PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE MINISTERIO DE ECONOMIA

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB4007 Project Name Unleashing Productive Innovation Region LATIN AMERICA AND CARIBBEAN Sector General industry and trade sector (60%); Tertiary education (25%); Central government administration (15%) Project ID P Borrower(s) MINISTERIO DE ECONOMIA Implementing Agency Agency for the Promotion of Science and Technology (ANPCyT), Avenida C#rdoba 831, 1er Piso (C1054AAH) Buenos Aires Argentina Tel: (54-11) /5539 Environment Category [ ] A [X] B [] C [ ] FI [ ] Date PID Prepared July 3, 2008 Date of Appraisal July 3, 2008 Authorization Date of Board Approval September 25, 2008 I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues Argentina has demonstrated enviably high growth rates of 8-9 percent in the last four years. This growth has been achieved in a favorable global economic environment characterized by high commodity prices. Drastic changes in relative prices following the currency devaluation have improved the competitiveness of Argentine exports overall. As a consequence, higher exports have been one important source of growth. However, there are concerns about the sustainability of this high growth-rate. The current export structure of Argentina presents vulnerabilities in the medium and long term. Argentina s exports are fairly concentrated in low-value products. The top ten Argentine exports account for 51 percent of total exports. 1 In order to foster sustainable economic growth, new high-value export products need to be developed and the value added of existing products must be increased. 2 Strengthening the capacity of the Argentine economy to innovate holds considerable promise for increasing the sophistication and value added of Argentina s export structure. Despite inadequate value added to the overall export portfolio, there are pockets of high technological dynamism. Dynamic, export-oriented small and medium-enterprises (SMEs) are emerging, such as the highly successful wine cluster in Mendoza. Argentina was also the first country in Latin America to implement a nuclear reactor for power production. A medium-sized Argentine firm, together with other actors, has been constructing and exporting reactors to Peru, 1 See Guerson, Parks and Torrado (2007). 2 Hausmann, Hwang and Rodrik (2006) argue that the mix of goods a country produces may have important implications for long-term economic growth. 1

2 Algeria and Australia since the 1980s. 3 The emerging cluster of export-driven software producers demonstrates another pocket of dynamism having exported goods and services valued at US$ 400 million in Furthermore, the scientific foundations in biology and biomedicine have supported the development of approximately 86 biotechnology enterprises with a total export value of US$ 75 million and have made great contributions to the competitiveness of agriculture in Argentina. Yet, the pockets of dynamism are still few. Overall innovation by firms is low. In recent years, Argentina s investment has shown an increasing trend, recovering from the drop experienced during the crisis and surpassing levels prevalent in the 1990s. Notwithstanding a rising trend in R&D expenditures by private firms since the crisis, expenditures by firms in R&D (0.14 percent of GDP) fall short in comparison with other Latin American countries such as Brazil (0.36 percent) or Chile (0.3 percent), and rapidly growing low income countries such as China and India (Table 1 and Figure 1). Even taking into account that Argentina s production structure is mainly focused on sectors that are worldwide characterized by a lower level of R&D activities, investment in R&D remains very low. 4 Both the public and private sector will have to contribute to further R&D investments. As other country experiences show, public sector investments in R&D can help catalyze further private R&D investment, especially in the early development stages of an innovation system. Patenting indicators are also low. Country Table 1: Indicators of Productive Innovation Inputs and Outputs in Argentina and International Comparator Countries R&D/GDP (percent) R&D per capita (US$/ppp) Resident patent applications per million inhabitants Private R&D as percent of total Hightechnology exports as percent of manufactured exports Royalty and license fees, payments /GDP (percent) Royalty and license fees, receipts/gdp (percent) Argentina Australia Brazil 0.91 Canada Chile China India Mexico Note: Data from 2007 or latest available Source: UNESCO (2007) and World Bank (2007) Other proxies for innovation also point to inadequate innovation levels. As Figure 2 shows, private innovation activities are 1.12 percent of firms sales, less than half of levels prevalent in Brazil. Private innovation activities are heavily concentrated on the purchase of equipment and machinery, which constituted 67 percent of all private innovation activities in the pre-crisis 3 Participation in the construction of reactors had a major impact on the development of technological capacity of metal working companies, which now display internationally competitive skills. One outstanding example is the design and construction capacity of turbines and electric motors, which has achieved a high degree of competitiveness in global markets. 4 See, among others, Anlló, Lugones and Peirano (2007). 2

3 period of (SECYT, 2006). The economic crisis of 2002 with its currency revaluation made those purchases more expensive, leading to a decrease in both the percentage of equipment purchases and overall private investment in innovation. Although the trend has been recovering since 2003, private investment in innovation activities remains low. In sum, there are niches of technological excellence that show promise and need to be expanded, but Argentina s overall performance on innovation is mixed. Historically, macroeconomic volatility constrained investments in innovation. Firms consider investments in innovation as risky and long term, and thus, they require a predictable macroeconomic environment. Better macroeconomic conditions in recent years have improved conditions for firms to engage in innovation activities. Other factors that continue to hold back innovation are: (i) human capital is not adequate; (ii) financing for innovation is not easily available in the market, especially for start ups, and a culture of innovation is not widespread; (iii) linkages among relevant actors are insufficient; and (iv) incentives for public research and technology centers are not strong enough. These are further explained below. Figure 1: Private and Public Expenditure in R&D as Percentage of GDP Public R&D as % of GDP Australia Brazil OECD Average Argentina Chile 0.3 Mexico LAC Average Private R&D as % of GDP Note: 2004 or latest available. Average of LAC calculated from available data Source: UNESCO Institute for Statistics.. Finland Figure 2: Private Innovation Activity as Percentage of Total Sales Innovation activity as % of total sale Argentinia Brazil Urugay France Italy Portugal Spain Note: average. Innovation activity includes external and internal R&D, engineering and development technology-adoption consulting and training. Source: Community Innovation Survey , PINTEC , II Encuesta de Actividades de Innovación en la Industria ( ) DINATEC-INE as well as Anlló, Lugones and Peirano (2007) The stock of specialized, advanced human capital to support innovation is not adequate. Argentina had been a leader on advanced human capital indicators in the region, but it has lost some of its competitive edge. The stock of researchers is not sufficient. Although the number of researchers per capita surpasses the levels attained in most other countries in the region, it has not kept up with Chile, which has increased its investments in human capital. Table 1 also points to further human capital indicators in which Argentina has to catch up compared to other medium-sized economies that have successfully added value to their natural resource-based exports such as Australia or Canada. The average age of researchers is rising which indicates future shortages. Furthermore, only a low number of researchers hold an advanced university degree. A startling 67 percent of Argentine researchers hold a bachelor s degree as their highest qualification, and only 25 percent of researchers have a doctoral degree. 3

4 Market financing for innovation is not easily available. Innovation entails a fundamental information asymmetry (Trajtenberg, 2005). The firm seeking to innovate has a more intimate knowledge of the innovation and capacity to develop it compared to the external financing agent, which is likely to be skeptical of its returns. This problem can be partly overcome through collateral when innovation is undertaken through capital goods but becomes more challenging for other types of innovation. The problem is particularly acute for start ups. The World Economic Forum indicator on venture capital indicates that the availability of venture capital (VC) is close to the Latin American average but lags behind knowledge-based economies in OECD countries (see Table 2). The VC industry in Argentina is estimated at US$ 25 million compared to US$ 2 billion in Spain. In addition, there is not yet a market for innovative technological ideas. The existing incentive system for deal flow is based on a non-profit logic. There are few business incubators. Moreover, those that exist are mainly publicly managed and do not proactively strengthen and foster the entrepreneur, but rather limit their activities to administration and financial management aspects (Anlló, Lugones and Peirano, 2007). The lack of agents than can help transform technology ideas into viable commercial projects impedes the development of technology start-ups. While there are pockets of dynamism and technological excellence, there is not a widespread culture of innovation among private entrepreneurs. This combined with inadequate financing and the perceived high risk by many enterprises hinders private investment in innovation. Country Table 2: Constrains for Productive Innovation: Selected Indicators for Argentina and Comparator Countries Venture capital availability 1 Firm-level technology absorption 2 Capacity for innovation 3 Quality of research institutions 4 Universityindustry research collaboration 5 FTE Researchers in R&D per million inhabitants Argentina Australia Brazil Canada Chile China India Mexico Entrepreneurs with innovative, but risky projects can generally find venture capital (1=not true, 7=true) 2 Companies are 1= not able to absorb technology, 7=aggressive in absorbing technology 3 Companies obtain technology 1= exclusively from licensing or imitating foreign companies, 7 = by conducting formal research and pioneering own new products and processes 4 Scientific research institutions are 1=nonexistent, 7=best in their fields internationally 5 In R&D activities, business collaboration with local universities is 1= minimal or nonexistent, 7=intensive and ongoing Source: World Economic Form 2008, UNESCO (2008) Linkages within the national innovation system are weak. Excluding a few examples, e.g., collaborations between INTA and agricultural producers, cooperation among companies and between companies and other public and private knowledge centers such as universities and 4

5 technology institutes remains scarce, leading to a significant under-investment in club goods (Rosenwurzel and Bechinsky, 2007). Funding to enhance public-private partnerships represents only 10 percent of the overall public funding for R&D. The World Economic Forum indicators on public-private collaborations also suggest that it is less prevalent than in Brazil and Chile. Guarenteed financing for technology institutes, which constitutes more than 50 percent of STI funding, has often hindered incentives to collaborate with the productive sector. By contrast, most OECD countries provide some limited financing for technology institutes encouraging them to access additional financing through the provision of technology services to the productive sector and the participation in competitive research funding projects. Box 1: General Purpose Technologies: Biotechnology, Nanotechnology and ICT in Argentina General purpose technologies (GPT) are technologies (i) that perform some generic function that is vital to the functioning of a large segment of existing or potential products, and (ii) whose continuous improvements spread through the economy bringing about generalized productivity gains. Brelahan and Trajtenberg (1995) show that GPTs imply external increasing returns to scale. GPTs have a positive long-term effect on growth. Historical examples of GPTs are electricity as well as the steam engine. Biotechnology is commonly referred to as the technological application of biological systems and living organisms or its derivatives for the creation or modification of special purpose products. It has numerous productive applications especially in agricultural goods and food production as well as in health services and products. Argentina already has a small and dynamic group of about 86 biotechnology companies, which are active in very specialized niches, primarily agricultural and fishing products. Total sales are high, amounting to US$ 300 million per year, and the direct export value of the sector is US$ 75 million compared to imports of US$ 20 million. The indirect export value of biotechnology-related products is far higher, especially when genetically modified agricultural products such as soybeans are accounted for. Biotechnology developments led to substantial productivity gains in Argentine agriculture during the last decade. The challenge is to expand the existing, highly specialized niches of excellence. The software and computer science service sector (SCSS) is the most dynamic sector inside the Argentine ICT-industry. Software and computer science services are also highly export-oriented. Sales and exports are rapidly increasing having reached US$ 3.1 billion and US$ 400 million in 2007, respectively, although they still comprise a very small share of total exports (0.5 percent). ICT is probably the sector where employment is rising the fastest. Despite rapid growth, value-added in the software industry is still moderate. The industry s challenge is to move away from the model of software-factories towards the development of products and new enterprises with higher value added. Human capital in the SCSS industry is scarce relative to market needs. A very large percentage of students in computer sciences leave their university careers early to accept jobs in the industry. While this helps meet a skills gap in the short run, it prevents the industry from moving to higher value-added niches. The Government together with the industry and learning institutions has developed a comprehensive educational plan to try to address these shortages. Nanotechnology is a highly multidisciplinary field based on the manipulation of material at the molecular level. Nanotechnology has the potential to revolutionize a wide range of commercial activities and solve existing problems across a wide range of applications. The MINCyT has realized the enormous potential of nanotechnology and made a strategic choice to foster the sector s capacity. Thus far, capacities in nanotechnology and nanoscience are very limited in Argentina. There are about 200 researchers engaged in these fields, although the numbers are rising. The private sector has not yet become aware of the potential benefits of it. There are about 50 companies that are active in nanotechnology in Argentina. Most of these companies are involved in the development of materials. The largest companies operate in the high-technology engineering area and in chemical products. Given the state of development of the Argentine nanotechnology sector and the need to develop a critical mass of researchers that can be internationally competitive, the Government in collaboration with local and international experts and industry needs to identify a few key strategic areas inside nanotechnology that could have a high potential to the Argentine economy. 5

6 Argentina s STI system faces many challenges, but rising public expenditures in STI over the last five years and the creation of the Ministry of Science, Technology and Productive Innovation (MINCyT) are signs of the strong public commitment to it. The creation of the MINCyT will also facilitate coordination of STI policies among public institutions, of critical importance given the cross-sectoral nature of these policies. The new Ministry is committed to enhancing innovation, expanding the human capital base for it, and increasing linkages between Argentina s research base and the productive sector. Like in most OECD countries, the MINCYT also intends to rebalance public funding from a more neutral to a more selective policy approach, where funding allocations are more closely connected to Argentina s productive sector and its social priorities and where a critical mass of technological capacity that is internationally competitive can be developed. Sectoral funds are being created inter alia to support the health, energy, and agricultural sectors and critical general purpose technologies (biotechnology, ICT and nanotechnology). Box 1 summarizes the status of development and the potential of the biotechnology, nanotechnology and ICT areas in Argentina. The Government has requested the assistance of multilateral agencies to help implement this important and complex agenda. The Inter-American Development Bank (IDB) is supporting Argentina s STI through a Technological Modernization Project, the third in a series, which provides funding to (i) enhance the research capacity in S&T and advanced human capital, (ii) foster technology transfer and other technology modernization activities by individual firms or clusters, and groups of firms and knowledge and technology transfer centers. In 2007, the Government also requested support from the World Bank to address specific areas of the STI policy agenda, especially the formation of new technology-based ventures and the development of funds and expansion of human capital related to general purpose technologies that are a priority for Argentina. B. Rationale for Bank involvement The Government has requested a new investment project to foster productive innovation. The operation is a priority to the newly created MINCyT and key public institutions, including the Chief of Cabinet Office and the Ministry of Economy and Production. The demand is based on broad support from crucial players within the innovation system. The proposed project is fully aligned with the goals of the Bank s Country Assistance Strategy (CAS). It would specifically support the goal of promoting sustainable private sector led-growth and contributing to the generation of more productive employment. It would use the World Bank s innovation knowledge to fill specific gaps in the innovation system by supporting the creation of highly specialized, scarce human capital; the development of new knowledge-based companies; and the introduction of a more selective, sectoral focus to innovation according to priorities defined in the National Strategic Plan for STI (Plan Estratégico Nacional de Ciencia, Tecnología e Innovación). The Bank has acquired expertise in these areas though projects in Korea, Turkey, Russia, and more recently in Mexico. The project would be mainly implemented by the Agency for the Promotion of Science and Technology (ANPCyT), which was created in 1996 and now reports to the MINCYT. The establishment of the ANPCyT set an important benchmark for STI policies in Argentina by introducing competitive funding policies. While the share of STI funding allocated through ANPCyT was less than 15 percent in 2007, its 6

7 share has steadily increased since its establishment and further increases are expected in the medium term. The design of the proposed World Bank project has been closely coordinated with the IDB to ensure complementarities, and the team would continue to coordinate activities very closely during its implementation. It would complement the on-going Program for Technological Modernization (PMT III), supported with IDB financing (US$ 280 million) and executed by the ANPCyT. The PMT III was launched in early 2007 and its implementation to date has been satisfactory. Half of resources had been disbursed by end The ANPCyT also executed the two preceding IDB-funded operations ( ), which had a satisfactory implementation. The Government of Argentina has requested IDB financing for a fourth operation that would mainly support a few sectoral funds, complementing the ones that the Bank would be financing. It is expected that the operation would be presented to the IDB Board in C. Higher level objectives to which the project contributes The high-level objective of the project would be to support the competitiveness of the Argentine economy by increasing the value added of goods and services. More specifically, the project seeks to support the creation of new knowledge-based companies, develop the capacity for productive innovation in priority areas, expand human capital for productive innovation, upgrade research-infrastructure and strengthen the policy framework for innovation. II. PROJECT DESCRIPTION A. Lending instrument The Government of Argentina has requested a Specific Investment Loan (SIL) for US$ 150 million to promote productive innovation by creating highly skilled human capital; facilitating the creation of new knowledge-based companies; fostering private public collaborations in the priority areas of ICT, nanotechnology and biotechnology; upgrading research-infrastructure; and strengthening the system s overall policy framework. A SIL would provide a framework for the Bank s team to share its experience and knowledge with similar efforts undertaken in other countries (e.g., Korea, Turkey and India) as the ANPCyT moves forward with the implementation of project components, many of which are new to the Argentine context. The project would be conducted over a five-year period ( ) to allow adequate time to implement the new policy instruments and the consolidation of the new Ministry. B. Project development objective and key indicators The project development objective (PDO) is to expand Argentina s capacity to generate productive innovation in knowledge-based areas. The objective would be achieved by (i) facilitating the creation of new knowledge- based companies; (ii) fostering specialized human capital; (iii) introducing selective funding for priority areas of the argentine economy; (iv) upgrading research-infrastructure; and (v) strengthening the policy framework for science, technology, and productive innovation. Progress towards meeting these objectives would measured by a number of progress and output indicators. The Ministry of Science, Technology and Productive Innovation would be strengthened in its monitoring capacity and to carry out evaluations of key components. Key project indicators are expected to include (i) increase in number of technology brokers and 7

8 technology management students; (ii) number of technology companies in which the early stage fund has invested; (iii) private sector funding leveraged through public participation; (iv) number of upgraded research laboratories and installations; and (v) number of universities that successfully updated or established norms on international property rights according to OECD trends. The selected indicators are closely linked to the project objectives and the programs that will be supported by it. They reflect intermediate outcomes towards higher-level, long-term goals. Changing an innovation system is a long-term process (10 to 15 years) as international experiences illustrate. In addition, the project would support selected areas within Argentina s overall innovation system complementing other policy interventions supported by IDB-financed projects. C. Project components The project would have five components: (i) developing human capital for productive innovation; (ii) supporting knowledge-based start-ups; (iii) fostering sector specific capacity for innovation; (iv) upgrading research infrastructure; and (v) strengthening the policy and institutional framework for innovation. The ANPCyT would be responsible for overall project coordination and the implementation of all project activities, except for subcomponent 5.1 to strengthen STI policies, which would be implemented by the MINPCyT. The design of the components has been informed by other operations and extensive consultations held with a large number of NIS stakeholders in Argentina, including universities, research centers, business associations, biotechnology and ITC companies, and angel investors. Table 3: Total Project Costs by Component Component Counterpart Loan US$ Total US$ financing*us $million million million 1. Developing human capital for productive innovation Technology brokers and managers Human capital for the ICT-Industry Support to new knowledge based companies Venture Capital fund Deal Flow facility Sectoral funds Upgrading research infrastructure Strengthening the policy and institutional framework Policy-making capacity of the MINCyT Institutional capacity of the ANPCyT Total project costs Front-end fee** Total financing required *Includes counterpart financing by government, private firms and research institutions 8

9 Component 1: Developing human capital for productive innovation (US$ 22 million) The component would help to fill critical gaps in advanced human capital for productive innovation. It would achieve the above through two subcomponents: (i) developing and training technology brokers" and technology managers and (ii) strengthening the ICT-specific advanced human capital. Both subcomponents would address the demand as well as the supply side of human capital formation. Subcomponent 1.1 would develop highly skilled human capital necessary for the development of industry-academia linkages, commercialization of research ideas, and management and commercialization of technology projects within firms. Technology brokers and managers are professionals that are managerially trained and have a solid understanding of technology. The former focus more on the creation of new deals, while the latter are in charge of innovation projects within a company. The project would support the establishment or strengthening of approximately six technology broker/manager post-graduate programs through Argentina that would be selected on a competitive basis. The subcomponent would finance curricula-adaptation and development, faculty training, fellowships for visiting scholars from abroad, and faculty exchanges with leading universities abroad. It would also finance scholarships for some of the students participating in these programs and internships for the best performing students at selected universities to conduct practical training at institutions and firms abroad. Scholarships would be granted on a merit and needs basis. Subcomponent 1.2 is designed to reduce the shortage and increase the quality of ICT-specific advanced human capital in Argentina as part of a broader national plan for ICT-related human capital. 5 It would offer scholarships (about 1300 on a yearly basis) to undergraduate students in ICT careers on a merit and needs basis. In addition, activities would seek to strengthen the supply of quality training in ICT-related career programs at universities and could include upgrading of curricula, visiting scholars, joint degree-programs with international universities and others. The ANPCyT would execute the component in close coordination with the Secretary for University Policies of the Ministry of Education, especially the call for proposals and selection process. The ANPCyT, however, would be fully responsible for the disbursements and overall financial management of the component. Component 2: Support for new knowledge-based companies (US$ 30 million) The objective of this component would be to promote the development of new knowledge-based companies through two complementary set of activities. Subcomponent 2.1 would pilot an early stage VC-fund that would be privately managed and comprise a limited public contribution (US$ 10 million) up to one third of the total fund equity. This pilot fund would provide a demonstration effect of the commercial viability of early stage funds for technology start-ups. This demonstration effect is expected to attract other VC companies creating a critical mass of early stage investments and market agents. The project design takes into account lessons learned from many OECD countries that have implemented similar initiatives to kick-start an early VC industry. 5 Other parts of the plan include the expansion of vocational and non-university tertiary programs, the implementation of which is very advanced. 9

10 The selection process for the management team of the new early stage fund would take place through a competitive tender, and the evaluation committee would include international experts. The competitive tender would include as one of its key criteria the amount of equity the private management agent proposes to bring to match public funds. Using this and other criteria covering, for example, the experience and skills of the proposed team, the bids would be ranked. The first ranked bid would then be invited to negotiate on the detailed conditions of the management contract. The fund would have a steering board where private investors and representatives of the ANPCyT would participate according to the share of equity investments. An investment committee, managed by the private sector provider, would handle day-to-day operations. The investment committee would report to the steering board for information. In addition, the steering board would receive reports from an independent audit that would have the responsibility to ensure that the service agreement is being followed and transparency in information and decision criteria is being achieved within the limits of commercially sensitive disclosure. The VC fund would be liquidated after having created commercial returns, which according to international experience is expected to happen in 8-10 years, meaning after the project is closed. After this period, equity contributions and its commercial gains would be returned to investors. The ANPCyT has requested a formal legal opinion on whether it will be feasible to launch the VC fund under the existing legal framework applying to the ANPCyT or whether a special law will be required. Subcomponent 2.2 would seek to start a market for specialized business development services that are able to transform technology ideas into commercial projects acceptable for early stage venture capital or other investors. The key lesson from other countries that have attempted to introduce early stage venture capital pinpoints to the need of parallel activities that will facilitate the availability of deal flow i.e., investment ready projects. Recognizing this, the subcomponent would support the formation of privately-managed deal-flow consortia that would assist an entrepreneur in all stages of the incubation cycle. More specifically, the functions of the deal flow promoters would comprise (i) assessing the technological viability of the project; (ii) estimating the commercial potential of the innovation; and (iii) generating, presenting and marketing new information about the project. By contrast to existing incubation structures, the deal flow agents would be mainly remunerated on a success-fee basis, providing the incentives for agents to actively seek out and nurture technological ideas with commercial potential and identify external finance. The remuneration structure would allow them to be self-sustainable in the future. The providers of the deal flow services would be selected through a competitive bidding process. The evaluation committee would include international experts. A contract of about four years would be signed between the ANPCyT and the deal flow service provider defining operational guidelines, reporting, and auditing responsibilities. The subcomponent is designed as a pilot that could be scaled up in subsequent stages. Small matching grants to entrepreneurs as transitional arrangement: For up to two years, while the fee-for-service consortia become fully operational, the ANPCyT would offer small matching grants (up to US$ 25,000 and 75 percent of entrepreneurs costs) for entrepreneurs to prepare business plans. The ANPCyT would select the projects. 10

11 Component 3: Fostering sector specific capacity for productive innovation (US$ 60 million) The objective of this component is to develop critical capacities in priority areas, in particular biotechnology, nanotechnology and ITC. International experiences indicate that market failures warranting state intervention need sufficient scale of investments to secure impact. This creates a need to allocate part of STI funding strategically and with a clear focus towards priority areas with a high potential impact on the productive sector. Biotechnology, nanotechnology and ITC have been selected as priority areas because they are general purpose technologies with a high potential impact. It is essential to develop these three fields from their present level in support of the productive sector as they underpin productivity and competitiveness across the economy. The direction of the sectoral funds has to be distinct from basic science funding, which also needs to be continued in the three areas. Thus, the sectoral funds would support productive research activities aimed at (i) generating new knowledge or adapting and transferring knowledge with high potential impact on the productive sector; and (ii) fostering public-private and private-private collaborative research. The sectoral funds need to build a strong role for the private business community in both specifying the research agenda and funding it. Private sector commitment would ensure that the research agenda is directed to solving real problems or opening up new commercial opportunities for an internationally competitive sector to emerge. The selected priority technology areas, however, are all at very different stages of development and have different challenges in realizing their potential. Consequently, project support needs to be adapted to the level of development of each technology field in Argentina and target its distinct development challenges. The component s support for biotechnology, nanotechnology and ICT would be implemented through the Biotechnology Fund, a new Nanotechnology Fund under operated by the Argentine Foundation of Nanotechnology (FAN), and FONSOFT, respectively. The last one is already operational. It is expected that the first two will become operational within the next few months on the basis of the 2007 Biotechnology Law and the Nanotechnology Law. In the meantime, the biotechnology and nanotechnology funds could also be operated under the Fund for Science and Technology (FONCyT), administered by the ANPCyT. Only a share of the total component amount would be pre-designated to each fund. The three funds would have to compete with each other for the majority of funding allocated to Component 3. Projects to be financed would be selected on the basis of competitive calls for proposals issued by each fund. Each fund would operate under the purview of the ANPCyT. Items to be financed on a grant basis would include training, domestic and foreign researcher salaries, fellowships and scholarships for young researchers, travel, specialized research equipment, service fees for use of equipment, materials used for research, and funding for commercialization and patenting. Beneficiaries would provide counterpart funding to be determined in the operational manual that will be ready by appraisal. Component 4: Upgrading of research infrastructure The objective of the component would be to enhance the capacity of the technology centers or technology training institutes by providing adequate research infrastructure. Research infrastructure has received less attention than other STI funding areas and has become increasingly inadequate over the years. The component would finance refurbishments and building reconstructions and specialized research equipment to technology centers or institutes that provide technology services or training for the productive sector. The ANPCyT would make 11

12 an open and competitive call for proposals where the centers and institutes would present proposals and would be selected on the basis of pre-defined criteria included in the operational manual. Component 5: Strengthening the policy and institutional framework for innovation (US$ 13 million) The component would comprise two subcomponents: subcomponent 5.1 to strengthen the policymaking capacity of the MINCyT, and subcomponent 5.2 to strengthen the capacity of the ANPCyT in selected areas and to support dissemination of project activities. Subcomponent 5.1. Strengthening the policy-making capacity of MINCyT (US$ 8 million) The objective of the component is to increase the policy-making, monitoring and evaluation capacity of the newly established MINCyT. The creation of the Ministry reflects the high policy priority granted to STI. It is crucial to support the Ministry s capacity so that it can respond to the STI policy challenges and public objectives set in this area. To adequately inform policy-making, the component would (i) expand the number and reliability of STI indicators at both the national and regional level; (ii) develop a database on Argentine researchers and large research projects allowing the monitoring of existing human capital and research capacity for innovation; and (iii) finance the supporting management information systems to use data more effectively. Item (ii) would operate on an open access system permitting researchers to foster and expand their research networks. The component would also fund analytical work on STI trends; emerging STI needs and gaps on specific sectors; and analytical work on the regional and national innovation systems to develop strategies to enhance them; and policy impact evaluations. Most of this analytical work would be embedded in a foresight process and include the participation of relevant actors from the regional and national innovation systems. Analytical findings would be widely disseminated. In addition, the component will support the formation of an International Advisory Committee with two or three high-level international STI experts that would guide the MINCyT on strategic issues concerning the project and other issues that the ministry might consider relevant. In parallel, with project support, the MINCyT, would assist technology transfer offices at universities to identify and implement international best practice models for the management and commercialization of intellectual property. The subcomponent would finance surveys, consultant services, management information systems, and training. Subcomponent5.2. Strengthening the ANPCyT capacity The subcomponent would strengthen the ANPCyT capacity in selected areas and support dissemination of project activities. With regard to the ANPCyT s capacities, it would finance management information systems and provide technical assistance to the Environmental and Social Management Unit (UGSA) to further upgrade its evaluation process. The subcomponent would finance consultant services, training, and management information systems. III. Safeguard policies that might apply A. Social At the project concept review, the Regional Safeguards Team determined that none of the Bank s social safeguards is triggered by the project. Support for the innovation agenda is expected to 12

13 have positive social ramifications to the Argentine population, enhancing the competitiveness of its industry and generating new and better remunerated employment. Project activities would be actively disseminated through the nation to ensure that the project impact is widespread. In addition, the selection procedures of subprojects would be adapted to incorporate a few questions related to the expected social impact and workplace security of the subproject. These questions would be part of the subproject s technical assessment. Project evaluators would receive training to adequately implement these new procedures. During project preparation, MINCyT and ANPCyT representatives together with the Bank team have held extensive consultations with a large number of NIS stakeholders, including universities, research centers, technology transfer offices at universities, chambers of commerce and other business associations, the ITC business association, biotechnology and ITC companies, representatives from the financial sector, and angel investors. The results of these consultations are reflected in the project s design. B. Environmental The proposed project was assigned an environmental category B rating from the regional safeguards team. It triggers the World Bank s Safeguard Policy OP/BP An environmental specialist has assessed the capacity of the ANPCyT and elaborated recommendations which have been incorporated to the project s design. The selection procedures for subprojects would be expanded to include an environmental and workplace security category in order to allow the Unit for Social and Environmental Management (UGSA) to screen projects and identify those that may have a potential negative impact, and subsequently, require the application of OP/BP UGSA has a proven track record of supervising subprojects through the implementation of three projects partly financed with IDB lending. Its staff would receive further training on environmental impact assessments and World Bank procedures. Project evaluators would receive training on how to determine the likelihood of an environmental impact. In the case of a possible negative environmental impact, the subproject applicant would need to elaborate an environmental assessment and/or elaborate mitigation measures. The UGSA would revise the environmental assessment and determine whether the project can receive funding. Only environmentally sound subprojects would receive funding. Environmental manuals would be attached to official bidding rounds for transparency purposes and to adequately inform applicants. In cases of refurbishing and remodeling activities, the Bank s basic guidelines for construction management (covering issues such as noise, dust, worker safety, etc.) would be included in the bidding contracts. IV. Contact Point Contact: Esperanza Lasagabaster Title: Sr. Financial Economist Tel: (202) Elasagabaster@worldbank.org 13