Document of The World Bank Report No: NC000001775 NOTE ON CANCELLED OPERATION REPORT (IBRD-75740) ONA LOAN IN THE AMOUNT OF USD 30 MILLION TO THE REPUBLIC OF CHILE FOR PROMOTING INNOVATION AND COMPETITIVENESS December 27,2010 Poverty Reduction and Economic Management Bolivia, Chile, Ecuador, Peru and Venezuela Country Management Unit Latin America and the Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective December 2,2010) Currency Unit = Chile Pesos (CLP) 1.00 CLP = US$ 0.00206079 US$ 1.00 = 485.250 CLP FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS APL Adjustment Policy Lending CNlC National Innovation Council for Competitiveness (Consejo Nacional de Innovacion para la Competitividad) CONlCYT National Commission For Scientific And Technological Research CORFO Chilean Development Agency (Corporation for the Promotion of Production) CPS Country Partnership Strategy GDP Gross Domestic Product LAC Latin America and the Caribbean Region LCSFM Latin America Financial Management Unit LCSHE Latin America Education Unit LCSPF Latin America Finance and Private Sector Unit LCSPT Latin America Procurement Team M&E Monitoring and Evaluation MoE Ministry of Economy MSTQ Measurements, Standard, Testing and Quality NlS National Innovation System OECD Organization for Economic Cooperation and Development PCU Project Coordination Unit PFM Public Financial Management System R&D Research and Development S&T Science And Technology SIGFE Budgetary and Financial Management System (Sistema Integrado de Gestion Financiera del Estado) SIL Sector Investment Loan SME Small and Medium Enterprise STI Science, Technology and Innovation TFP Total Factor Productivity Vice President: Pamela Cox Country Director: Carlos Felipe Jaramillo Sector Director: Marcelo Giugale Sector Manager: Lily L. Chu Project Team Leader: Esperanza Lasagabaster NCO Team Leader: Esperanza Lasagabaster CIDLE Innovation for Competitiveness Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Ratings of Program Performance in ISRs 1. Context, Project Development Objectives, and Design ............................................ 1 2. Post-Approval Experience and Reasons for Cancellation ......................................... 6 3. Assessment of Bank Performance ............................................................................ 7 4. Assessment of Borrower Performance ............................................................. ;....... 7 S. Lessons Learned ...................................................................................................... 8 Annex 1. Bank Lending and Implementation Support/Supervision Processes .............. 9 Annex 2. List of Supporting Documents ....................................... .-............................ 10 MAP A. Basic Information Promoting Innovation Country: Chile 'Project Name: and Competitiveness Project ,Project ID: P082927 iLlcrrF Number(s): ffiRD-75740 NCO Date: 12/28/2010 Lending Instrument: SIL Borrower: 'REPUBLIC OF CHILE Original Total USD30.0M Disbursed Amount: USDO.IM Commitment: Revised Amount: USDO.IM Environmental Category: C Implementing Agencies: Ministry of Economy Cofinanciers and Other External PartDers: B.KeyDates Revised I Actual Process Date Process Original Date Date(s) Concept Review: 06/04/2007 Effectiveness: 01/1512010 11/0112009 . Appraisal: 1211012007 Closing: 07/1512014 07/1512010 Approval: 0711512008 C. Ratings SUIlUDlll'f Performance Rating by NCO Outcomes: .Not Applicable .' Risk to Development Outcome: Not Applicable Bank: Performance: Satisfactory Borrower Performance: Moderately Unsatisfactory D. Sector and Theme Codes Original Sector Code (as % of total Bank financing) •General industry and trade sector 45 •Public administration- Industry and trade 40 •Tertiary education 15 Theme Code (as % oftotal Bank rmaneing) . . Education for the knowledge economy 15 1 Other ftnancial and private sector development 41 Small and medium enterprise support 12 Technology diffusion 32 E. Bank Staff Positions At NCO At Approval Vice President: :PamelaCox Pamela Cox Country Director: Carlos Felipe Jaramillo Pedro Alba Sector Manager: Lily L. Chu Eduardo Velez Bustillo Project Team Leader: Esperanza Lasagabaster ·Esperanza Lasagabaster NCO Team Leader: Esperanza Lasagabaster NCO Primary Author: Esperanza Lasagabaster F. Ratings of Project Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 10116/2008 Satisfactory Satisfactory 0.00 2 12/20/2008 Satisfactory Satisfactory 0.00 3 06/09/2009 Moderately Satisfactory Moderately Satisfactory 0.00 4 12/22/2009 Moderately Satisfactory Moderately Satisfactory 0.00 5 06115/2010 Unsatisfactory Unsatisfactory 0.00 ii 1. Context, Project Development Objectives, and Design Country Background Chile has been the fastest growing economy in Latin America since 1990. The impressive performance of the economy owes much to a strong institutional framework, exemplary monetary policies and deep integration into the global economy. Due to strong growth Chile has made notable progress towards the goal of convergence with OECD economies. The income gap, however, remains sizeable. Despite progress in recent decades, Chile remains highly dependent on the export of unprocessed natural resources, notably copper. Chile will need fast and sustained growth to further reduce poverty, continue improving living standards, and close the income gap with the lower tier of OECD countries by 2020. Sound macroeconomic management is well entrenched. Hence, Chile is in a favorable position to focus on microeconomic reforms aimed at boosting the capacity of firms to sustain productivity growth and develop new business opportunities. Evidence from economies that have successfully diversified and added value to their natural resource base such as Australia and Finland suggests that boosting Chile's capacity to innovate should be at the center of such reforms. Cross-country analysis indicates that half of all differences in income and growth is attnbutable to differences in total factor productivity (TFP), generally associated with technological development and innovation (see Chile, Development Policy Review, 2006). Chile's total f8ctor productivity has historically been relatively high; however during the 199Os, TFP growth rates decreased. Sector Bqckgrguml In the area of science, technology and innovation (STI), Chile has made gains over the last decade but continues to lag substantially advanced economies with respect to most STI indicators. Chile's R&D spending per capita, full-time equivalent researchers as a percent of population, and patent activity significantly lag the efforts of OECD countries, even those with a natural resource base. The differences are not due solely to income disparities; on some STI indicators, Chile also -falls behind dynamic economies with lower GDP per capita such as China and India. Several factors have explained Chile's relatively weaker performance on innovation relative to more advanced economies: Chile's policies and institutional framework for innovation were fragmented preventing an efficient use of public support for innovation. The capacity to design and evaluate innovation po licies can be strengthened. Chile's stock of human capital for innovation and technology management is low and geographically concentrated. 1 Overall investments in research arid development are low and the articulation with private sector is less than necessary. Mechanisms for transferring technology to small and medium enterprises can be enhanced. The incentives and support for technology based start-up companies are at a nascent stage. Rationale for Bank Assistance During the 2000s, the World Bank had assisted the Government of Chile in the innovation area through policy advice (e.g., the preparation of a Strategy to Promote Innovative SMEs (2004), an Investment Climate Assessment (2006), and the Development Policy Review (2006)) and support for two investment projects - the Millennium Science Initiative followed by the Science for the Knowledge Economy Project. The latter, implemented by CONICYT, was conceived as a two-stage APL since testing new instruments in the innovation system involved a learning and incubation process before they could be consolidated. The APLI was satisfactorily implemented and closed at the end of March 2007, as originally envisaged. In 2007, the Government of Chile requested a new investment project to foster Innovation. The project built on the aforementioned APLI but had a wider set of objectives to accommodate the new policy vision, which was more ambitious. It supported key elements of the national innovation strategy with a strong emphasis on building robust institutional foundations. The Government regarded the World Bank as a strategic partner due to its expertise in the innovation area, knowledge of a wide range of international experiences such as OECD and Asia, and the capacity to help adapt international practices and instruments to Chile's reality and needs. The project was fully aligned with the goals of the Country Partnership Strategy (CPS). In particular, it supported the objective of converging with OECD income levels and living standards by accelerating sustainable growth through increases in total factor productivity. The project had strong synergies with other Bank interventions aimed at increasing Chile's innovation capacity, in particular the Tertiary Education Finance for Results APLI. Development Objective The project's overall development objective was to enhance Chile's policy and institutional innovation framework for competitiveness and improve the impact of priority innovation programs. More specifically, the project's objective was: (i) to strengthen the Ministry of Economy's capacity on innovation and ensure its coherence with other policies for competitiveness; (ii) strengthen CONICYT and improve the coherence, quality and relevance of research funding policy in Chile; and (iii) stimulate technology transfer and the creation of new technology based enterprises through CORFO. 2 Components The project sought to contribute to the aforementioned development objective through three components: Component one: Strengthening the MoE capacity on innovation and related competitiveness polit?ies. This component sought to enhance the MoE's institutional capacity to formulate, monitor, and evaluate innovation policies in accordance with the guidelines of the National Innovation Strategy. In addition, it would have supported selected elements of the broader Strategic Plan to strengthen the MoE, in order to foster consistency between innovation policies and other policies seeking to enhance Chile's competitiveness. The design of this component benefited from an extensive consultation process with internal and external stakeholders. Component two: Strengthening Chile's Science Base. This component aimed to strengthen CONICYT by helping the institution formulate a strategic plan with clear medium-term goals aligned with the national innovation strategy, develop and implement a coherent research support policy. and increase its capacity to design and evaluate programs. At the end of the project, CONICYT would have increased its capacity to design, oversee, and learn from the implementation of its programs. The Inter-ministerial Committee on Innovation and the Ministry of Education were to guide CONICYT in the implementation of this component. Component three: Fostering Technology Transfer and New Technology-Based Ventures. The component intended to strengthen CORFO-Ied programs aimed at start- ups of knowledge intensive businesses and the adoption of higher value technologies by SMEs, and its monitoring and evaluation capacity. It sought to achieve the above through three subcomponents: (i) upgrading new technology based enterprise development, (ii) strengthening technology extension and transfer services for SMEs, and (iii) strengthening CORFO's monitoring and evaluation capacity oflnnovaChile's programs. 3 Costs and Fundinr. Counterpart Loan Total Project Cost By Component/Sub-component Financing USS million USSmillion USS million 1. Strengthening the MoE's capacity on innovation and its coherence with other competitiveness poDeles 7.0 7.3 14.3 1.1 Strengthening the capacity to formulate and implement innovation and related competitiveness policies 3.3 2.7 6.0 1.2 Establishment of a Monitoring and Evaluation Unit 2.9 2.3 5.2 1.3 Project Coordination Unit 0.8 2.3 3.1 2. Strengthening Chile's science base 17.3 13.4 30.8 2.1 Sharpening CONICYT's role within the NIS 3.0 1.9 4.9 2.2 Consolidating/reformulating group research support and promoting mobility of advanced human capital 13.5 9.5 23.0 2.3 Enhancing CONICYT's M&E capacity 0.8 2.0 2.8 3. Fostering technology transfer and new ventures 11.4 8.2 19.6 3.1 Start up of knowledge enterprises 0.3 4.1 4.4 3.2 Promoting technology transfer 9.9 2.6 12.5 3.3 Strengthening CORFO's M&E capacity of lnnovaChile's programs 1.2 1.5 2.7 UnaDocated 1.0 1.0 Finanelal expenditures 4.3 4.3 Front end fee 0.075 0.075 Total Project Costs 40.0 . 30.0 70.0 Implementation Arranr.ements The Project would have been implemented by the MoE, CONICYT and CORFO. A Project Coordination Unit (pCU) within the MoE, reporting directly to the Minister of Economy, was responsible for overall coordination of project activities among the three institutions and for the implementation of component I. CONICYT and CORFO were responsible for implementing components 2 and 3 of the project, respectively, and inform the MoE accordingly. The PCU within the MoE would have presented semi-annual progress reports to the Bank on the implementation of the three components, progress on achieving project indicators, and other project administration aspects. Financial Management (PM) arrangements for the project would have relied on the country budgetary and fmancial management system (SIGFE).· Each entity would have executed its component and would have reported execution to the PCU within the MoE, 4 which would have been responsible for the preparation of the interim and annual financial statements and disbursements for the project as a whole. Procurement activities would have been carried out by each implementing agency (the Ministry of Economy, CONICYT, and CORFO) for their own component. However, the PCU within the MoE would have been responsible for monitoring the consistency of all procurement activities with Bank practices. The PCU within the MoE was adequately staffed with technical experts to support project design and implementation. Risk AIUI/psis H - High, S - Substantial, M - Modest, L - Low Risk Risk Risk Mitigation Measure Rating Ineffective coordination s This risk was mitigated by the establishment of the Inter-ministerial across agencies and Cabinet on Innovation that comprised key ministries forming part of ministries forming part Chile's support system for innovation. The project's support for the of the innovation PCU"on Innovation at the MoE created the conditions for the Ministry system hampers project to undertake its coordinating role in an effective manner. The implementation. Convenio Mtm::o (Fmmework Agreements) to be signed between the MoE and CONICYT and the MoE and CORFO will also facililate coordination and project implementation. Inadequate progress in M The right set of conditions-in particuJar leadership, vision, strengthening the MoE govemment support, and a cbange management team--were in place capacity on innovation mitigating this risk. Furthemtore, the change management team and related developed a consultation process involving all major stakeholders in competitiveness policies such a way that there was ownership and coherence in the design. and implementation of the institutional strengthening process. Internal and external communications would continue during project implementation. Potential less demand s This risk was mitigated by various factors. First, Chile enjoyed a tban expected from the favorable business climate that encouraged entrepreneurship and private sector for private sector investment, and the government was working towards technology services further improving the business climate through Chile Compile and expanding finns' access to new external markets. Second, tecbnology centers and other technology transfer programs would comprise tecbnology brokers that would play a proactive role in reaching enteIprises, identifying their technology needs, and linking them with technology service providers. . Resistance to change M This risk stemmed mostly from the traditional separation of Chile's from research research community from other parts of the innovation system. performers and other CONICYT's stakeholders had sometimes impeded changes toward stakeholders who greater accountability and relevance. The risk was mitigated by the . benefit from the current close cooperation between CONICYT and the Inter-Ministerial research funding Committee of Innovation and the new vision and strategy developed arrangements by the National Innovation Council. Changes to CONICYT's strategic directions would have to be both aligned with the national strategy on innovation and supported (ex-ante) by the Jnter- Ministerial Committee of Innovation, the National Innovation Council and the Ministry of Education. This would provide added 5 authority to CONICYT's decisions to orient funding mechanisms toward greater relevance for innovation. Financial Management L Project activities would be mainstreamed in the country financial management system (SIGFE) and thus shared the same low risk as Chile's Public Financial Management System (PFM). Procurement M The procurement assessment indicated that the procurement risk was avemge. A procurement consultant knowledgeable of Bank procurement policies and procedures had been contracted by the PCU of the MoE. In addition, a procurement information system acceptable to the Bank would be put in place during the first year of the implementation. Overall risk rating S Ouality at Entry The project responded to a demand from the Government of Chile to strengthen key institutional pillars of its innovation system in line with the national innovation strategy. During project preparation, the Bank team carried out consultations with members of the National Innovation Council for Competitiveness, and representatives from the private sector, the academic community, and think tanks. Project formulation was also informed by extensive analytical work on innovation conducted by Chilean academics and World Bank experts as well as lessons learned from the Chil~Science for the Knowledge Economy Project and other innovation projects in the region (see Annexes 2 and 12.of the Project Appraisal Document). Initially, the leadership of the Ministry of Economy requested support for a more ambitious operation that would have encompassed a broader institutional strengthening of the Ministry of Economy together with support for CONICYT and CORFO. On the basis of follow up consultations with the Government and Bank management, it was agreed that the project would focus on strengthening those institutional aspects of the Ministry of Economy that had the greatest bearing on innovation policies and programs. A broader focus would have increased the project's complexity. 2. Post-Approval Experience and Reasons for Cancellation. (main events leading to cancellation, steps taken to resolve problems, exogenous factors, identification ofcauses and responsibility ifproject failed, implications offailure): The project was approved by the Board on July 15,2008 and signed by the Minister of Finance on December 31, 2008. It became effective on November 1, 2009, following clearances by the Comptroller's Office. A new Government took office in March 2010. The team visited Chile on May 12-14, 2010, to meet the new authorities, including Mr. Juan Andres Fontaine, the new Minister of Economy, and to discuss the project's objectives. On June 8, 2010, the new Government of Chile requested the project's cancellation. Only the front end fee for US$75,000 was disbursed. The innovation strategy of the new Government has a substantially different focus .. 6 3. Assessment of Bank Performance (lending process/ensuring Quality at Entry, supervision and implementation assistance role, compliance with Bank policies, justification for rating): Rating: Satisfactory The Bank performance is rated satisfactory. Project formulation followed a clear demand driven approach, and consultations were conducted with different stakeholders as noted earlier. Its design was also informed by extensive analytical work performed by the World Bank, academics and practitioners. During preparation, the World Bank team was active sharing lessons learned from innovation policies and programs in other Latin American and OECD countries. Following approval by the World Bank's Board in July 2008 and prior to effectiveness in November 2009, the World Bank's team maintained a very active dialogue with Government counterparts and conducted supervision missions, helping with the implementation of the first project activities as noted in section 4 below. The World Bank management team also maintained active discussions with the Ministry of Finance to follow up on the reasons concerning delays in project effectiveness, in particular the clearance process by the Comptroller's Office. In May 2010, two months after the new Government took office, the World Bank team conducted a mission to discuss the project's objectives and its scope with the new leadership at the Ministry of Economy, Who expressed a different policy approach· towards innovation as discussed in the following section. 4. Assessment of Borrower Performance (government and implementing agency performance, compliance with covenants, justification for rating): Rating: Moderately unsatisfactory From the early stages of project preparation, the Government established project units at each of the three executing agencies (the Ministry of Economy, CORFO and CONICYT), which facilitated project preparation. The three units actively contributed to the design of the project following the guidelines of the Inter-ministerial Committee on Innovation. In particular, the unit at the Ministry of Economy played a leadership role in coordinating activities among the three institutions; its head reported directly to the Minister of Economy, Chair of the Inter-ministerial Committee on Innovation. Following Board approval in July 2008, the loan agreement was signed by the Minister of Finance in December 2008. Project effectiveness did not take place until November 2009, after the project was cleared by the Comptroller's Office. Despite the unusual delay, the Comptroller's Office did not have observations on the project's objectives and scope. During this period, the executing agencies, especially the . Ministry of Economy and CORFO, were active launching the first project activities. Most importantly, the Ministry 7 of Economy created a monitoring and evaluation unit for innovation and competitiveness, started to gather new indicators on STI, and completed the first studies and evaluations; CORFO developed a framework for monitoring and evaluating InnovaChile's programs (Component 3.3) and completed the first phase of the process for selecting the beneficiaries of Component 3.2 to establish technology centers. Activities moved more slowly at CONICYT, although they also started to gather new indicators on science and technology complementing the actions of the other two implementation agencies. A few months after project effectiveness, a new Government took office. The approach of the new Government on innovation policy differs markedly from the innovation strategy prepared by the previous National Innovation Council for Competitiveness, which served as a key guiding framework for the project along with stakeholder consultations. The new Government considers that the public sector should not play an active role in addressing market failures (or that there are substantial market failures) related to innovation and proceeded to request project cancellation. 5. Lessons Learned (both project-specific and ofwide general application) The main lesson learned is that consultations with a wide range of stakeholders are critical to the success of a project, but this might not suffice if there is an important political change in the country. In circumstances where a very substantial change in the policy direction occurs, project cancellation might often be the preferable course of action. 8 Annex 1. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Lending Michael F. Crawford Sr Education Specialist LCSHE Ana Maria Grofsmacht Procurement Analyst LCSPT Jose L. Guasch Consultant LCSPF Bob Hodgson Consultant LCSPF Efraim Jimenez Consultant EAPCO Esperanza Lasagabaster (TTL) Sr Financial Economist LCSPF William F. Maloney Lead Economist DECMG Daniela Marotta Country Economist MNSPR Marta Elena Molares-Halberg Lead Counsel LEGES Xiomara A. Morel Sr Financial Management Specialist LCSFM Alejandro Roger SQIanot Sr Financial Management Specialist LCSFM Bob Hodgson Consultant LCSPF Kristian Thorn Consultant ECSHD SupervisionINCO Micky O. Ananth Program Assistant LCSPF Marco A. Arena Duffoo Economist LCSPF Michael F. Crawford Sr Education Specialist LCSHE Ana Maria GrofSmacht Procurement Analyst LCSPT Jose L. Guasch Consultant AFTSN Robert Hodgson Consultant LCSPF Jose C. Janeiro Senior Finance Officer CTRFC Andres Mac Gaul Senior .Procurement Specialist LCSPT Marta Elena Molares-Halberg Lead Counsel LEGES RekhaReddy Economist LCSPF Alejandro Roger Solanot Sr..Financial Management Specialist LCSFM (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle usn Thousands (including travel No. of staff weeks and consultant costs) Lending FY07 26 174.06 FY08 42 233.84 FY09 1 3.50 Total: 69 411.40 SupervisionlNCO FY09 17 121.62 FYlO 21 99.44 Total: 38 221.06 9 Annex 2. List of Supporting Documents Concept Note Project Appraisal Document Implementation Supervision Reports 10 85'W 7S'W PACIFIC OCEAN REGIONS OF CHILE I. TARAPAcA II. ANTOFAGASTA III. ATACAMA IV COOUIMBO V VALPARAiSO RM. REGION METROPOLITANA DESANTIAGO VI. LlBERTADOR GENERAL BERNADO O'HIGGINS VII. MAULE VIII. BIOBio IX. LA ARAUCANiA X. LOS LAGOS XI. AlSEN DEL GENERAL CARLOS IBANEZ DEL CAMPO XII. MAGALLANES Y DE LA ANTARTICA CHILENA XIV LOS Rios' XV ARICA-PARINACOTA' , Regions approved by cabinet and parliament, will become effectiYe ATLANTIC on October, 2007 OCEAN CHILE o I 200 I 400 I 600 Kilometers I I I o SELEGED CITIES AND TOWNS o 200 ® REGION CAPITALS 5()os ® NATIONAl CAPITAl ~ RIVERS - - MAIN ROADS ~t? FALKLAND ISLANDS (ISLAS MALVINAS) A DISPUTE CONCERNING SOVEREIGNTY OVER THE tSLAJoDS EXISTS 8E1W£EN ARGENTINA WHlOi ClAiMS - - RAILROADS THIS SOVEREIGNTY AND THE U. /C WHICH ADMINIS TfRS THE ISLANDS - - REGION BOUNDARIES - -- INTERNATIONAL BOUNDARIES so'W 7S0W 7O'W 6O"W 55'W scow JUNE 2007