Turkey - Industrial Technology Project

Document of The World Bank ReportNo: 18351-TU PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$155 MILLION TO TURKEY FOR AN INDUSTRIAL TECHNOLOGY PROJECT May 5, 1999 Financial and Private Sector Development Unit Country Department VI Europe and Central Asia Regional Office  CURRENCY EQUIVALENTS Exchange rate as of May 1 1999 Currency Unit = Turkish Lira I million Turkish Lira = US$2.78 US$I = 390,000 Turkish Lira BORROWER FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Strategy CMB - Capital Markets Board CPIU - Central Project Implementation Unit ECU - European Customs Union EDP - Economic Development Program ESW - Economic Sector Work FMS - Financial Management System FY - Fiscal Year &OT - Govemment of Turkey lAS Intemational Accounting Standards ICB - Intemational Competitive Bidding ICR - Implementation Completion Reporn IPR - Intellectual Property Rights IRA - Institutional Renewal Account Is tntemational Shopping ISO Istanbul Chamber of Industry (Istanbul Sanayi Odasi) IT - Information Technology ITP Industrial Technology Project (the Project) ITU - Istanbul Technical University KOSGEB - Small and Medium Enterprise Development Organization LACI - Loan Administration Change Initiative LIB - Limited International Bidding MAM - Marmara Research Center (Marmara Arastirmna Merkezi) METU - Middle East Technical University MTR - Mid-term Review MSTQ - Measurement, Standards, Testing and Quality NAC - National Accreditation Council (TURKAK) NGO - Non-Governmental Organization NS - National Shopping OECD - Organization for Economic Cooperation and Development PA - Project Agency PAD - Project Appraisal Document PIP - Project Implementation Plan PIlU - Project Implementation Unit PCT - Patent Cooperation Treaty PPF - Project Preparation Facility R&D - Research & Development SIS - State Institute of Statistics SME - Small and Medium Enterprise SOE - Statement of Expenses SPO - State Planning Organization TDF - Technology Development Finance TDP- I - Technology Development Project -I TIDEB - Technology Monitoring and Evaluation Department (Teknoloji Izleme ve Degeriendirnme Baskanligi) TP - Technopark TPE - Turkish Patent Institute (Turk Patent Enstitusu) TRIPs - Trade Related Intellectual Property Rights TSC - Technology Services Center TSE - Turkish Standards Institute (Turk Standard Enstitusu) TSS - Technology Support Services TTGV - Technology Developnsent Foundation of Turkey (Turkiye Teknologi Gelistirme lVak'.i) TUBITAK - Council for Scientific and Technological Research UFT - Undersecretariat of Foreign Trade UME - National Metrology Institute (Ulusal Metroloji Enstitusu) VC - Venture Capital VCF - Venture Capital Fund WTO - World Trade Organization Y2K - Year 2000 Vice President: Johannes Linn Country Director: Ajay Chhibber Sector Director: Lajos Bokros Task Team Leader: Vinod K. Goel  Turkey Industrial Technology Project Project Appraisal Document TABLE OF CONTENTS A. Project Development Objective 1. Project Development Objective and Key Performance Indicators ..........................................................2 B. Strategic Context 1. Sector-Related CAS Goal Supported by the Project ..........................................................3 2. Main Sector Issues and Government Strategy .........................................................4 3. Sector Issues to be Addressed by the Project ..........................................................4 C. Project Description Summary 1. Project Components .........................................................7 2. Benefits and Target Population .........................................................7 3. Implementation Arrangements .........................................................8 D. Project Rationale 1. Project Alternatives Considered and Reasons For Rejection ..........................................................8 2. Major Related Projects Financed by the Bank ......................................................... 10 3. Lessons Learned and Reflected in Proposed Project Design .......................................... ............... 10 4. Indications of Borrower Commitment and Ownership ......................................................... 11 5. Value Added of Bank Support ......................................................... 12 E. Sommary Project Analysis 1. Economic ......................................................... 12 2. Financial ......................................................... 12 3. Monitoring and Evaluation ......................................................... 13 4. Technical ......................................................... 13 5. Institutional ......................................................... 13 6. Social ......................................................... 13 7. Environmental Assessment ......................................................... 13 8. Participatory Approach ......................................................... 13 F. Sustainability And Risks 1. Sustainability ......................................................... 14 2. Critical Risks ......................................................... 15 3. Possible Controversial Aspects ......................................................... 16 G. Main Loan Conditions 1. Conditions of Effectiveness ......................................................... 16 2. Conditions of Disbursements ......................................................... 16 3. General Covenants ......................................................... 16 4. Institution Specific Covenants ......................................................... 16 H. Readiness For Implementation ......................................................... 17 I. Compliance With Bank Policies ......................................................... 18  Annexes Annex 1. Project Design Summary ............................................... 19 Annex 2. Detailed Project Description ................................................ 21 Annex 3. Project Costs and Financing ............................................... 23 Table 3.1: Project Costs Summary by Components ............................................... 23 Table 3.2: Project Costs Summary by Component and Financier ............................................... 24 Table 3.3: Project Costs Summary by Expenditure Category and Financier ............................................... 24 Annex 4. Project Implementation Arrangements ............................................... 25 Annex 5. Economic Analysis ............................................... 28 Table 5.1: Measurements ............................................... 31 Table 5.2: Calibration ............................................... 31 Annex 6. Monitoring and Evaluation Arrangements ............................................... 34 Appendix 1: Project Performance Indicators .35 Annex 7. Procurement Arrangements and Allocation of Loan Proceeds ............................................. 36 Table 7.1: Summary of Procurement Arrangements ............................................. 36 Table 7.2: Procurement Review ............................................. 37 Table 7.3: Procurement Plan ............................................. 38 Table 7.4: Allocation of Loan Proceeds ............................................. 44 Annex 8. Project Processing Budget and Schedule ............................................. 47 Annex 9. Documents in Project File ............................................. 48 Annex 10. Statement of Loans and Credits ............................................. 50 Annex 11. Country at a Glance ............................................. 53 Map No 29767: Turkey: Location of Project Agencies  TURKEY INDUSTRIAL TECHNOLOGY PROJECT Project Appraisal Document Europe and Central Asia Regional Office Date: May 5, 1999 Task Team Leader: Vinod K. Goel Couatry Director: Ajay Chhibber Sector Leader: Ilham Zurayk Project ID: TR-PE-9073 Program Objective Category: PSD Lending Instrument: Investrnent Program of Targeted Intervention: O Yes 0 No Project Financing Data 0 Loan Cl Credit D Guarantee For Loans and Credits: Amount (US$ million): 155.0 Proposed Terms: 0 Multicurrency 0 Single currency Grace period (year): 5 D Standard Variable El Fixed 0l LIBOR-based Years to maturity: 17 Cormmitment fee: Standard Service charge: Standard 1% Financing Plan (US$m): Source Local Foreign Total IBRD 7.7 147.2 155.0 Private Sector 69.2 87.7 156.9 Goverrnment 45.9 45.9 Project Agencies 12.6 16.6 29.2 Total 135.4 251.6 387.0 Borrower: Republic of Turkey Responsible Agencies: Turkish Patent Institute, National Metrology Institute, Marmara Research Center, and Technology Development Foundation of Turkey Estimated Disbursements (Bank FY/US$ million) 2000 2001 2002 2003 2004 Annual 5 15 30 60 45 Cumulative 5 20 50 110 155 Project Implementation Period: 4 years; Expected Effectiveness Date: August 1999; Closing Date: December 31, 2003  2 A: Project Development Objective (see Annex 1): The major objective of the project is to assist in the harmonization of Turkish technology infrastructure with European Customs Union (ECU) standards, and assist firms in upgrading their technological capabilities in order to improve the competitiveness of Turkish industry, both in domestic as well as foreign markets. Project Objective Key Performance Indicator Harmonization of technology infrastructure Compliance of Turkish Industrial Property Regime with WTO and ECU requirements. Improvement in Turkish metrology infrastructure to facilitate alignment of industry with ECU requirements. Technology upgrading by firms Increase in contractual research undertaken by technology institutions for industry purposes. Increase in number cf firms developing, adapting, and commercializing new technologies. 1. Background. Increased economic integration with Europe has been high on the Turkish agenda since the 1980s. The ECU is a major trading partner, accounting for over 50 percent of the country's exports as well as imports. These figures are expected to grow due to the customs union agreement signed between Turkey and the EU in January 1996, which allows most industrial goods to pass freely between the partners, and will hopefully prepare the way for full membership in the years to come. While accession to ECU offers Turkey a unique opportunity to accelerate its development through freer and better access to markets, it has also made Turkish firms more vulnerable to intemational competition. In order to take advantage of trade opportunities created by the ECU and respond effectively to greater competition in the domestic market, Turkish industry would need to upgrade from low- quality, labor-intensive products, which have limited growth prospects, towards the production of higher value- added goods and services. This transition would require upgrading of their technological capabilities. According to the OED report on Industrial Technology', technological capabilities are defined as the skills that are necessary to set up a plant, utilize it efficiently, improve and expand over time, and develop new products and processes. They comprise a broad range of activities from the routine ones needed for the factory shop-floor, to the sophisticated ones needed for advanced research. In most developing countries it means the ability to become more efficient and competitive in the technologies they have imported across a range of manufacturing activity. Under the Bank-supported first Technology Development Project (TDP-I, efforts were undertaken towards the improvement of Turkish technology infrastructure and services. TDP-I supported the strengthening of Turkey's Metrology, Standards, Testing and Quality (MSTQ) infrastructure by assisting the Turkish Standards Institute (TSE) in strengthening competencies in the areas of standards preparation, product certification, and testing, including the development of a Quality Campus near Istanbul to help the industrial community in that area gain greater access to these services. TDP-I also supported the strengthening of metrology services to industry through the National Metrology Institute (UME), with investments in physical infrastructure, equipment, technical assistance and training. As a result of these investments, UME is widely used by industry, and small and medium enterprises (SMEs) claim to be aware of the importance of metrology to productivity due to its presence. While independent national accreditation services could not be established during the project due to the pending of a new Study on Bank Lending for Industrial Technology Development, 1993, OED, The World Bank (Report No. 12138).  3 N1AC Law with the Parliament and failure to reach consensus, progress has been made in recent months. The project also supported the establishment of the Technology Development Foundation of Turkey (TTGV) which was instrumental in initiating a culture of technology finance in Turkey to assist firms in undertaking technological upgrading activities. Through conditional loans provided by TTGV, firms were able to undertake substantial technological effort and introduce new products and processes, as well as replace expensive or pxroprietary foreign technologies with viable, adapted and cheaper counterparts. The record of commercialization of such efforts was also good - so far, about thirty percent of the completed projects were able to develop technologies that were commercialized. The project also made a significant contribution towards making the legal and regulatory framework conducive to venture capital (VC) finance although no Venture Capital Funds (VCFs) were established under the project. However, more work remains to be done to deepen Turkish technology infrastructure and services. Industry's demand for refinements in measurement accuracy, and for rigorous product specifications embodied in public standards continues to grow in all OECD countries. Turkish industry's needs are likely to increase substantially as it tries to move from low-skill goods to technology and skill intensive products that demand precision, quality and traceability to international standards. These requirements will place heavy demands on the MSTQ infrastructure which would, therefore, need to be further expanded and strengthened. UME would need to make stronger efforts tc, stay one step ahead of industry's needs and this expansion would require strengthening of its institutional capacity to manage such a rapid transformation. Firms are also responding to competitive pressures by trying to upgrade their technologies. Therefore, continued support for technology investments in the private sector through a vehicle such as TTGV would become even more important. While an awareness and market for technology development has been created through TTGV's activities, there is a large potential for carrying this momentum fcrward. As is natural in most instances when such a project is attempted for the first time, TTGV's lending portfolio was skewed towards established firms with reasonable financial track records that proved them credit worthy. With this learning period behind them now, TTGV should be able to take on more challenging activities - which is to focus more attention on small and medium sized firms (and/or start-ups) - so that industry as a whole becomes more competitive. A culture of technology development and modification has only recently begun to be fcirmed, therefore it is critical to build upon the successes of TTGV's activities. Meanwhile, research institutions and universities can also help Turkish industry upgrade its capabilities, but these institutions would have to be brought into the mainstream by helping them become better aligned to the needs of industry. Finally, Turkey's Industrial Property Rights (IPR) regime would need to be strengthened to facilitate technology transfer from fcireign firms to domestic ones and also to protect domestic innovations. These next steps are important in achieving this critical transition for Turkey. B. Strategic Context (see Annex 1): 1. Sector-related Country Assistance Strategy (CAS) Goal Supported by the Project: Document number and date of latest CAS: 16992-TU, August 6, 1997. Thie proposed project would support important elements of two major objectives as stated in the CAS: (i) enhancing industrial competitiveness, through the upgrading of technology infrastructure and services to industry; and (:ii) improving public expenditure management, by providing greater fiscal discipline in the functioning of the individual institutions thus lowering their dependence on government funding. Public assistance in the provision of technological support is justified by the high level of externalities which characterize this activity. It is believed that there are market failures in the supply of skills, finance, information, standards, etc. Based on this assumption, most developed industrial countries have, over a long period of time, invested in setting up specific mechanisms and institutions to provide for education, training, technology finance, science infrastructure and research institutions. This is true not only of original research but also of diffusion and acdaptation activities. Even metrology, standards and testing facilitates are often referred to as infrastructural with reference to their public good nature. Many technology services are also characterized by economies of scale, making in-house provision prohibitive for all but the larger firms. Therefore, assistance provided though this project is seen as an important step towards increasing the access of Turkish industry to better technology services. This would help improve its competitiveness thus accelerating realization of the benefits of economic integration.  4 2. Main Sector Issues and Government Strategy: The Government's industrial technology strategy is articulated in the policy document, "Turkish Science and Technology Policy: 1993-2003;" and forms an integral part of Turkey's Seventh Five-Year Development Plan. In the context of Turkey's integration with the ECU and the World Trade Organization (WTO), the Government recognizes the importance of increasing the competitiveness of industrial enterprises through productivity improvements and technological innovation. It is aware that Turkey's science and technology infrastructure has largely operated in isolation of industry's needs, and stresses that a nation becomes competitive in world markets "only when it has the ability to transform scientific and technological products into economic and social profits". To this end, the key objectives of Turkey's science and technology strategy are to achieve a better integration of the science and technology infrastructure with production needs, to increase private sector participation in technology development, and to develop stronger linkages between industry, universities, and research institutions. Over the next decade, the strategy aims to increase private sector contribution to Research & Development (R&D) and to raise the level of R&D spending from 0.3 percent to 1 percent of GDP. The Government recognizes that it has an important role to play in providing a conducive environment for technology development. In recent years, it has passed various laws regulating industrial property rights, established TPE and UME, is in the process of creating a law for an independent national accreditation institution, and provided seed capital for innovative projects through TTGV. In order to further encourage innovation among Turkish industry, the Government in 1995 started a scheme known as TIDEB to provide grants for R&D activities among private firms. This scheme is administered by TUBITAK in collaboration with TTGV. Nevertheless, it would be useful to monitor the use of TIDEB in order to ensure its complimentarity with TTGV programs and avoid any future distortions. The Goverrnent has also granted public research institutions some degree of autonomy in becoming more market-oriented and reducing their dependence on government funding. The Government now hopes to deepen Turkey's technological capability and to increase private sector i.avestments in technology upgrading through initiatives such as risk capital financing and collaborative private-public mechanisms. The proposed project would directly support the Government's technology development strategy. 3. Sector Issues to be addressed by the Project: Industry is the second leading sector in the Turkish economy, accounting for nearly a quarter of GNP and more than 88 percent of total exports. The manufacturing sector in Turkey is dominated by SMEs and a majority of enterprises are concentrated in low-skill and low-technology manufacturing. After a prolonged period of import substitution and heavy state involvement in the economy, Turkey embarked on an export-oriented development strategy in the early 1980s, progressively opening up its economy to the outside world and handing over the main initiative for industrial development to the private sector. The main aim of these policy changes was closer integration with the EU. An important milestone in that regard was the signing of the ECU agreement under which barriers to free trade will gradually be dismantled. However, in order to :-eap the benefits of greater economic integration, Turkish industry needs to pay increasing attention to matters of adherence to intemational standards (technical and non-technical), quality, technological upgradation and innovation management. Looking at the existing technology infrastructure in the context of assessing the readiness of industry to compete in global markets, Turkish industry faces a number of pressing constraints. Product and Process Quality: Over the last decade, OECD markets have become increasingly stringent vis-a-vis product quality and performance, and conformity with intemationally-recognized standards such as ISO 9000 has become a de facto requirement to access OECD markets. Turkish industry, therefore, needs to comply with these requirements if they want to gain access to major markets, or even allow domestic production to compete effectively with OECD imports. As a result, demand from industry for MSTQ services has increased and is likely to increase significantly in the near future. Also, MSTQ can drive incremental innovation in firms through the nested relationship between product testing, identification of technical problems, and process innovation. A weak MSTQ infrastructure could, therefore, severely impede industry's ability to compete effectively. However, investments in MSTQ are expensive and cost recovery from direct metrology services can be as low as 10-30 percent (as is the case in most metrology institutes in industrial economies). Even large private firms can not create these facilities in-house, and hence these services are considered "infrastructural". Sustainability and improvements therefore remain public funded to a large extent in most economies. The Government helped to upgrade the capabilities of UME and TSE through TDP-I. The private sector, which previously had to obtain calibration and measurement services from abroad, has started to benefit from UME's services, but a large part of industry's  5 metrology needs, about 50 percent, still need to be outsourced to foreign centers, which not only increases the diiect cost of such services by several multiples and adds costly delays, but also denies Turkish firms the externalities that emerge from having their metrology needs met locally. Another problem facing the Turkish indlustry is the absence of an independent National Accreditation Council (NAC), which would regulate and certify standards and testing institutions. With such a body, many more institutions could be accredited -- decreasing the cost, and increasing the availability of certification services in Turkey. Establishment of such an accreditation body has now been given priority by the Government with the completion of significant preparatory work and a draft law has been presented to the Parliament. Indlustrial Property Regime: While Turkey offers financial incentives for the import of technology, strong international evidence exists to suggest that the ease with which foreign companies sell technology to developing coumtries, the terms on which it is sold (licensed), and the vintage that is sold, is affected by the owners ability to maintain proprietariness of the technology. The prevailing IPR regime thus becomes an important determinant of tht amount and quality of technology transfer from developed to developing countries. Also, as the country moves from simply importing technology to finding creative ways to adapt and modify it to local demand or technical conditions, the lack of a regime that protects such new ideas can be an impediment to undertaking such costly investments. Turkey has recently become a signatory to the agreement on adopting stronger industrial property rights to be in conformance with Trade Related Intellectual Property Rights (TRIPs) regulations and EC'U standards. However, the existing infrastructure and facilities for the filing of patents (or utility models), and access to existing patent literature is weak. Meanwhile, industry's awareness of the importance of these services is nearly absent. The absence of trained attorneys, patent agents, and judges to handle infringement cases renders the en^forcement mechanism for IPRs incapable of fully supporting innovation and technology transfer. Based on an independent assessment of the compatibility of domestic procedures required to make the agreement effective, domestic ratification of TRIPs appears to be complete and no more domestic statutory regulations are required. Average Level of Technology Development: While the policy environment in Turkey has been quite liberal for technology imports, and tax incentives for R&D in firms have also existed, both of these mechanisms generally favor the larger firms. Only two percent of all industry undertakes any kind of R&D and most large firms have achieved equipment modernization through simply importing embodied technology in order to catch-up with Western best practice. A majority of the industry, which comprises mostly SMEs, remains technologically behind and needs help in learning how to adopt new technologies, effectively assimilate and integrate new equipment with existing technologies, and in adapting and modifying raw materials and requirements to suit local conditions, in such a way to enhance their competitiveness. In sectors that have attained a degree of depth and maturity, such a latent demand exists. This was confirmed in Bank missions' extensive interaction with private sector firms of all sizes and across several sectors. Private sector associations have also been frequently contacted by their members in search of information and support on technology-related activities. Feedback received by TT GV also underscores the existence of this demand. Further, this demand will be stimulated as the process of integration exposes firms to greater international competition. However, a large majority of firms are unable to find technology finance for undertaking such innovative and riskier activities, or even accessing existing technology services. Under TDP-I, TTGV created a market for technology development finance (TDF) and technical assistance to firms. TTGV provided up to 50 percent of the counterpart finance (on softer terms) for the development and modification of technologies to firms and is considered a valuable and pioneering effort by Turkish industry. In the absence of such a scheme, most of these efforts would have remained unrealized and a culture of research and innovation could not have taken root. Firms that have benefited under TDP-I through T1I'GV have reiterated this point strongly. Further, the development of new ideas, or innovative modifications of existing ones, requires non-traditional financial instruments that are not based on commercial terms of market rates and collateral requirements. Typically, venture capital is needed to finance such technology development, but Turkey does not have such finance as yet. While there are two small VCFs, the culture of VC needs to be promoted in order to attract the right kind of investors as well as the skills needed to run such risky, but rewarding, operations. Perhaps minor adjiustments may also be required in the existing regulatory framework. Also industry needs to be made aware of how venture capital works. Another area of concern, which stems from the largely SME based industrial structure, is the fact that most firms are simply unaware of the recent advances in technology, changes in the world trading system, of the new laws and regulations, or of the technical and non-technical standards that must be adhered to. This is not unique to  6 Turkey, it is a symptom of most SME based sectors because these small firns can not afford to have the in-house specialized services to seek out the latest information. Quite often, even if financing is available, what stops SMEs from implementing important changes in their technology infrastructure is the lack of information on what the state-of-the-art is, what is most appropriate for their firm, and what the potential benefits of upgrading might be. While market imperfections in the generation of technology for small firms are generally accepted, it is only recently that it has been recognized that very similar market imperfections exist even in the diffusion of existing technologies. This is due to uncertainty on the part of the user, coordination problems between user and supplier, and high leaming costs on both sides, which are particularly acute for small firms. Therefore, policies and instruments that could help address the obstacles faced in the dissemination of standard information, reducing the uncertainty and leaming costs of technology diffusion and adoption, and augment sources of assistance that could increase the willingness of firms to take up new technologies and better practices are very important, but lacking in Turkey. Without these, any investments in addressing the infrastructural constraints are likely to remain underutilized. In this context, promoting information dissemination and advisory services to SMEs, e.g. through industry associations and other appropriate means, need to be pursued. Linkages between R&D Institutions and Industry: Universities and public research institutions do conduct R&D, in fact, most of Turkey's R&D (68 percent) is public, compared to the OECD average of 16 percent. However, it has not served as an effective agent of technology transfer to the private sector, and its activities are largely disconnected from the needs of industry. Very few firms have had any contact with technology institutions or universities. The only evidence of any university-industry linkage is through the incubators that some universities have established to support young entrepreneurs develop and commercialize technologies. These incubators provide university infrastructure for a few start-up companies in exchange for a nominal fee and have successfully "graduated" entrepreneurs in about 3-4 years. This isolationist culture is likely to change in the near future on two accounts. First, industry recognizes that technology upgrading is imperative and therefore must seek to form partnerships with universities and technology institutions. This is especially true for SMEs that can not afford to respond to the imperative by investing in large R&D and technology departments within their firms. Second, government funding for research institutions as well as universities is likely to decrease in the coming years. Therefore, these institutions are willing to channel their expertise towards joint activities with industry by changing their focus from basic research to applied contract based research for outside clients. In the absence of such a restructuring, these institutions may lose the technical and human capital that has been built up over the years. However, the focus, pace and prioritization of the restructuring process needs to be carefully matched with the growing needs of industry in order to reap the benefits of this infrastructure that has the potential of supporting firms from various sectors and sizes. The existence of technoparks (TP) can sometimes help catalyze this restructuring process. Technoparks, by definition, focus on technology-intensive development, generally with a university or research institution as a key aspect of their establishment and operation (as opposed to industrial estates where the defining characteristic is the availability of land for business purposes, generally manufacturing). The university or research institution provides access to faculty, staff, students, libraries, laboratories, as well as technological infrastructure. Such operations are characterized by large, mature tenants, which can make substantial commitments required to take advantage of the technological potential of a nearby institution. Success in supporting entrepreneurship by exploiting synergy between universities and industry is not easy to attain. Intemational experience points towards location, reputation of university or research institution, ability to attract the right kind of entrepreneurs, well trained management, right incentives given to researchers to seek industry collaboration, realistic costing scenarios, and strict performance benchmarks and monitoring as key ingredients of success.  7 C. Project Description Summary (see Annex 2 for project description, and Annex 3 for detailed cost breakdown): i'. Project Components: Indica- % of Bank of Component Category tive total Financing ank costs (US$M) inan- (US$M) ing A. Strengthening of Industrial Property Rights Services: Institutional 19.3 5.0 15.0 9.7 Assist in harmonizing Turkey's IPR regime with building, WTO and ECU standards. goods, works B3. Strengthening of Metrology Services: Institutional 42.5 11.0 33.0 21.3 Further investments in Turkey's metrology building, infrastructure to serve a larger section of Turkish goods, works industry and gain acceptance from European bodies. C. Restructuring of R&D Institutions: Institutional 42.3 10.9 33.0 21.3 Support restructuring of technology institutions to building, goods help them become industry-oriented. works l). Supporting Technology Upgrading by Firms: Institutional 265.4 68.6 60.0 38.7 Support innovation in firms by providing matching building, loans for technology development, promoting goods information-dissemination to SMEs, and exploring formation of technology service centers, venture capital and technoparks. F'ees 1.5 0.4 1.5 1.0 lJnallocated 15.9 4.1 12.5 8.0 Total 387.0 100.0 155.0 100.0 2. Benefits and Target Population: Benefits ii Harmonization of regulations and technology infrastructure with ECU standards. l Increased participation by private sector in R&D and technology upgrading activities. ii Efficient use of technology institutions via alignment with industry needs. Target Population Exporters will have access to technology services that were previously unavailable or inadequate, giving them better access to new markets. 4i Domestic firms will be able to increase their competitiveness through greater awareness, adoption, and modification of technologies. The government budget will be less strained due to the increasing capability of some of the institutions to earn a greater portion of their incomes through the sale of their services.  8 3. Institutional and Implementation Arrangements, including on-lending arrangements (see Annex 4 and Project Implementation Plan (PIP)). I. Implementation Arrangements: A. Project Management Overall responsibility for the coordination of the proposed project rests with the Turkish Treasury, while the activities planned under the project would be managed and implemented by the various institutions concerned. The Central Project Implementation Unit (CPIU) established at TTGV would also act as the coordination unit handling common aspects (such as information, development impact measurement) in association with individual PIUs established under each component. All disbursements, accounting and financial reporting would be the responsibility of each of the PIUs ofTPE, UME, MAM and TTGV. B. Agreements Between Borrower and Implementation Agencies The Borrower is the Republic of Turkey represented by its Treasury. Assurances have been obtained from the Governmnent that adequate funding, based on the project financing plan, would be made available to project agencies (PA) in a timely manner. C. Implementation Arrangements by Component TPE would be responsible for the strengthening of IPR services component, UME for the metrology services component, MAM for the restructuring of R&D institutions component, and TTGV for supporting the technology upgrading activities of Turkish firms. II. On-lending Arrangements: Bank funds would be lent to the Treasury to be passed on to project agencies in the form of soft loans and grants, under Subsidiary Finance Agreements. The exact terms of grants and loans reflect the respective roles of project agencies, their ability to pay through revenues generated from industry, expected reduction in dependence on the government budget, and on the public-good nature of the services they provide. TTGV would on-lend project funds for technology development financing sub-projects to private sector enterprises, technology service centers, venture capital funds and technoparks. D. Project Rationale 1. Project Alternatives Considered and Reasons for Rejection. Due to the externalities associated with the generation, adaptation and diffusion of new technologies, it is well known that if the private sector were left to itself it would invest in these activities only to the extent that it could internalize the benefits of these investments fully. This is possible only for the very large firms leaving a large part of industry needs unfulfilled and the level of private investment far below the socially desirable level. On the other hand, completely public sector approaches to this problem have lead to inappropriate infrastructure and service development with poor coverage of industry needs. Compared to both of these alternative strategies, the project takes the "in-between" approach by providing support for setting up of technology services where they do not exist or re-orienting those that do exist, but with a strong emphasis on private sector participation in design, delivery and cost sharing. Another alternative was to postpone all technology development support until Turkey's macro-economic situation had improved. This alternative was not pursued for three reasons: (i) technology and innovation investments have long gestation periods before the financial or economic returns can be realized. Building a strong technology support infrastructure as well as inculcating a greater awareness of the issues among the private sector is a slow process and must be catalyzed as early as possible, (ii) Turkey has joined the ECU and under this liberalized regime the importance and relevance of paying attention to technological activity to enhance competitiveness can not be underestimated, and (iii) Turkish private sector is strong and ready to undertake efforts to increase its capabilities in  9 the face of competition. Postponing technology support would only hold back the potential of the private sector to upgrade its performance in domestic and international markets. At the other end of the spectrun was the alternative of responding to individual institutions' request for a comprehensive investments plan that would aim to fulfill nearly 100 -.ercent of their investment needs. This altemative was rejected because it was not considered prudent to attempt to make a radical transformation in one project, and further, the benefits of these investments are likely to be optimal when they are made at a reasonable pace in keeping with industry needs as well as institutional absorptive capacity. Hence, the support extended to institutions in the proposed project does not promise to bring these institutions to their long term goals by the end of the project, but rather attempts to facilitate and catalyze their reforms in the right direction. Further, even during the transition phase in the next few years these institutions warrant adequate government support in order to conduct their operations smoothly. Other alternatives considered and not adopted were the establishment of new research institutes and sector specific testing laboratories proposed separately by the TTGV, TSE, METU and ITU. Proposals made included an Informatics Center (US$23 million), high voltage power testing laboratory (US$45 million) for electronics and engineering sectors, and testing laboratories for the automobile, food and textile sectors. In light of the specificity cf the demands that such infrastructure could serve and the high cost recovery possible from such targeted services, it was considered appropriate to leave such investments to the industry. Instead, the project would make investments in strengthening technology infrastructure and services more broadly so that it becomes responsive to industry needs in general. Initially, TTGV proposed setting up several technology service centers (TSC), technoparks, venture capital funds, and credit guarantee fund, with majority equity participation and operating responsibilities. This alternative was not found appropriate because TTGV would be able to serve its mandate well if it concentrated its efforts on playing the role of an intermediary and catalyst in technology upgrading activities of the SMEs rather than getting bogged d.own by ownership of expensive institutions. Similarly, high-tech research laboratories were proposed by universities and these proposals were not considered prudent because interviews with the private sector revealed, that while there were some commonly acknowledged gaps in the technology infrastructure, as far as research institutions were considered, the few that existed were underutilized and disconnected from industry. Restructuring existing facilities to meet industry's needs was therefore selected. Alternatively, given the fact that TTGV is a relatively new institution with considerable scope for institution building, the prospect of pursuing some of the new activities as separate components with distinct implementing agencies outside of TTGV was also considered. However, few institutions would be immediate candidates for implementation of these activities, and TTGV had already begun to entertain preliminary proposals on several of theem, e.g. technology service centers, technoparks. Hence, inspite of the concerns regarding the widely expanded scale and scope of TTGV's activities, these new activities were allowed to remain under the TTGV umbrella. Strong technical assistance and training requirements were emphasized in order to ensure the fiscal, technical, and nmanagerial soundness during the implementation of these new activities. (liven the high-risk and high-reward nature of technopark investments, the project would support these initiatives on a limited basis and in a phased manner on the basis of evidence of demand from industry, and with explicit cost sharing arrangements with the research institution/university, as well as with other interested organizations. Similarly, venture capital would be approached on a pilot basis to test the demand for such non-traditional financing if the right elements are deemed present in the country. In terms of the scope, the project is complex, and simpler designs were considered for easier implementation. However, experience has shown that industrial technology development projects are most effective when an integrated approach that addresses the infrastructure, institutional, and demand aspects of technology services is adopted. On the other hand, certain aspects of technology development were considered beyond the scope of the project, such as the development of scientific skills within the country or establishment of vocational training institutes. While these are acknowledged to be critical elements in raising the competitiveness of any country, it is proposed that education reform (and other complementary elements) be addressed in a separate project. Considering that the Y2K problem may require some Bank assistance on a short notice, the project had to explore the possibility of adding a separate component for a Y2K program. While considerable assessment work is needed  10 before the appropriate technical needs and resources can be determined for Y2K problem, a tentative provision for a small pilot program was considered useful within the TTGV component. Given the complexity of this project and the scale of activities being pursued by TTGV, implementation details of the potential Y2K component would be designed such that no additional burden is imposed on TTGV. Given that the proposed project is already a quite complex, it was not considered prudent burden the project with an additional large component and especially which is not fully defined and could be quae complex to implement. Finally, adequate flexibility has been built into the project design (including some unallocated funds to be utilized for priority activities demonstrating superior performance). Given the very nature of technology development activities, and the newness of many of these activities in Turkey, it was not considered appropriate to follow a rigid implementation scenario. Thus, several of the initiatives discussed above would be started on a pilot basis, business plans for several sub-projects would be required, and with the help of intensive monitoring criteria their design and/or continuation would be reviewed and modified if necessary. 2. Major Related Projects Financed by the Bank: Sector Issue Ongoing and Previous Bank Loans Latest Form 590 Ratings Scientific Research and Technological Infrastructure Technology Development Project (Loan 3296) S Improve competitiveness of Turkish industrial enterprises Small and Medium Enterprise Support Small and Medium Scale Industry Project (Loan S Support development of labor-intensive 2647) SMEs Second Small & Medium Scale Industry Project S (Loan 3067) Human Resources Development Increase supply and quality of skilled Industrial Schools Project (Loan 2536) S manpower Increase supply and quality of technical Industrial Training Project (Loan 2399) S manpower 3. Lessons Learned and Reflected in Proposed Project Design: The project incorporates relevant lessons leamed from previous and ongoing Bank-financed projects, the OED evaluation of industrial technology projects, as well as the current literature on industrial technology development: * The first project (TDP-I) initiated the enhancement of technological capabilities among Turkish industry. The investments made in metrology and standards have resulted in the establishment of valuable systems that possess the potential of serving a large part of Turkish industry's needs. An awareness and market for technology development have been created through TTGV's activities, which holds great potential for carrying this momentum forward. A culture of technology development and modification has only recently begun to be formed, therefore, building on the successes of the first project is considered appropriate. * On the other hand, a lesson learnt from the first project is that greater institution-building efforts in the newly formed institutions may have been able to prepare them better to serve the needs of industry more effectively. For example, TTGV generally followed a somewhat conservative apps:oach, lending to firms primarily with established track record, and could get actively involved in the start-up projects only to a limnited extent. UME has developed into a reputable institution but more needs to be done in terms of attracting the qualified personnel to assist in the management as well as implementation of metrology services to industry. This project recognizes the need for focusing on institution strengthening from the start through training, study tours, technical assistance, and greater private sector participation in setting priorities for these institutions. These  I1 efforts would be supplemented with intense Bank supervision during implementation. The experience of NAC under TDP-I has indicated that any changes in Parliamentary laws should be sought early in the project cycle. * Findings from the recently completed India Technology Project in the Bank as well as the technology development literature, stress the importance of acknowledging and correctly identifying the public good element of technology-related infrastructure. Experience has shown that market deficiencies that hold back technological effort can be overcome by careful market friendly interventions and that timing is important to get the incentive structure right. Often, the liberalization of an economy serves as a necessary precondition for such support to work, but liberalization in itself is not enough. It has to be accompanied by institutional, financial and informational measures to remedy deficient markets. This project uses the backdrop of the ECU to catalyze technology building efforts but supports instruments to address institutional, financial and informational bottlenecks facing the private and public sectors. * The OED report suggests that "altogether there appears to be too much attention to R&D financing rather than the more mundane needs of training, quality improvement..." This project recognizes that due to the SME based industrial structure, the main needs of Turkish industry are centered around availability of measurement, testing, and standardization services as well as upgrading their technological capabilities and hence places a strong emphasis on the MSTQ component and technology development financing. * A recent informal review of past and ongoing technology development projects in the Bank stresses the importance of addressing the market failures that exist in accessing and utilizing correct information, particularly for SMEs. It therefore suggests a more proactive approach towards dissemination, outreach, and training for owners and workers of SMEs. This project incorporates this lesson by supporting the awareness raising, information dissemination and match-making functions that private sector associations would perform on a cost sharing basis with industry. * While this project has tried to adopt a comprehensive and integrated approach to technology development, it recognizes that there are some aspects which, while important - such as the improvement in skills and output of scientific technical manpower - are beyond the scope of this project. Lessons leamt from previous Bank projects endorse this approach by suggesting that technology development be approached in an integrated way and as part of a broader industrialization strategy, but acknowledges that no one project can or should try to address all constraints. Therefore, for the sake of effectiveness in reaching the project goals, the project design has attempted to stay within implementable and monitorable parameters. Also, given the nature of technology development efforts and the risk associated with some of these efforts, adequate flexibility has been maintained in project design to allow for certain initiatives to be piloted if the environment is right (technoparks, venture capital), rather than conunitting large funds up front. While not part of this project, skill needs of firms would be monitored through the benchmarking and tracking surveys. Skill deficiencies and constraint to technology upgrading would be assessed and findings on how to improve the skills delivery would be made available to the appropriate agencies, including to Bank staff involved in on-going Bank supported education projects. 4. Indicators of Borrower Commitment and Ownership. The Government is committed to continuing the technology reform and strengthening process started under the first Tec]:mology Development Project and has requested Bank support for a follow-up project. Each institution has carried out assessment and feasibility reports of their investments using Turkish and international consultants. Some have begun to implement the recormnendations of the reports already. TPE has begun to conduct seminars for sectors that are likely to be most affected with the new IPR laws and has begun to train its own staff for new WTO related procedures. UME has prepared a detailed prioritization plan for investments and has started to pay more attention to client feedback through client reports and industry visits. UME has commissioned a study on the institution's organizational, management and staffing systems and will implement its recommendations through a detailed action plan. MAM has also begun its transition towards a contractual research organization by instituting incentives for scientists who initiate contractual research and providing advice to scientists on negotiation, marketing, and intellectual property rights sharing on contractual research. MAM's commitment to restructuring is evidenced by the gradual increase in its earnings from contractual research over the last two years. TTGV has developed its policy and strategy statements with the help of Turkish and international consultants and has revised its operating procedures and by-laws. It has drafted a comprehensive business plan to  12 reflect TTGV's new focus. In order to accomplish its expanded role TTGV has hired two top level experts from the private sector in corporate finance, and new technology business areas. A detailed Project Implementation Plan (PIP) has been prepared for each component. A PIU has been established by each institution, which would be further trained on Bank procedures and guidelines. A Project Preparation Facility (PPF) Advance (US$2.5 million) has been instituted for advance preparatory work to be undertaken by project agencies. A workshop on Bank procurement, disbursement and financial management procedures was organized for PIUs (in September 1998). A project launch workshop is planned for September 1999. 5. Value Added of Bank Support: Recent management and OED reviews have suggested that the Bank has an important role to play particularly along the lines supported in the India, Indonesia, Mexico, Hungary and Korea industrial technology projects. The Bank has already contributed substantial value added to strengthening the technology infrastructure in Turkey under the first Technology Development Project. 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 directly driven by industry's needs. In the case of several components Bank participation would speed up the reform process (TPE, UME and MAM) thus accelerating the realization of the benefits of economic integration with the ECU. In other components, such as the TTGV support for technology development in SMEs and start-up companies, without Bank involvement the momentum that has built up thus far is not likely to be sustained, and piloting new infrastructure such as venture capital funds and technoparks, is not likely to be pursued effectively. On the institution building side, the Bank could contribute immensely in its capacity as an objective overseer of the reform process and play the role of a broker in bringing together effective partners for each of the institutions that would advise and participate in building the institutional capabilities. This would ensure effectiveness of current services in the design and delivery and build in sustainability of these activities for the future. Bank involvement would also help ensure that difficult measures are taken with regard to increasing the accountability of several institutions. With Bank involvement, prudent market tests would be applied to components such as technoparks and venture capital, and fiscal discipline imposed on institutions that are in the process of restructuring. Based on experience from other countries the Bank could provide the long term support, advice, and leverage needed during the restructuring phase for the institutions that seek to attain greater fiscal independence and quality of their services. E. Summary Project Analysis (see Annex 9 for list of documents containing detailed assessments) 1. Economic (see Annex 5) Cost-Benefit Analysis Cost Effectiveness Analysis: [x] Other: A cornerstone of the justification for technology support is the public good nature of technology development and upgrading due to the high spillovers from such efforts. It is not feasible, given the importance of externalities in technology development efforts and our limited ability to measure these externalities, to measure project specific rates of return (such as net present value (NPV) and financial rate of return (FRR)) or accurate estimations of the benefits that might flow from the proposed investment. Annex 5 contains a discussion of the direct and indirect benefits from such activities. Where evidence can be found in the existing empirical literature in this area, plausible ranges for rates of return are also presented. This project, and the monitoring and impact evaluation information system, that it would implement, is expected to advance our knowledge base on the private and public benefits of industrial technology projects. 2. Financial NPV and FRR -- Not applicable (see above)  13 3. Monitoring and Evaluation (see Annex 6) The monitoring and evaluation indicators have been finalized in consultation with the project agencies and other stakeholders, on the basis of sensitivity to project inputs, conceptual relevance to project objectives, feasibility of calculation and parsimony. Three sets of indicators would be used to monitor project progress and achievements: (il input indicators to keep track of the extent to which implementation meets stated expectations and schedule; (ii) output indicators to track immediate results of implementation in accordance with project plans; and (iii) development impact indicators to evaluate the extent to which the project has achieved its objective of improving technology development in the Turkish industry. 4. Technical A[l project agencies would strengthen their practices regarding industry feedback mechanisms for the appropriate delivery of services and effective phasing of their investments. MAM has prepared detailed business plans for the restructuring of each of the technical institutes. TPE would review the extent of patent examination that can be outsourced to other patent offices and plan for an optimal amount of in-house technical training on IPR examination procedures. The TTGV has revised its operating policies and procedures for sub-project selection, evaluation, and monitoring. 5. Institutional UME and MAM have reviewed their institutional models and changes to provide them with appropriate operational and financial autonomy during transition have been adopted. It is expected that UME would be able to mnaintain a 10-30 percent cost recovery ratio, and MAM would be able to achieve 40-70 percent self sufficiency during the next five to seven years. Both these institutions are pursuing a dialogue with TUBITAK to arrive at a long-term arrangement that would allow them to institute incentive mechanisms required for the reform process to be effective without sacrificing critical public support for their activities. High staff turnover and institutional systems are identified as a source of concern in UME. The institute has conducted, with the help of a professional management consultancy firm, a review of its organizational and m,magement structure, including personnel policies with regard to remuneration, and non-financial incentives. Based on the recommendations of this report, an institutional development plan would be implemented in consultation with the Bank. TTGV's institutional capacity to assist technology development among the private sector would be strengthened. It would act upon the recommendations of the consultant studies and recruit individuals with appropriate finance and technology development experience from the private sector as well as further strengthen its operational procedures and staff skills base in order to sharpen its core business activities and enhance commercial orientation. The Financial Management Specialist on the mission team has evaluated project agencies' financial management system (FMS), including accounting, reporting and auditing systems of all four PIUs and appropriate steps have been taken to design and install such systems with the help of professional consulting firms. The FMS will be tested and certified prior to project effectiveness and satisfy Bank's requirements for the use of special accounts and Statement of Expenses (SOEs). 6. Social None 7. Environmental Aspects: The project is not expected to cause any environmental problems and thus has been designated Category C. 8. Participatory Approach: Private sector companies representing firms of all sizes, varying levels of technological complexity and export orientation, were consulted on the quality of technological services available in the country and constraints facing  14 their growth and expansion. Feedback was also obtained on the services strengthened through TDP-I and some concrete suggestions gathered on areas of improvement in design and focus. Business associations such as Istanbul Chamber of Industry (ISO) and the Small and Medium Industry Development Organization (KOSGEB) and their sector representatives were also consulted to understand the nature of existing services offered by these organizations as well as their perceptions of industry demand for the near future. Input and involvement from such organizations would continue to be obtained during project implementation, including using co-financing grants from TTGV to promote increased provision of technology support services to SMEs. F. Sustainability and Risks 1. Sustainability: The project is being proposed at a critical juncture when Turkey is embarking on a significant liberalization effort as part of the European Customs Union. The incentive structure has changed and Turkish industry's demand for technology services has received a boost in light of this economic integration. These needs are expected to continue to grow as competition becomes more fierce. The project has been designed to fill in the infrastructural gaps as well as provide technical assistance with strong private sector participation, not just in the demand for these services but also in the design delivery and cost sharing of their delivery. This private-sector focus of the project is designed to promote the sustainability of technology support services and resources in Turkey. Also, in large part the project builds upon the recent creation of culture of innovation that is taking root, and through awareness-raising and information dissemination, would continue to propel the momentum of this change forward. Careful attention would be paid to the institutional capacity building, not just in terms of upgrading facilities, but strengthening the management as well as staff quality to ensure that the reform efforts permeates all levels. Individual institutions supported under the project are being assisted in becoming less dependent on government fLunding by restructuring their activities to be more industry-oriented and thus revenue generating and self- sustainable to a large extent in the long run. For example, given that UME provides national level services, it aims to achieve a cost recovery ratio of between 10-30 percent, a figure equivalent to other similar institutions in Europe. At the retail level such services are expected to be provided by secondary level laboratories in the private sector. MAM has reduced its dependence on public funds in the last two years and aims to achieve around 40-70 percent self sufficiency. In addition, an innovative approach would be introduced whereby UME and MAM would establish Institutional Renewal Accounts (IRA) to be used to sustain their continuous renewal efforts. It should be possible for institutions to self-finance a rising portion of further improvements and infrastructure investments in their facilities from the revenues eamed from providing services to industry. The on-lending terms would comprise a combination of soft loans and grants from the Treasury to the institutions to encourage a business-like thinking and fiscal discipline in the management and functioning of institutions. Under TDP-I, TTGV received 100 percent grant to carry out TD finance activities, but with the leaming and experience of evaluating viable R&D projects behind them now, they would be encouraged to make the transition towards adopting a business-like approach in lending and hence a mix of soft loan and grant is designed for them. In addition, TTGV would co-finance 25 percent of sub-finance for TDF sub-projects. In the case of MAM and UME, the arrangements are designed such that repayments based on the revenues be funneled into an Institutional Renewal Account from which they could borrow for their future investment needs. Such an IRA would instill a financial discipline and long-term planning on the institutions without forcing them to adopt short-term financial austerity measures and sacrifice the delivery of important services. Each institution would phase investment on the basis of business plans, thus providing adequate attention to the issues of financial sustainability. The project design has given careful attention to the issue of institutional capacity. Each institution's top and middle management structures have been reviewed and where necessary, additional measures to strengthen these structures have been designed. Training, study tours, possible twinning arrangements and other appropriate forms of technical assistance form a key part of project design in each institute so that the reform process permeates and strengthens all levels of staff and institutions.  15 2. Critical Risks: Type of Risk Risk Risk Rating Risk Minimization Measure Generic Risks Serious macro- M Turkey possesses a strong and resilient private sector in (e.g., macro- economic conditions spite of years of macro-economic instability. Integration economic risks, may decrease demand with the ECU and other major markets provides the past country and/or opportunity for context to increase their demand for adherence to portfolio failure firm technological international standards and increased investments in rate based on upgrading technological innovation. OED project ratings, etc.) Lack of counterpart M Several of the activities are income generating and hence funds the institutions' own resources have been committed. Where other counterpart funding is needed, commitments have been obtained by agencies within the government system. Project-Specific Risks Insufficient demand for M Preliminary proposals indicate that there is a large technological unfilled and increasing demand for more advanced infrastructure and facilities and technological services. Individual business services from industry plans for R&D institutions and technoparks investments would be evaluated on the basis of evidence of being demand-driven and cost-sharing by private sector. Inadequate institutional M All agencies would receive appropriate technical capabilities and their assistance and training support. willingness and ability to adopt appropriate TPE is hiring extemal help for project management, and changes (e.g., TTGV will consult with other Patent Offices in the design of and MAM) their institutional strengthening programs such as training for its staff and awareness raising for industry and enforcement personnel. UME's management systems have been reviewed by international management consulting firm, recommendations will be implemented by UME. MAM has engaged intemational consultant to prepare business plans for each institute. Investment and training needs will proceed along recommendations made therein. TTGV has engaged international consultant to draft its business plan reflecting a focus on institution strengthening and a private sector commercialization and management. Insufficient M Content, design, and delivery of outreach programs for participation of SMEs SMEs will proceed on the initiative of business associations and inability of who represent SMEs and experienced private sector institutions to deliver practitioners. Cost sharing in these services with the the outreach programs beneficiary firms should ensure demand-responsiveness. TTGV would review these criteria before approving funds for this purpose. Provision of M Draft NAC law is pending in Parliament. If law does not get independent passed in the near future, the Government would need to accreditation services adopt appropriate legislation compatible with intemational standards. Overall Risk Rating M *Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)  16 3. Possible Controversial Aspects: None G. Main Loan Conditions 1. Conditions of Effectiveness: (i) Signing of satisfactory Subsidiary Finance Agreements by the Treasury with each Project Agency (LA Sec. 3.01, 6.01(a)) (ii) Establishment of satisfactory Financial Management System by all Project Agencies (PA Sec. 4.01(a), LA Sec. 6.01(b)) (iii) Selection of extemal auditors under terms and conditions satisfactory to the Bank (PA Sec. 4.01(b), LA Sec. 6.01(c)) (iv) Adoption of satisfactory business plans by MAM and TTGV (LA Sec. 6.01(d)) (v) Adoption of satisfactory Institutional Development Plans by all project agencies (LA Sec. 6.01(e)) 2. Conditions of Disbursements (apply to respective components). (i) Establishment of IRA by MAM under satisfactory terms and conditions (LA Sch. 1, Para 3(b)) (ii) Establishment of IRA by UME under satisfactory terms and conditions (LA Sch. 1, Para 3(c)) (iii) Establishment of National Accreditation Council with satisfactory terms and conditions and signing of a satisfactory protocol between TTGV and the Undersecretariat of Foreign Trade (LA Sch. 1, 3(c)) (iv) Signing of a satisfactory Y2K protocol between TTGV and State Planning Organization (LA, Sch. 1, 3(d)) 3. General Covenants: (i) All Project Agencies to submit by October each year, for Bank review, satisfactory Annual Operating Plans including technical assistance, training and procurement plans (PA Sch., Para 3) (ii) A Mid Term Review to be conducted by June 30, 2001, based on satisfactory terms and conditions (LA, Sch. 5, Para 4(b)) (iii) All Project Agencies to maintain satisfactory Financial Management Systems including records and accounts, and prepare financial statements, all in accordance with accounting standards satisfactory to the Bank and annual project accounts and institutional audits to be provided to the Bank within six months of each year (the audits to be carried out by independent external auditors in accordance with international accounting standards, and TORs satisfactory to the Bank) (PA Sec. 4.01(b)) (iv) All Project Agencies to maintain PIUs (and TTGV also CPIU) with satisfactory functions, staffing and other resources (PA, Sch., Para 1) (v) All Project Agencies to maintain satisfactory statues, business plans, policies and strategies, by-laws, organizational structure, staffing, and operating procedures (PA Sec. 3.04) (vi) All Project Agencies to establish (by September 30, 1999) or maintain and operate satisfactory Advisory Boards based on international best practices on industry feedback mechanisms (TTGV, TPE PA Sec. 3.05; MAM, UME PA Sec. 3.06) (vii) All Project Agencies to implement the project in accordance with the Project Implementation Plan (LA, Sch. 5, Sec. 1) (viii) All Project Agencies in coordination with the Borrower to monitor project performance in accordance with the satisfactory monitoring indicators framework (LA, Sch. 5, Para 4(a)(b)) (ix) The Borrower to maintain satisfactory operations of NAC in conformance with international guidelines (LA, Sch. 5, Para 2) 4. Institution Specific Covenants: UME: (i) UME to maintaining satisfactory organizational autonomy model with an optimal balance between autonomy and stability of institutional enviromnent (PA Sec. 3.05) (ii) UME to operate IRA with satisfactory policies and procedures, and to contribute from its revenues at least US$8 million into an IRA during the 2001-2012 period (PA, Sch., Para 2)  17 TPE: (i) TPE to take all measures to ensure that the World Trade Organization carry out, by December 31, 2001, or other date as the Bank shall agree, in a manner satisfactory to the Bank, a review of compliance of the Turkish Industrial Property Rights Regime with the standards of the Council of Trade Related Intellectual Property Rights (TRIPs) agreement (PA, Sch., Para 2) (ii) TPE to, by December 31 of every two calendar years, starting in calendar year 1999, carry out, in a manner satisfactory to the Bank, an exercise to benchmark the pricing of its services and the duration of its processing time with comparable patent offices in other European countries (PA, Sch., Para 3) MAM: (i) MAM to maintaining satisfactory organizational autonomy model with an optimal balance between autonomy and stability of research environment (PA Sec. 3.05)) (ii) MAM to operate IRA with satisfactory policies and procedures, and to contribute from its revenues at least US$10 mnillion into an IRF during the 2001-2012 period (PA, Sch., Para 2) (iii) Each sub-project for investments in MAM's technical institutions and other activities to be based on satisfactory business plan subject to Bank's prior review (PA, Sch., Para 3) (iv) MAM to generate adequate contractual income to cover at least 40%, 45%, 50%, 55%, 62%, and 70% of its total annual expenditures during the year 1999, 2000, 2001, 2002, 2003, and 2004, respectively (PA Sec. 4.03) TTGV: (i) TTGV to maintain satisfactory criteria for R&D financing including TDF sub-projects, technology service centers, venture capital funds and technoparks (PA, Annex to the Sch., Para 1) (ii) TTGV to develop by August 31, 1999, and adopt by September 30, 1999, satisfactory technology support services programs (PA, Sch., Para 3) (iii) TTGV to take all measures to assist UFT in the establishment of NAC (PA, Sch., Para 4) (iv) TTGV to take all measures to assist SPO to prepare and fumish to the Bank by August 31, 1999, an implementation plan for carrying out the Y2K pilot program (PA, Sch., Para 5) (v) TTGV to demonstrate satisfactory (at least 75% with a target of 90%) collection rate on its total technology development financing portfolio in order to utilize project funds over $20 million (PA, Annex to the Sch., Para 8) H. Readiness for Implementation 1. The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. [x] Under preparation [] Not applicable. 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 4. The following items are lacking and are discussed under loan conditions (Section G): Each agency to install satisfactory financial management systems.  18 1. Compliance with Bank Policies [x] This project complies with all applicable Bank policies. Task Team Leader: i b Goel Sectdok ifo:ta okros C-ountry Director: Ajay Chhibber  19 Annex 1 Turkey: Industrial Technology Project Project Design Summary Sunmunry Key Pefortwace Indicators? Monitoringgand Evalution CiiaMtt~do Method- Sector-related CAS Goal: (Goal to Bank Mission) Enhancing international Increased exports into new markets Annual industrial and To enhance competitiveness. from Turkey, increase in trade statistics. competitiveness through technological sophistication of productivity increases exports, increased market shares in ESW reports. contributes to growth destination markets. and poverty alleviation. Project Development Objective: (Objective to Goal) Promote integration with ECU Acceptance of metrology traceability Progress reports from Continued adherence to through harmonization of procedures intemationally, increased agencies. the ECU. technology infrastructure system. awareness of metrology-productivity link among firms. Survey of firms No major changes in the Enhance firm-level competitiveness conducted by SIS. policy and regulatory through private sector investments Intemational recognition of valid environment affecting in technology development. IPR system in Turkey by ECU/WTO, Supervision reports the trade & industrial increase in licensing and other sectors. technology transfer agreements, Evaluation reports (MTR, increase in R&D activity, improved ICR). protection of IPR in Turkey. Increased awareness of R&D activity among private sector, increased investments in technology upgrading, introduction of new products and processes into new markets by private sector. Relevant industrial research being conducted for Turkish industry. Outputs: (Outputs to Objective) Upgraded industrial property rights Reduction in processing time of IPR Progress reports from No major changes in the system created in Turkey. applications, increase in foreign and agencies. policy and regulatory domestic applicants for IPR environment affecting the protection. Survey of firms trade & industrial sectors. conducted by SIS. Improved metrology capabilities Increased coverage of metrology within Turkey. services, demonstration of cost Supervision reports savings to Turkish industry. Evaluation reports (MTR, Provision of sources of finance and Number of firms supported in their ICR) technical assistance to promote investments in R&D projects, private sector investments in number of these efforts that are technology development. commercialized, increase in productivity of beneficiary firms. Technology institutions realigned to Reduced dependence on govemment the needs of Turkish industry. budget, increased share of contract research in total output, increase in joint projects between participating technology institutions and industry. - See appendix to Annex 6. See Annex 6.  20 Project Components/ Sub- (US re oillion) (Ciomponents to components Outputs) Strengthening of industrcial property 15.00 Progress reports from Comitment to rights serviceso agencies. institution building to * expanding physical familities manage and sustain new and documentation and Survey of firms investments would infosnation center; conducted by SIS. remain. * training for staffi a R training of enforcement Disbursement reports. Firms will be interested in personnel; upgrading technological