropriate technology financing programs, including venture capital, and start-up funds, are in place. Technology projects typically are complex, contain multiple components of a complementary character, and must be seen as long-term efforts. Experience has shown that a systemic and holistic approach to technology development works best and that such operations should not be too narrow. Each technology project has to be custom-designed and must be a product of a collaborative approach among the stakeholders in the country. Complementarity of activities and the built-in synergies in these projects imply complexity in design, and as a result these projects are labor-intensive and resource-intensive to prepare and supervise (for both the

5 5 client and the Bank). The projects require support from the public sector, to promote investment in R&D. Given the difficulties of the initial reforms and delayed return for the economy, the innovation support agenda sometimes is accorded low priority by the busy governments struggling with fiscal deficits and other macro-economic challenges. Therefore, technology projects require strong dedicated championship in the country to move the reforms along on both the Government and the institutional level. The technology projects also require intensive preparation and supervision by the Bank, and as a result the lending and supervision resources of these projects are typically higher than average. Public-good nature and externalities. Due to the public-good nature of investment in measurements, standards, testing and quality systems and R&D infrastructure and the high spillover effects and externalities associated with the generation, adaptation, and diffusion of new technologies, the involvement of the public sector in this area is justified. The private sector normally would invest in these activities only to the extent that it could internalize the benefits of these investments fully and make a profit. This is possible only for very large firms, leaving a large part of the industry needs unfulfilled and the level of private investment far below the socially optimal level. The role of the public sector therefore is crucial, in its ability to create a shared approach by providing support for the setting-up of technology services where they do not exist or the reorientation of those that do exist. Building a good institutional framework and setting up regulations conducive for technology development remain the responsibility of the public sector. Private sector participation. Public sector approaches in the past have led to inefficient infrastructure and services that do not respond well to industry needs. An emphasis on private sector participation therefore is important in the restructuring process, for the sector s ability to inject into the process efficiency, management capability, good governance, and cost-effective design and delivery. The private sector is instrumental in making a shift from knowing to applying the knowledge for the benefit of the economy. Co-financing from the private sector and the setting up of advisory boards and councils with private sector participation, while maintaining involvement of the public sector, have in past experience proven valuable in helping maintain a business focus that benefits the economy. Also, private sector research community involvement in the project evaluation and monitoring process is important. * STP has been designed in paying close attention to policy reform and the difficult task of institution building. The project scope has emphasized striking a reasonable balance between the broader needs of technology development and the realistic absorptive capacity of the targeted Croatian institutions, with careful consideration to the ability of a single Bank project to handle a number of activities. 9. Environment Aspects (including any public consultation) Issues : Overall, the project is not expected to cause environmental problems. BICRO Component involves financing of R&D projects (including Mariculture Business Innovation Center [MARIBIC]) and BICRO will assume responsibility for ensuring that necessary reviews are carried out and that appropriate environment safeguards are put in place by the beneficiaries in accordance with the Croatian regulations. 10. List of factual technical documents:

6 6 11. Contact Point: Vinod K. Goel Ekaterina N. Koryukin The World Bank 1818 H Street, NW Washington D.C Telephone: / Fax: For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.