Mexico - Science and Technology Infrastructure Project

I-/V L 8/ 7J --- A/L Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. 10468-ME Type: (SAR) Report No. 10468-ME ROGER, NIE/ X38720 / I8 181/ LA2C1 STAFF APPRAISAL REPORT MEXICO SCIENCE AND TECHNOLOGY INFRASTRUCTURE PROJECT APRIL 30, 1992 Country Operations Division I -- Mexico Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in Ibe performance of their offlciil duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Mexican Peso (Mex$) US$1 MexS3,087 MexSI million US$324 (April 1992) FISCAL YEAR January 1 - December WEIGHTS AND MEASURES 1 meter (m) 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 hectare (ha) 10,000 m2 . 2.47 acres 1 square kilometer (km2) - 0.38 square miles (mi2) = 100 ha I metric ton (m ton) - 2,205 pounds Main Abbreviations and Acronyms CENAM Centro Nacional de Hetrologia; National Center of Metrology CONACYT Consejo Nacional de Ciencia y Technologia; National Council of Science and Technology DGDT Direccion General de Desarrollo Technologico (SECOFI); Directorate General of Technology Development. DGN Direccion General de Normas (SECOFI); Directorate General of Standards FIDETEC Fondo de Investigation y Desarrollo para la Modernizacion Tecnologica; Research and Development Fund for Technological Modernization GATT General Agreement on Tariffs and Trade GOM Government of Mexico IMPI Insrituto Mexicano de la Propiedad Industrial; Mexican Institute of Industrial Property ISO International Organization for Standardization NAFIN Nacional Financiera; National Development Bank NAFTA North American Free Trade Agreement NIST US National Institute of Standards and Technology PACIME Programa de Apoyo a la Ciencia en Mexico; Program for Support of Science in Mexico PTB Phy8akalisch-Technische Bundesanstalt R&D Research and development SECOFI Secretaria de Comercio v Fomento Industrial; Ministry of Commerce and Industrial Development SHCP Secretaria de Hacienda y Credito Publica; Ministry of Finance and Public Credit SNC Sistema Nacional de Calibration; National Calibration System SNI Sistema Nacional de Investigadores; National Registry of Researchers. WIPO World Intellectual Property Organization Map: IBRD 23547 dated February 1992  FOR OMCIuL USE ONLY SCIENCE AND TECHNOLOGY INFRASTRUCTURE PROJECT TABLE OF CONTENTS LOAN AND PROJECT SUMMARY . . . . . . . . . . . . . . . . . . . . . . . I* INTRODUCTION . .. ................... 1 A. Recent Economic Developments ................ 1 B. The Public Sector Role In Science and Technology . . . . . . 2 II. THE SCIENCE AND TECHNOLOGY SECTOR .............. 4 A. Developments over the 19809 .. . . . . . .. .. .. ... . 4 B. The Government's Science and Technology Policy S_atements . . 5 C. CONACYT's Science Programs . . . . . . . . . . . . 7 1. Th6 New Programs . . . . . . . . . . . . . . . * . 7 2. Experience with the Pilot Programs in 1991 . . . . . . . 9 D. Industrial Technology Infrastructure . . . . . . . . . . . . 11 III. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . . 1 16 A. Rationale for Bank Involvement . . . . . * . . . . . . . 16 B. Lessons from Experience . . . . . . . . . . . . . . . . 17 C. Project Objectives . . . * . . . . . . . . . . . . . . 17 D. Project Description . . . . . . . . . . . . . . . . . . . . . 18 1. Science Research and Equipment Programs . . . . . . . . 18 2, Metrology **...............19 3. Standardization Program .............. . 20 4. Intellectual Property Protection . . o . . . . . 21 E. Project Cost, Financing, Procuremont, Disbursement and 1. Project Cost . . . . . . . . . . . . . . . . . . . . . . 22 2. Financing Plan . . . . 23 3. Procurement . . . . . . . . . . . . . . . . . . . . . 24 4. Disbursements 6 . . . . . . . . . . 26 5. Administration . . . . . . . . . . . . 27 F. Project Administration 27 1. Project Implementation . . . . . . . . . . . .... 27 2. Loan Supervision ..... .. . 28 G. Environmental Matters ..28 H. Project Benefits . . . . . . . . . . . . . . . . . . . . 29 I. Project Risks . . . . . . . . . . . 29 IV. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . . . . 30 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TEXT TABLES 1. Federal Expenditures on Science and Technology . . . . . . . . . 5 2. Participation of Principal Institutions in Federal Budget for Science and Technology -- 1986-1991 . . ...... . . . . . . . 6 3. CONACYT's Expenditures for Science, 1991 . . . . . . . . . . . . 10 4. Research Projects by Science Area, 1991 . . . . . . . . . . . . . 10 5. Equipment Projects by Science Area, 1991 . . . . . . . . . . . . 11 6. Project Total Coat .. .............. 23 7. Pr ject Financing Plan . . . . . . . . . . . . . . . . . . . . . 24 8. Project Casts by P_ccurement Methods . . . . . . . . . . . . . . 26 BOXES 1. The Social Benefits of Research ...... .. .. 3 2. Basic Definitions in Standardization . . . . . . . . . . . . . . 13 3. Highlights of 1991 Law on Industrial Property Rights . . . . . 15 This report is based on the findings of a World Bank appraisal mission which visited Mexico City from January 20 to 31, 1992. The mission was composed of Neil Roger (Task Manager), Kathleen Di Tullio and Ivan Rizo of the Bank, Stephen Carpenter of the US National Institute of Standards and rechnology, and two consultants, Aror Kuppermann and Daniel Newlon. Country Department Director, Rainor Steckhan. Division Chief, David de Ferranti.  ANNEICES 11.1 National Policy fir Science and Technology Modernization II.2 Administrative Restructuring of CONACYT II.3 The Rules of Operation of PACIME II.4 The National Metrology Center (CENAM) II.5 Standardization 'reogram 11.6 Mexican Institute for Industrial Property (IMPI) II.7 Key Activities for Technology Infrastructure III.1 Impact of bcience and Technology III.2 Detailed Project Cost and Financing III.3 Estimated Disbursement Schedule 111.4 Auditing Requirements III.5 Implementation Indicators III.6 Key Areas to be Addressed in the Mid-Term Review DOCUMENTS ON PROJECT FILE1' 1. Rules of Operation of PACIME, April 1992 (CONACYT) 2. Project for the National Center for Metrology, april 1992 (CENAM) 3. Standardization in Programs, January 1992 (SECOFI, DGN) 4. Project for the Mexican Industrial Property Institute, April 1992 (SECOFI, DGDT) 5. Evaluation of CONACYT's 1991 Programs 1/Available on request.  PROPOSaD SCIENCE AND TECHNOLOGY INFRASTRUCTURE PROJECT LOAN AND PROJECT SUMMARY Borrower: Nacional Financiera S.N.C. (NAPIN) Guarantot: United Mexican States Executing Aaencies: Consejo Nacional de Ciencia y Tecnologia (CONACYT); Centro Nacional de Metrologia (CENAM); Secretaria de Comercio y Fomento Industrial, Direccicou 'koeral A. Normas (SECOFI/DGN); and Instituto Mexicano de li Propiedad Industrial (IMPI) Beneficiaries: CONACYT, research institutes and researchers; CENAM and industrial firms; SECOFI/DGN d industrial firms; IMPI, and industrial firms Loan Amount: US$189 million equivalent Terms: Repayment in 15 years, five year grace period, * standard variable interest rate Prolect Otiectives: The main objectives of the proposed projec- , 3: (i) Ratioralize public sector funding by sup-.--'rting increased public spending for (a) grants for basic scientific research proje!ts and equipment infrastructure projects, with improved allocation on a competitive basis to generate relevant researc annd train scientists; and (b) technology infrastruct*e in the areas of metrology, standards and quality assurance, and intellectual property protection to improve services to industry, thereby encouraging modernization and enhancirg competitiveness, and increasing attractiveness for foreign investment; and (ii) DeveloD institutions by supporting the restructuring of CONACYT, and development of institutions providing support to industry in metrology (CENAM), standards and quality assuran#4 (SECOFI/DGN), intellectual property protection (IMPI), to improve the efficiency of public support in these areas. Proiect Components: The proposed project would have four components: (i) Science Programs (estimated total cost of US$765 million). This component would support the first four years of CONACYT's new science research programs beginning in 1992. The main programs fund individual research projects and equipment infrastructure projects open to universities and other research institutions, both public and private. The programs stress scientific merit rather than particular  - ii - sectors or applications. Award of the grants is on t!he basis of transparent, competitive pear review by evaluation committees, including foreign scientists, in eight broad areas. The research project grants mainly fund equipment, materials, visiting researcheis, and dissemination costs, but the sponsoring institutes fund the affiliated researchers salaries and overheads. The scientific equipment infrastructure projects are intended to strengthen institution's capacity for carrying out research, and are funded co-operatively with the institutions. CONACYT would implement this component, and Bank funds would disburse for scientific equipment and materials; (ii) Metrology (US$63 million). This component would support the start-up of a new metrology center (CENAM) to provide primary metrology services to industry, and facilitate the development of a private system to provide secondary metrology services. CENAM would implement this component, and Bank funds would disburse for scientific equipment, technical assistance training and promotion; (iii) Standardization Programs (US$17 million). This component would support building capacity for metrology's standards, testing, certification and quality assurance in industry. DGN has prepared an indicative "privatization" program which would transfer the primary role for standards and quality assurance to the private sector. SECOFI/DGN would implement this component, and Bank funds would disburse for training and promotion; and (iv) Intellectual Provertv Protection (US$41 million). This component would support the start-up of an Institute for Industriql Property (IMPI) to implement the new intellectual property law which was passed in July 1991. IMPI would implement this component, and Bank funds would disburse for international consultants, computer systems, data bases and training. Costs an.4 Financin Plan; The estimated total cost of the proposed project is US$886 million, consisting of a base cost of US$853.5 million, price contingencies of US$30 million and physical contingencies of US$2.5 million. The Bank loan would provide US$189 million (and US$1.5 million is being provided from previous loans), the Government US$404 million, participating research  - ili - institutions US$287 million, and private sector industrial firms US$4 million. Benefits: The science component would help rationalize public sp.nd4ng on research project and equipment grants, .aad str?.%gthen the responsible public institutions, thus gererating relvvant research and modernlzing Mexico's science and technology capability. The technol *+i infrastructure components would improve &ervices to industry, enhancing competitiveness and attractiveness for foreign investment. By their nature the benefits of the proposed project are broad, dispersed and hard to quantify. It is not feasible to estimate an ex ante economic rate of return, but studies have shown high ex post social rates of return to spending on basic science in industrial countries. CONACYT and the Bank are co- operating to develop an approach to economic assessment of the new science programs. Risks: The main risk for the science component is that the llocatton mechanism would become politicized and f'ragmented again, arnd reinforce past patterns of science research rather than looking to future needs. R: e,oer, the new PACIME rules are clear and there .ems to be a strong commitment to the new allocation .Atem on the part of both the authorities and the sciunce community, which should make a return to preiv:ous practices unlikely. The main risk for the technology infrastructure components is that the close links required between the responsible public sector agencies and private industry to build confidence in the programs would still be lacking and the services would be poorly used. However, the authorities are cognizant of this and have built institutional mechanisms and strong teams with close consultation between all interested parties to ensure successful implementation.  - iv - ESTIMATED PROJECT COST (US$ million) Proiect ComDonents Local Foreign Total Science Programs 387.6 351.7 739.3 Metrology 15.3 42.7 57.9 Standardization Program 8.2 8.5 16.7 Intellectual Property 31.5 8.1 39.6 Total Base Costs 442.5 411.0 853.5 Price Contingencies 14.8 15.0 29.8 Physical Contingencies 2.5 - 2.5 Total Prolect Costs 459.8 426.0 885.8 Financins Plan Government 299.1 105.2 404.3 Bank 4.6 185.9 190.5, Research Institutions 152.5 134.9 287.4 Private Sector 3.6 - 3.6 Total Financing 459.8 426.0 885.8 Estimated Disbursement Schedule (USS million) BANK FY 1993 1994 1995 1996 1997 1998 Annual 28 44 48 32 22 15 Cumulative 28 72 120 152 174 189 V Includes US$1.5 million from Loans 2747-ME and 3047-ME. Note: Taxes and duties are excluded. Retroactive financing: costs of no mc-;e than US$18.9 million incurred after January 1, 1992 in the science component vaould be eligible. Special Account of US$15 million. Rate of return: not applicable.  I. INTRODUCTION A. Recent Economic Developments 1. Mexico's economic reform program since the well-known crisis of 1982 stands out as a success story in Latin America. The success of the program of stabilizing, liberalizing and privatizing the economy, begun by the administration of President de la Madrid and carried on by the current administration of President Salinas, has seen a return to positive income per capita growth in the last three years (1989-1991), a reduction in inflation from 200 percent at the height of the crisis to less than 20 percent in 1991, rapid capital inflows a-id a return to international capital markets. With plausible assumptions regarding the external environment, particularly for oil prices, US growth and international interest rates, Mexico appears set for sustained private sector-led growth of about five percent per year. 2. The cornerstone of the economic success has been 1he program of macroeconomic stabilization, which dramatically reduced inflation and restored confidence in the Mexican economy. The fundamental shift from deficit (about eight percent of GDP in 1981) to surplus (of nearly eight percent of GDP for the last four years 1988-1991) in the primary fiscal balance, was achieved mainly through cutting public expenditure. This orthodox fiscal retrenchment was supported by heterodox temporary wage, price and nominal exchange rate controls engineered by a social pact known as the Pacto (later the PECE) which provided crucial political support and social acceptance for the program. The Pacto/PECE has been extended several times most recently until January 1993, but the Government has relaxed price controls such that now more than three quartere of private production is free of regulation. 3. The main structural reforms were a fast and far-reaching trade liberalization to open the economy to international competition, and a major program of privatization to enhance domestic efficiency. In the early 1980s, almost all international trade was subject to quantitative control, but now less than 20 percent of tradeables production is protected by quantitative controls on competing imports, the maximum tariff is 20 percent and he weighted average tariff is 12.5 percent. Mexico has gone from being a -irtually closed economy to one of the more open economies in the world. The ongoing negotiatior a North American Free Trade Agreement (NAFTA) with the US and -ada can be expected to improve market access, further open the domest$- ionomy and, importantly, give permanence to the reforms. Mexico's rapid 4.-egration into the world marketplace has placed increased competitive pressure on domestic industrial firms, but at the same time the improved access to imported capital and intermediate goods has allowed them to improve efficiency. 4. The Government has also reassessed its role domestically and more than two-thirds of state enterprises have been liquidated or privatized, and many of those remaining are being increasingly run on a profit basis. The land-mark privatization of the telecommunications and banking sectors has been crucial for increasing competition in services. The Government has also implemented important structural reforms, including deregulating the financial sector, improving foreign investment regulation,  -2- removing technology transfer rules and strengthening intellectual property protection. 5. The challenge for economic leadership now is to maintain the macroeconomic stabilization and complete the structural reforms. Rapid economic reform brings a new set of concerns, including, inequitable income distribution, environmental degradation and political opening which the Government is beginning to address. The Government is firmly convinceo that the private sector must be the locomotive for sustained growth. The basic building blocks of macroeconomic stabiXity, well-structured incentives, transparent regulatory framework, and confidence in the economic leadership are largely in place. The severe curtailment of public investment in the 1980s has created an enormous need for investmeor in physical and human infrastructure to support continued economi -owth. This is the economic perspective for the proposed project. B. The Public Sector Role In Science and Technology 6. Technological progress has accounted for much of the improvement of standards of living in the world. Innovation allows countries to produce a wider range of goods and services, and to produce existing goods and services more cheaply. International trade in ideas allows countries to take advantage of innovations in the rest of the world. 7. Traditional models of growth and trade have tended to view technological change largely as a force outside the economic system. For example, economic growth was seen as being determined partly by technological change, but in turn this was seen as depending on non- economic factors such as the exogenous rate of scientific discovery rather than economic forces. The so-called new growth literature retains the emphasis on technological change as determining growth, but accords economic forces and thus economic policy a role in encouraging technological change and thus overall growth. 8. Scientific research and technological development generate knowledge and understanding which are important for their own sake and to expand production and consumption possiktlities. Carrying out R&D also provides all important practical educatiLn and on-the-job training and skill maintaining experience for scientists and technologists. While Mexico can import technology, and acquire human capital skills offshore, domestic scientific and technological capability is needed for research on uniquely Nexican issues, and to tirjose between technologies on the international technology shelf, adapt them to M xican needs and operate them in Mexican industry. 9. Basic scientific research and technology infrastructure have special characteristics as economic commodities -- they are known as "public goods". Once researcn has been successfully undertaken, the marginal cost of providing the results to potential users is generally low and many parties can use them simultaneously. Indeed, it may be very costly for researchers to exclude potential users from the benefits of their research. Thus the market may fail to produce sufficient research  - 3- because of these broadly avallable ezternal benefits or "spillovers", and private agents may not be *ble to appropriate enough of the benefits to make Lheir investmens worthvhile. Public provision of research can improve the overall efficiency of both production and consumption of research where apprwmriability ia difficult, typically in research. Private provision would still occur where private beneCits were sufficient, typically in more applied R&D. Technology infrastructure such as metrology services and intellectual property protection are "impure" public goods. Collective action is required for socially efficient production, but private consumption can be rationed with appropriate cost recovery. 10. Because of their nature, it is difficult to quantlfy the broad and dispersed social benefits of public goods like bgasc resealch, although svail3ble studies for industrial countries suggest high social returns to public spending (see Box 1). Further, it is similarly ditficult to establish an effic4ent level of public spending on public goods. Box ls Thc Soclal Benefits of Research (Au Extract (coi Nansfield, E. "Acado,aic Research Industrial Innovation", Science Policy, 20, 1991, North Holland. ~ea~e U:=~ ta4i4 e awbae. ' . ' ..yeum~t an 1*i~ #ae* inaetl =tb.'~adwdeped . 4ifcl oi^iiyadma~ _het 1^k bewe ..deicreea .sg 4 di Sw-....ri...... ...tt.o..... ...Th......................t..,..ap.....r.............. IS S; fIrtti 4a zi:w-L~ab e~e.eo iw rd~ gf~~ thtkiEdg zSth oatw fica Eaul o w bendvl~d~~ uaaxi4da) ute abec of ree Qnw Ni4i~ Ne~ tha I..b+ut o,tet ig h ip n 'S~~~~~a~ 197 X-- tt' =..f~m I 4*