IMPLEMENTATION COMPLETION REPORT MEXICO SCIENCE AND TECHNOLOGY INFRASTRUCTURE PROJECT (LOAN 3475-ME) FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT MEXICO Report No: SCIENCE AND TECHNOLOGY INFRASTRUCTURE PROJECT (LOAN 3475-ME) December 30, 1998 Finance, Infrastructure and Private Sector Management Unit Mexico Country Management Unit Latin America and the Caribbean Regional Office 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.

2 (Exchange Rate Effective October 1, 1998) Currency Unit = Mex$ Mex$10.16= US$1 FISCAL YEAR July I - June 30 ABBREVIATIONS AND ACRONYMS CAS CCC CENAM CONACYT DGN FY GDP GFCYT GOM IACyT IBRD ICR IADB IMPI INEGI IPR ISI KIP MSTQ NAFIN NAFTA NIST NPSTM NSF OECD PACIME R&D SAR S&T SECOFI SECODAM SEP SHCP SNI STIP WIPO Country Assistance Strategy President's Science Advisory Council - Consejo Consultivo de Ciencias National Center for Metrology - Centro Nacional de Metrologia National Science and Technology Council - Consejo Nacional de Ciencia y Tecnologia Director General of Standards - Direcci6n General de Normas Fiscal Year Gross Domestic Product Federal Expenditure on Science and Technology - Gasto Federal en Ciencia y Tecnologia Government of Mexico Scientific and Technologic Activity Indicators Indicadores de Actividades Cientificasy Tecnol6gicas 1996, Mexico, CONACYT, 1997 Intemational Bank for Reconstruction and Development Implementation Completion Report Inter-American Development Bank Mexican Institute for Industrial Property - Instituto Mexicano de la Propiedad Industrial National Institute of Statistics, Geography, and Informatics - Instituto Nacional de Estadistica, Geografia e Informatica Intellectual Property Rights Institute for Scientific Information Knowledge and Innovation Project - Proyecto de Conocimiento e Innovaci6n Metrology, Standards, Testing and Quality Nacional Financiera, S.N.C. North American Free Trade Agreement National Institute of Standards and Technology National Plan for Science and Technology Modernization (of Mexico) National Science Foundation Organization for Economic Cooperation and Development Support Program for Science in Mexico - Programa de Apoyo a la Ciencia en Me'xico Research and Development Staff Appraisal Report Science and Technology Ministry of Commerce and Industrial Development - Secretaria de Comercio y Fomento Industrial Ministry of the Comptroller General Ministry of Education - Secretaria de Educacion Puiblica Ministry of Finance and Public Credit - Secretaria de Hacienda y Credito Publico National System of Researchers - Sistema Nacional de Investigadores Science and Technology Infrastructure Project World Intellectual Property Organization Vice President: Shahid Javed Burki Country Management Unit Director: Olivier Lafourcade Sector Management Unit Director: Danny M. Leipziger Task Team Leader: Daniel Crisafulli

3 CONENTS FOR OFFICIAL USE ONLY PREFACE... EVALUATION SUMMARY... V vi PART I: PROJECT IMPLEMENTATION ASSESSMENT... 1 I A. PROJECT OBJECTIVES AND DESCRIPTION I B. ACHIEVEMENT OF PROJECT OBJECTIVES C. IMPLEMENTATION RECORD AND MAJOR FACTORS AFFECTING THE PROJECT D. PROJECT SUSTAINABILITY... 9 E. BANK PERFORMANCE F. BORROWER PERFORMANCE G. ASSESSMENT OF OUTCOME H. FUTURE OPERATION I. KEY LESSONS LEARNED PART II: STATISTICAL TABLES TABLE 1: SUMMARY OF ASSESSMENTS TABLE 2: RELATED BANK LOANS TABLE 3: PROJECT TIMETABLE TABLE 4: LOAN DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION TABLE 6: KEY INTDICATORS FOR PROJECT OPERATION TABLE 7: STUDIES INCLUDED IN PROJECT TABLE 8A: PROJECT COSTS TABLE 8B: PROJECT FINANCING TABLE 9: FINANCIAL AND ECONOMIC COSTS AND BENEFITS TABLE 10: STATUS OF LEGAL COVENANTS TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS TABLE 12: BANK RESOURCES: STAFF INPUTS TABLE 13: BANK RESOURCES: MISSIONS Annex 1: ICR Mission Aide Memoire Annex 2: Operation Plan for the Project Annex 3: Borrower's Contribution to the ICR 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.

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5 IMPLEMENTATION COMPLETION REPORT MEXICO SCIENCE AND TECHNOLOGY INRASTRUCTURE PROJECT (LOAN 3475-ME) PREFACE This is the Implementation Completion Report (ICR) for the Mexico Science and Technology Infrastructure Project, for which Loan 3475-ME in the amount of $189 million was approved on May 26, 1992, and made effective on 15 October, The loan was closed on June 30, A final supplemental disbursement of US$ took place on September 3, The ICR was prepared by Daniel Crisafulli, Task Manager, Private Sector Development Department and John Daly, Science and Technology Policy Specialist. The report was reviewed by Fernando Montes-Negret, Sector Leader of Finance, Private Sector Development and Infrastructure Department and Maria Victoria Lister, Quality Assurance Officer, Latin America and the Caribbean Region. The Borrower provided inputs to the ICR that are reflected in Part I and II of the ICR as well as in Annex 3. The Government, Borrower and Beneficiaries contributed to the preparation of the ICR by exchanging views on all parts and phases of the Project including policy aspects, preparation, procurement, implementation experience and related issues and by preparing its own contribution to this ICR. v

6 MEXCO SCIENCE AND TECHNOLOGY INFRASTRUCTURE PROJECT (LOAN 3475-ME) Introduction Evaluation Summary 1. The project was conceived during the implementation of the broad program of structural adjustment undertaken by Mexico during with support from the Bank. As Mexico emerged from a period of high inflation and macroeconomic instability, it became clear that strengthening of the basic science and technology infrastructure of the country would prove critical in meeting the challenges posed by the newly opening economy. Negotiated in the same year as the North American Free Trade Agreement (NAFTA), the project aimed to improve the competitiveness of Mexican firms and attract foreign investment while embarking on a program of long term institutional development. Project Objectives 2. The objectives of the project were to: * Rationalize public sector funding (for science and technology) by supporting increased public spending for: (i) grants for basic scientific research projects and equipment infrastructure projects, with improved allocation on a competitive basis to generate relevant research and train scientists; and (ii) technology infrastructure in the area of metrology, standards and quality assurance, and intellectual property protection to improve services to industry, thereby encouraging modernization and enhancing competitiveness, and increasing attractiveness for foreign investment. * Develop institutions through (i) supporting the restructuring of a science research program, and (ii) development of institutions providing support to industry in metrology, standards and quality assurance, and intellectual property protection to improve the efficiency of public support in these areas. Implementation Experience and Results 3. Overall, substantial progress was made toward meeting these objectives. In the areas of institutional development (all components) and increased attractiveness to foreign investment (technology components), the project was largely successful in meeting the established goals. The impact of the project on the competitiveness and modernization of Mexican industry appears positive but is not yet fully realized. The project's impact on overall financing to science and technology activities, however, is ambiguous as a result of the financial crisis of The Mexican financial crisis of strongly impacted the availability of funds for project activities. In November 1995, the Government and Bank agreed to accelerate the disbursement of funds through retroactive financing of US$80 million for activities associated with vi

7 the project which were previously funded by the GOM. In spite of this reduction of funding, the project was largely successful in meeting basic goals. 5. The Scientific Research Component saw an increase in the number of Mexican scientific research publications and their impact, a significant production of research-trained personnel, a renewal of the Mexican research instrumentation infrastructure, the institutionalization of meritbased peer review, and improvements in the efficiency of the National Science and Technology Council (Consejo Nacional de Ciencia y Tecnologia - CONACYT). 6. The project supported the creation of the Mexican National Center for Metrology (Centro Nacional de Metrologia - CENAM). With 104 laboratories now operating, demand from industry for calibration service has far outstripped projections. CENAM appears to be helping to attract foreign investment and promoting the competitiveness of Mexican industry. 7. The project supported the creation of the Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial - IMPI), significantly reducing delays in award of patents, increasing enforcement activities, and increasing inspections related to intellectual property violations. Use of the system by Mexican firms and individuals has remained low, but this lack of use is arguably the result of underlying weaknesses in the system of institutions and firms involved in creation, diffusion, and application of industrially-useful knowledge in Mexico. 8. The standardization component was intended to support the Directorate General of Standards (Direcci6n General de Normas - DGN) of the Ministry of Commerce and Industrial Promotion, but Govermment budgetary allocations were never made available for the component activities. Funds were either cancelled (US$1 million) or reallocated to the CONACYT component (US$2 million).' Despite the lack of disbursement under the loan, the DGN accomplished many of the objectives agreed during Appraisal. 9. Overall, the Bank performance in the implementation of the project is considered satisfactory. Implementation costs were held low, and the considerable capacity of the counterpart institutions was allowed to grow and be applied to the management of the project. Overall performance of the borrower was satisfactory. However, disbursement was subject to initial delays. The complexity of procurement and disbursement arrangements under the science research component were the single largest weakness in project design, resulting in excessive delays and burdensome procedures for beneficiaries and staff of CONACYT, NAFIN, and the Bank (para. 32). 10. Project sustainability is likely to be strong, given the advances in institutional development and likely future growth in demand for science and technology services in Mexico. The development objectives (growth with stability, social development, and modernization of the state) of Mexico's Country Assistance Strategy (CAS) imply increasing demand for creation and application of knowledge and technology, highly skilled scientific and technological human resources, technological infrastructure (including metrology, standards, quality control, intellectual property rights protection), and modernization of state institutions supporting science and technology. Conversely, reduced prospects for fuiture growth - or renewed macroeconomic and budgetary instability - could undermine 'US$500,000 in studies under the component were supported under the Mexico Industrial Restructuring Loan (3047-ME). vii

8 institutional and other gains. The executing agencies have progressed rapidly under the proj ect, but remain highly vulnerable to changes in their operating environment (particularly to funding levels and staffing changes). Summary of Findings, Future Operation, and Key Lessons Learned 11. The project was largely successful in meeting the stated objectives of building a basic institutional infrastructure in support of long-term scientific and technological development. This success is particularly striking in light of the macroeconomic instability experienced during implementation. Although this support for creating a supply of basic S&T infrastructure may be considered appropriate given the chronic underinvestment during the 1980s, the project should have incorporated measures to promote articulation of demand for S&T services and for linkage of research to societal needs. Given the challenges facing Mexican firms during a period of rapid trade liberalization, the project clearly should have aimed for a much more direct and immediate impact on firm-level technological capabilities. A second failure in project design was the lack of incentives to link research with teaching, thus potentially reducing the impact of research on the formation of skilled human resources. 12. The project enhanced the stability of scientific funding during the crisis of , when as so often happened in the past, research funding was threatened by fiscal cutbacks. The project helped to sustain development of an R&D capacity in Mexico which would be hard to replace and will likely prove increasingly important to future development. 13. The Government requested a follow-on operation to support a second generation of reforms to science and technology (S&T) policy. The Knowledge and Innovation Project (KIP), approved on June 16, 1998, is designed to enhance the effectiveness of research support programs while increasing linkages to user groups in society and industry. In addition, the KIP supports a restructuring of CONACYT's programs to promote university-industry linkage and industrial technology development. In parallel, SECOFI has initiated a series of studies to assess strategic options in competitiveness policy with support of a Japanese grant. 14. The project lessons include: (i) institutionalization of a competitive mechanism for allocation of research funds in a developing country can be feasible and beneficial, particularly with close participation of scientific community in the planning and review process; (ii) a well-designed system for support of science incorporates incentives for scientific excellence and national developmental needs in an open, competitive, and transparent manner. Especially desirable is some mechanism to strengthen fields of science and technology that are significantly weaker than appropriate to national developmental needs while maintaining incentives for excellence; (iii) development of "one-stop shopping" mechanisms, which aim to reduce the expenditure of time and effort of researchers in obtaining resources, is a difficult process requiring a high degree of commitment by implementing agencies over the medium-term; (iv) development of human resources for science and technology is perhaps the most important output of this project, and this output could have been strengthened by more viii

9 explicit incorporation of incentives for training of Masters and Doctoral students in research grants. In addition, systems to support scientific research should include a mechanism to ensure participation of highly-qualified young researchers in funding programs; (v) in tandem with the creation of a world-class metrology capability, policies to stimulate private sector demand for services and formation of a private secondary metrology network are critical to achieving significant medium-term impact on competitiveness of local industry; (vi) similarly, creation of a world-class intellectual property rights (IPR) agency is a necessary but not sufficient condition for productive application of IPR for development. In tandem with institutional strengthening, a systemic approach is needed to address weaknesses in the judicial system and broader issues in the creation, diffusion and application of technical knowledge in the country; (vii) the project also confirms the truism that continuity in staffing at the managerial and technical level is critical in assuring the successful creation or restructuring of an executing agency. The high degree of stability in each executing agency across a change in administration helped ensure rapid and sustained institutional development. ix

10 IMPLEMENTATION COMPLETION REPORT MEXICO SCIENCE AND TECHNOLOGY INFRASTRUCTURE PROJECT (LOAN 3475-ME) 1. The objectives of the project were to: Part I: Project Implementation Assessment A. Statement/Evaluation of Objectives * Rationalize public sector funding (for science and technology) by supporting increased public spending for: (i) grants for scientific research projects and equipment infrastructure projects, with improved allocation on a competitive basis to generate relevant research and train scientists; and (ii) technology infrastructure in the area of metrology, standards and quality assurance, and intellectual property protection to improve services to industry, thereby encouraging modernization and enhancing competitiveness, and increasing attractiveness for foreign investment. * Develop institutions through (i) supporting the restructuring of a science research program, and (ii) development of institutions providing support to industry in metrology, standards and quality assurance, and intellectual property protection to improve the efficiency of public support in these areas. 2. Given the broad program of structural reforms implemented by the Mexican Government during , including rapid trade liberalization, privatization, and deregulation of industry', the project's aim to strengthen the basic infrastructure for scientific and technological development was well-directed and timely. The growing openness of the Mexican economy required greater investment in scientific and technological systems to boost long-term competitiveness of enterprises. 3. The project supported the Government's National Program for Science and Technology Modernization (NPSTM), which set the goal of increasing total public and private expenditure for S&T from 0.32 percent of GDP in 1991 to 1.0 percent in 1994 and 2.0 percent in 2000 (Staff Appraisal Report - SAR, p. 5). In light of evidence from leading industrial countries, the Government's goal was perhaps overly ambitious even in the absence of the financial crisis of At least one half of the total in 2000 was to be provided by the private sector; however, neither the NPSTM nor the project supported explicit measures to incentivize private spending in the sector. Although support for creating a supply of basic S&T infrastructure was appropriate given the chronic underinvestment during the 1980s, the project should have incorporated I Mexico Country Economic Memorandum - Fostering Private Sector Development in the 1990s. Report No ME public support for research and development in advanced economies ranged from 0.5 to 0.6 percent of GDP in Japan and Italy, to 0.9 to 1.1 percent of GDP in France, the United Kingdom and the United States. Key determining factors included military R&D spending, Government strategy, and per capita income.

11 measures to promote articulation of demand for S&T services and for linkage of research to societal needs. Given the challenges facing Mexican firms during a period of rapid trade liberalization, the project clearly should have aimed for a much more direct and immediate impact on firm technological capabilities. A second failure in project design was the lack of incentives to link research with teaching, thus potentially reducing the impact of research on the formation of skilled human resources. 5. The project was negatively impacted by the financial crisis of In early 1995, during the period of severe financial turmoil following the devaluation of the peso, the Government requested a restructuring of the entire portfolio of Bank-financed projects under supervision. A letter of amendment was signed November 17, 1995 to accelerate the disbursement of funds under the Loan. The Bank agreed to accept retroactive financing of US$80 million for activities associated with the Project (research scholarships, chairs of excellence and repatriation grants) originally funded by the Government. The rationale for this restructuring was to provide additional liquidity support to the Mexican Government at the time of the financial crisis. Although the decrease in support to Project activities which resulted from the financial crisis is unfortunate, the Bank and Government acted appropriately in response to the financial stress experienced at the time. B. Achievement of Project Objectives 6. The project achieved a substantial positive impact toward meeting the stated objectives at Appraisal. In the area of rationalization of public sector funding, substantial progress was made toward creation of the competitive review mechanism for science research projects and in creating a basic infrastructure in the areas of metrology and intellectual property protection. Regarding the goal of increased attractiveness to foreign investment (technology components), the project was largely successful in meeting the established goals. The impact of the project on the competitiveness and modernization of Mexican industry is positive but not yet fully realized. Finally, the project's impact on overall financing to science and technology activities is ambiguous as a result of the financial crisis of As is customary in science and technology projects, net present value, economic rates of return and financial rates of return were not included in the Staff Appraisal Report for this project, and it is not possible now to estimate the value of project benefits. While inefficiencies in the procurement system reduced the positive effect of the project (para. 32), available evidence suggests that the project did represent a low cost solution to the problems of increasing human and material resources for science and technology. Science and Technology Research Component 8. The science research component supported the creation of PACIME (Programa de Apoyo a la Ciencia en Mexico - Program to Support Science in Mexico) under the administration of CONACYT. This component was successful in achieving the goals of supporting high-quality research and human resource formation while building sustainable institutions. Several external evaluations by international and Mexican experts have agreed that this basic goal has been met. 3 3 Aron Kuppernann, Evaluation of PA CIME, April 1997; Dan Newlon, Evaluation ofpa CIME, February 1997; Carlos Elizondo Mayer-Serra, PACIME: Algunos Criterios de Evaluaci6n, 1997; and J. M. 2

12 9. Rationalization of Public Sector Funding. The project aimed to increase the creation of scientific knowledge and formation of trained scientists. The number of publications by Mexican authors in the ISI data base rose from 1,869 in 1991 to 2,619 in and 2,974 in This 59 percent increase in five years is a significant indicator of project success. Articles by Mexican researchers in the natural sciences and engineering increased from 0.23 percent of the ISI data base in 1992 to 0.32 percent in 19956, supporting the conclusion that Mexican scientific production increased during the project. The average number of citations per paper for Mexican papers was 1.91 in , slightly improved from the 1980's, but was still far lower than the three to five citations per paper found in advanced developed nations.' 10. Public funding of science and technology (Gasto Federal en Ciencia y Tecnologia, GFCYT) was 0.45 percent of Gross Domestic Product (GDP) in 1981, but fell to a low of 0.25 percent of GDP by 1988 and The project was conceptualized when GFCYT was recuperating. The percentage of GDP devoted to Federal expenditure on science and technology increased to 0.41 by 1994, but with the budget pressures of the succeeding years again dropped to 0.35 percent in 1995 and 1996 returning to 0.41 percent in Thus, in spite of the setback of the crisis, the project has been accompanied by increasing public funding for science and technology. However, 1997 GFCYT had not reached the level of 1981, and the original arguably unrealistic targets set by the Government of Mexico were not met. Despite this shortfall, the project may have forestalled an even more dramatic reduction of public support for science and technology under the budgetary pressures of The NPSTM targeted an increase of the number of Mexican researchers in the National System of Researchers (Sistema Nacional de Investigadores - SNI) from 6,442 in 1991 to 19,300 in the year 2000 (SAR, page 36). The number of enrolled researchers was 5,969 in 1996 (IACyT, page 84) and 6,278 in mid 1998 (Project Implementation Plan, Knowledge and Innovation Project - KIP). However, the initial reduction in numbers of researchers appears to have been largely due to reduction of the numbers of SNI Candidates, confined primarily to the category of membership for engineers and technological researchers. Thus SNI shifted away from technological research toward increased support for basic researchers. Survey results indicate that well over 30,000 people were actively involved in research in Mexico in The 1,300 retention and repatriation grants made during the project, and the estimate of some 250 doctoral students graduating per year in Mexico (many with CONACYT financial assistance for their research) suggest that the project has made a substantial contribution to sustaining and increasing human resources for research in Mexico. 12. Institutional Development. The project has succeeded in institutionalizing a process of allocation of resources for research and research infrastructure in CONACYT through merit Rojo, PACIME Science Programme Report, April 1997 available in project file. Also see, Programa de Repatriaciones: : Parte L Resultados, Anailisis e Impacto, SEP-CONACYT, November, Indicadores de Actividades Cientificas y Tecnol6gicas, 1996: Mexico, Table HI..15, CONACYT, Uribe E., Misael and Hector Delgado A., Producci6n Cientif ca Mexicana por Areas del Conocimiento, Unidad de Apoyo para la Evaluacion de la Actividad Cientifica, CONACYT, undated. 6 Science and Engineering Indicators; 1998; Table 5-49, U.S. National Science Foundation, "U.S. Share of World Papers Slides as Europe, Asia Rise", Science Watch, Vol. 8, No. 3, May-June

13 based competition judged by independent scientific review boards. This is a significant accomplishment. Perfecting peer review is by its nature an ongoing process. The KIP supports a second generation of reforms to the system. CONACYT also has established a science and technology indicator program for the first time, and the data is widely available through hard copy and Internet publication. This accomplishmnent is likely to help further rationalize management of science and technology in Mexico. 13. One objective of the project was to decrease fragmentation of CONACYT funding, both concentrating resources in the best projects and allowing integrated support for research projects (one stop shopping). The project did result in an initial increase in the size of research grants provided by CONACYT, but the average research grant size peaked in 1993 at US$62,000, dropped to US$35,000 by 1995, and returned to US$51,000 in Early progress in defragmentation was interrupted at the time of the economic crisis and change in administration. The infrastructure grants, which were the largest in the program, were reduced in number in 1994, and eliminated thereafter. Similarly, the numbers of projects per year strengthening postgraduate education was reduced greatly in 1994 and thereafter. Several new modalities of chairs of excellence grants were introduced, and the numbers of these grants increased in the latter years of the project, as did the individual research grants. A new category of grants for sabbaticals and postdoctorates was introduced and many such grants were made in 1996 and Overall, the program went from 1,306 grants in 1992 with a total value of US$32.1 million to 1,796 grants in 1997 with a value of US$65.8 million. Thus overall, the average value per grant rose faster than inflation, but was still less than US$37,000 in The KIP seeks to continue the effort to provide "one-stop shopping" for Mexican researchers. 14. During , CONACYT reduced staff by 21% while adding new responsibilities, making the agency considerably more staff efficient, but less efficient than was planned in the SAR. With 1150 staff positions in 1990, CONACYT reports 360 staff in the Joint Directorate for Scientific Research (DAIC) and a total staff of 843 in There was a modest increase in CONACYT staff in mid-project with the addition of two responsibilities: (i) administration of SNI, transferred from SEP; and (ii) coordination of the SEP-CONACYT system of science and technology institutes. Total staff is reported to be 912 in Prior to the 1992 reorganization, CONACYT had 162 management positions. The SAR reported that higher and mid level positions were reduced 54 percent in 1992, with 72 Directorships or Sub-directorships. Retrospective data show that there were 76 such positions in The number of management positions was increased to 172 in 1993, with the transfer of new responsibilities to CONACYT, and remains at that level today. Metrology Component 15. Industrial Competitiveness and Foreign Investment. The CENAM component did not include direct indicators of impact on either industrial competitiveness or attraction of inward foreign investment to Mexico. However, project output indicators and firm interviews indicate a positive impact on both areas. The calibration services provided by CENAM are indicative. The SAR projected that CENAM would calibrate 820 instruments during project implementation versus the actual figure of over 5700 during Demand from industry for calibration service has far outstripped projections. In addition, CENAM's client list includes a large number of foreign-owned enterprises - an indication of perceived quality of CENAM services as well as the agency's role in helping to attract foreign investment. The high demand for CENAM's 4

14 relatively high-cost services, however, indicates the weakness of the system of secondary metrology facilities in Mexico (see para. 45 for further discussion). 16. Institutional Development. The component was highly successful in achieving goals of institutional development, especially in light of the budgetary reductions resulting from the financial crisis. Following initial delays in construction, CENAM management moved rapidly to establish a world-class facility with international recognition from peer organizations. CENAM was selected to preside over the Interamerican Metrology System during , a position which involves coordination of five basic measures on a regional basis. 17. In spite of the initial construction delays, CENAM achieved most Appraisal estimates of investment and institutional development during the originally scheduled implementation period. By 1995, end of the implementation period projected in the SAR, CENAM had established 83 laboratories versus 31 as planned. Expenditure on equipment during was only slightly higher than Appraisal estimates (US$30.5 million versus US$26.6 million at Appraisal). This increased number of laboratories was achieved primarily through a review of metrological priorities and cost effectiveness of equipment purchases. 18. After the financial crisis of 1995, budgetary allocations for component activities were dramatically reduced (para. 5). Annual budgetary allocations, including Government and Bank funding, fell from a high of US$32.1 million in 1994 to US$13.72 million in As a result, loan disbursements were delayed. In October 1997, the Government requested the reallocation of remaining funds of US$3.8 million for retroactive financing of activities under the CONACYT component. 19. Nevertheless, total financing for the component, including Government contributions, reached US$111.9 million by 1997, versus US$62.6 million at Appraisal. 8 US$11.8 million of the increased cost was due to construction cost overruns during 1993 and 1994 resulting from unforeseen redesign requirements for conversion of the facilities of a former horticultural research center. CENAM reports that the remaining US$37.5 million in increased cost resulted primarily from operational costs arising from the longer implementation period. Intellectual Property Component 20. Industrial Competitiveness and Foreign Investment. As in the case of the metrology component, the SAR did not include explicit impact indicators in this area. Nevertheless, institutional development indicators cited below, (e.g., reduced delays, improved enforcement) imply that the component has supported incremental progress toward the goal of industrial competitiveness. The overall system of intellectual property protection, however, continues to experience weaknesses in two areas: (i) enforcement and (ii) utilization by Mexican nationals. 9 Interviews with private firms indicated continuing problems in enforcement of intellectual property rights due to inconsistent treatment by the judiciary. Increased training of judicial staff scenam project cost includes US$1.0 million provided under the Mexico Industrial Technology Loan (2747-ME) for building remodeling and physical contingencies. 9 IMPI is responsible only for "industrial property", e.g., patents and trademarks. Other forms of IPR, including copyright and plant variety protection, are undertaken by other agencies. 5

15 and the creation of a specialized intellectual property court are measures which could improve enforcement activities. Use of the system by Mexican firms and individuals has remained low. Only 116 patents were awarded to Mexican entities in 1996 out of a total of 3,186 (3.6 percent). In 1992, by contrast, 9.1 percent of patents (out of 3,160) were awarded to Mexicans. 21. Factors which may explain this reduction include the tighter requirements for granting of IPR after legal reform in 1993, higher fees charged by IMPI, reciprocation agreements with the United States and European Union, and the financial crisis of The optimal level of IPR protection accruing to Mexican firms is a complex issue, depending on the strength of local technology institutions and openness to imported technology arnong other factors, and will not be fully explored in this paper. 22. The low level of IPR use is also a result of weaknesses in the system for generation and diffusion of knowledge. Although selected Mexican universities and research institutes have developed world-class scientific capabilities, incentive systems and regulations too often impede collaboration with industry and utilization of IPR. 23. With respect to foreign investmnent, the component supported strengthening of intellectual property rights critical to the implementation of the North American Free Trade Agreement (NAFTA) in The high proportion of intellectual property protection provided to foreigners in Mexico (96.4% of patents in 1996) gives a clear indication to foreign investors that Mexico is committed to providing intellectual property protection. 24. Institutional development. IMPI has substantially met project objectives in terns of institutional development criteria. Created by decree in December 1993, IMPI reduced delays in award of patents from 6 years to years by 1996, a performance level similar to worldwide best practice. Enforcement activities have increased in tandem, from 886 resolutions/opinions issued in 1994 to 1711 in Inspections related to intellectual property violations have also increased, from 947 in 1994 to 1504 in This progress is largely due to two factors: the improved quality of IMPI staff, through training and staffing renewal; and investment in information systems (e.g., digital scanners, networked databases) which radically simplified operations. Benefits of informatics use include eliminating the printing of over 23,000 document pages per month, with corresponding reductions in processing time and staffing and storage requirements. 25. The SAR indicators focused on project inputs rather than results. IMPI surpassed the sole operational indicator established at Appraisal. As estimated at Appraisal, IMPI's own income from services was expected to cover 2.5 times the agency's operational costs. Actual cost recovery averaged 3.2 times operating costs during implementation.' Overall cost of the component, at US$32.1 million, was less than the Appraisal estimate of US$40.6 million. Component investment in informatics was slightly greater than planned at Appraisal, due to rapid obsolescence of computer equipment. In addition, the agreement with the 0 IMPI pricing policy has remained constant in nominal terms since 1994, reducing the income/expense ratio from 4.3 to 2.7 between 1994 and 1996 (versus an appraisal projection of 2.5). This real reduction in pricing was justified due to (i) reduced demand which resulted from financial crisis; and (ii) continuing difficulties in enforcement which reduce effective value of IPRs. 6

16 World Intellectual Property Organization (WIPO) was renegotiated in 1996, resulting in a savings in technical assistance expenditure. Administrative expenses Were responsible for the majority of cost savings for this component (US$26.2 million actual versus US$34.6 million SAR). The Bank financed US$4.1 million in component cost, with the remaining US$1.9 million reallocated to support CONACYT activities under the project. 27. The financial crisis of reduced IMPI's budget significantly during ; however, IMPI was able to meet project institutional development objectives through a greater emphasis on information technology and reliance on bi-lateral relationships for information sharing and technical assistance. Standardization Component 28. The standardization component was intended to support strengthening of the Directorate General of Standards of the Ministry of Commerce and Industrial Promotion, with an appraised cost of US$17.3 million. The project included US$3.0 million in Bank financing under Loan 3475-ME for equipment purchases, promotion, technical assistance, and training, plus an additional US$0.5 million from a previous Bank loan to undertake two studies 11. US$3.6 million was to be recovered from the private sector, and the remaining US$10.2 million was to be provided by the Government. 29. The condition for disbursement under the component, completion of the two studies according to terms of reference agreed with the Bank, was met in a timely manner. However, Government budgetary allocations were never made available for the component activities and no funds were disbursed. US$2 million of the funds were cancelled on July 14, 1995 at the request of the Government. The remaining US$1 million were reallocated to support CONACYT activities in October Despite the lack of disbursement under the component, the DGN accomplished many of the objectives agreed during Appraisal. A variety of measures to rationalize the system of industrial norms and increase private sector participation have been undertaken. These measures include a strengthened role for private sector consultative committees, creation of an information center, and launch of an internet site with full-text downloading of official standards issued since C. Implementation Record and Major Factors Affecting the Project 31. Considering the severe budgetary impact of the financial crisis of , the project performed strongly during implementation. Following initial delays often associated with new executing agencies, institutional development goals were generally met or exceeded. ",This success was due to the outstanding effort of teams encharged with reform/creation of the executing agencies and strong support provided by NAFIN to reverse systematic delays in procurement. 1 The studies, "Policy of Privatization of Activities in Standardization and in Verification and Certification of Quality" and "Analysis and Alternatives for the Development of the Laboratory Infrastructure in the Country" were financed under Loan 3074-ME in

17 32. Procurement/disbursement. The complexity of procurement and disbursement arrangements was the single largest weakness in project design, resulting in excessive delays and burdensome procedures for beneficiaries and staff of CONACYT, NAFIN, and the Bank. Procurement arrangements entailed multiple review stages and an enormous paper flow between participating universities, CONACYT, NAFIN and the Bank. The extreme degree of centralization, predictably, produced long delays and increased the burden on beneficiaries in the research community. The project did not take into account widely used best practices in procurement of scientific equipment from OECD countries, which entail making the recipient institution responsible and accountable for procurement activities. In addition, changes during 1996 in Government procurement procedures applicable under the General Procurement Law resulted in further delays and additional burden for CONACYT, NAFIN, and participating universities. 33. In June 30, 1995, just prior to the restructuring of the project (para. 5) total disbursements had reached only US$37.5 million versus Appraisal estimates of US$120.0 million. Commitments were to have been complete by December 30 of the same year, at which time they had only reached US$90 million.' 2 The discrepancy between the Appraisal estimates and actual numbers must be attributed in some degree to overly optimistic estimates in the Staff Appraisal Report. For example, the SAR did not take multi-year research projects into consideration in compiling disbursement estimates. A series of other issues also impacted disbursement. First, available retroactive financing of up to US$18.9 million in projects approved by CONACYT in 1992 prior to loan effectiveness was not requested by the Government. In addition, the project was designed so that loan disbursement was made against procurement of specific goods instead of against grants for research projects. This design flaw resulted in excessive centralization and ex-ante review by CONACYT, NAFIN and the Bank. Finally, further delays in disbursement were experienced due to complexity of financial management system and initial start-up problems within CONACYT and NAFIN. Factors not Subject to the Borrower's Control 34. The economic contraction resulting from the financial crisis of caused a reduction of budgetary support for all project activities. In response to the crisis, the Government requested a restructuring of the project as described in para The CONACYT component was affected by the growing but still low demand of Mexican industry and government for research services, and for hiring of staff with researchbased degrees from Mexican institutions. More positively, the strong economic performance of Mexico just before and in the early years of the project and recently has contributed to the growth of support for research from both the public and private sectors. 36. Regarding the CENAM component, unforeseen design problems and construction delays resulted in slippage of startup by approximately one year. Only one laboratory was launched during 1993 versus a projected Appraisal estimate of 13. This delay was offset in 1994, as 51 laboratories were under operation versus SAR estimate of The reallocation of US$80 million for rapid disbursement in November 1995 enabled the original closing date of June 30, 1998 to be met. 8

18 37. The financial crisis negatively impacted industry demand for intellectual property protection during Growth in demand for IMPI services returned in 1996 and continues to expand rapidly. Factors Subject to the Borrower's Control 38. As in other projects in Mexico, annual delays in transfer of budget allocation to the project affected the project adversely. Regarding the science research component, regulations and procedures of the Mexican customs service were poorly suited for the importation of scientific equipment, resulting in delays and damages. To this end, special rules were promulgated in 1997 to facilitate importation of sensitive equipment. 39. Customs procedures involved excessive delays. Researchers reported that physical inspection practices too often resulted in damaged equipment. Financing of customs duties was also problematic. Initially, customs duties were paid from a special fund endowed by the Government. However, that fund was not replenished as it was used, and research institutes were required to pay their own duties. In 1997, research equipment was granted an exemption from customs duties. Despite this recent improvement, researchers and their institutions report that the customs system remains responsible for continuing delays and onerous procedures. Factors Subject to the Implementing Agency's Control. 40. Continuity in staffing at the managerial and operational level has played a critical role in assuring the successful reform/establishment of the executing agencies. Two of the agencies (CONACYT and CENAM) received a new Director General following the change of administration in 1994 but key operational staff remained in place. IMPI has maintained the same leadership since its creation in January Changes in senior staff responsible for the project were kept to a minimum by the Government. This stability has played a key role in ensuring rapid institutional development of the entities. D. Project Sustainability 41. Project sustainability is likely to be strong, given the strong institutional development and likely future growth in demand for science and technology services in Mexico. The development objectives (of growth with stability, social development, and modernization of the state) stated in Mexico's CAS imply increasing demand for creation and application of knowledge and technology, highly skilled scientific and technological human resources, technological infrastructure (including metrology, standards, quality control, intellectual property rights protection), and modernization of state institutions supporting science and technology. Conversely, reduced prospects for future growth - or renewed macroeconomic and budgetary instability - could undermine institutional and other gains. The executing agencies have progressed rapidly under the project, but remain highly vulnerable to changes in their operating environment (particularly to funding levels and staffing changes). 42. Science Research component. CONACYT's competitive review process appears sustainable, enjoying a continuing high level of support from the academic community. A return to the previous allocation system is highly unlikely. The follow-on Knowledge and Innovation Project supports a second-generation of reforms to improve effectiveness and increase linkage of research 9

19 with potential users groups and applications. Bank financing is programmed to decline as a proportion of total CONACYT funding to ease the transition to full counterpart financing. 43. Metrology component. CENAM appears well-positioned to continue to serve the needs of Mexican industry and society, with a well-trained technical staff and administration, state-of-the-art equipment and strong demand for service from industry. Several areas of CENAM's strategy, however, will be critical for the future health of the organization. 44. Retention of highly trained technical staff and administrators isa top priority for CENAM. However, there is evidence that salary levels for technical staff are non-competitive with comparable positions in industry. Analysis of CENAM staff hired away by industry during indicates an average 60% increase in salary. Given the high expense, large time requirements, and bi-lateral cooperation required to train technical staff, remuneration policy should encourage long-term employment and career building within CENAM. 45. In addition, CENAM's strategy for promoting the development of the network of private secondary metrology facilities will be critical for achieving the long-term project objective of industrial competitiveness. CENAM's Mesura program was established in 1995 to encourage formation of a network of metrology service suppliers through technical assistance to laboratories and end users. The continued evolution of this program will be important to assure long-term project objectives of supporting industrial competitiveness are met. 46. Intellectual Property Rights. Prospects for sustainability at IMPI appear strong as a result of capable management and financial self-sufficiency. In order to meet the growing needs of industry, IMPI has developed plans for expansion of services and capabilities. Beyond IMPI, however, the broader system of intellectual rights protection requires additional development to ensure the benefits of IPR accrue to Mexican industry and academia. Interviews with private firms indicate that a greater specialization and expertise in IPR is required in the judiciary. In addition, efforts of IMPI and CONACYT to diffuse information and strengthen IPR capacity within universities and research institutes is an important element of an overall strategy. E. Bank Performance 47. Overall, Bank performance is considered satisfactory. Implementation costs were held low, and the considerable capacity of the counterpart institutions was allowed to grow and be applied to the management of the project. 48. Preparation and Appraisal: The Bank had relatively little experience in support of governmental institutions providing R&D funding and technological services outside of sector specific mission contexts (such as agricultural research and development, or health research) and therefore relied heavily on external experts for project design. As discussed in para. 3, several targets related to the objectives of the project were perhaps overly optimistic. The Bank changed the project team during negotiations, and some Mexican counterparts report difficulties in continuity as a result. 49. Implementation. The delays in procurement, described in para. 32, were partially the result of normal start-up difficulties within new implementing agencies. However, the design of procurement arrangements agreed with the Bank were clearly sub-optimal. Given the Bank's relative lack of experience with funding of scientific research, lessons of worldwide best practice 10