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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 8300

PROJECT COMPLETION REPORT

SPAIN

INDUSTRIAL RESEARCH DEVELOPMENT AND ENGINEERING PROJECT(LOAN 1425-SP)

DECEMBER 29, 1989

Industry and Energy Operations DivisionCountry Department IVEurope, Middle East and North Africa

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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FOR OmCUL USE ONLYTHE WORLD BANK

Washington. DC. 20433USSA

Office A ot,rectoe-Cetal

December 29, 1989

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDZNT

SUBJECT: Project Completion Report on Spain Industrial Research,Development and Engineering Project (Loan 1425-SP)

Attached, for information, is a ccpy of a report entitled "ProjectCompletion Report on Spain Industrial Research, Development and EngineeringProJect (Loan 1425-SP)" prepared by the Europe, Middle East and North AfricaRegional Office. No audit of this project has been made by the OperationsEvaluation Department at this time.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties Its contents may not otherwise be disclosed without World Bank authorization.

FOR OMCIAL USE ONLY


SPAIN INDUSTRIAL RESEARCH, DEVELOPMENT AND ENGINEERING PROJECT(LOAN 1425-SP)

TABLE OF CONTENTS

Page No.

Preface ................................................................iBasic Project Data ............ ..... . . ....... ...... iiHighlights ............... ........................................ iv

I. INTRODUCTION ....................... . 1

II. PROJECT BACKGROUND .... 2

A. The Sectoral and Financial Environment .............. 2B. Project Preparation, Appraisal and Approval ......... 3C. Project Objectives and Scope ....................... 4D. Financing of R&D Activities .. ....................... 5

III. PROJECT IMPLEMENTATION AND MANAGEMENT . . 6

A. Achievement of Project Objectives .................. . 6B. Project Management . ............................ . 6C. Operating Policies and Procedures ....... 8............. aD. Bank Procurement and Disbursement Procedures . . 11

IV. OPERATING PERFORMANCE OF CDTI ................. .......... 12

A. Growth of Operations .... .............. 12B. Type of Subprojects . . . .............................. 13C. Sponsor Ownership ................................... 14D. Financial Aspects . . . ................................ 14

V. INSTITUTIONAL DEVELOPMENT .. 15

VI. ROLE OF THE BANK AND LESSONS LEARNED . ..... 17

A. The Bank's Role ..................................... 17B. Lessons for the Borrower and the Bank ... ........... 18

ANNEXES

1. Examples of CDTI Supportd Proje cts . .222. Organization Charts .. . .25

3. Documents Available in the PCR File. 274. Compliance with Covenantsv e ns...... .... . 28

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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SPAIN - INDUSTRIAL RD&E PROJECT(LOAN 1425-SP)

PRtEFACE

1. Loan No. 1425-SP for the Industrial Research, Development and Engine-ring(RD&E) Project in the amount of US$18.0 million was signed on July 8, 1978 andwas closed on June 30, 1984, having been fully committed.

2. The main objective of the Project was to assist the Government inestablishing a system to promote the acquisition, adaptation, development andutilization of modern technology by Spanish industry, thus improving itscompetitiveness. The means to reach this objective was the creation of anautonomous unit to finance research, development and engineering. On the whole,the Project objective has been achieved.

3. The Project was the first direct attempt by the Bank to assist inindustrial technological development. Therefore, it was expected to provide alearning experience from whicth the Bank would benefit in its future work inimproving and accelerating technology development in other countries.

.4..; This Project Completion Report was largely prepared prior to thereorganization by the then Industry Department, based on a project completionmission to Spain in January 1985.

5. This PCR was read by the Operations Evaluation Department (OED). Thedraft PCR was sent to the Borrower on November 16, 1989, for comments byDecember 14, 1989, but none were received.

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PROJECT COMPLETION REPCRT

SPAIN INDUSTRIAL RO&E PROJECT(Loan 1425-SP)

BASIC PROJECT DATA(Page 1 of 2)

KEY PROJECT DATA

Actual orAppraisal Current Estimate

USS Million

A. Proiect Cost and Financing

Total Project Cost a/ 18.0 18.0Foreign Exchange Cost 18.0 18.0FinancingGovernment Grants - -IBRO Loan 18.0 18.0

8. Project Schedule

First mention 03/73 t/First Preparation Mission 06/73Appraisal 12/75Negotiation 03/77Board Approval 05/17/77Loan Signature 07/08/77Loan Effectiveness 03/31/78Effectiveness of Modified

Procurement andDisbursement Procedures 12/03/80

Closing Date 12/31/82 06/30/84Project Completion r/ 12/31/82 12/31/84Borrower GovernmentBeneficiary Spanish Industry COTI/Industry J/Fiscal Year of Beneficiary 01/01 - 12/31

,/ No project cost was defined and the figure used for this purpose is actually the Loan amount. Wmb/ Not including discussions held in the mid-1960s between the Government. OECD and the Bank._/ There is no definite completion date" in a project of this type and it has

been assumed that the completion date is the same as the closing date or shortly after.g/ CDTI was called a *beneficiary" of the Loan beginning in 1978 (after its creation). The Loan

legal documents do not specify CDTI as a beneficiary. because it did not yet exist at the timeof Loan signature.

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SPAIN INDUSTRIAL R0&E PROJECT(Loan 142S-SP)

BASIC PROJECT DATA(Page 2 of 2)

MXJSION OATA

Item Month/Year No. of Weeks No. of Persons Manweeks Date of Report

Appraisal 12/75 4.0 5 20 05/22/77Follow-up 05/76 2.0 2 4 04/22/77Follow-up _/ 07/77 0.4 1 0.4 07/28/77Supervision I 09/77 1.0 1 1.0 09/30/77Supervision II _/ 11/77 0.4 1 0.4 12 /0 9/77 a'Supervision III a/ 02/78 0.8 1 0.8 02/13/78Supervision IV 10/78 0.6 1 0.6 11/02/78Supervision V 10/79 0.6 1 0.6 12/06/79Supervision VI 07/80 1.6 2 3.2 08/25/80Supervision VII 07/82 1.8 2 3.6 10/07/82Supervision VIII 06/83 1.2 2 2.4 08/01/83Supervision IX 12/83 1.6 1 1.6 02/28/84Supervision X 04/84 0.4 1 0.4 04/20/84Completion 01/85 1.Q 2 LA 05/14/85

Total: 1? 4 gl_a

COUNTRY EXCHANGE RATES

Name of Currency: Spanish Ptas.

Year: Appraisal Report April 1977 Exchange Rate: US$1 = 66.00 E/Project Completion Report Jan. 1985 US$1 = 170.00Actual - August 1978 US$1 = 76.67

August 1979 US$l = 67.13August 1980 US$1 = 71.70August 1981 US$l = 92.31August 1982 US$1 = 109.86August 1983 US$l = 143.43August 1984 g/ US$l = 153.00

Abbrev1ations

Government: The Government of SpainCOTI : Centro para el Desarrollo Techologico Industrial

(Center for the Development of Industrial TechnologyICi Internattonal Competitive BiddingMinistry : The Ministry of Industries

_/ Review of Project Status and Initial Supervision Report carried out at headquarters.fl The average for 1977 was, however. Ptas. 76 to the US$.g/ January-September.

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SPAIN - INDUSTRIAL RD&E PROJECT(Loan 1425-SP)

HIGHLIGHTS

i. This project was the first of its kind both for the Bank and for Spain.It was developed in response to the need to modernize Spanish industry and tointroduce new technologies that would improve the efficiency andcompetitiveness of manufacturing, promote new product development and createnew and technologically advanced industries. By its very nature, this is along-term process; the Project's objective was to create the initialconditions favorable to its continued development (para. 2.07).

ii. Some difficulties were encountered during Project implementation. Thesewere related mainly to the lack of sufficient autonomy of the implementingagency and to the inadequacy of the original procurement and disbursementprocedures agreed upon between the Borrower and the Bank; both problems wereresolved. Subsequent to project completion, The Center for the Development ofIndustrial Technology (CDTI) obtained the autonomy from the Governmentinitially envisaged and the Government resources needed for CDTI to have asubstantial impact (paras. 3.02-3.05 and 3.20-3.22).

LESSONS

iii. The major lessons learned from the Project were:

a) The project was on balance successful, in large part because thetiming for technology development investment was appropriate toSpain's level of industrialization, the recent entry into thelabor force of a large pool of technical manpower and the need tostimulate increased Research, Development and Engineering (R,D&E)in industry. This demonstrates the importance of appropriatetiming for projects of this type. CDTI has since become a key armof the Government in stimulating industrial technologydevelopment (para. 6.04a).

b) The project, the first of its kind for the Bank, was also sensiblyflexible in its organizational structure and approach. However,it was initially rigid on procurement and disbursement procedures-the procedures needed modifications and this was done after anexcessive amount of time. In such instances, the Bank shouldrespond more quickly in modifying proced-res than was done in thiscase (para. 6.04b).

c) The role of CDTI, like similar institutions elsewhere, changedgradually from an agency whose role was primarily to promotetechnological development as part of the Government, to one whoserole became more demand driven and financing-oriented withincreased autonomy, as indigenous technological capability grew,and most particularly, as it became clear that Spain would have tocompete within technologically advanced Europe (para. 6.04c).

V~~~~~~~~~~~~d) While the Bank was instrumental in helping to create CDTI and in -

developing its modus operandl, it was less successful in -supervising this first effort and in helping CDTI learn fromexperience and mistakes. The Bank, furthermore, did not take allthe time necessary to work with CDTI to develop its financial iinstruments, its supervision techniques, etc., for the benefit ofCDT! as well as subsequently for applying these lessons to othercountries (para. 6.04d).

e) With respect to financias' instruments, the conditional loan repaidwith royalties became the preferred vehicle for CDTI financing.The royalty payment formula was a complex one, which ultimately,even for successfu'l projects, did not result in significant pre0itfor CDTI to make up for the failures, even though the proportic-of failures was well below the percentage anticipated (121compared to normal 331). This was an area where the Bank couldhave provided more financial expertise. Consequently, the newadministration that took over CDTI in early 1982, attempted tocorrect the errors of the previotis administration by adopting amore conservative traditional lending approach and graduallyphasing out conditional lending (para. 6.04e).

f) Likewise, as CDTI's role as a financier of industrial technologydevelopment grew in importance, the Bank should probably haveinsisted earlier and more consistently on the need for CDTI (i) toemphasize in its loan evaluations late-stage development andcommercialization rather than research; and (ii) to de-emphasizefinancial strength and the collateral of the borrower fin order tpromote the develonRment of really innovative technolo2ie& (para. 6.04f).

g) Insufficient attention was devoted to other policies. (e.g., taxincentives) related to industrial technology development (ITD).Although these have developed rapidly in recent years, the Bankcould have contributed more throughout the project in identifyingconstraints and proposing policy and program alternatives (para. 6.04g).

h) In summary, while the project, with significant Bank contribution,was well conceived, appropriate for the Spain of the mid-1970s andon the whole accomplished its objectives, the project and CDTT wasslow to evolve to the needs of the 1980s--ITD andcommercialization of new technologies. The Bank did notcontribute as much as would have been desirable to helping CDTIevolve in the later stages of the project (para. 6.04h).

iv. The Project fulfilled its expected goals and its benefits are likely toremain and expand in the future. The Government increasingly recognized theimportance of CDTI's role by making growing amounts of resources available tothe entity. For 1985 Government allocated Ptas. 8.0 billion (US$52.3 million)to CDTI, up from Ptas. 2.1 billion (US$13.7 million) in 1984. These amountscontinued to increase in subsequent years. As noted above, CDTI has sincebecome a key institution with regard to stimulating industrial technologydevelopment in Spain (Table 4.4 and para. 4.06).



I. INTRODUCTION

1.01 The Bank, through the late 70s, had generally not been directlyinvolved in industrial technology development. Instead, it had assisteddeveloping countries in the utilization of modern technology through thepreparation and implementatiorn of specific industrial projects or throughcomponents of education projects. In the case of Spain, the Government'sconcern about the obvious need for technological progress and the Bank'sinterest in this aspect of economic development resulted in the approval onMay 17, 1977, of a US$18.0 million Bank loan for the establishment of a systemto acquire, adapt and develop technologies tailored to the needs of Spanishindustry.

1.02 The main objective of the Project was to sensitize Spanishindustry to the urgent need for innovation and to facilitate the introductionof new technologies in industry in order to remain -- or become --competitive. To achieve this, a secondary objective was to create anautonomous organization to assist entrepreneurs in their efforts to developand introduce new technologies. These objectives have been achieved andappear to be sustainable, but some deficiencies remain: insufficient attertionto the needs of the industrial inventor and technological entrepreneur who arefrequently eng;.nes of innovatiie progress; and a relative lack of venturecapital to translate successful inventions and technology adaftations andimprovements into commercial production and marketing. It should, however, beborne in mind that a project of this type can only be the beginning of anongoing process, and its cost was the initial expenditure needed to launchthis process.

1.03 Following Board approval of the Loan, an R&D Unit, the Canter forthe Development of Industrial Technology (CDTI)1/ was created under theMinistry of Industry in August 1977; CDTI became a semi-autonomousorganization in February 1978. The purpose of the Center was to selectpromising areas for research, to finance selected RD&E studies, and to carryout product development and pilot-plant operations. The Bank stronglybelieved that CDTI should have full operating autonomy subject to policyguidelines set by Government. Obtaining this freedom of action requiredparliamentary approval. However, the Industrial Restructuring Law containing,inter alia, a section granting CDTI autonomy, was not enacted until November1983. This delay and the inappropriate procurement and disbursementprocedures contained in the Bank's Loan Agreement (later modified by Bankletter of May 29, 1980) caused disbursement delays. The Loan closing date wasextended twice, from December 31, 1982 to June 30, 1984; the Loan was fullycommitted by June 30, 1984.

'/ Centro para el Desarrollo Tecnologico Industrial.

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1.04 By the end of 1984, CDTI had approved 306 projects. Its average |participation was Ptas. 32.8 million (US$0.28 million) for a total of Ptas10,209 million (US$87.3 million). Approximately 34X of this cost was borne byCDTI (including from the proceeds of the Bank loan), 501 by the projectsponsors, and 161 by Government and other public sector institutions.

1.05 Out of the 306 projects approved up to early 1985 by CDTI, only 14had failed by that time (as they did not prove commercially viable); 109projects had been completed and many had already started repayment to CDTI;and there were 40 (projects which proved viable but beneficiaries were notmaking royalty payments to CDTI) project sponsors against whom legalproceedings had been initiated btcause of long overdue payments or lack ofcompliance with other covenants agreed upon with CDTI. These projects didprove viable but beneficiaries were not making royalty payments to CDTI.Given that a failure rate of 33% or higher is normal in research projects,CDTI's failure ratio of 12% (14 out of 123 projects) is very good, althougbpossibly a reflection of overly cautious project evaluation procedures(para. 3.14).

1.06 The main subsectors targeted by CDTI's projects were electronics,transportation, and mechanical and chemical industries; lately, biotechnologyhas also become important in CDTI's project portfolio. Most of the projectsderl7c with the adaptation or improvement of technology already known outsideSp-?.. , but some were truly innovative. Some examples of projects aredescribed in ANNEX 1.

1.07 The Project under review was the first Bank project aimed directlyat technology development, and it was the last Bank industrial project inSpain. It was expected that the project would give valuable insights intothis type of operation and be useful for future Bank operations in othercountries.

II. PROJECT BACKCROUND

A. The Sectoral and Financial Environment

2.01 At the time of appraisal, Spain was emerging from a period ofrapid growth and structural change. GNP had expanded at an average annualrate of about 6.51 during 1961-77. Industry was the leading sector, havinggrown at an average rite of 9.0X per annum during the same period. Rapidlyrising foreign exchan.se inflows from commodity exports, tourism, workers'remittances and foreign private investments strongly supported economic growthby removing foreign exchange constraints and opening up industry to foreigntechnology, know-how and management techniques.

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2.02 In the years following appraisal, however, the Spanish economybegan to experience the full impact of the petroleum price increases of the1970s and of the world recession. GDP grew at an average of only 1.3% peryear between 1979 and 1983. Industry continued to grow, although at a slowerpace than in the previous years; its share of GDP reached 36X in 1983 ascompared to 23% in 1965.

2.03 The most important contributors to growth in manufacturing weremetal products, machinery, transport equipment and chemical products.Traditional industries -- textiles, wood and cork products, food products andfurniture --lagged behind. The share of manufactured products in exportsincreased from less than one third of the value of goods exported in 1970 tomore than two-thirds by the mid-1980s.

B. Project PreRaration. ARnraisal and ApRroval

2.04 In the mid 1960s, Spaniqh authorities began discussions with theOECD, the Bank and other organization-s on possible means to improve industrialreseaich in Spain. The structure and potential for growth of industry incountries at an intermediate stage of economic development were a subject ofparticular interest to the Bank. In 1971/72, a Bank mission visited Spain toreview the situation of Spanish industry and to analyze possibilities fordevelopment.

2.05 The mission's report2' concluded that Spanish industry needed tomove gradually away from traditional subsectors and should improve within eachsubsector, the technology used. After some additional preparatory missions, aresearch, development and engineering (RD&E) project was appraised in December1975. In 1976, a follow-up Bank mission visited Spain, and Spanish officialsvisited the Bank and RD&E institutions in the U.S.

2.06 The appraisal report I/ was finalized in April 1977. TheExecutive Directors approved on May 17, 1977 a loan of US$18.0 million to theGovernment, to be passed on as a grant to an aatonomous institution. The loandid not become effective until ten months later, on March 31, 1978, after aunit for the Development of Industrial Technology (CDTI) was created (para.3.03).

3/ IBRD, Growth and Change in Spanish Industry, Report No. 285-SP,November 16, 1973.

/ .Report No. 1153-SP, April 22, 1977.

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C. Project Obiectives and ScoRe

2.07 The main objective of the Project was to establish a system tosupport the research, development and engineering efforts needed to create nerproducts and introduce new processes, thus modernizing and improving theefficiency of Spanish industry. One of the means to achieve this objectivewas the creation of a specialized institution dedicated to the acquisition,development and utilization of new technology. Additionally, the Projectaimed to assist interested enterprises in strengthening their own technologydevelopment capacity.

2.08 The Project was the first direct attempt by the Bank to assist inindustrial technological development. Therefore, it was expected to provide alearning experience from which the Bank would benefit in its future work inimproving and accelerating technology development in other countries.

2.09 The Project as defined during appraisal consisted of:

(a) The establishment of a new organization (CDTI) todirect Project activities;

(b) The selection of areas for initial concentration ofRD&E activities and establishment of criteria for theevaluation and selection of projects; and

--(c) The creation of a project portfolio representing theminimum critical mass required for the program tobecome self-sustaining in a relatively short period oftime.

2.10 The Appraisal Report concluded that the subsectors most likely tobenefit from technology development were food processing, electronics,mechanical engineering and machine tool production. General criteria for theselection of suitable projects, agreed upon between the Bank and Government,aimed at improving the competitiveness and export potential of Spanishindustry.

2.11 The Appraispl Report also attempted to define the minimum sizeneeded to make the program successful. The following criteria wereemphasized:

(a) The number of commercially successful projects must besufficient to inave a demonstration effect, thusencouraging other firms to undertake or increase theirRD&E efforts;

(b) '.he expected royalty payments or other types ofreturns (to CDTI) should be adequate to support thecontinued expansion of the program; and

(c) The program should fill a measurable portion of thegap (e.g., 10X) between research funding available andfunding needed to bring it up to the level ofcountries with similar per capita income.

D. Financing OL R&D Activities

2.12 In 1974, total financing available in Spain for domestic R&D wasUS$280 million, which increased rapidly to US$780 million in 1983. In 1983,approximately 451 of total domestic R&D expenditures were used for the4evelopment of industrial technology. In addition, there were payments abroadfor licenses, patents and technical know-how amounting to US$616 millionduring that year (para. 5.01). R&D expenditures remained stable in 1984; theywere estimated at US$1,370 million (US$793 for domestic R&D and US$577 millionfor imported technology), only slightly below the US$1,396 million reached in1983 and much higher than the US$596 million spent in 1974. Over the period1974-83, R&D expenditures grew in relative importance from about 0.4X of GDPin 1974 to 0.6X in 1983. A summary of the sources of financing for domesticR&D in 1973 and 1983 is shown below:

Table 2.1: Spain - Industrial RD&E Proiect

Sources of Financing for Domestic R&D

1974 1983

ptas USS Etas USi

Public Sector ----------------millions---------------

- Ministry of Education 1,150 19.9 20,000 139.5

- Ministry of Agriculture n.a. n.a. 7,000 48.8

- Industry:Ministry of Industry n.a. n.a. 16,000 111.6

. Investment Institutes 2,300 39.9 16,971 118.4

. CDTI - - 2,530 17.6

- Other Public Sector n.a. n.a. 27.740 193.4

Subtotal Public Sector 10,300 178.5 90,242 629.2

Private Enterprises 5.878 L01.9 21.5Z1 L.ii.4

TOTL 16.178 O280.4 111l.12 779.6

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III. PROJECT IMPLEMENTATION AND MANAGEMENT

A. Achievement of Prolect Obiectives m

3.01 A technology development project of the type under review a

constitutes only the first phase of a long-term process of acceleratedintroduction of new technologies in industry. The attainment of suchobjectives, which provide the ultimate rationale for a Project of this nature,cannot, therefore, be tied to specific dates or volumes of RD&E expenses. Themain objectives of the Project - increasing the awareness of Spanish industryof the need for rapid technological advancement and the creation of aninstitution dedicated to assist in the acquisition, development andutilization of selected technologies - were in the process of being achievedat the time of project completion, although at a somewhat slower pace thanenvisaged during appraisal.

B. Project Management

The RD&E Unit

3.02 During appraisal of the Project, the Bank reached the conclusionthat the organism that would channel the Bank-assisted efforts to improve RD&Eactivities in Spain should be an autonomous entity. Thus, it should havemaximum independence and receive income also from sources other tL.anGovernment. The RD&E unit should be responsible for defining and financingresearch, establishing working groups, recruiting staff from public andprivate sector institutions or from abroad, and making quick decisions on theallocation of funds.

3.03 The Bank, however, recognized that creation of a truly autonomousorganization would cause protracted delays because of legal and politicalproblems. Therefore, it accepted a compromise. In effect, Section 3.01(a) ofthe Loan Agreement stipulated that the Government, should to the satisfactionof the Bank: (i) establish within the Ministry of Industry a Unit to carryout the Project; (ii) define the responsibilities, functions andadministrative and operating procedures of the Unit; and (iii) as soon aspossible but not later than December 31, 1979, or such other date as theBorrower and the Bank might agree, take all necessary steps to transform theUnit into an autonomous organization. The Unit was created as the Centro pazael Desarrollo Tecnologico Industrial (CDTI) on August 5, 1977. On February10, 1978, it became an "autonomous administrative organization" (OrganismoAutonomo de Caracter Administrativo). CDTI's organizational structure,functions and responsibilities were further defined by Decree No. 548 of March25, 1978. The Loan became effective on March 31, 1978.

3.04 In the ensuing years, however, it became apparent that CDTI'sautonomy was inadequate: it could not really establish its own recruitmentpolicies and set salary scales adequate for the hiring and retention of highquality staff; expenses had to be incurred in accordance wita narrowly definedcategories of authorized expenditures; and cash receipts, whether from

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budgetary allocations, Bank Loan proceeds, or operating revenues, had to beturned over to the Treasury. This made it difficult for CDTI to taka high-risk decisions of the type necessary for an aggressive technology developmentprogram. At the same time it gave CDTI little incentive to improve itsfinancial management. CDTI's lack of autonomy was a constant preoccupation ofthe Bank, highlighted in the project supervision reports and in Bankcorrespondence .4/

3.05 On September 17, 1979, CDTI requested the Government to change itsstatus to that of an autonomous "commercial, industrial and financial"organization. However, this request was not immediately pursued. Instead,the new government elected to present a bill to the legislature on industrialpolicy in general, which included a section on technology development. Therefollowed a lengthy period of debate and review during which the Government

* industrial policies were defined. Finally, on November 30, 1983, RoyalDecree-Law No. 8/1983, dealing with the restructuring of Spanish industry, wasenacted. Section 36 of this law authorized, effective January 1, 1984, theconversion of CDTI into a public law entity (entidad con personeria juridica).Such entities operate in most respects like private sector commercialenterprises. The functions, authorities and responsibilities of the new CDTIare spelled out in detail in Decree No. 2/1984 issued by the Ministry ofIndustry on January 4, 1984.

CDTI's Management and Organization

3.06.! Sectiont 3.01(b) of the Loan Agreement also stipulated that theBorrower would employ in the unit a qualified and experienced managingdirector appointed after consultation with the Bank. The first two managingdirectors of CDTI were appointed after consultation with the Bank. However,the Bank was not consulted regarding the appointment of the subsequentDirector General on January 16, 1984.

3.07 CDTI was reorganized in the first quarter of 1984. Organizationcharts prior to and after restructuring are shown in ANNEX 2. The neworganization structure was adequate, except that the project evaluation units,which are vital to the work of CDTI, could have gained further ineffectiveness through independence from the Finance Department (and thus fromundue emphasis on financial criteria) and from the recruitment of additionalqualified staff.

3.08 As previously mentioned (para. 3.04), initially CDTI did not havesufficient autonomy in recruitment and salary policy; in spite of this, asmall team of dedicated staff was built up from nine professionals in December1979 to 24 in July 1983. Due to the lack of autonomy, CDTI had to resort tosome unusal procedures for hiring and retaining staff; this fact and somestill unresolved accusations of administrative irregularities led, after the

In particular, in the supervision reports dated August 25, 1980and August 2, 1983.

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reorganization and the appointment in 1984 of a new Director General, tofri-tion due to differences in outlook and expectations between the old staff -and the new management. As a result, about three quarters of the old staff -either quit or their contracts were allowed to expire.

.

3.09 In spite of the disruptive effect of the reorganization, CDTI'sstaff appeared qualified and dedicated. The institut'on's efficiency, ifanyt'hing, was increasing. However, a good deal of the experience gained sinceinception, and of the institutional memory, was lost in the wholesale changesof 1984.

C. Operating Policies and Procedures

General Policies

3.10 At the time of appraisal, it was thought that the actual RD&E workwould be carried out by industrial firms and laboratories or institutions, aswell as directly under the control of CDTI, which would purchase most of theequipment that it required for this purpose. In retrospect, this expectationwas unrealistic and not appropriate for an institution that was also tofinance technology projects of other firms. The actual role of CDTI evolvedtherefore during the first year of operations (para. 5.03) and shifted from apredominantly controlling role (i.e., one in which CDTI would select theindustrial subsectors, identify technologies required and commission RD&Ework) -towards a role that was predominantly supportive of industryinitiatives.

3.11 Starting in 1979, CDTI undertook an extensive promotional effortwith leading industrial trade associations, particularly with the NationalAssociation of Equipment Manufacturers (SERCOBE). This approach wassubsequently continued. In addition CDTI was working closely with regionaldevelopment centers. It assigned technical advisors to these centers, whopromoted CDTI's activities and screened potential applicants. This approachhas not been allocated a high priority since 1984. As a consequence of itssearch for broad fields of investigation, CDTI also commissioned or carriedout in-house studies of some subsectors or lines of inquiry. Most of thestudies were relatively low cost bibliographical research efforts, but threestudies'5 (out of 76) cost more than US$500,000 equivalent each. Loanproceeds were not used to pay for any of the CDTI studies.

3.12 Section 3.02(b) of the Loan Agreement required CDTI to obtain Bankapproval for subprojects costing more than US$500,000 equivalent during thefirst three years after the Loan signing date (i.e., until July 8, 1980). The

-/ Two of them were really subprojects for the pilot plant testing ofa process for the recovery of metallic values from complex pyriticores and energy savings in the production of cement. The thirdone was a study on the production of energy by photo voltaiccells.

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Bank objected to some aspects of threa subprojects. One was later dropped andthe other two subprojects were not financed by the Bahk.

SubRroject Evaluation

3.13 Enterprises and organizations applying for CnfTI financing were topresent information on the product or process to be developed, the expectedmarket demand, and the organization, management, and finances of the entity.The proposals were reviewed by CDTI with the assistance, if necessary, ofoutside experts, and an appraisal report was presented to CDTI's board. Afterboard approval, a contract was negotiated between CDTI and the projectsponsor, specifying how CDTI would recover its investment and possibly benefitfrom its participation in the project. Since CDTI traditionally financed onlyabout 50% of the R&D cost, the financial situation of the applicant carriedconsiderable weight in the project evaluation. CDTI later gave greater weightto project objectives and the realism of the budget presented, but marketingaspects were still not considered sufficiently. Nevertheless, CDTI'scontinued emphasis on traditional financial criteria led to an over-emphasison established firms, and a reluctance to take the kinds of risks required intechnology financing.

3.14 Proposals submitted by individual inventors were supposed to bescreened first by the Institute of Civil Engineers. This procedure wasestablished in order to avoid having CDTI's professional staff mired in time-consuming discussions with inventors of impractical schemes. Based onexperiences in other countries, this procedure may not be fully appropriatefor technology (as opposed to research) lending; rather, technical expertsshould be brought into the evaluation process. (Peer review committees tendto be biased in favor of established names and approaches.) In addition,after the initial screening, CDTI would generally not consider financing theproposed R&D, because individual invenLnrs frequently lacked financialresources. Instead, CDTI would send information about the research proposalto enterprises that might be interested. if such an enterprise could befound, CDT! would arrange for meetings between inventor and enterprise. Onceagreement had been reached, CDTI would process the proposal like any otherenterprise-sponsored proposal. The Bank frequently pointed out that this wasinadequ4te to promote the development of really innovative technologies, whichoften succeed as the result of efforts by individual inventors, and in dynamicnew firms rather than larger, traditional ones. However, CDTI did not changeits policies in this respect and continued to believe that individualinventors would have to come to terms with going concerns, includingmultinationals, to develop their new products or processes.

SubiroJect Supervision

3.15 An elaborate supervision system was originally prepared by CDTIconsisting of: (i) analyses of the physical progress and financial aspects ofimplementation; (ii) evaluation of the sponsor's monitoring systems; (iii)technical assistance to small firms lacking the means to prepare such

- 10 -

programming and control systems; and (iv) monitoring of project implementationschedules and costs. Cost control was to be carried out through periodicreviews, which should tie in with contractual "checkpoints" of projectprogress and include the corresponding documents (invoices, payroll, etc.).Monthly progress reports were to be prepared for each project and a summaryreport for all CDTI projects was to be submitted monthly to its board. Thisoverly ambitious system, however, never became fully operational and manyprojects were not supervised due to lack of staff.

3.16 Later, CDTI's management correctly decided that detailedsupervision of project exRenditures was too time-consuming, unnecessary andcounterproductive for the institution carrying out the RD&E project. Thisview was shared by the Bank. It was generally agreed that project supervisionshould concentrate on monitoring achievement of specific, agreed projecttargets. However, CDTI still needed to learn from the experiences of venturecapital companies elsewhere. Supervision of technology projects is alwaystime-consuming and staff-intensive, and assistance of varying types needs tobe provided to the client firms.

Commercialization Procedures

3.17 The term commercialization, as used by CDTI, referred to themonitoring of recipient enterprises to ensure the CDTI obtained its fair shareof the proceeds of any successful RD&E project financed by it. Until 1984,the-participation agreements provided for repayment of principal and"benefits' (funds provided by CDTI were not considered to be loans andtherefore did not earn normal interest) through the payment of a royalty onsales over a number of years, calculated by doubling the period required torecover the principal of the funds advanced. The formula was complicated andled to low rates of collection, even for successful projects.

3.18 Starting in 1984, CDTI introduced more flexibility in therepayment of advances. Three procedures could then be followed:

(a) Priority Loan (Credito Prioritario) - This was aconventional loan with a fixed repayment schedule andinterest rate. The interest rate in 1985 was 14%.These loans tended to dominate CDTI's operations inthe subsequent years;

(b) Variable Participation (Riesgo y Ventura) - Theenterprise had a reduced or no obligation to repayCDTI if the project failed, but had to pay principalplus royalties for a specified number of years, if theproject was successful;

(c) Eguity ParticiDation (Capital de Riesgo) - CDTI wouldtake a share in the enterprise's capital, generallycombined with a loan. The number of equity

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participations was small (6), and the amountrepresented only about 2% of CDTI's total investments.

D. Bank Procurement and Disbursement Procedures

3.19 The procurement procedures established in Schedule 4 of the LoanAgreement were the standard ones applicable to large industrial projects,requiring international competitive bidding (ICB) in all cases where the itemsor groups of items were estimated to cost more than US$100,000, except forproprietary equipment or items which could be procured only from a limitednumber of suppliers, or whose delivery required a long lead time and for whichearly delivery was needed. In the latter cases international shopping wasallowed. The procedures for Bank review of procurement decisions asstipulated in Section D of Schedule 4 of the Loan Agreement required theBorrower to furnish the Bank, for all contracts estimated to cost more thanUS$100,000: (i) before bidding: the text of the invitation to bid, thespecifications, the advertising procedures, and other bidding documents; and(ii) after bids had been received and evaluated: the name of the bid winnerand a detailed report on the evaluation of the bids. Since the majority of theprocured items costing more than US$100,000 were proprietary in character orcould be purchased only from a limited number of suppliers or were narrowlydefined in technical terms, most of the items in a technology project of thistype should rather have been procured through international shopping.

3.20--- Other items such as pipes, small tanks and pumps, and nuts andbolts to build or adapt pilot plants or to build some prototypes were verylarge in number and of very small individual value. The Loan Agreement didnot provide for a simplified procedure for these items. The application ofstandard Bank procedures in this case was particularly cumbersome because thegoods and services were not acquired by the Borrower but by the subprojectsponsors. Application of standard DFC procedures would have been far moreappropriate for this project, in particular in view of the high percentage ofsubprojects ultimately carried out by subproject sponsors in the privatesector.

3.21 The disbursement procedures established in Schedule 1 of the LoanAgreement were also not suitable for this Project because they were designedfor large industrial type projects. Bank Loan proceeds could be disbursedunder two categories: (i) equipment and machinery, and (ii) technicalservices. It is, however, clear from the Appraisal and President's Reportsthat materials should have been eligible for financing, provided they were notused in the beneficiary's daily operations. Furthermore, the originaldisbursement procedures required that all orders and contracts, even for lowcost items, be submitted to the Bank prior to or together with the withdrawalapplication.

3.22 The December 1979 supervision mission stated that "The applicationof normal procurement procedures is awkward and the processing of thousands ofpurchase orders impractical." It recommended that the Bank adopt a simplifiedprocedure (Statement of Expenditures or similar) to facilitate disbursements

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of the Bank loan against small purchases made by CDTI borrowers. The Bankapproved the change in procurement and disbursement procedures. In a letterdated May 29, 1980 the Bank proposed that simplified procedures by applied.These procedures did not, however, become effective until December 3, 1980,because of a long delay on the part of the Government in countersigning theBank letter.

IV. OPERATING PERFORMANCE OF CDTI

A. Growth of Operations

4.01 Only four projects had been approved by CDTI at the end of 1978and no contract was signed until May 1979. There was generally a considerabledelay between project approval by CDTI's Board and the date of effectivenessof the contract, mainly because of the time required to negotiate the detailsof the agreement and the formal signing of the contract. In the followingyears, the build up of CDTI's activities accelerated considerably as shownbelow:

Table 4.1

SRain - Industrial RD&E ProlectProiects and Studies Financed by CDTI

No. of Proiects 1978 1979 1980 19I8 192J 19I 1984 Totals

Approved byCDTI 4 28 39 46 81 18 90 306Signed 19 17 51 68 21 67 243Completed 35 24 14 13 86Terminated 4 10 14Startedrepayment 14 12 1 13 40

Cost of ApprovedProjects (USS Mlns)

Total 2.4 16.9 17.4 13.8 34.7 7.2 65.6 158.1

CDTIparticipation 1.2 14.3 10.2 9.5 21.5 3.9 26.5 87.3CDTIdisbursements 3.4 6.3 9.5 9.2 2.2 17.3 48.2

SubprojectRepayments (Ptas Millions) 9 18 38 503 5'5

(US$ Millions) .10 .16 .27 3.29 3.82l

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B. TIne of RD&E Projects

4.02 Until 1983 the most important R&D subsectors financed by CDTI wereelectronics and electrical equipment, transportatior. equpment and mechanical_ndustries. In 1984 the electronics subsector continued to attract thehighest relative participation of CDTI financing, although biotechnology wasan important newcomer (13.5Z of the total committed in 1984). A detailedbreakdown is available in the PCR file. (A list of the documents available inthis file is shown in Annex 3.) The overall classification of CDTI'soperations is shown in the following table.

Table 4.2: Sgain - Industrial RD&E Proiect

Subsector Classification of CDTI Financed Projects (1978-84)(Percentages)

------ Approved Subprojects--------CDTI

Number Cost ParticipationSubsectors

Electronics and Electricalequipment 33 33 33Mechanical Industries 21 14 15Transportation Equipment 7 22 19Chemicals, Biotechnologyand Pharmaceuticals 12 12 12Energy 7 5 6Food and Textiles 11 6 8Other 9 8 7

TOTAL 100 1QQ 100

4.03 Few of the projects involved advanced indigenous research. Mostwere for development and engineering based on existing basic technological andscientific advances, either by introducing foreign technology not yet known inSpain, or by improving already known technology. This task of efficientlyselecting, absorbing, adapting and improving existing advanced technology isof the greatest importance in developing countries and was so considered inthe appraisal of the Project.

4.04 The average cost of the CDTI financed projects was Ptas. 61.2(US$0.51) million and CDTI's participation averaged Ptas. 32.8 (US$0.28)million. A classification by size follows:

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Table 4.3: SOaL - RD&E Proiect

Size of CDTI Sub2rojects

1978-80 1981-83 1924

Average cost/subproject-Ptas. million 36.2 42.3 111.6-US$ 000 equivalent 517 385 729Number of Subprojects-Below US$0.5 million 47 128 61Between US$0.5 m and US$1.0 m 15 5 13-Above US$1.0 million 9 12 16

C. Snonsor Ownershig

4.05 Most of CDTI's assistance has been channelled to privateenterprises, including some subsidiaries of foreign firms. The few operationswith public sector institutions have, however, been larger than average (3.91of the projects accounted for 17.5% of the total cost for all CDTI projects).The main public sector beneficiaries were: ENADIKSA for a process toconcentrate complex ores by a single selective flotation process and for thetechnology, design and construction of a treatment plant for solid urbanwaste; ATEINSA for the design and engineering of a manoeuver yard locomotive;Energia e Industrias Aragonesas, for a system to regenerate metallic anodes;Empresa Nacional de Petroleo (ENPETROL) for the development of anoligomerization process to obtain high octane gasoline; OFICINEM for energysaving studies in cement production; and the national telephone company (CTNE)for design of hardware and software for data processing, telecommunicationsand establishment of a design unit for integrated circuits.

D. Financial Aspects

4.06 Project sponsors generally financed between 30X to 551 of theproject costs while CDTI financed the balance; the average share of thesponsors in their project costs was 46.61. Through December 1984, CDTI hadreceived budgetary allocations totalling US$96.1 million from Government andhad committed US$87.3 million. Government support to CDTI was increasing andreached Ptas. 8.0 billion in 1985 (US$52.3 million) as compared to Ptas. 2.1billion (US$13.7 million) in 1984. Actual disbursements stood at US$48.2million, one third of which was drawn from the Loan proceeds as shown in thefollowing table:

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Table 4,4: Spain - Industrial RD&E Project

CDTI Financing

GovernmentBudget Allocations IBRD LoanPtas US$ Disbursements

Million Million USS million

1978 480 6.31979 727 10.81980 1,153 16.1 -1981 1,344 14.5 5.41982 1,840 16.8 0.51983 2,529 17.6 3.01984 2.136 14.0 91

Total 10.209 96.1 18.0

V. INSTITUTIONAL DEVELOPMENT

Targe-ted Activities and Generation of Technology Proiects

5.01 During the period 1974-1984, Spain's expenditures for RD&E weremostly for basic research in institutions of higher education and the paymentof licenses, royalties and know-how for imported technology. Payments abroadfor technology increased from US$316 million in 1974 to US$720 million in 1982and then dropped by about 20X through 1984, as shown below. Approximateiy 60%of the payments abroad were for licenses and royalties, and the balance fortechnical know-how.

Table 5.1: Sgain - I.ndustrial RD&E Project

Exports and ImRorts of Technological Services

---------Imports--------- ---------Exports-------- DeficitPtas. million USS million Ptas million USS million USS mln

1974 18,170 316 2,070 36 2801979 34,704 517 7,642 114 4031980 44,393 619 10,873 152 4671981 52,302 567 16,698 181 3861982 78,984 719 15,707 143 5761983 88,338 616 18,691 130 4861984 88,347 577 20,637 135 442

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The deficit widened in absolute terms, but dropped from 50X of the net cost oftotal R&D expenditures in 1974 to 361 in 1984. As is frequently the case,the main importers of technology were subsidiaries of foreign companies.

5.02 The appraisal report noted that Government R&D efforts weredispersed over too many institutions working without sufficient coordinationand spread over too many research areas. Progress to counteract these trendshas been slow. Although steps were being taken to improve the situationthrough legislation (e.g., overall planning in science and technology would bethe responsibility of an interministerial body), it was not clear that theproposals at that time to create a complicated administrative superstructurewould improve the efficiency of R&D activities.

5.03 For the successful development of modern, competitive technology itis not sufficient to have organizations such as CDTI alone; the policyframework should foster efficiency in industry and should not distortinvestment decisions by encouraging ventures that are not economicallyjustified. Therefore, in spite of the success achieved by CDTI (up to 1985),the subsequent development of the country's technological base would requirecontinued attention to policy inconsistencies in the incentive framework forthe importation of capital goods and technology and in the laws governingpatents and licensing of foreign and domestic technology.

5.04 During appraisal of the Bank's Project, it was thought that CDTIwould initially concentrate on some priority areas (electronics, mechanicalindustries and food processing) where technological progress could most easilybe absorbed by Spanish industry and competitiveness improved. However, theinitial reaction of industry was lukewarm. Thus, in order to obtain asufficiently large volume of activities to make its weight felt, CDTIcorrectly decided to promote R&D in a large number of areas. In response togrowing demand for R&D in new disciplines, CDTI later participated in researchprojects in biotechnology and aquaculture. There was also from the start animportant change in the source of proposals for technology development.During appraisal, it was expected that the initial ideas would originatemainly in CDTI, which would then conduct market studies, identify productlines, and commission, finance and supervise the necessary R&D. Thus,although the actual R&D would have been carried out by public and privatesector institutions, the scope of these activities would have been largelydetermined by CDTI1/. This entity did, in fact, carry out several studieswhich were made available to the public. However, with few exceptions, theprojects financed by CDTI were initiated and defined by the interested firmsthemselves.

Supervision Summary, Section 7(b), December 6, 1979 andSupervision Mission mamorandum of December 21, 1979.

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Subproject Evaluation

5.05 is previously pointed out (para. 3.13), CDTI initially attachedexcessive weight to the financial condition of project sponsors. This policywas subsequently relaxed somewhat, but applicants still had to be able to putup substantial collateral. As a result, individual inventors could generallynot obtain assistance from CDTI unless they were independently wealthy or wereassociated with an enterprise (para. 3.14). During the PCR mission, CDTIstated that this policy would be continued and that employment of theindividual inventor by an enterprise, e.g.. by the Spanish subsidiary of amultinational cooperation, would be beneficial. However, this policy maydelay the development of entrepreneurship of the type that has fostered rapid -3

technological change elsewhere. Bank supervision missions commentedfrequently on this aspect of Spanish R&D, which was not adequately addressedby the then existing sector policy.

Scaling-up of Facilities for New Products and Processes Developed inCDTI SubDroiects

5.06 Many CDTI projects which reached the prototype or pilot plantstage were not scaled up to commercial production or full s'zd industrialoperation. In some-cases, the final economic and financial arnalyses indicatedthat the project would ot be viable. In other cases, financing of theinvestments re#uired in plant and equipment, market penetration and workingcapital were tl1e principal obstacles. This underlines the need for morecareful consideration of the commercial potential of proposed projects. Italso highlights the need for the development in Spain of venture capitalcompanies or other types of financial intermediaries with the resources andthe willingness to take substantial risks in exchange for high potentialreturns. Such investing in the final stage of new product/process developmentis indispensable for aggressive anid continued technological progress inindustrializing and industrialized countries alike. In spite of some effortsin the country at the time, the availability of risk capital in Spain remainedlimited and needed to be further developed.

VI. ROLE QF THE BANK tND LESSONS LEARNED

A. The Bank's Role

6.01 Starting in the mid-1960s, the Bank participated actively indiscussions with the Spanish Government, OECD and other organizations on thepossibility of improving the country's research programs. During appraisaland initial supervision, the Bank assisted in formulating the criteria forresearch project evaluation and other work related to R&D -apacitydevelopment. The Bank also arranged visits by CDTI officials to RD&E groupsin the U.S. In November 1983, the Bank sponsored, jointly with CDTI, aseminar on the "Technological Aspects of Development: The Spanish

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Experience." The seminar attracted an international audience and provided afruitful forum for the exchange of ideas in this field.

6.02 The Bank played a decisive role in developing a system for theacquisition, adaptation and creation of new industrial technology in Spain,was instrumental in developing an organization dedicated to this end, and insecuring the necessary autonomy for it. Through this, the Bank assisted inmaking Spanish industry aware of the necessity of using the most appropriatetechnology if industry is to grow and remain competitive.

6.03 On the debit side, the Bank failed to foresee the difficultiesthat CDTI would encounter in applying the procurement and disbursementprocedures of the Loan (para. 3.20). It did not follow the Project'simplementation closely enough, despite the fact that this was the firstproject of its kind both for Spain and for the Bank. Between March 1978 andNovember 1983 there were five supervision missions, i.e., one every 14 months;this was on the low side for a project of this type. Perhaps as a result, theBank did not obtain advance information on the changes in CDTI's organizationand management that took place early in 1984 (para. 3.06). The Bank was alsosomewhat lax in enforcing CDTI's reporting requirements. Annual externalaudits of CDTI did not take place because CDTI was part of the Ministry ofIndustry until the end of 1983. The first annital external audit (for the year1984) was in progress at the time of the PCR mission. The compliance withcovenants is shown in Annex 4.

B. ''Lessons for the Borrower and the Bank

6.04 The needs for assistance in R&D in different countries may differconsiderably. Therefore, it is not prudent to try to embody the idealorganization for a technology development unit into a unique recipe. Thereare, howe-cr, some general lessons from the Project under review:

LESSONS

(a) The project was, on balance, successful in large part because thetiming for technology development investment was appropriate toSpain's level of industriclization, the recent entry into thelabor marketplace of a large pool of technical manpower and theneed to stimulate increased R,D&E in industry. This demonstratesthe importance of appropriate training for projects of this type.CDTI has since become a key arm of the Government in stimulatingindustrial technology development.

(b) The project, the first of its kind for the Bank, was also sensiblyflexible in its organizational structure and approach. However,it was initially rigid on procurement and disbursement procedures--the procedures needed modification and this was done after anexcessive amount of time. In such instances, the Bank should

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respond more quickly in modifying procedures, etc., than was donein this case.

(c) The role of CDTI, like similar institutions elsewhere, changedgradually from an agency whose role was primarily to promotetechnological development as part of the Government, to one whoserole became more demand driven and financing-oriented withincreased autonomy, as indigenous technological capability grewand, most particularly, as it became clear that Spain would haveto compete within technologically advanced Europe.

(d) While the Bank was instrumental in helping to create CDTI and indeveloping its modus operandi, it was less successful insupervising this first effort and in helping CDTI learn fromexperience and mistakes. The Bank, furthermore, did not take allthe time necessary to work with CDTI to develop its financialinstruments, its supervision techniques, etc., for the benefit ofCDTI as well as subsequently for applying these lessons to othercountries.

(e) With respect to financial instruments, the conditional loan repaidwith royalties became the preferred vehicle for CDTI financing.The royalty payment formula was a complex one, which ultimately,even for successful projects, did not result in significant profitfor CDTI to make up for the failures, even though the proportionof failures was well below the percentage anticipated (13Xcompared to normal 33X). This was an area where the Bank couldhave provided more financial expertise. Consequently, when a newadministration took over CDTI in early 1982, in attempting tocorrect the errors of the previous administration, it simplyadopted a more conservative traditional lending approach andgradually phased out conditional lending.

(f) Likewise, as CDTI's role as a financier of industrial technologydevelopment grew in importance, the Bank should probably haveinsisted earlier and more consistently on the need for CDTI (i) toemphasize in its loan evaluation late-stage development andcommercialization rather than research; and (ii) to de-emphasizefinancial strength and the collateral of the borrower in order topromote the development of really innovative technologies.

(g) Insufficient attention was devoted to other policies (e.g., taxincentives) related to industrial technology development (ITD).Although these have developed rapidly in recent years, the Bankcould have contributed more throughout the project in identifyingconstraints and proposing policy and program alternatives.

(h) In summary, while the project, with significant Bank contribution,was well conceived, appropriate for the Spain of the mid-1970s andon the whole accomplished its objectives, the project and CDTI wasslow to evolve to the needs of the 1980s--ITD and

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commercialization of new technologies. The Bank did notcontribute as much as would have been desirable to helping CDTIevolve in the later stages of the project.

Bank Procurement and Disbursement Procedures

6.05 Bank procurement and disbursement procedures for this kind ofproject should reflect the reality of RD&E activities. Normal procurement anddisbursement procedures applied by the Bank in direct loans to industry arenot practical in this kind of project. DFC type procurement policies shouldbe the rule. For very small items, which are quite common in some RD&Eactivities, local purchasing procedures would be advisable.

Commercialization of SubDroject Results

6.06 In the process of project preparation and appraisal, carefulconsideration should be given to the availability of financial resources forscaling up technically successful RD&E results developed by researchers orcompanies not strong enough to undertake this type of financing on their own.The necessity of creating new financial institutions and/or establishingformal links with existing financial intermediaries and potential sources ofventure capital should be explored from the start in order to avoid costlydelays, and in some cases failures, in the development of new products andprocesses.

Promotion of Technological EntreDreneurshiD

6.07 Related to the above aspects, the widespread absence in mostdeveloping countries of mechanisms, policies and incentives to stimulateentrepreneurship of individual inventors or to create limited partnershipsshould be the subject of special consideration during preparation of R&Dprojects.

General

6.08 In a project of this type it is not appropriate to calculatefinancial or economic rates of return. However, it is clear that in spite ofsome deficiencies, the Industrial RD&E Project in Spain had importantachievements. The project had a significant impact on the thinking ofindustry executives in a number of highly innovative fields such aselectronics and biotechnology. Even in large enterprises, CDTI support for aresearch proposal legitimized the research function and enabled researchers torequest appropriate funding and stronger commitments from their respectiveBoard of Directors.

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6.09 While recognizing that it would not be possible to exactlyreplicate a Project such as the one under review, many of its features and thelessons learned could be usefullv applied in future R&D projects in othercountries. In summary, the investment in this Project promoted thedevelopment of a more efficient and competitive industry and assisted inopening up new fields of activity for Spanish manufacturing. The supportprovided by CDTI had a catalytic effect on the development of Spanish RD&Ecapabilities.

Spain: aa

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ANNEX IPage 1 of 3


SPAIN - INDUSTRIAL RD&E PROJECT

SOME EXAMPLES OF CDTI SUPPORTED PROJECTS

Desiln and Organization of a Center to Manufacture Integrated Circuits.

This project was approved on December 13, 1979, together withanother, very costly project, both sponsored by the Compania TelefonicaNacional de Espania (CTNE). The cost of this project was estimated at Ptas32 million with a CDTI participation of Ptas 16 million and animplementation time of 24 months. The objective was to develop a unitcapable of designing custom made integrated circuits and the possibility ofmaking them in existing 'planar' technology plants; at the same time alearning process would be started In building specialized plants. Thegroup acquired a CAD computer, a CALMA computer, a logical analyzer,micromnmipulators, etc. The implementation of the project was delayed 30months but the final cost (excluding salaries) was close to budget. Theproject was technically successful. Sales began in 1982, and are expected

* to grow more rapidly than estimated at the time of presentation of theproject to CDTI's Board. In another project costing Ptas 246 million (witha Ptas 100 million CDTI participation), CTNE, associated with two privateenterprises (SECOINSA and SINTRE), developed prototypes for telephone datatransmission systems that were up to then imported. Some equipment hasalready been installed for Spanish customers and customers abroad haveshown interest. However, projected sales are lower than originalestimates.

DesiRg of a Battery for Solar Photovolatic ApDlications.

This project was approved by CDTI on January 30, 1981 for an

estimated cost of Ptas 9.3 million with a 68X participation by CDTI. Theobjective was to design a 1OKU battery to store electric energy generatedby a solar photovoltaic generator; it would therefore be capable ofreceiving and storing electric power fluctuating in intensity not onlyaccording to the hours of the day but also according to the seasons. Theproject sponsor, Fabrica Espanola Magnetos S.A. (FEMSA) successfullydesigned and built two generations of battery prototypes. The project wasimplemented on time and within budget. The selling price of the batteriesdesigned by FENSA has been estimated to be 20X higher than those built inotter European countries. This might be an acceptable margin for a newirdustry incorporating a technology not yet applied in Spain. However,actual production of the batteries will have to wait until a program forexperimental solar power plants is developed. Therefore no sales areforecast for the near future.

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ANNEX 1Page 2 of 3

New Type of Furnace for Ceramic Tiles.

Tecersa was a company formed by ceramic tile manufacturereslocated in the Valencia area to develop technological improvements in theindustry. On March 27, 1979, it obtained financial assistance from CDTIcovering 572 of the Ptas 87 million project cost to develop a tile tunnelfurnace where temperature control at different locations should beexercised with greater precision then in the furnaces then in use inSpain. The problem was that while the temperature should be smoothlygraduated lengthwise as the tiles move along the tunnel, the crosswisetemperature should be as uniform as possible. The project was technicallysuccessful but after a prototype was built, the promoter of the enterprisedied and there was not enough interest to continue the project. Thli is aninteresting case where the importance of the individual entrepreneur was ofdecisive importance in the development of a new business. Although notassisted by CDTi, Tercersa successfully developed an instrument to measurethe presence of small cracks in tilea based on electric voltagedifferentials rather than by using sound waves.

Radioisotopes for Clinical Diagnosis

On April 10, 1984, CDTI agreed to finance 50S of this Ptas 38million project aimed at the development of tracing compounds based Onradloactive technecium for diagnosis based on the absorption of specificcompounds at specific sites in the human body. The technology is wellknown abroad. Its introduction in Spain by Isotopos y Derivados S.Ae, apartnership between one of the largest Spanish pharmaceutical manufacturersand a research group, was well received by the medical profession so thatsales, which had been expected to begin in 1986, actually started inNovember 1984. The company intends to separate radioactive technecium, nowbeing imported, and incorporate it into the compounds administered topatients. For this purpose, it has obtained from CDTI, in October 1984, asecond credit for 50Z of the estimated cost of this project (Ptas 54.4

Electronic Artificial Respirator

Approved by CDTI on June 30, 1980, this project, sponsored byManufacturas Medicas S.A. , aimed at developing a respirator which wouldfeed back information on the patient's reaction. The proposed design wasnew not only in Spain but also abroad when it was presented to CDTI. Thecost of the project was estimated at Ptaa 33.9 million and CDTI assumed66Zo The project has been successful but because the company is not knownoutside Spain (where the main market ib.) and has no establisheddistribution network, sales projections have been reduced. In 1982, only32 respirators were sold instead of the estimated 227. In the meantime,

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ANNEX IPage 3 of 3

other companies (SLemens, ATM, Robert & Carrier) have introduced or areintroducing models competing wlth the Pulmosystem Z-800 made byManufacturas Medicas S.A. The company,in a defensive strategy, enteredinto a contract to sell lts technology to Aire Shlelds Inc. (U.S.).

Mercury/Membrane Chlorine Electrolytic Call

IavestigacLon Quimica Industrial, a small research group jointlysponsored by a large process Ludustry (EnergLa e Industrias Aragonesas) andan engineeriag firm (TecuLcas Reunidas), presented a proposal to developa new type of cell for the electrolysis of sodlum chloride brine to producechlorlne and caustic soda, in which the advantages of a conventionalmercury cell (higher product purity) and a maubrane cell (lower operatingcost) could be combined. An added advantage sought was less floor spacerequirements. The project costing Ptas 80.3 m$llon (501 financed by CDTI)ws approved by CDTI on October 26, 1978. Pilot tests carried out in 1980showed It to be technically satlsfactory and patents were applied for inthe US and Europe. Unfortunately, fabrication of the type of polyu.r usedin the membranes, made by Dupont, was discontinued. The project dld notbecome commercially viable because the productlon volum for thesemL-permeable membranes was not suffLcient to justify lts manufacture inSpain or elawhere.

-industrial Modules for Innovative Enterprises.

Thls project aimed at establishing an LndustrLal park specializedin providLng mdules and servlces for embryonic enterprises developing newtechnologies. The park was to have a deslgn center for all customers aswell as a building for offlce space and solar energy utillzation systems,which would allow making comparlsons ln different modules. The project wasapproved on July 29, 1982, and lts estimated cost of Ptas 16.0 mllion was1OO1 fLnanced by CDTI. No sales forecast was made at the time of approvalby the Board (where lt was presented as a study and not as a project).vtne inditles were hiitlt. h,,t %fth the rvtA nf r?aqmant ve% r'WiT neiv

foreseen, it ls dlfflcult to imaglne that repayment wlll be made ln lessthan 50 years.

Reactance for Fluorescent LLghts

CDTI financed 50% of the Ptas 32.4 million cost of a projectdeveloped by Glbbs & Rill Espanola S.A. for the design, development andprototype constructlon of improved reactances for special uses (such as400W mercury halLde, 70-400W high pressure sodlum vapor, and very highemission lamps). According to the project sponsors, the efficlencylmprovements of fluorscent lamps obtained ln the last few years was wipedout by higher losses ln the reactances. The project took 12 months (5month delay) but the fLnal cost at Ptas 29.7 mllion was below budgetPresent sales projectLons are lower than orLgLnally forecast, because therange of products to be offered has been narrowed down.

- 25 -

ANNEX 2Page 1 of 2



CDTI - Organization Chart(July 1983)

Dlrector. . Board n

Department Department Secretaryof of General

Studies Promotion

Project ExternalAporaisal Relations

Accounting

Public SupervisionSector and Project

Procurement Follow-up Contracts

r Plannin -I lI'wuImr-IaI i-Iand Special I 1.ization PersonnelPrJctJo I _ Management

Administra-tion &Govt.Liaison

Industry DepartmentFebruary 1985

- 26- ANNEX 2Page 2 of 2

PROJECT COMPLETION hEPORT


CDTI - Organization Chart(March 1984)

Board

Director

Proje techunlon Proj StuPdLu

Promotion Depart- eports trativeDopt. mcat Depare Dapa tment

Electronics Projectand Data Evalua- AccountingPrnuessrig tion

Bloteebnolo- Pro ect Pergsonnel_gg, Medical Spr- ManagementProducts and vldn& Develo-ChemtteRI nea

{Industries 1L_

Agricultural Cromerca |Corporate|Industries llzatlon FinancesAnd FoodProducts

Energy and RelationsMechanical with Reglo-Industries nal organi-

zations

Industry DepartmentFebruary 1985

- 27 -

ANNGK 3



Documents available in the PCR File

1. Legal Status of CDTI (Royal Decree-Law 8/82)

2. CDTI: Published Reports

3. Subproject Evaluation Forms

4. List of RD&E Subprojects

5. List of RD&e Studies

6. Subproject Distribution by Subsectors (1978-83)

7. Sumary of Disbursements Schedule Based on Outstanding Commitments(12/31/1984).

- 28 -

ANNEX 4



Compliance with Covenants

Covenant Compliance

Establish an RD&E unit within the Ministry of Industry Yeswith defined responsibilities, functions, and procedures(Section 3.01 (c)).

Transform the RD&B unit into an autonomous organization by Yes*/December 31, 1979 (Section 3.01 (a)).

Make available to the RD&E unit the proceeds of the Loan plus Yesother funds as required (Section 3.01 (d)).

Semi-annual review by the Bank of the unit's work program for Yesthe next six months (Section 3.02 (a)).

Consult with the Bank before initiating RD&E projects costing Yesmove than US$500,000 during the first 3 years (Section

-3.02 (b)).

Submission of project completion reports on each project Yes(Section 3.02 (c)).

Annual external audits of the RD&E unit; audit reports to be Nosubmitted within 4 months (Section 4.03 (b)).

*/ Delayed to November 30, 1983 (see para. 3.05)