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]Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 18105
IMPLEMENTATICN COMPLETION REPORT
INDIA
INDUSTRIAL TECHNOLOGY PROJECTLoan 3119-IN
June 30, 1998
Finance and Private Sector Development DivisionSouth Asia Region
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. It:s contents may not otherwise be disclosed withoutWorld Bank authorization.
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CURRENCY EQUIVALENTS
(as of June 28, 1998)
Currency Unit Indian Rupee (Rs.)
Rupee 1 US$0.023
US$1.00 Rupee 42.71
GOVERNMENT FISCAL YEAR
April 1 - March 31
ABBREVIATIONS AND ACRONYMS
CSIR Council of Scientific & Industrial Research
Gol Government of India
IDA Intemational Development Association
lDBI Industrial Development Bank of India
ICICI Industrial Credit and Investment Corporation of India
ICR Implementation Completion Report
ITD Industrial Technology Development
NCL National Chemical Laboratory
NICs Newly Industrializing Countries
OED Operations Evaluation Division
OTCEI Over-the-Counter Exchange of India
SPREAD Sponsored R&D
TG Technology Group
TDF Technology Development Fund
Tls Technology Institutions
UTI Unit Trust of India
VC Venture Capital
VCC Venture Capital Company
WB World Bank
Vice President Mieko NishimizuDirector Edwin LimSector Manager Marilou UyTask Manager Sanjay Kathuria
FOR OFFICIAL USE ONLY
IMPLEMENTAT'ION COMPLETION REPORT
INDIA
INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT
(LOAN 3119-IN/ CREDIT 2064-IN/ JAPAN GRANT 2700-IN)
TABLE OF CONTENTS
PrefaceEvaluation Summary .............................................................. i
PART l: PROJECT IMPLEMENTATION ASSESSMENTA. Project Objectives .IB. Achievement of Project Objectives .3C. Implementation Record and Major Factors . .7D. Bank Performance .. 8E. Borrower Performance .. 8F. Assessment of Outcome .. 8G. Project Sustainability .. 8H. Future Operations .. 101. Key Lessons Learned .. 11
PART II: STATISTICAL INFORMATION
Table 1: Summary of Assessments ......................................... .................. 16Table 2: Related Bank Loans/Credits ........................................................... i 7Table 3: Project Timetable ................... ........................................ 17Table 4: Loan/Credit Disbursements ............................................ ............... 18Table 5: Key Indicators for Project Implementation .............................................. 18Table 6: Studies Included in the Project .............................................................. 18Table 7: Project Costs ........................................................... 19Table 8: Project Financing ................... ........................................ 19Table 9: Status of Legal Covenants ............................................ ............... 19Table I 0:Bank Resources: Staff Inputs ........................................................... 19
APPENDIX I Borrower's Contribution to the ICR .............................................. 20-38APPENDIX 11 Aide Memoire ........................................................... 39-45
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT
INDIA
Loan 3119-IN/Credit 2064-IN/Japan Grant 2700-IN
Preface
This is the Implementation Completion Report (ICR) for the Industrial Technology Project in India for which Loan3119-IN and Credit 2064-IN in the amount of US$ 200 million equivalent was approved on December 8, 1989 andmade effective on May 1, 1990. Japan Grant 2700-IN was signed on March 28, 1990 and'made effective on May 1,1990.
The loan/credit/grant was closed on December 31, 1997 instead of December 31, 1995 which was the original closingdate. The last disbursement took place on May 19, 1998.
The ICR was prepared by Mr. Sanjaya Lall (Oxford University) and Ms. Manjula Luthria (PSDBE) with the help ofMs. Harpinder Oberai (Consultant), under the supervision of Mr. Sanjay Kathuria, SASPR, task manager. The ICR wasreviewed by Ms. Marilou Uy (SASFP), Ms. Shideh Hadian (SASFP), Mr. Ashoka Mody (PFG), Mr. Jan Peter Wogart(CA2DR).
Preparation of this ICR began during the Bank's final completion mission in January 1998. It is based oni material inthe pro ject files as well as information received during the mission. The borrower contributed to preparation of the ICRby providing written input which is attached with this ICR.
EVALUATION SUMMARY
Project Objective
The overall objective of the project was to facilitate the acquisition and development of technology by industrialfirms in India. It aimed to balance existing domestic technological capability with import of foreign technology.and reduce the financial constraints to new technology ventures and the foreign exchange constraint to technologyimport. The project had three components:
a) Helping small, innovative firms obtain financing by supporting the development of venture capital (VC) in India.This $ 45 million loan component originally aimed to support four venture capital entities and finance perhaps 150enterprises.
b) Upgrading research and standards institutions to provide technology services to industry and promotingcollaboration between industry and research institutions. This technology services component was expected toupgrade the facilities and build the industrial support programs of 12 - 15 technology institutions (Tls) for $ 40million: and provide $ 15 million to about 60 firms to finance R&D projects contracted with TIs.
c) Financing the import of technology and technical know-how by industry by supporting the the fast-trackTechlnology Development Fund (TDF), with $ 100 imillion equivalent of loan proceeds, expected to benefit between600 and 800 firms.
Evaluation of Objectives
The experience of the project suggests that the failures it was addressing in capital, information, technology andinstitutional markets were real, and the modalities dlevised for remedying them well conceived. Policy changes thatdirectly affected the project such as import liberalization and the determination of the government to make scientiticinstitutions financially more self-supporting, and, more generally, the increasingly positive attitude to the privatesector and foreign investors, all reinforced the benefits of the project, suggesting that its initial concept was sound(refer para #4 of main text and para # 1.1 of borrower input for policy environment).
Implementation Experience
Overall implementation experience was highly satisfactory. All covenants were fully complied with. Loandisbursements were slow in the initial periods, largely due to the fact that there was a long learning period for theimplementing agencies given that R&D finance, restructuring of R&D institutes and venture capital were all newconcepts to be grappled with. Restructuring of the project in light of early closure of the TDF component alsocontributed to delays. Bank agreement with the Borrower to reallocate some of the funds from unusable componentsinto others improved the implementation process and contributed to the quality of the project. Cooperation betweenthe Bank and the project institutions was highly satisfactory and credit for this goes to both sides. Continuity and;olrcommitment on the part of the Gol as well as the Bank played a key role in the ability and readiness to solveproblems.
ICICI and IDBI functioned as high quality intermediaries for this project. Strict performance monitoring andevaluation criteria and a high degree of institutiona'l involvement in each of the sub-projects was present throughout(refer Section E of main text on borrower performance). Finally, the availability of Japanese implementation grantswere very useful in funding key studies, internship programs, and seminars that increased the "ownership" andunderstanding of the borrowing institutions. Availability of IDA resources allowed sub-loans to institutions to berestructured as interest-free loans for longer periods. This made the loan affordable while inculcating the disciplineof repayment for activities that they would not have typically borrowed for (refer Section C, para # 11 of main textfor detailed discussion of both issues and para #1.5 of borrower input).
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Results
A caretfil selection of the participating institutions, adequate seminars, training and study tours, the right economicincentives and policy environment, and strong Borrower as well as Bank commitment resulted in a highl)satisfactory results.
Technical Development Fund (TDF) component (Section B, para # 7 of main text): US $100 million of the loan wasto support increased and rapid import of various forms of technology required for upgrading. Around 400 firmlsused this facility as a one-stop-shop for importing technologies. A wide range of technologies in diverse sectorswere imported by firms of all sizes; however medium and large firms predominated. The project came in at a tiimewhen foreign exchange limitations were severe and rules for imports of technology were highly bureaucratic. Bysupporting the TDF, the project was able to bolster the speed of reform towards greater liberalization.
Indeed, against the backdrop of the TDF, the Government of India liberalized import policies considerably,beginninig July 1991, rendering this component redundant. While $53.5 million was eventually used for thiscomponent, $11.5 million was reallocated to the Pilot Software Fund and S 15 million to traditional VC, $20 million
was canceled.
Veentlre Capital (VC) component (Section B, para # 8 of main text): Numerically, the project achieved more thlanset out in its initial objectives. The project supported six venture capital companies (VCCs) which managed ninlefunds. They invested in over 300 companies and the returns have been around 18-20% on average. Most of theinstitutionis set up adopted the innovative, hands-on, risk-taking approach that venture capital requires, andsponsored some exciting and valuable technology based projects.
In fact, many of the ventures would not have taken off in the absence of VCCs because of the lack of other souIcesof technology finance. Those projects that may have been undertaken would have either taken much longer, or th2lirscope significantly curtailed. In that sense, the project in essence launched the VC industry in India, Its indirectcontribution may have been equally important, in influencing the 'culture' of risk finance and enabling foreignventure capitalists to be attracted to India.
TI component (Section B, para # 9 of main text): The project supported 33 loans in 30 Tls instead of the target of12-15 institutions. Of these, 7 loans supported new TIs, mostly private contract or cooperative research labs ortechnology service institutions. The project provided loans rather than grants, forcing the TIs to focus on financialmanagement and rates of return. Also, the loans were made conditional on the launching of internal institutionalchanges.
A number of research institutes were able to modernize and upgrade their physical facilities in several importanitareas. This enabled them to enter new areas of research and re-orient themselves to serve industry. Most of theseinstitutions have raised the proportion of the budget that comes from their own earnings significantly. Theinstitutional re-orientation towards market friendly postures has been remarkable (see para #1.13, Boxes I and 2 ofborower input for examples).
Sponsored R&D (SPREAD) promotion fund (Section B, para # 10 of main text): A total of 98 projects in 96companies borrowed under the SPREAD program. Nearly two-thirds of these have never undertaken any R&Dactivity before, and around 80 of them had no previous joint activities with a TI. Furthermore, almost 90 percent ofthe companies borrowing under SPREAD were of small or medium- scale. Many of the technologies developed arecomplex and demanding and a sample of the projects suggests that most involve substantial technological effort andintroduced completely new products or processes to India. They mostly involve replacing expensive or closely heldnew foreign technologies with viable, adapted and much cheaper local counterparts. Also, exports often resultedfrom SPREAD projects.
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The immediate benefit of SPREAD for borrowing firms came from expediting the identification of Tls orresearchers for the proposed project; the clarification and credibility which ICICI's appraisal brought to the firms'proposal; and the intermediary role of solving problems between Tls and firms that ICICI performed. The larger-benefits of SPREAD include new or improved products or processes which would have gotten to market much moreslowly or not at all or through a more costly route. Other benefits are the positive impact on new projects beingdeveloped in collaboration between firms and Tls; and the confidence of the various parties (firms and Tls) in theirabilities to produce practical results and work together. Many of the firms have stated that they will go back to lilsor universities for research collaboration in the future.
Project Sustainability
The project made a positive contribution to industrial technology development in India. It helped shape the directionof reform in technology institutions, launched the venture capital industry, and started a culture of collaborativeresearch between firms and technology institutions. Perhaps more importantly, it has launched a process that hasenormous externalities that will feed into longer term developments. However, concerns regarding the momentlmof reform in the absence of the committed intermediaries and Bank funds are expressed in Section G of the maintext of this document as well as in the borrower input in paras # 1.28/1.29 and # 3.9.
Key Lessons Learned
The project offers some important overall lessons for the design of ITD projects in other developing countries (referSection 1. paras # 25, 26 and 27 of main text):a) Success in restructruing public sector institutions resulted from identification of market failures and in-built
tight monitoring, training, and incentives for participants to 'own' the projects. Such monitoring is demandingfor the Bank and internediary institutions (see section E, paras # 14 and 15 of main text for discussion ofborrower commitment and performance). Strong leadership in the beneficiary institutions played a key role inachieving success.
b) The broader policy context within which ITD is placed is crucial to its success. The Indian project was locatedwithin a liberalization episode, when growing internal and international competition forced firms to improvetheir technologies and innovate. While withou.t this backdrop much of the impact may have been lost, theproject did not wait for the entire reform process to be either initiated or completed, but accepted the limitedreform that had already taken place and played the role of a catalyst in accelerating the momentum of thereform effort further.
c) The role of an agency such as the World Bank iis important in accelerating and augmenting such reform effor-tsbecause the Bank has credibility and the experience necessary to play the role of an honest broker between thescience & technology institutions, industry, and the Government.
d) A strong positive response also depends on the existing base of industrial and technological capabilities. India'slarge supply base responded to technological policy stimuli and was able to enter advanced technologies even atfairly small scales.
e) A strong and committed intermediary is crucial to the success of a complex project. In the Indian experiencethe intermediary possessed and further cultivated the skills and commitment necessary to create a market lortechnology finance.
f) There is a fairly long 'learning' period for all participants in such projects, including for the intermediaryagency. Where a culture of technology upgrading and collaborations has to be created among firms and R& Dinstitutions, it may be. typical to see slow starts (reflected in slow disbursements) in the beginning, but the rightincentives, training, and advice can help build momentum.
Future Operations
The response to SPREAD shows that interventions of this nature are more useful in stimulating industry to spendmore on R&D than tax incentives. Much of Indian industry is unable to afford the cost of R&D and needs softfunding support for industrial technology development. Continuation of this program in its present or modified form
iv
will allow efficient usage of the existing R&D infrastructure through joint projects with industry. The expertise builtup in the Technology Group of ICICI could be built upon and augmented, perhaps through its transformation into afull-fledged organization on its own, like the Korea Technology Bank.
Small-scale industry does not and cannot seek alliances with formal R&D institutions, however industry-inclinedthe latter might become. The needs of small industry may also be more routine -- in the area of quality promotionand standards adherence, which need to be supported by different organizations that are able to target clusters otfirms which face similar constraints. New and small technology-based companies need special attention once thesupport for the domestic VCFs through the bank project comes to an end.
The process of bringing an industry-oriented approach to R&D institutions in India has begun well, but muchremains to be done. Training of scientists in CSIR labs needs to be continued over a longer period of time so that theability of scientists to respond to the new incentives is enhanced. Many more institutes need to be challenged wvithreform for the culture gap between science and industry to be bridged. Industry needs to be encouraged to usescientific institutions to solve industrial problems and this requires a continuation of the education, awareness-raising and training efforts. Similar efforts need to be conducted in universities and engineering colleges so thateducational programs can be more industry focused.
Finally, if local inventive efforts are to be encouraged and nurtured, and the absorptive capacity of technologytransfer from abroad to be strengthened, the role of intellectual and property rights (IPRs) will need to be facedsquarely While India is a member of the WTO, and legislation that makes India a signatory to adopting strongerintellectual property right regime is due in Parliament, a lot will need to be done to bring a greater understanding ofthe role of IPRs to both the scientific community and industry. Compliance with internationally accepted IPR normswill mandate non-trivial investments in the enforcement infrastructure on the one hand, and a critical role loreducation, training, and dissemination of information on the other, which in turn would stimulate technologygener-ation and diffusion.
Foor borrower's suggestions on future operations refer "Unfinished Agenda" paras # 1.28 through # 1 .32 of borrowerinput section.
INDIA
INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT
(Loan 3119-IN, Credit 2064-IN, Japan Grant 2700-IN)
Part 1. PROJECT IMPLEMENTATION ASSESSMENT
Project Identity
Project Name Industrial Technology Development Project
Loan no. 3 119-IN (US $145 million)
IDA credit no. 2064-IN (US $55 million equivalent)
Japanese Grant no. JPN-2700 (US $2.5 million equivalent)
Country India
Sector Financial Sector
A. PROJECT OBJECTIVES
Project Objectives
I. The overall objective of the project was to facilitate the acquisition and development of technology byindustrial firms in India. It aimed to promote within industry a balanced recourse between existing domestictechnological capability and increased and easier import of foreign technology; and to reduce the finanicialconstraint to new technology ventures and the foreign exchange constraint to technology import. The project lhadthree components:
a) Helping small, innovative firms obtain financing by supporting the development of venture capital (VC) in India.This $ 45 million loan component originally aimed to support four venture capital entities (later expanded to six),finance perhaps 150 enterprises, lead to the development and commercialization of many new products anclprocesses and earn returns on investments of 15-18%.
b) Upgrading research and standards institutions to provide technology services to industry and promotingcollaboration between industry and research institutions. This technology services component was expected toupgrade the facilities and build the industrial support programs of 12 - 15 technology institutions (TIs) for S 40million: and provide $ 15 million to about 60 firms to finance R&D projects contracted with TIs.
c) Financing the import of technology and technical know-how by industry by supporting the expansion and easieraccess by companies to the fast-track Technology Development Fund (TDF), with $ 100 million loan, expected tobenefit between 600 and 800 firms. This 'policy finance' was agreed to after the Government removed some majorlimitations from the TDF, in 1988-89.
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Policy Context (historical, and preceding the project)
2. The Indian Government was one of the first in the developing world to implement a comprehensive planfor industrial technology development (ITD), aiming to promote institutions and provide incentives for formalresearch activity. Beginning in the early 1940s, but principally since independence, many institutions were builtlargely within the public sector to support the development and diffusion of technology. Their activitiesencompassed virtually all those generally found in the industrialized countries and advanced newly industrializingcountries (NICs). They included over one hundred research and development (R&D) institutes, as well asinstitutions responsible for standards and product certification; patents and other forms of intellectual property:technology diffusion to small-scale industry; technical consulting at the state level; and regulating the inflow offoreign technology.
3. Flowever, this strategy was not successful in catalyzing ITD in Indian industry. Technological effortremained predominantly in the public sector, and the R&D institutes remained largely divorced from directinvolvement in productive activity. Technology imports were also restricted. The controls, first launched in the 60sin the wake of the tight foreign exchange controls, became more stringent during the 70s. Over this period, lndiaindustrialized with the lowest relative dependence on foreign technology of all the leading developing countries.
4. Major policy changes were first initiated in the late 80s and continued during the early 90s. These inchldedgradual but significant trade liberalization; the lifting of various internal regulations on industrial growth; financialsector reforms; and a more positive attitude to foreign direct and portfolio investment. A major shift in sciencepolicy required that public R&D institutes and laboratories turn more commercially-driven and self-supporting.Some of these changes deserve elaboration.
* Liberalization of the domestic regulatory system removed the licensing requirements for investments up to acertaiin limit, reduced the number of products reserved for production by small scale industries, eased themonopoly regulations by increasing the threshold level, and expanded the product areas in whicih firimlsclassified as monopolies could invest.
- Gradual trade liberalization in the late eighties paved the way for liberal technology imports which came intofull effect in the early nineties, leading to a marked jump in the number of foreign collaborations. Newguidellines which enabled the import of technologies removed many of the previous restrictive conditions.providing a boost to technological competition among firms. The processing of applications was streamlined.and restrictions on capital goods imports relaxed.
* On the recommendation of the Abid Hussain Committee it was stipulated that one-third of the revenues of theCSIR network of laboratories should be generated from non-budget sources by 1992-93 and 40% by 2000: thatindustry should be represented on the governing board of the CSIR; that links should be built with designengineering firms; that the institutes do their own marketing; and that individual researchers be encouraged toconlsult for industry. The management of the institutes was strengthened, and some experienced industrialmanagers were attracted. These reforms started to yield some benefits quickly, and within a year or two achange of orientation was evident in some CSIR laboratories. The better managed ones showed a significantincrease in their earnings based on the re-orientation of their activities to the needs of industry.
5. As a result of these policies (and accompanying expansionary macroeconomic policies), industrial growthaccelerated from 6 percent in the early eighties to 9 percent per year towards the end of the decade. While this rapidgrowth was partly in response to the expansion of public spending which created demand for industrial products. theimproved lpolicy environment contributed substantially by enabling firms to adjust the volume and composition ofoutput to meet this increased demand. The technology project, while aware of the many remaining deficiencies, wasbased on this improved incentive structure which had already demonstrated positive signs of its effectiveness.
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Evaluation of Objectives
6. Given this liberalized policy environment, was the technology development project still useful for Incdianindustry? The evidence suggests that it turned out to be more rather than less successful than originally expected:the failures it was addressing in capital, information, technology and institutional markets were real, and themodalities devised for remedying them well conceived. Policy changes that directly affected the project such asimport liberalization and the determination of the government to make scientific institutions financially more self-supporting, and, more generally, the increasingly positive attitude to the private sector and foreign investors, allreinforced the benefits of the project, suggesting that its initial concept was sound. The project also helped in somemeasure to ease various growing pains, when the effects of liberalization began to come to the fore.
B. ACHIEVEMENT OF PROJECT OBJECTIVES
7. Technical Development Fund component:1 US $100 million of the loan was to support increased andrapid import of various forms of technology, thus doubling the Fund's capacity. Support was provided solel lforimports required for technology upgrading and whichi were approved under a 'fast-track' system.
* Around 400 firms used this facility as a one-stop-shop for importing technologies.
* Mainly three types of technology transfer mechanisms were supported: licenses, technical drawings, and capitalgoods imports. A wide range of technologies in diverse sectors were imported by firms of all sizes: however.medium and large firms predominated.
Timing was an important asset in the achievements of this component. The project came in at a time whenforeign exchange limitations were severe and rules for imports of technology were highly bureaucratic. Bysupporting the TDF, the project was able to bolster the speed of reform towards greater liberalization.
* Indeed, against the backdrop of this improved. TDF facility , the Government of India liberalized importpolicies considerably, beginning July 1991, which meant that a large part of the original US $100 million wasno longer required under the technology import component. US $53.5 million was eventually used for thiscomponent, US $ 26.5 million reallocated to the VC component (US $11.5 million to traditional VC and US$15 million to a special VC fund called the Pilot Software Financing Facility) and US $20 million canceled intwo installments, once in 1994 and then in 1997.
8. VC component: US $45 million of the loan (an additional $ 26.5 million was allocated later) was to berelent by the government to four financial institutions to finance part of their equity investments in the venturIecapital funds established by them or their subsidiaries (refer para # 2.1 of borrower input section for details). EachVCF would consist of investments made by the respective financial institutions as well as when feasible, fuildsraised from public, institutional, and foreign investors. One third of each VCF investments came from Bank ftinds.2
LNumerically, the project achieved more than set out in its initial objectives. The project supported six ventuLrecapital companies involving six VC management companies and nine funds: Technology Development andInformation Company of India, Ltd. (TDICI), Gujarat Venture Finance Ltd. (GVFL), Andhra Pradesh VentureCapital Ltd. ( APVCL), Canara Bank Venture Capital Fund and (CANVCL) were the original four. Twoadditional funds, IL&FS Venture Capital Funcl (IVC) and Risk Capital and Technology Finance Corp. Ltd.(RCTC) were added in 1993. They have invested in over 300 companies and the returns have been around 18-
Limited information could be collected on this component at the time of preparing this ICR on account of the factthat this component had been closed for several years.2 While the IFC joined the Bank mission and contributed to one existing fund (TDICI), it could not participate morefully because no foreign investors were interested.
4
20% on average, which is considerably better than what is earned in VC activities during its infancy.3 Totalinvestments have been about $60.4 million instead of $ 45 million that was planned, and in local currency thedifference between planned and actual would be higher owing to the devaluation of 1991.
The project in essence launched the VC industry in India by building upon the existence of one VC entity andencouraging the framing of appropriate policies and incentives. Currently, around Rs. 30 billion is beingmanaged by this industry as opposed to Rs. 2 billion in 1990. Its contribution, in terms of influencing the'culture' of risk finance and enabling foreign venture capitalists to be attracted to India was equally if not moreimportant than the narrow numerical contribution. Prior to this project the culture of VC did not exist in India4 .but was developed through technical and management training for VC managers and seminars to riaiseawareness among .industry. Through the various internships, study tours, and extensive training programs, apool of skilled talent has been created for the VC industry. Programs are also in place now that will offertraining for venture capitalists in the future (refer para # 2.4 of borrower input section for review of overseastraining program).
* Many of the ventures would not have taken off in the absence of VCCs, as other sources of technology financewere simply not available. Those projects that may have been undertaken would have taken much longer, ortheir scope significantly curtailed.
* Protected domestic markets are no longer the driving force in technology-based investments - even when themain market is domestic, which is natural for a large country like India, the technologies used are expected tobe competitive with imports and with multinational entrants. The newly liberalized environment has allowedmany enterprising technologists to develop competitive products that have good potential in export markets.The firms' awareness of current technological trends, the high level of sophistication of many projects, and theability to 'reverse engineer' complex technologies while adapting them to very different raw materials orproduct specifications, are also impressive.
* The VC institutions have adopted the innovative, hands-on, risk-taking approach that venture capital requires.and have sponsored some exciting and valuable technology based projects. Examples of these projects areprovided in Section I of the ICR and the attached borrower's input. However, over time these funds havetended to adopt a more risk-averse approach, moving away from financing technology based start-up
companies to relatively safe investments in established companies.
* The Software Fund was a little slow to get off the ground but the fund claims a solid portfolio of excellentcompanies that would not have been able to attract either VC or traditional banking finance.5 In the limitedperiod of around nine months of investment activity, nine investments aggregating US $7.54 million weremade. Given the recent formation of this fund, an in-depth evaluation of the firms assisted by it has not yet beenundertaken, but at least one of its investee companies has been an outstanding success, and one other has strongpotential. While the Fund was the first of its kind, the fact that similar software funds are now being planned'after the close of the Bank project is one indication of the usefulness of the facility created.
While in the earlier years the returns were much higher, in recent years the declining stock exchange hasmaintained very low multiples and the market for initial public offerings has been almost moribund.4 While one VC company already existed (TDICI), it was considerably reshaped and influenced by the project toreflect a more technology based orientation.5 Because software companies lack collateral and have capabilities not understood in the banking community, theyrequire other assistance. On the other hand, the Software Fund was not a pure VC fund either, since there was not avery large up-side scenario. It was aimed at potentially good companies that were unlikely to generate 40-50% rateof return but needed a range of support apart from equity and advice.6 A large new foreign fund is being formed with special funds earmarked for the Software industry.
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Technology support services:
TI component
9. Of the US$55 million IDA credit (amounted to $ 61.2 million owing to SDR appreciation), $US 40 millionwas to finance i) technology service institutions through equipment for pilot plants, laboratory and testingfacilitates; ii) common R&D facilities with industry; iii) technology collaboration fees; iv) training and exchangeprograms with industry; v) upgrading of management systems, safety and marketing capabilities; vi) other R&Dexpenditures such as special samples, materials and consultant fees. The project was essentially targeted to improvethe functioning of the Council of Scientific & Industrial Research (CSIR) and its constituent laboratories7 (refer para# 1.2 of borrower input section for issues identified in the functioning of technology institutions). Of the $40million, $15 million was earmarked for restructuring CSIR, and the remaining $25 million for other institutions.
* The project has supported 33 loans in 30 Tls instead of the target of 12-15 institutions. These included nineCSIR laboratories, nine labs under other govemmmnt departments, eight research foundations, five laboratoriesset up by industry associations and two national technology training institutions.
* This component built upon the Abid Hussain Committee proposed reforms and demonstrated via examples, theability of scientists and technology institutions to respond to changed incentives. By aiding the first few steps ofthis new regime this component gave the reform process the momentum and commitment it needed to gainwider acceptance.
• The project provided loans rather than grants (which was a first for most institutions), helping to focus TIs onfinancial management and rates of return. Also, lhe loans were made conditional on the launching of internalinstitutional changes. ICICI, which administered the project, applied strict project evaluation criteria andhelped the TIs to reorganize and provided monitoring. However, since the emphasis was on encouragiig Tls tomake major investments in future programs and build technological capability, the loan was kept interest fiee(see para #1.5 of borrower input). Funding was open to all autonomous technology institutions, both existingand new. This made it possible to support technolcigy institutions of diverse ownership.
* Most of these institutions were able to achieve a stronger industry orientation, create state-of-the art facilities.and in some cases tie-ups with international companies (see Annex I of borrower input). On average, theproportion of external revenues in the Tis' total revenue has gone up from around 15% to 40% during theproject lifetime.
* The contractual R&D and consultancy income of the CSIR laboratories taken together has increased from Rs.800 million in 1992-93 to 1670 million in 1995-96. Annual industrial production based on CSIR know-howincreased from Rs. 19,000 million to Rs. 30,000 million in the same period. For example, one of the CSIR labs.National Chemical Laboratories (NCL) now earns more than half its total budget from contractual research,and the value of its research contracts with foreign companies exceeds that with Indian companies. Externlalearnings for NCL have increased from Rs. 28 million in 1990 to Rs. 113 million in 1997. Such foreigncollaborations have provided valuable feedback into its own information and skills (see Box I of borrowerinput).
* The Director-General of CSIR has stated that the project has been primarily responsible for changing theinstitutional orientation and he considered this mnore important than the credit provided. This has happenedover a period of time, through interaction with the World Bank, and the Japanese grant-facilitated availabilityof foreign experts and training programs, both in India and abroad.
* Another institute, the Sriram Institute of Industrial Research, known for its reputation in testing and otherservices in materials sciences, environment, and toxicology, has been able to modernize and upgrade its
7 CSIR's network comprises 42 laboratories and a scientific and technical manpower of 15000, making it one of tllelargest research institutions in India.
6
physical facilities in several important areas. This has led to a compounded annual growth rate of 28% in itsrevenues from services and allowed it to enter new areas of research (see Box 2 of borrower input).
* Two institutions that did not perform so well were the B.V. Patel Center for Pharmaceutical Research and theBureau of Indian Standards. This was mainly due to over-optimistic plans to sell services to industry, change inpatterns of demand among firms, and above all a lack of a continued, committed and visionary leadership.Weak leadership compromised the autonomy, financial management and marketing capabilities of theinstitutions concerned (see Box 2 and paras #1.15 and 1.16 of borrower input).
Sponsored R&D promotion fnd (SPREAD)
10. US$15 million of the original IDA credit was to be used to support R&D projects carried out jointly byfirms and TIs or contracted directly to Tls by firms. Project resources were passed onto participating firms asconditional loans with an initial nominal interest or royalties if successfu I, and written off if adequately proven to beunsuccessful.
* A toital of 98 projects and 96 companies borrowed under SPREAD.
* Nearly two-thirds have never before undertaken any R&D activity, and around 80 of them have no previoUsjoint activities with a TI. Furthermore, almost 90 percent of the companies borrowing under SPREAD were olsmall or medium-scale.
* The immediate impact of SPREAD includes the identification of Tls or researchers; reduced gestation lag-without SPREAD, the beneficiary project could have taken much longer; the clarification of project andapproach which ICICI's appraisal may have brought out; the help which ICICI brought to solve problemsbetween the TI and the firm. The larger benefits of SPREAD include new or improved products or processeswhich would have gotten to market much more slowly or not at all or through a more costly route, perhaps withihigher value added going overseas. Other benefits are the positive impact on new projects being developed incollaboration between firms and Tls; and the confidence of the various parties (firms and TIs) in their abilitiesto produce practical results and work together. Many of the firms have stated that they will go back to Tls oruniversities for research collaboration in the future (also see Annex 3 of borrower input).
Many of the technologies involved are complex and demanding. A sample of the projects suggests that imostinvolve substantial technological effort and introduce completely new products or processes to India. Theymostly involve replacing expensive or closely held new foreign technologies with viable, adapted and muchcheaper local counterparts. Exports have resulted often from SPREAD projects (refer para # 1.20 and # 1.21 olIborrower input section for operational experience).
* The record of commercial and technological success is excellent. In the 98 projects on which information isavailable, 40% have developed technologtes that have been commercialized; 4% have developed technologiessuccessfully but commercialization has been delayed, 2% in which the technologies developed are nolcommercially feasible, 8% which are technological failures, and the remaining 46% are under implementatioll.
* The projects are also successful in financial terms: 75 % are meeting their obligations regularly and 17°/oirregularly, while 8% are in default.
* The failure rate under SPREAD is lower than expected -- 15% rather than 20%. This suggests that. intechnological terms, the technology group (TG) did a good job of selecting proposals and may have even beenable to afford somewhat greater risks.
* Perhaps several more firms could have been helped were it not for the long learning period that all theparticipants had to put themselves through. More aggressive marketing could have also fueled the demand forSPREAD projects sooner. While the stringent evaluation and counterpart funding criteria was instrumental in
7
determining the success of this project, it is possible that for small firms this requirement may have been toostringent. Of course, flexibility in the application of the 50 percent counterpart funding could have alsotranslated into greater failures for the SPREAD component.
C. IMPLEMENTATION RECORD AND MAJOR FACTORS
II. The OED report' on industrial technology projects praised this project for being built partly around thefactor market failures that normally affect ITD, and partly around the distortions created by Government policies onS&T institutions and technology imports. The components were also noted to be well conceived and designed tomeet a specific and pressing need, thus making this project the most promising project of the ones reviewed at thetime of writing of the OED report. The outcomes confirms the initial prognosis, implying a very sound and highquality implementation of the project. In addition to the right policy environment, trade liberalization, theimposition of hard budget constraints, and CSIR reform, a number of factors have contributed to the successfulimplementation of the project.
a) The Japanese "implementation" grants were very useful during the project. Activities such as internship forVC managers, OTC exchange and training programs, collaboration with NASDAQ, training in laboratory safety forCSIR, enhancing the marketing capabilities and management system of the CSIR laboratories, development of VCtraining materials, etc., would not have been funded adequately, were these funds to have come out of the loan. TheGrant of over $2.5 million amounted to more than one percent of the corresponding Loan and Credit amounts. Keystudies and technical assistance programs were able to become important sub-components of this project due tothese funds. In addition to the provision of these seriices to the institutions, there were some externalities createdfrom the use of these implementation grants. For exarnple, based on the success of the VC internship training in theUS/UK, the India Venture Capital Association (VCA) and the UTI Institute of Capital Markets have developedbasic materials for training within India for VC executives, would-be venture capitalists and relevant governmenltofficials. Innovative technology management education programs were also initiated during the project, which inturn stimulated the development of other programs in India towards technology management (for borrowercomments see part 3, paras #3.1 through #3.9 of borrower input section).
b) Availability of IDA resources for the TI component helped. As with technical assistance, it is likely that theGol would not have been willing to borrow expensive Bank resources for restructuring institutions that were notcommercially viable. The availability of IDA allowed sub-loans to Tls to be structured as interest free loans forlonger periods. This had the virtue of making the loan affordable whilst inculcating the discipline of repayment ofloans for Tls which had never encountered such arrangements before (see paras #1.25 through #1.27 on experienceof borrower with Bank and GoI on IDA funds).
c) A great deal of flexibility was built into the project from the beginning. This gave a sufficient amount ofleeway to ensure that the rules of the game could be adapted easily, so long as they fitted within the objectives andoverarching structure of the project. What was defined were the procedures and basic institutions. Even those couldchange subject to agreement by the Bank.
d) The project closing was extended by two years, through two one year extensions. This owed to two mainfactors. First, the restructuring of the project due to the truncation of the TDF component and reallocation of theunused funds to other components, needed additional implementation time. Second, by its very nature the projectinvolved a change in mind set on the part of technology institutions and firms, which was slow to come about. Agreat deal of 'learning' had to take place on all sides, and in the initial years of the project, disbursements were veryslow. Once the culture and momentum had been built up, demand from industry and Tls grew rapidly, withparticularily intense implementation and disbursemenis in the last two (extended) years of the project.
s Study of Bank Lending for Technology development: (1993), Operations Evaluation Division, World Bank.
8
D. BANK PERFORMANCE
12. The project design accurately reflected the market deficiencies prevailing at the time in India and workedtowards the improvement of the policy environment. In fact, once the policy environment was liberalized, theimpact of the project multiplied, implying that the Bank's role during identification and appraisal was wellformulated.
13. Bank supervision for this project was very intense. Supervision quality was further enhanced by the factthat the project maintained rare continuity in task-managership, from design to almost the closing date. This alloweda close relationship between the Bank and borrower to be formed, which, by fostering joint learning, allowedfeedback from the borrowers to be incorporated. Further, when task managers changed, a considerable amount oftime (almost a year) was allowed for overlap in the process of handing over responsibilities, which createdownership for the project on the part of the new task manager, and reduced the transition pains to the borrower.During the last year of the project, when implementation was very intense, field-based task management was criticalin having issues resolved with promptness and flexibility.
E. BORROWER PERFORMANCE
14. ICICI played the role of a very high quality intermediary for this project. For the TI component, it applieda very strict project evaluation criteria and carefully monitored the loans. ICICI stayed involved with theinstitutions in their strategy and role identification through the reform process (refer para # 1.9, 1.10, and 1.1 I ol'borrower input section for organizational procedures). For the SPREAD component, ICICI realized that they did nothave the necessary skills to carry out the functions and therefore strengthened the Technology Group (TG) that hiadbeen created under a previous USAID project (refer para # 1.20 and 1.21 of borrower input section for pro-gramimplementation and operational experience). They recruited engineers and researchers with hands-on experience inR&D, design, and commercialization of prototypes, and also appointed a steering committee of eminent scientists,researchers, industrialists and academics to approve proposals. The involvement of the TG in each project'sappraisal, implementation and commercialization remained intense. Similarly, IDBI acted as the intermediary forthe VC component for five of the six VCFs, and in fact contributed its own funds to two of the assisted VCFs. Italso helped in settling the Trust and preparing the Trust Deed for a number of funds.
15. Continuity and/or commitment on the part of the borrowers was also very critical to the success of thisproject. The quality of personnel, readiness to solve problems, and commitment to project goals remainedexemplary. Similarly, visionary leadership in ICICI, the Technology Group within ICICI, and key CSIR institutionswas critical to the successful implementation of the reforms that were undertaken. Excellent leadership was the keyto allowing difficult steps to be taken at the right time along with ensuring that the culture of reform spread withinthe organization.
F. ASSESSMENT OF OUTCOME
16. A careful selection of the participating institutions, adequate seminars, training and study tours, the righteconomic incentives and policy environment, and strong Borrower as well as Bank commitment resulted in a highlysatisfactory assessment of project outcomes.
G. PROJECT SUSTAINABILITY
17. The project made a positive and significant contribution to industrial technology development in India. Ithelped shape the direction of reform in technology institutions, launched the venture capital industry, and started aculture of collaborative research between firms and technology institutions. Perhaps more importantly, it launched aprocess that has enormous externalities and that will feed into longer term developments. One of the positiveexternalities of the project was the impact on human resources. Within lCICI, while it was visionary leadership that
9
initiated the process, close interaction with the Bank, training, and study tours, allowed more individuals to take ona leadership role. Similarly at CSIR, and within the VC community, the training as well as the close and regulardialogue with the Bank allowed the new wave of thinking to start filtering through across the institutions.
18. In the area of risk financing it is clear that there is a burgeoning need for financing technology-based start-ups in India. The process launched by the project has been successful, and has had beneficial spillovers to the rest ofthe VC industry. The VCCs often provided more than capital: they took an intense and continuing interest inpromoting ideas, guiding and inducing entrepreneurs to adopt good business practices, sharing their problems,putting them in contact with useful firms or institutions and helping them market the product. This sort ofrelationship is typical of good VCCs elsewhere and bodes well for the sustainability of this industry. Also, theproject has helped to create some basic training material for VC, which will help in the provision of trainedmanpower.
19. However, this is a new industry in India and has a long way to go before it reaches maturity. Anassumption that must be made for future growth of this industry is that the stock market allows for the profitablefloating of shares or off-loading of ventures. Until such time, exit will remain difficult and funds will move awayfrom classical VC (which is supposed to finance risky, technology-based ventures) to equity type of funding ftorrelatively safe investments in established companies. The project has tried to help the off-loading of ventures byassisting the OTCEI but more remains to be done. Also, the VC industry needs to be encouraged by appropriate taxincentives as is done in most other countries, wit]h some attention to the needs of long-term and risky ventures. Theentry of foreign VCFs with more international knowledge and greater industry specialization will provide the skillsthat local funds cannot muster. Collaborations between local and foreign funds may be a good way to transfer theskills and continue the momentum built up thus far.
20. Of the 33 VCFs in India currently, 23 are large off-shore equity funds. These funds invest between US $5-8 million per deal and invest in existing companies which have a potential for market capitalization of about Rs.1000 million ($25 million) after 4-5 years. Thus the small to medium size companies or the new technology basedenterprises are not funded by these large funds. The domestic funds which finance the small to medium-sizetechnology based projects have largely been furLded by the WB through this project. With the completion of thisproject, the equity fund sources for small to medium size technology oriented companies will need to besupplemented.
21. In terms of restructuring research institutions the project has shown that public Tls can be reformed andplay a valuable role in technology development without weakening their scientific effort, if the 'culture' of theinstitutions is changed. That seems to have happened in India and appears set to continue because of the clearsignals and a 'hard' budget constraint from the Government; strong and committed leadership within the institutionsand in the parent organization; and greater autonomy afforded to the laboratories and the network as a whole toimplement changes and hire and fire staff. While these conditions are not easy to create and the process of culturalchange among scientists is often slower than expected, once the process starts there is a 'snowballing' effect, nlowevident in India. Spillovers to other institutions that have not directly benefited from the Bank project have alsoresultedl from exchange of staff and management that have brought the industry-oriented culture with them.Institutions have realized that becoming more demand driven is the only way to maintain their facilities in the faceof government budget cuts. The Tls that were assisted in this project serve as excellent role models for the others.
22. Of course, much remains to be done, such as in the case of CSIR. Budgeting and MIS systems still need tobe overhauled. More of the 42 CSIR institutes, apart from the 8 laboratories and the CSIR headquarters that wereassisted, need to start serious reform. Furthermore, training for CSIR staff needs to continue, so that the momentumgenerated by the project continues and percolates to an ever-larger group of staff. While the successes from thisproject have shown the way to reform, special attention will have to be paid to the intrinsic differences that exist inthe nature of scientific research across different fields, hence making it imperative that incentives be designedappropriately for each institute or department. Wthile the momentum for reform has been generated, the lack of anintermediary like ICICI to bring industry and Tls together after project completion may compromise further reformefforts. More formal education in technology management is also needed to be able to build local capabilities inthis area and sustain the technology development efforts of both industry and scientific institutions. Internationally
10
accredited programs need to be designed and incorporated into the curriculum of the leading science andengineering institutes and universities.
23. The SPREAD program helped small enterprises that were able to provide counterpart finance to participatein R&D financing schemes. It also provided Tls the assistance in gearing up to meet the expectations of enterprisesin terms of timeliness, delivery and practical application. A rapid learning process occurred among both enterprisesand Tls, and a heartening number of collaborations have been able to overcome the culture gap relatively quicklyunder the SPREAD program. The injection of a relatively modest sum of money (most of which is repaid) by aknowledgeable intermediary such as ICICI has led to the stimulation of a longer-term process of interaction andthere is a (surprisingly) strong latent demand in the industrial sector for technological collaboration with Tls anduniversities, which can continue. Many of the firms involved say that they will go back to Tls or universities forresearch collaboration in the future.
24. It is important to build on the capability developed by ICICI's TG. Mobility of staff within ICICI meansthat staff are constantly being transferred around the organization, and the skills developed by the TG thusdissipated. It may be useful for ICICI to think of spinning off the TG as a subsidiary (to resemble the KoreaTechnology Bank) which could have a joint venture with CSIR.
H. FUTURE OPERATIONS
25. The response to SPREAD shows that interventions of this nature are more useful in stimulating industrv tospend more on R&D than tax incentives. Much of Indian industry is unable to afford the cost of R&D and needssoft funding support for industrial technology development. Continuation of this program in its present or moditiedform will allow efficient usage of the existing R&D infrastructure through joint projects with industry. The expertisebuilt up in the Technology Group of ICICI could be built upon and augmented, perhaps through its transformationinto a full-fledged organization on its own, like the Korea Technology Bank.
26. Smlall-scale industry does not and cannot seek alliances with formal R&D institutions, however industry-inclined the latter might become. The needs of small industry may also be more routine -- in the area of qualitypromotion and standards adherence, which need to be supported by different organizations that are able to targetclusters of firms which face similar constraints. In terms of financing needs, new and small technology-basedcompanies need special attention once the support for the domestic VCFs through the bank project comes to an end.For the sustainability of the industrial segment and for the survival of the classic venture capital industry, a followup operation which places an emphasis on domestic classical venture capital type of activities may be designed.
27. The process of bringing an industry-oriented approach to R&D institutions in India has begun well. butmuch remains to be done. Training of scientists in CSIR labs needs to be continued over a longer period of time sothat the ability of scientists to respond to the new incentives is enhanced. Many more institutes need to bechallenged with reform for the culture gap between science and industry to be bridged. Industry needs to beencouraged to use scientific institutions to solve industrial problems and this requires a continuation of theeducation, awareness-raising and training efforts. Similar efforts need to be conducted in universities andengineering colleges so that educational programs can be more industry focused.
28. Finally, if local inventive efforts are to be encouraged and nurtured, and the absorptive capacity oftechnology transfer from abroad to be strengthened, the role of intellectual and property rights (IPRs) will need tobe faced squarely. While India is a member of the WTO, and legislation that makes India a signatory to adoptingstronger intellectual property right regime is due in Parliament, a lot will need to be done to bring a greaterunderstanding of the role of IPRs to both the scientific community and industry. Compliance with internationallyaccepted IPR norms will mandate non-trivial investments in the enforcement infrastructure on the one hand, and acritical role for education, training, and dissemination of information on the other, which in turn would stimulatetechnology generation and diffusion.
29. For borrower's suggestions on future operations refer "Unfinished Agenda" paras # 1.28 through # 1.32 ofborrower input section.
l]
1. KEY LESSONS LEARNED
30. The project also offers some general lessons for the design of ITD projects in other developing countries:
• Success can be achieved in dealing with public sector institutions. Much of the success has resulted from theinitial design of the project which, while complex and perhaps risky, correctly identified market failures andbuilt in tight monitoring, training, and incentives for participants to 'own' the projects. Such monitoring isdemanding for the Bank and intermediary institutions (see section E, paras # 14 and 15 for discussion ofborrower commitment and performance). St:rong leadership in the beneficiary institutions played a key role inthe adoption of reforms. Also, a tremendous amount of flexibility was built into the project to allow a moresuitable response to the changing economic environment. Without such flexibility being built in, the projectmay have been locked into rigid commitments whose need had been outlived.
* The broader policy context within which technology policy is formed (or reformed) is crucial to its success.The Indian project has evoked such a positive and competitive technological response because it was locatedwithin a liberalization episode, when growing internal and international competition forced firms to improvetheir technologies and innovate. Without this backdrop, much of the impact would have been lost. Having saidthat, it is also very important to point out that the project did not wait for the entire reform process to be eitherinitiated or completed, but accepted the limited reform that had already taken place and played the role of acatalyst in accelerating the momentum of the reform effort further.
- The role of an agency such as the World Bank is important in accelerating and augmenting such reform effortsbecause the Bank has the credibility and experience necessary to play the role of an honest broker between thescience & technology institutions, industry, and Government.
* A strong positive response also depends on the existing base of industrial and technological capabilities. TheIndian experience suggests that its long experience of import substitution, combined with its base ol'entrepreneurial and technical skills, has led to a large receptive base and a network of suppliers and institutions.This base is now allowing it to respond to technological policy stimuli and enter advanced technologies even atfairly small scales. In countries where such a base does not exist, a strong positive response to changingincentives through restructuring and matchmaking may not result.
• A strong and committed intermediary is crucial to the success of a complex project. In the Indian experience.the intermediary possessed and further cultivated the skills and commitment necessary to create a market fortechnology finance.
* There is a fairly long 'learning' period for all participants in such projects, including for the intermediaryagency. Where a culture of technology upgrading and collaborations has to be created among firms and R&Dinstitutions, it may be typical to see slow starts (reflected in slow disbursements) in the beginning, but the rightincentives, training, and advice can help build momentum.
31. Finally, this project offers some insights into the transportability of these specific components to otherdeveloping countries.
Restructuring Tls
Public sector TIs can be restructured to sell their services to industry without compromising on the quality oftheir scientific research (see Box I for list of barriers faced by laboratories in the process of reform). Forexample the NCL has maintained the best record of publications and patents while earning the highest share oftheir budget from contractual research for industry. Success in reform is however greatly influenced by thearea of research - while research in Chemistry allows itself to be patented for commercial use and at the sametime be considered theoretical enough to earn publication in reputed academic journals, research in Engineerillgmay not be amenable to such a balance between the two.
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* Leadership is very important- if top management is convinced of the need and feasibility of such reform, itis feasible to mount organizational changes, training programs and marketing efforts that can transform theiroperations relatively quickly.
* It is important to build in strong financial incentives for public institutions to meet performance objectives.Scientists must be rewarded for initiating joint projects and conducting contractual research for industry.
* This business culture is alien to the scientific community at large and therefore incentive changes will not beenough for reform. Consensus building must be undertaken and special training must be provided to the stafl'of these institutions to allow them to change their attitudes, create new skills, routines and networks.
* Due to these 'cultural' changes, the process of reform will be slow in the beginning. In fact, speed should beabandoned in favor of caution in implantation in order to avoid resistance, backlash and low morale amongscientists and researchers.
Venture capital
* Venture capital is an effective way to provide risk finance for technology development. Much of venture capitalis not geared to technology based investments, and a special effort has to be made to create funds that canfind, assess, and work with technology start-ups (see Box 2 for examples of technology start-ups supportedby this project).
* The success of VCs therefore depends on the presence a large body of potential new entrepreneurs withadvanced technological capabilities and of experienced financiers who can be trained to undertake theevaluation and support services that VC requires. The 'learning' process for the latter can be quite demandingand needs considerable external support and guidance.
* It also needs a fairly efficient capital market in which the shares of technology companies can be sold oncethey are commercially established.
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Box 1: Barriers Faced by Laboratories in the Process of Reform
Based on a questionnaire circulated to 35 CSIR labs that had undergone the process of restructuring, an attempt was made tounderstand the most important barriers faced by the institutions in their efforts to transform themselves into contractual resealrchorganizations.
The top five barriers listed were the following;
I . Lack of industry awareness: industry did not know the capabilities of the institutions or their own technology needs.2. Poor acceptance by industry: Industry did not feel confident of labs' capabilities or facilities. Maybe related to the firstpoint.3. Lack of incentives: R&D personnel did not feel mnotivated to transfer technology to the marketplace.4. Lack of experience: Scientists did not know how to interact with industry.5. Excessive bureaucracy: Industry got discouraged by the procedures that needed to be followed in public institutions.
It is interesting that matters of confidentiality, or the perception that labs and industry were competitors, was rated as the leastimportant barrier to collaboration by the institutions in this survey, while anecdotal evidence gathered from talking to firmsreveals that this is seen as a formidable obstacle to collaboration by firms.
On tlle basis of this information it would seem that the most important areas for labs that want to become contractual r esearchorganizations to pay special attention to are:* Allocation of resources to improve interaction: The key seems to be addressing some of the information market failtires thatprevent collaboration. This can be done by designatin,g an interface that facilitates industry/client interaction. The interfaceshould be responsible for launching programs to make industry aware of the R&D capabilities of labs.* Ch7anging the performance evaluations and reward system for scientists: Performance evaluations of scientists andenginieer-s should include utilization/marketing of their research output. Scientist/engineers should share in the earnings fromcommercialization of R&D activities.* Llpgradingfacilities and investment in resource development: Upgrading human resources is essential in an era of rapidlychanging technologies. Besides technical training to keep up-to-date, successful labs also trained their scientists in team-btiildingand customer orientation.
Source: Management of publicly funded R&D in India, case study of CSIR, January 1998.
R&D promotion financing
* In industrial sectors that have attained a degree of depth and maturity, there exists considerable latent demandfor technology finance and technological services from Tls. This demand can be stimulated by a process ofliberalization (that exposes firms to greater domestic or international competition and allows them full access totechnology imports), and can be met by measures to bridge information gaps between industry and Tls andprovide specialized technology finance. In countries or sectors that have not reached this level of depth ofmaturity to warrant finance for R&D, such specialized technology finance should be used for more routinefunctions such as testing, standards conformance, certification, quality upgrading etc.
It is possible to induce private firms to enter into technological collaboration with Tls, assuming they have capablemanagers (see Box 3 for a profile of participarnts and reasons for seekcing collaboration), by offering relativelymodest financial incentives, if the scheme is administered by an intermediary that has good contacts with businessand understands technology. A government bureaucracy may not be able to handle this task as effectively as aprivate sector intermediary that has close contacts with private firms and the capability to judge, and workclosely with, technology ventures.
* However, just as in the restructuring component, there is a process of learning, both for the TI and for the firm.Cooperation between Tls and firms must be encouraged and sustained.
* While many countries have tried to persuade industrial enterprises to place research with Tls by providingfinancial incentives in the form of grants, the Indian project suggests that grants are not necessary, and may
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be inferior to conditional loans which impose a smaller cost on the government and yield a pool of reinvestibleresources. The use of the conditional loan instrument has been found
Box 2: Indian Technology Start-ups Supported by Venture Capital - A Few Examples
VXL Instruments, Bangalore: This company was launched in 1987 by five engineers, four with electronics training from theIndian Institute of Technology, to make intelligent' monitors for computers for specialised use in hospitals, railways andindustry. These have finer resolutions than normal monitors and have a great deal of in-built software to decode complexinformation. The products were developed in-house, and in 1995-96 its sales reached $13 million, of which 35% came tromexports to Japan, UK and USA. It employs 500 people, of which 70 are in R&D (R&D expenditures account for over 4%/o ofsales). Its prices are much lower than competitors in Korea and Taiwan, and its software capabilities are more advanced. It hasISO 9002 certification. It invests heavily in training its engineering and technical staff. It is setting up a new wholly export-oriented unit to make colour monitors for the USA.
Lumen Cables, Gujarat: This company was started in 1993 by a metallurgical engineer to make ultra-fine magnetic wires withmultiple insulating coats of polyutherane, only 16-45 microns in diameter, for use in quartz watch movements and telephonevoice coils. This is one of only eight such facilities in the world, and the market used to be dominated by a few producers. Thesmall plant (18 employees) exports all its output through a buyer in Hong Kong, and is around 20% cheaper than competitors.The technology used was originally imported from Switzerland, but considerable technical effort was needed to master and a(iaptit: in the process, the capacity of the machinery was raised by over 50%, product endurance was improved and processes verechanged to enable coloured wires to be made. Significant expansion is planned in the near future.
Astra Microwave, Hyderabad: This firm was started in 1993 by seven technocrats who used to work in defence R&D, and makessophisticated telecommunications components such as ferrite, filters, sources, antenna and so on. The firm has a 75% marketshare in India, and has started exporting to Japan and USA. By 1996 its exports reached $1 million, about two-thirds of itsoutput. Exports fetch 40% more than domestic sales, and import content is very low (15%). Of its 120 employees, 40 aregraduate engineers and 35 are technicians. It has been certified for ISO 9001.
Labroton Instruments, Ambala: The promoters were a business family making glass products, and developed the technologx loImaking laproscopes (sophisticated optical medical instruments) and research microscopes indigenously. The product wasreverse engineered' from foreign models, and went through a long and difficult development process; two US buyers provided
technical advice on improving it and bringing it to world standards. The product is now being exported to the USA at half theprice ol competitors (all in developed countries); the unit will soon become fully export-oriented. It is getting ISO 900(0certification.
to summon a range of viable and profitable technology-based projects, but its success depends vitally on theappraisal and monitoring capability of the institution responsible.
* Universities offer enormous potential for technological collaboration even in developing countries.
32. In conclusion, the project suggests that the market deficiencies that hold back technological effort and theeffective use of Tls can be overcome by some careful market-friendly interventions. In an economy like India's.with a considerable base of technological skills and a dense industrial structure, there is a surprising amotlit oftechnological dynamism that needs to be supported. The liberalization of the economy is a necessary preconditionfor such support to work, but liberalization has to be accompanied by institutional, financial and informationalmeasures to remedy deficient markets.
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Box 3: Profile of Participants and Reasons for Seeking Collaboration
Background of the SPREAD participantA majority of the heads of the participant firms in the SPREAD project possessed engineering degrees (40%). Only two of thesehad a formal MBA qualification. A small percentage (13%/6) were non-engineering graduates while 17% of the participants helddoctorate degrees. This suggests that the program attracted a fair amount of individuals who had a good understanding of whatR&D based projects involved. In terms of assets as well as sales most of these firms were of small or modest size. There was awide variation in the number of years of experience possessed by an applicant (0-36 yrs), implying that the program attracted afair amount of young first generation entrepreneurs as well as professionals with established business activity, although lhemajority seems to belong to the latter category. About 60% of the beneficiaries had involvement with previous R&D and for therest R&D was a first time activity.
Reason and evaluation of the joint R&D experienceIt should be noted that 56.7% of the participant firms had become involved with the TI from the inception-of-the-idea stage. 'I'l[ereasons for seeking this collaboration with a TI are shcwn below, and testing and evaluation dominates all other categories. [l'sthat are starting the process of reform may find this information useful in outlining their physical investment and human resourceupgrading strategies.
Reasonsfor collaboration with TI
% ofJfirms
Testing, trials, results evaluation 43.3Product prototype development 20.(Technical assistance, library reference 20.(Detailed design 3.3Lab scale/commercial scale process development 10all other aspects 10
Among the constraints faced by the firms, it is noteworthy that 43.3% said they faced none, and the most common complaint wasthe Tls lack of business orientation or commercial approach. Comparing this with the results of Box I reveals how perceptionsvary on both sides and how much effort and training maybe required to bridge the "culture-gap" between industry andtechnology institutions.
Constraints faced in working with TI
% offirms
None 43.3Lack of business orientation/commercial approach 40.0Time and cost overruns 23.3Inadequacy of design/testfacilities 23.3Bureaucratic processes 13.3Inefjective technology at commercial scale 6. 7Lack offull attention 3.3UnhelpJidl attitude of Tlpersonnel 3.3
Source: Evaluation of SPREAD program, School of Management, IIT, Bombay.
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Part 11. STATISTICAL INFORMATION
Table 1: Summary of Assessments
A. Achievement of Objectives Substantial Partial Negligible Not ApplicableMacro policies X
Sector policies X
Financial objectives X
Institutional development X
Physical objectives X
Poverty reduction X
Gender issues x
Other social objectives x
Environmental objectives X
Public sector management X
Private sector development X
Other (specify) X
B. Project Sustainability Likely Unlikely Uncertain jC. Bank Performance Highly satisfactory Satisfactory Deficient
Identification ; X |Preparation assistance XAppraisal XSuperv ision X
D. Borrower Performance Highly Satisfactory Satisfactory DeficientPreparation XImplementation XCovenant compliance XOperation (if applicable) X
E. Assessment of Highly Satisfactory Satisfactory Unsatisfactory HighlyOutcome Unsatisfactory
X
17
Table 2: Related Bank Loans/Credits
Loan/credit Title Purpose Year of Approval StatusPreceding operations
1. Electronics Industry Foster a competitive 1989 ClosedDevelopment electronics sector by(Ln. 3903/4/5-IN) supporting the modemization
and expansion of thesubsector as well asupgradation of the technicalinstitutions to provide theprofessional skills. -
2. Technical Education Capacity expansion and 1990, ActiveProject I and 11 diversification of educational 1991 Active1: Credit no. 2130 and Ln institutions to allow them tono. 3195 undertake courses in new andI: Credit no. 2223 developing technologies.
2. Export development Promotion of exports, 1989 Closedproject including financing of(Ln. 3058/59) technical assistance in
technology intensive areaswith promising exportpotential e.g. software
3. Vocational training To improve the efficiency of 1989 Closedproject industry by providing highCr. no 2008. L no. 3045 quality workers trained in
relevant skill areas.
Table 3: Project Timetable
Steps in Project Cycle Date Planned Date Actual/ LatestEstimate
Identification (Executive Project Summary) October-Nov 1988PreparationAppraisal 03/24/1989NegotiationsLetter ol'development policy (if applicable) ____X__________Board presentation _ 9/12/89Signing 12/08/1989Effectiveness 03/08/90 05/01/ 1990First tranche release (if applicable) _
Midterm review (if applicable)Second (and third) tranche release (if applicable)Project completion 04/30/95 04/30/97Loan closing 12/31/1995 12/31/1997
18
Table 4: Loan/Credit Disbursements: Estimated and Actual(US$ million)
FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98Appraisal estimate 20 37 50 61 23 6 3 - -
Actual 30 6.49 22.72 11.95 25.73 23.88 12.53 21.46 28.15Actual as % of estimate 150 17.54 45.44 19.59 111.87 398 417.67 - -
IBRD 31190Actual 14.00 6.49 2099 8.95 21.90 18.04 6.04 10.88 6.63Cumulative 14.00 20.49 41.48 50.43 72.33 90.37 96.41 107.29 113.91
IDA 20640Actual 6.00 - 1.73 3.00 3.83 5.84 6.49 10.58 21.52Cumulative 6.00 6.00 7.73 10.73 14.56 20.40 26.89 37.47 58.99
Table 5: Key Indicators for Project Implementation1. Key Implementation Indicators in Estimated ActualSAR/President's ReportNumber of firms using fast-track technology 600-800 400imports9
Venture capital financinga) nuimber of venture
capital schemes 4 6supported
b) number of companies 150 300supported
c) rcturn on investments 15-18% 15-20%
TI upgradinga) number of technology institutions supported
12-15 30b) number of sponsored R&D projects undertakenjointly wvith Tls 60 98
Table 6: Studies Included in ProjectStudy Purpose as Defined Status Impact of Study
at Appraisal1. Stud) on enhancing Enhance and strengthen the skills Completed Staff trained in selection of clients.marketing capabilities of engaged in marketing and mechanisms of technology transfer anidCSIR. management of technology technology arrangements. Traditionial
knowledge base. practices replaced by market friendly ones,several marketing and businessdevelopment units established in CSIR.
2. Studs of NCL management Assessment of management and Completed Upgraded management of NCL to achievesystems marketing systems greater commercial market orientation and
abilitv to increase revenues 1rom iindUSLI;ialclicnis. Project based accounting s! stemIidesigned, proicet selection and budgetallocation system improved, organiiationllstructure modified to tacilitate industrycollaboration.
Study of laboratory safety Identification of risks, study of Completed Perceptible change in awareness of labstandards best practice in the world, salety issues. increased adoption ofG(iLI
devising protocols suited to local and IS09000.conditions.
9 This component was canceled due to redundancy after liberalization,
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Table 7: Project Costs
Appraisal Actual/Estimatz Estimate(US$M) (US$M)
Item Local costs Foreign Total Local Foreign Totalcosts costs costs
1. Technology venture financing 70 100 170 185 42.5 227.52. Technology support services 49 41 90 58 36 94
(i) Technology institutions 27 33 60) 24 27 51(ii) R&D promotion 22 8 30 34 9 43
3. Technical development Fund 150 150 0 80 8()TOTAL 119 291 410 243 158.5 401.5
Table 8: Project Financing
Appraisal Estimate (US$M) Actual
Source Local cosI:s Foreign costs Total TotalIBRD 145.0 145.0 113.9IDA 20.0 35.0 55.0 58.9*Cofinancing institutions 1.0 1.5 2.5 2.34(Japanese implementation grant funds)Domestic contribution 98.0 109.5 207.5 226.4(GO, corporations, individuals,industry, TIs)TOTAL 119.0 291.0 410 401.5* SDR/$ exchange rate variation made original amount of US $ 55 million appreciate to US $ 61 million.
Table 9: Status of Legal Covenants[India]
[Industrial Technology Development]
Type of Covenants Present StatusFinancial All covenants fully complied with
Table 10: Bank Resources: Staff Inputs (actuals)
Stage oi project cycle Weeks US$(000)
Preparation to appraisal 227.3 546.5Appraisal 34.1 93.2Negotiations through Board 7.1 21.0approvalSupervision 135 460Completion 15 40.0TOTAL 418.5 1160.7
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BORROWER'S CONTRIBUTION: PROJECT COMPLETION REPORT
(INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT 2064-IN, 3119-IN, JAPANESE GRANT 2700-IN)
The Industrial Technology Development (ITD) Project initiated by the World Bank in 1989 was completedin 1997. The project had three components:
* * Support to venture capital entities for financing technologically innovative
and growth oriented small enterprises.
* * Assistance for technology service institutions (TIs) to serve industrialneeds and for industry to utilize the Tis for R&D.
und * Support for expansion of and easier access to the Technical Developmentfund.
With these three components, the project aimed to stimulate more rapid domestic technologydevelopment and provide industry with easier access to technology from domestic as well as foreignsources. These three components of the project were complemented by a technical assistance grant ofJapanese Yen 337.5 million provided by the Government of Japan.
ICICI was reasponsible for implementation of second component of the project. IDA credit of SDR 44.2million (equivalent US$ 55 million at that time) was made available under this component. This componenthad two sub-components namely, technology institutions (TI) programme for supporting research andstandards institutions aimed at providing technology services to industry and Sponsored Research andDevelopment (SPREAD) programme aimed at promoting collaboration between industry and researchinstitutions. Of these US $ 40 million were allocated for the TI programme and the balance US$ 15 millionwere allocated for the SPREAD programme.
ICICI was also one of the beneficiaries of the Venture Capital component. ICICI had promoted aseparate company TDICI which was allocated a loan of US$ 20 million . This report has been divided inthree parts. Part 1 covers the experience of the borrower (i.e. Government of India) with the IDAcomponent Part 2 covers the venture capital component, while Part 3 covers the Japanese Grantcomponent.
21
PART I
1.1 The ITD project was formulated and implemented at a time when the Indian economy hadstarted opening up. Prior to this, the domestic industry was protected from competition by way ofindustrial licensing and high import tariffs. [ue to the absence of competition the industry had nothreat to its survival and consequently the investment in technology development was low. With thegradual reduction in import tariffs and removal of restrictions on investment, domestic industry wasexposed to competition from many new players both local and foreign. Thus it became necessary forit to invest in technology not only to improve its production efficiency and quality but also to introducenew products. The project was therefore inl:roduced at an appropriate time.
ASSESSMENT OF TI PROGRAMME
IMPACT
"This line has demonstrated that Technology Institutions can borrow loans and pay it back"
Substantial jump in eamings of Tls from private industry going upto 50% in the last 8 years
Restructuring & reforns have helped to provicde improved services to the industry
State of art facilities created to support industry in several areas such as leather processing, catalysis,polymers, petroleum refining, infornation technology, lasers, material science and rapid prototyping.
Issues identified in functioning of Technology Institutions
1.2 The thrust of industrial policy on technological self reliance had led to setting up of a wide arrayof technology institutions to support technology development and diffusion to the industry. The majority ofthese institutions were owned by the government. Though there was substantial investment of resourcesmade by way of human and capital in these institutions they had not provided the desired benefits to theeconomy in terms of the services to the industry as most of these Tls were carrying out research inrelative isolation from the potential users. As a result, a major part of the capital and revenue expenditureof these institutions was met through grants from the govemment. Therefore, one of the major issues ofconcern to the government was dependence of these institutions on the government for budgetarysupport. The government therefore expected that these institutions should be able to earn about 50% oftheir budget from the industry over a period of time thereby reducing dependence on government. Theproject aimed to address some of the issues which would facilitate their working with the industry andachieve the earnings target set by the government. The project assessed that the major reason whythese institutions were not successful in working with industry was due to deficiencies in theorganizational and incentive structure. Projects were formulated at the initiative of the researcher withinsufficient market information and little or no involvement of the potential users during the R&D phase.Further, there was not much representation of the industry on the governing boards of these Tls. This hadresulted in contract research forming only a small part of their research work. Further in severallaboratories the equipment and facilities had become obsolete and needed replacement. Thus theinstitutions were not able to generate business from industry. The project was essentially targeted toimprove the functioning of Council of Scientific & Industrial Research (CSIR) and its constituentlaboratories. CSIR with its network of 42 laboratories and scientific and technical manpower strength of15000 constituted one of the largest instituticns for publicly funded R&D.
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Programme Objectives and Design
1.3 The TI programme was specially designed to overcome the shortcomings in the public R&Dinfrastructure including systems and structures, facilities and equipment and skills and expertise of thetechnology institutions. The programme guidelines stipulated that support should be provided to onlythose institutions which demonstrated their potential and willingness to change. Further, the funding wasrestricted to those Tls which had a business plan that demonstrated the intention of TI to serveindustry more effectively. Some of the elements which the institutional plan was required to indicate were:
a) priority areas of research and resource allocation;
b) revenue generation potential of the project and programme;
C) involvement of the industry;
d) technical capability at the institution to provide the services outlined in the plan; and
e) leadership and management of the technology institution to bring about the changes.
1.4 The instrument designed to support this restructuring was an interest-free loan repayable over amaximum period of 15 years with a service charge of 1% p.a.
Assessment of Design
1.5 The instrument for funding technology institutions was imaginatively designed as the technologyinstitutions had in the earlier years received funding only by way of grant. Thus it required a cultural andmind set change in these institutions even to accept loans. As it was desirable that these institutions makemajor investments in future programmes and build up the technological capability the loan wasappropriately kept interest-free. If the loan had carried interest it would have either dissuaded most of theinstitutions f-om availing the assistance or even if they came forward it would have led them to focus onprojects bringing short term returns. The interest- free loan thus provided the institutions adequate timeto bring about the desired transition without any compromise on their research focus. With the fundingavailable only as loan the Tls were forced to interact with the industry before making investment decisionsso as to understand whether the proposed activity matched their needs and had the potential forimproving their earnings to repay the loan.
1.6 The programme funding was open to all autonomous technology institutions both existing andnew. This made it possible to support technology institutions of diverse ownership. While a majority ofthose funded were publicly owned, the programme enabled to support some institutions which hadpotential for growth but were unable to takeoff because of limited funding options.
1.7 The preconditions for eligibility of financing such as preparing business plan instead of researchplans brought about a commercial focus in the technology institutions. It also ensured that theinvestment made in assets were of the nature which had potential for revenue generation and usage byindustry. During the course of business plan preparation and also after interacting with the consultantsarranged from the World Bank the Tis understood several aspects of technology institutionsmanagement. They became more aware of their costs and were therefore able to appropriately price theirtechnologies. Tls reorganized their marketing function, recruited people for marketing and provided formarketing budgets. Several other aspects of the Tls working were overhauled to improve their services to
23
the industry. Many of the Tls upgraded their skills on project management and improved theirmanagement information system. Assistance under the TI programme enabled the Tis to upgrade theexisting facilities and set up new facilities at par with the international standards.
1.8 The eligible expenditure under the loan included equipment and pilot plants jointly owned andmanaged with industry, technology collaboration fees, training and exchange prograrnmes, upgrading ofmanagement system, safety systems and rnarketing infrastructure.
IMPLEMENTATION AND OPERATIONAL EXPERIENCE
Organisation
1.9 ICICI quickly put together a dedicated team of professionals with experience in project financeand industry for implementation of the project. ICICI had earlier implemented a United States Agency forInternational Development (USAID) project for financing R&D the experience of which was useful inimplementing this project. Shortly after commencement it was realised that the utilisation of the line couldnot proceed at the estimated pace as there was considerable amount of preparation work required in eachproject in terms of identifying the needs of the industry and finalizing the specifications of the equipmentand the facilities needed to meet these needs. To facilitate the implementation, the World Bank hadappraised and sanctioned an amount of US$ 24 million to 6 technology institutions before ICICIcommenced implementation of the programme. The 6 Tls included Bureau of Indian Standards (BIS) thenational standards organisation, four CSIR laboratories and one private contract research institution. Itwas anticipated by the World Bank that ICICI will appraise and sanction assistance to another 6 to 9institutions out of the balance funds of US$ 16 million. It was expected that most of these would be CSIRlaboratories.
Procedures
1.10 ICICI had to devise its own systerr and procedures for evaluation of the proposals under the TIprogramme. ICICI also put together a panel of distinguished industrialists and scientists for sanction ofproposals. Further as the Tls were for the first time availing assistance as loan, close monitoring of theprojects was done by ICiCI. Project implementation was monitored on the basis of measurable indicatorslike revenue generation by the TI, number of technologies licensed to the industry, capabilities andexpertise built in new areas and improvement of service to the industry.
1.11 In the course of implementation, some of the first six institutions revised their investment plansand reduced the project outlays. The savings made thereby as also continuous increase in the corpus offund due to change in the exchange rate of rupee from Rs 17 to a dollar at the time of commencement ofthe project to Rs 38 to a dollar at the time of the project completion enabled ICICI to fund several moreinstitutions than was originally envisaged. ICICI also assessed that the restructuring of the existing TIs willrequire a longer time. Industry was therefore encouraged in setting up new Tls in technology areas whereexisting institutions were not willing to step in. Two such examples are the CARE foundation promotedfor development of biomedical devices specially related to heart care and Centre For Laser Processing OfMaterials to meet the industry needs for lasers in material cutting, welding and processing.
New Areas
1.12 An important part of the national technology infrastructure are the 6 Indian Institutes ofTechnology( IlTs) which are the premier institutions for providing higher technology education. During theproject design stage these institutions were not considered for funding as their primary focus is providingtechnical training and education. In the course of implementation of the project it was observed thatmany of the SPREAD assisted companies selected IlTs as their partners for development because of the
24
technical competence of their faculty. Later on with approval from the World Bank, two of the IlTs, lIT-Delhi and IlT-Kanpur submitted proposals and were funded under the programme. The business plan atIlTs was structured to enable them to not only increase their contract research but also to step up theirprogrammes for training from industry personnel.
Performance
1.13 By the project completion date a total of 33 Tis as against an estimated number of 12- 15 werefinanced under the project. These included 9 CSIR laboratories, 9 laboratories under other governmentdepartments, 8 research foundations, 5 laboratories set up by industry associations and 2 nationaltechnology training institutions. The project was able to cover TIs in a wide range of industrial sectorssuch as pharmaceuticals, biomedical applications, engineering, electrical/ electronics, chemicals, leatherand environmental engineering. The facilities setup in these institutions are state-of-art and includeseveral new and emerging technologies such as rapid prototyping, laser processing, catalyst and polymerprocessing, drug delivery systems, microwave electronics, computer integrated manufacturing,aerodynamics testing and leather processing. 8 out of these 33 Tls have also started repaying the loanfrom the revenues generated with these facilities. The success story of one of the publicly funded TI aCSIR laboratory is given in box 1.
Box 1: Success Story - National Chemical Laboratory
NCL is one of the constituent laboratories of the CSIR. Its major areas of research are catalysis, biochemistry,organic chemistry and polymers. With the help of consultants arranged through World Bank, NCL was able torestructure its operations and business plan. With the loan assistance, pilot plants for catalysis, polymerprocessing and characterisation, plant tissue culture and membrane synthesis have been set up . In last yearalone NCL filed for 88 patents of which 24 were intemational. NCL is currently working for a number ofintemational companies including Dupont, Rhone-Poulenc, General Electric, Unilever and IC. More than half ofits eamings are from intemational contracts. NCL's extemal eamings also increased at a compounded annualgrowth rate of 22% from Rs 28 million in 1990 to Rs 113 million in 1997.
1.14 Another such example is Sriram Institute for Industrial Research an autonomous non-captiveprivate research foundation. The progress it has made with the help of TI assistance is given in box 2.
Box 2: S'uccess Story -Sriram Institute For industrial Research
Sriram Institute of Industrial Research founded in 1952 by a small group of industries. In the initial years itfocused on developing technologies related to the textile industry and in almost four decades of existence wasunable to make any significant growth in its activities due to limited funding from the promoting industrialgroup and "not for profit character" of its operations. The institution was on the verge of closure when theinjection of funds under the TI programme brought about a sea change in its operations. During the period ofthe lTD project the eamings of the institution increased at a compounded annual growth rate of 28% fromRs 20 million in 1990 to Rs 110 million in 1997. The institution currently meets its entire budgetary expenditurefrom its eamings from industry. The institution has been able to provide the industry timely, accurate andreliable third party testing services for a wide range of materials and chemicals. The institution has alsotrained a number of persons from industry in analytical testing and has also helped many industrialorganizations to set up their laboratories. The institution has also been able to diversify into new areas suchas calibration services required by companies going for ISO 9000 certification, environmental services anddevelopment of standard reference materials.
1.15 Some of the TIs did not take off as expected and the transformation in the institutions was verylimited. One such example is B.V. Patel Centre for Pharmaceutical Research as indicated in box 3.
25
Box 3: B. V. Patel Centre for Pharmaceutical Research
B.V. Patel Centre for Phamnaceutical Research set up in 1988 by a group of pharmaceutical companiesincluding Cadila and Wockhardt and also with the support of the state govemment of Gujarat. Its researchareas include bulk drugs, bioequivalence testing and drug evaluation and drug delivery system. Under TIprogramme a loan of Rs 27.5 million was provided to upgrade facilities in the above areas. The institution wasexpected to undertake contract research and train people from the pharmaceutical industry. However due toleadership weakness in the institution it has not been able to structure its incentive system for the scientistswhich has resulted in high tumover of its employees and has also not been able to organise marketingdepartment which could obtain research contracts from industry.
1.16 The Bureau of Indian Standards project is another example which also faced difficulty due tofrequent change of leadership and delays in the approval from its ministry.
ASSESSMENT OF SPREAD PROGRAMME
IMPACT
A working model for effective industry -TI collaboration
59 technology institutions covering universidies, research foundations, IlTs and Engineening Colleges, CSIRlaboratories and Laboratories under other govemment departments are collaborating with industry
More than two third projects are from small and medium scale industry and startups
Problems identified in the industry's reluctance for working with the Technology Institutions forR&D
1.17 Governments in several countries stimulate industry to undertake technology development by avariety of policies and incentives. Subsidizing the cost of R&D is one of the policy measures. ThoughIndia was spending about 0.9% of its GDP (,1988) on R&D, the vast majority of R&D expenditure in Indiawas financed by the central government budget and used in public sector Tls. The central governmentagencies and public sector accounted for about 85% of R&D expenditure while the private sectorcontributed about only 10% to 15% of R&D expenditure. There was no incentive available to industry forundertaking R&D. Further, as the Tis in the past were assured of their budgets from the government theyhad no concern to solicit proposals from the industry. With the reduction in their budgets coming at thetime of the ITD project formulation the TIs had started to look towards industry for projects and funding.However due to past experience of working with TIs the industry was not forthcoming easily. Some of theother reasons were that the facilities in several Tls were not upto date and TIs were not able todemonstrate technologies on a pilot scale which made commercial investments riskier. The projectmanagement system were not geared to meet the expectations of the industry in terms of project cost andtime.
Project Objectives and Design
1.18 The SPREAD programme was theirefore designed to stimulate the industry to undertake R&D.The assistance offered under the SPREAD programme was in the form of conditional loan. The intereston the loan during the implementation periodi was c 6% per annum. This was to enable the promoter toundertake the R&D with lower financial burden. The interest was stepped up to 15% per annum at theconclusion of the R&D project. The repay(ment of the loan could spread over a period of 10 yearsdepending on the project. The loan could be up to 50% of the project cost and could be written off in case
26
of the failure of the R&D project. Firms receiving the support had to show that their contribution wasadditional to what they were doing earlier.
Assessment of Design
1.19 This sub-component was well designed as availability of low cost and long term funds inducedindustry to work with the TIs . The SPREAD programme was the first funding programme in Indiaspecifically for collaborative R&D. The programme by design also addressed the funding of certainexpenditures which was difficult for industry to fund from outside sources. The programme funds enabledthe industry to make investments in pilot plant trials or prototype development. Thus several companiesavailing assistance under the SPREAD programme could take their project from the lab scale/ benchscale to pilot plant operation/ prototype trials and then to commercialization.
SPREAD Programme Implementation and Operational Experience
1.20 Initially the industry was reluctant to work with Tis because of their experience in the past.However, since working with a TI was essential for obtaining the funding under SPREAD the industrywas driven to the TIs for technology development. The SPREAD programme therefore required extensivepromotional efforts in the initial years of the project. Though there was no budgetary provision in theprogramme for marketing and promotion, ICICI took several measures to promote the programme such asparticipation in seminar and conferences, publicity in trade journals, business magazines andnewspapers. ICICI also utilized the database of its own assisted companies and various industryassociations in marketing the programme. In the SPREAD programme ICICI had to set up its ownsystems for project appraisal as unlike the TI programme the World Bank had not appraised andsanctioned any project under this programme.
1.21 Under the SPREAD programme 98 R&D projects were funded as against an estimated number of60 covering a broad range of industrial sectors such as pharmaceuticals, electronics and informationtechnology, chemicals, metallurgical minerals and biotechnology. It may be mentioned that about 80projects under the SPREAD programme are from small and medium enterprises. The number oftechnology institutions involved in working with these companies are 59. Of the 98 projects under theSPREAD programme, 45 have been successfully completed, 8 have failed while the balance are underimplementation. Some of the projects which have been commercialized have led to improvement inproductivity and quality of products thereby improving the competitiveness of the company. The projectscommercialized based on new technologies have also led to employment generation. More than 30companies have started repaying the loan as a result of commercialization of their technologies. Thesuccess of the SPREAD programme has demonstrated that a substantial potential exists for fundingindigenous R&D in collaboration with Tis. Two SPREAD projects which have been successfullycommercialised are indicated in box 5 and box 6.
Box 4: Success Story - Dhampur lnvertos Limited
A start up company promoted by an entrepreneur took SPREAD assistance of Rs 6.2 million in 1993 fordevelopment of an enzymatic process to manufacture invert sugar in cooperation with Bhabha AtomicResearch Centre. The invert sugar is used as a sweetener in confectioneries, pharmaceuticals andbeverages. The enzymatic route offers several advantages over conventional process based on acidhydrolysis including improved yields and environment friendly process. For commercialisation furtherassistance was provided by TDICI. The company is currently having a sales tumover of Rs 58 million and has50 employees.
27
1.22 As the maximum assistance under the scheme was restricted to Rs. 15 million per project amajority of the projects came from the small and medium scale sector including start-ups. The maximumassistance per project was later revised to Rs. 50 million as many good R&D projects from medium andlarge scale industry could not be funded. Further, ICICI was selecting projects which had a substantialinnovative content. ICICI also encouraged rnany of the companies to try out newer Tls so that they couldget experience of working with industry. The companies were encouraged to not only restrict theirassociation with publicly funded R&D institutions but also include several universities, engineeringcolleges and industry promoted research foundations as partners. The SPREAD programme was notonly successful in stepping up the R&D in the industry but also in improving the cost effectiveness ofR&D as the firms were able to compliment their resources with those of the Tls. The SPREADprogramme also helped in shortening the period of implementation of R&D projects as the developmentalactivities and responsibilities were shared between the technology institutions and the company.
Box 5: Success Story Shantha Biotechnics Private Limited
A start up company promoted by technocrat took SPREAD assistance of Rs 1.5 million in 1995 fordevelopment of recombinant hepatitis B vaccjne in co-operation with Centre for Cellular and Molecular Biology.The company developed the vaccine and received Drug Controller General of India's permission to commencecommercial production from September 1997. Currently there is no manufacturer of this vaccine in India andthe entire domestic demand is met through imports. Currently a paediatric dose of imported vaccine costsaround Rs 270 and 3 doses are required per child which makes it prohibitively expensive to be included underthe Expanded Programme of Immunisation of GOI. SPBL has introduced this vaccine at Rs 70 per dose (lessthan a third of imported vaccine).
Progress of IDA Credit Utilisation
1.23 By the project closing date ICICI had utilised US$ 58.87 million (Rs. 2080 million equivalent)against the available IDA credit of US $ 61.18 million under the two programmes (about 96% of theavailable credit). It may be mentioned that over the time the ITD project was implemented the funddenominated in SDR of 44.2 million had increased by about 11% in dollar terms (from US$ 55 million toUS $ 61.18 million). In rupee terms the fund more than doubled due to successive devaluation of rupeefrom Rs 17 to a dollar to Rs 38 to a dollar by the project closing date . As the sanctions anddisbursements under the TI programme an(i SPREAD programmes were in rupees the corpus availablewith ICICI more than doubled. As mentioned earlier this was the reason why ICICI could assist almosttwice the number of projects than was originally envisaged.
1.24 The year-wise disbursements for the IDA component is given in the table below. It can be seenthat a major percentage of credit was utilised in the last two years of the project. There are severalreasons for the step-up in utilisation in the last two years. One of the reasons was that the World Bankagreed to certain modifications in the operating guidelines for the two programmes. The changes made inthe operating guidelines was that the maximum limit for assistance under SPREAD project of Rs 15million was' revised to Rs 50 million. The second modification was reconstitution of the projectsanctioning committee so that the sanction process was not delayed due to the non- availability ofmembers. Further, around this time the reforms were getting established and the demand from the Tlsand the companies for the funds had increased substantially. In the initial years of the project the Tls werecautious in their approach to avail loan as they were not sure about its impact. Also it took time for themto restructure before they were allowed to draw the funds. (Rs in million)
28
(Rs in million)
Year FYearwise - Cumulative
SPread TI Total Spread TI Total1996f -7 _- 04---0-0 23.50 23.50
1990-91 ,0.00 1 23.50 123.50
1991-92 7 i660 13.90 81.50 i.60 - 97.40 105.00
1992-93 64t1f0 13.90 18.00 -11.70 7 111.30 123.001993-94 I --- ~~~------
1993-94 ! 73.90 96.00 1169.90 85.50 207.30 292.80
1994-95 132.00 118.30 250.30 217.50 325.60 543.10
1995-96 i 101.80 ! 107.00 208.80 319.30 432.60 751.90
1996-9i 192.60 139.70l 332.30 511.90 572.30 1084.20
1997-1998 144.30 852.90 I 997.20 656.30 1425.20 2081.50
Total 656.30 1425.2012081.50 -
Experience with the Bank on the IDA Component
1.25 The supervision and the monitoring of the project by the World Bank was fairly regular andhelped to keep pace in the implementation of the project. The Bank has identified and arranged anumber of consultants for the technology institutions to train their staff and provide support in preparationof the business plan. A special mention should be made of Mr. Melvin Goldman the task manager at thebank who showed keen interest in the project during the entire period of its implementation . He broughtseveral experts along with him to review the project and also ensured that he visited almost all theprojects both in the TI and SPREAD programme.
1.26 A project of this nature, involving reforms at the technology institutions and promoting a newculture in the industry requires considerable time and effort for getting accepted. Considering the abovethe time available for the implementation of the project was not adequate. A small portion of the funds(about 4%) under the project could not be utilised as the Bank did not agree to a further extension ofthree monthis after December 31, 1997 as there was delay in some of the projects. The implementationcould also have been more effective if the bank had agreed for a two year extension at a time instead ofyearly extensions given twice. This could have helped to remove uncertainty for the borrower and theimplementinig agency regarding the availability of funds.
Experience with the Government
1.27 There was substantial time lag between lodging of claims and in receipt of reimbursement fromthe Goverriment during the implementation of the project. This affected the recycling of funds to theindividual projects and thereby delayed their implementation . Also, as the funds to the technologyinstitutions were to be made available first by ICICI as Tls did not have funds of their own to invest, ICICI
29
had requested for a provision of advance on a continuous basis during the implementation of the project.However, a small amount of advance was approved after long a period. Had this advance been madeavailable earlier it would have avoided a number of uncertainties during the period of implementation ofthe project. The Government in future multilateral projects should keep a provision for advance to theimplementing agency and should also keep ithe fund flow out of the budgetary process.
UNI:INISHED AGENDA
1.28 Though the ITD project was successful in meeting the objectives of the TI and the SPREADprogramme it could target only a small nurnber of Tls and firms with limited impact on the economy.Though it succeeded in bringing about a transition in small numbers of Tls it still leaves a very largepopulation of TIs ( about 300 autonomous scientific research organisations in the country) whichrequire similar support for transition. Even in the CSIR system only 8 out of the 42 laboratories couldavail of the programme assistance. The reform process has still not been completed and there is furtherneed of similar support to these institutions to deepen and strengthen reforms. Some of the areas wherethese TIs need further support is rationalisation of manpower, downsizing, autonomy in closing certainactivities in non-strategic areas, freedom in setting up the incentive system. Some of these TIs are alsokeen to promote their own corporate ientities which will take responsibility of licensing andcommercialisation of their technologies. Further though the project helped the TIs in focusing theiractivities and upgrading their assets it will be necessary to build these laboratories to internationalstandards meeting GLP and ISO requirements. This will then enable them to attract a lot of contractresearch from abroad due to the lower cost of technical manpower and its availability.
1.29 The Indian industry is still not able to afford the cost of R&D and needs soft funding support fortechnology development. The response to the SPREAD programme has demonstrated that policy supportof this nature is more useful in stimulating industry to spend on R&D as against other incentives like taxbenefits. As the SPREAD project was a pilot project it needs to be continued with substantially morefunds so that the R&D culture can be diffusebd to a far more number of companies. The SPREAD projectalso demonstrated a suitable mechanism for supporting small and medium scale enterprises and firstgeneration entrepreneurs.
1.30 Since the ITD project was targeted to only a few TIs and companies during the course ofimplementation many other Tls and industry became increasingly aware of the programme which led tosubstantial jump in the number of proposals received at ICICI by the time the project got completed.Some of the TIs which were successful in transformation catalyzed many other TIs which initially werehesitant to request for the loan. Also some of the TIs which were funded under the project were eagerfor a second phase of funding as they wanted to increase both the scale and size of their activities. Thusa strong demand has been created for both SPREAD and TI programme. With the closure of the ITDproject there is no independent funding mechanism available in India for Tls and options with industry forgetting funding for R&D are limited. As these Tls are unable to borrow funds either from the banks andthrough capital markets and are therefore requesting that a funding mechanism to support their futureneeds should be continued. Though the Government has set up a revolving fund from this credit forcontinuation of these programmes ICICI will have to substantially restrict it activities for the next fewyears as the loans are repayable over long term period ranging from 10 to 15 years in the twoprogrammes.
1.31 Going by the experiences of the ITD project the same effort has to be extended to the Universitiesand Engineering Colleges. This will not only step up their earnings but also make their programmes moreindustry focused. Further there are several areas where support to industry has to be made available.Drugs and pharmaceutical industry requires support for it to adapt to a regime of product patents. Thisrequires not only financing mechanisms to support its R&D efforts but strengthening of the existing twoinstitutions Central Drug Research Institute and Institute of Chemical Biology to support their developmentwork as also means to support their R&D projects. Central Leather Research Institute with the support of
30
the prograrnme introduced a range of services for leather tanners and processors. The leather industry isrequesting it to start at least two extension centres at new locations where there is concentration ofleather industry. In two industrial sectors which have registered high growth in recent years auto-components and foundry no dedicated TIs exist which can meet all their needs. Some of the existing Tlsin the engineering sector are partially meeting their need but a concerted effort is needed to supportindustry in these sectors. Some of the newly emerging sectors like software and telecommunicationswhere the technology changes are rapid the Tls need to be strengthened.
Long Term Sustainability of the Activities
1.32 There is still a long way to go before an ultimate objective of financially independent,commercially viable and industry responsive Tls are created. It will be therefore desirable to continue atechnology financing mechanism for the industry and the technology institutions. This will ensure thecontinuation of the reform process initiated by the Tis and also help industry to continuously innovate.There could be several approaches for establishing the funding mechanism. One approach could becontinuation of the same project with additional funds. This is because the design of the project has beentested and found to be satisfactory. Another possibility could be to set up a separate and permanentinstitution specifically catering to the technology needs of the industry. The World Bank's technical andfinancial support will be necessary to make this a reality.
31
PART 2
TECHNOLOGY VENTURE FINANCING COMPONENT
2.1 A total of US$ 45 million was allocated to the four participating institutions in the amountspreviously agreed viz. US$ 20 million for ICICI, US$ 5.5 million to Canara Bank, US$ 3 million to APIDCand US$ 4 million to GIIC in addition to the inallocated pool to be distributed on a first come first servedbasis once the initial allocations were appropriately invested. These funds would be passed from theGovernment to the parent companies of the Venture Capital Funds (VCFs) in rupees.
Venture Capital Financing by TDICI through ICICI
2.2 The Bank allocated an amount of US$ 20 million to TDICI for Venture Capital activities throughICICI. This was further supplemented from the unutilised pool available for utilisation by future allocationof US$ 13 million. Of the total allocation of US$ 33 million. TDICI has utilised US$ 31.51 million. Thisamount of US$ 31.51 million was utilised towards funding/part funding around 125 companies in thecountry by way of assistance through venture capital financing. These assisted companies are engagedin the areas of manufacturing, engineering, pharmaceutical, telecommunication, software, hardware, etc.
Software Fund
2.3 The Bank further allocated an amount of US$ 15 million to TDICI through ICICI (the SoftwareFund) to provide special financing packages to the software industry in India which has been growing atover 50% annually over the last five years. Earlier, a survey undertaken by TDICI on behalf of the Bankclearly indicated the lack of availability of resources in the traditional forms like term loans, cash creditetc., from conventional financial sources like Banks and Fls primarily due to poor understanding of theindustry specific issues by these agencies. Keeping this in mind, the Software Fund was conceived to bea source of both equity and debt. In the limited period of nine months of investment activity (since the ITDProject closed in December 31, 1997), TDICI was able to make 9 investments aggregating US$ 7.54million under this fund.
Overseas Training out of Japanese Grant
2.4 Six Venture Capital Companies (VCCs) were identified by the Bank for training of their seniorexecutives in Venture Capital Companies/Funds in USA/UK, with TDICI acting as the co-ordinatingagency. Ten senior executives of the Indian VCCs were trained abroad for a duration of 16-18 weeks.Four Chief Executive Officers of the Indian VCCs had a special training of four weeks. Further, sevenmiddle level executives of the VCCs had a four weeks training in the USA and attended a Venture CapitalSeminar organised by the National Venture C(apital Association, USA. The Indian VCCs utilised a totalamount of US$ 7,28,296 and sterling pounds 53,853 in this regard.
32
PART 3
JAPANESE GRANT COMPONENT
Objectives
3.1 The grant was aimed at financing technical assistance to iCICI and BIS but also for carrying outstudies on development of industrial technology in India. A specific provision was also made for CSIR toimprove its laboratory safety system, marketing setup and also upgrade management information andplanning system at NCL.
Utilisation
3.2 By the project closing date almost entire funds available under the grant were utilised. The grantcomponent was very useful as it covered the cost of consultants and training which are essential in anyreform process. These are areas were firms and Tis are reluctant to put their resources though they areessential in any transformational process.
3.3 The Japanese Grant assistance to ICICI helped it to launch a major initiative in management oftechnology (MOT) education in India. A study was commissioned to be carried out by Science PolicyResearch UJnit (SPRU), University of Sussex, U.K. to assess the demand for MOT education which wasfollowed by a series of workshops for industry and technology institutions. This resulted in IIT-Mumbailaunching a full time post graduate programme in MOT while several other academic institutions likeAdministrative Staff College of India, Indian Institutes of Management (Ahmedabad and Bangalore) havelaunched short term programmes in MOT. The grant was also used for training of faculty from theseinstitutions at SPRU. The grant helped ICICI in getting several international consultants for restructuringand training of staff at the Tls particularly of the CSIR. CSIR also took several steps to improve thesafety practices in the laboratories with the grant. These included establishment of a central safety cell atheadquarters, appointment of safety officers in laboratories and study tours to some outside laboratories.CSIR could also train its business development staff from laboratories at Manchester Business School.NCL using services of Generics Group, plc, U.K could upgrade its management system . The trainingprovision under this component helped ICICI and CSIR to depute their staff to Tls in UK, USA, SouthAfrica, Australia and New Zealand to learn from their experiences.
Role of World Bank
3.4 Pursuant to the implementation of the ITD Project, the Bank has played a very important role inthe development of venture capital in India.. It was instrumental in introducing the concept of venturecapital in India. It supported six venture capital funds in their formative stages. It provided the nucleus forgrowth to venture capital in the country which today has an aggregate pool of over US$ 1 billion. Asmentioned above it has also provided substantial training inputs to over 21 professionals who today formthe core group of trained manpower in the country in venture capital. And lastly, it was also responsiblefor encouraging networking amongst the various Indian VC funds helping dissemination of learningexperiences and syndication of deals.
Impact on the Indian Industry
3.5 The Indian industry received many benefits from the ITD Project. New financial concepts andproducts were introduced in the market. The Software industry received a boost. The financial structuringin the indusitry become more sophisticated on the lines of the practices adopted in western countries. Thelong felt need to Employees Stock Option Plan (ESOP) was introduced in manpower intensive business.
33
Professional entrepreneurs were encouraged. The gap in capital requirements with stringent [POregulations was filled. Above all it improved the standards of corporate governance.
Conclusion
3.6 The regular supervisory missions of the Bank to monitor the implementation of the ITD Projectwas of immense use to the venture capital industry and other recipients of funds under the Project. Thesupervisory team members especially Mr. Melvin Goldman, Mr. Sanjay Kathuria and Mr. Sanjaya Lallgave appropriate guidance and inputs to TDICI. T he Bank was very co-operative and responded fast inapproving eligible sub-projects for funding under the Project.
3.7 The project could bring about a transition in 30 existing TIs Within these laboratories there areseveral other areas which have potential and could not be taken up in this project. CSIR itself haslaunched a major programme to bring its laboratories to international level. For this it could use theproject funds for preparing three of its laboratories to go in for GLP/ ISO 9000 certification. However it willnot be able to maintain this pace for accreditation of other laboratories due to constraints for financing.Some of its laboratories like the Central Drug Research Institute and Institute of Chemical Biology havebeen receiving a number of projects from the pharmaceutical industry. However they need to upgradetheir pilot plant and analytical facilities to pursue this work. With the low cost of manpower many of theselaboratories have started receiving contract research assignments from abroad. Some of the servicesintroduced by the Tls were not available to the industry indigenously and they had to go abroad. Anexample is the certification of the agrochemicals for which local companies had to pay US $ 2 million ifthey went to sell abroad. The same is being done today at about one-tenth of the cost at Jai ResearchOrganisation one of the Tls supported under the programme. There is a also a need to support institutionsin areas such as healthcare especially biomedical applications the cost of which is going beyond thereach of common man. A small step has been taken in this direction by setting up CARE foundation.
3.8 The SPREAD programme also received a very good response from the industry. Theprogramme demonstrated that though the overall investment by the industry in the past in R&D was lowit could be increased by certain policy measures. There are currently a limited number of programmesfor funding R&D in industry and the corpus of funds and their reach to the industry has been limited. Thefinancing of R&D projects is also difficult for industry through conventional sources of bank finance due tothe high risks involved and also the difficulty in their orientation of their staff. The venture capitalcompanies in general also step in to finance projects after the technology development is completed.Even then they are looking for projects which have very high internal rate of returns . This excludesseveral new projects which may be capital intensive and would require large investments in the beginning.There has been requests from several companies especially in the small and medium scale for thecontinuation of this programme as this need for financing cannot be met from other sources.
More Reforms ?
3.9 This is for the first time that the TIs have availed a loan for a project. The very process ofidentifying a bankable project, preparing a project proposal and the interaction with the ICICI in thisprocess sowed the seeds of reforms in the scientists of the Tls. As the project progressed throughimplementation, various inputs provided by ICICI by way of workshops, training and use of consultantscreated an environment conducive for reforms. The Tls have implemented the projects successfully anddemonstrated their capability to generate adequal:e revenues to service the loan. This is the unfinishedagenda of this project and calls for more radical reforms and therefore more support and facilitatingmechanisms.
34
Annex I
DEVELOPMENTAL IMPACT OF THE TI PROGRAMME
1. Thirty three leading Tis have taken up programmes in key industrial sectors like chemicals andpetrochemicals, leather, electronics, metallurgy and mining, textiles and garments and environmentalengineering.
2. The technology institutions include CSIR laboratories, laboratories set up by other ministries ofthe government, industrial research associations and research foundations.
3. The most important impact has been on the industry-orientation and strategic planning processintroduced by several laboratories. The National Chemical Laboratory was one of the first laboratories toundertake a restructuring exercise in terms of its clientele, areas of research, number and types ofprojects, charging of fees and project implementation procedures. Several other laboratories lateradopted these practices.
4. IMost of the programmes were formulated in consultation with the industry identifying current andfuture needs. This has led to creation of state-of-the-art facilities in areas like footwear design, polymers,catalysis, textile processing and environmental engineering. The industry is making extensive use ofthese facilities. These institutions in turn have been able to intensify their contracts with industry therebyincreasing proportion of market-driven research activities.
5. Several laboratories have tied with international companies and leading laboratories in the world.Thus, CL-RI has obtained accreditation from SATRA, UK and is providing cost-effective services to Indianleather goods manufacturers.
6. All the laboratories have taken substantial steps in increasing their external revenues.Implementation of the programmes have enabled many institutions to increase the proportion of externalrevenues from 10% -25% to 30% - 50%.
7. Availing of loan for the first time has led to the TIs acquiring a new perspective on financialmatters. TIs have created new structures have taken help from industry and improved internal systems.Some of the laboratories have constituted monitoring committees which are headed by therepresentatives of the industry. It is being proposed to operate some of the facilities as profit centres.
9. In the final analysis, the success of the programme is being reflected in the TIs meeting theirfinancial commitments.
35
Annex 2
Industry-wise Distribution of Projects
Industrial Sector of Projects No. of Projects
jPharmaceuticals zo00
Electricals/ Electronics 20.00
Chemicals/ Petrochemicals 16.00
Metallurgical & Minerals 15.00
Biotechnology 9.00
Machine Tools 5.00
Textiles 5.00
Composites 5.00
Others 8.00
103.00
Distribution of Firms and Technology Institutions
Size No. of Companies
Smrall~ ~~ ~~~~~~ 50.00
Medium 38.00
Large 15.00
103.00
--- -. -'o. o_ .T _.__ ....
Technology Institution type No. of TIs
! CSIR Laboratories 30.00
Laboratories set up by Govemment 13.00
Universities/ Engineering Colleges 18.00
I Research Foundations 8.00
l _ __ _ - 69.00 -
36
Annex 3
DEVELOPMENT IMPACT OF THE SPREAD PROGRAMME
1. Over 100 R&D projects in all the major sectors like chemicals, pharmaceuticals, electronics,machine tools, textiles, minerals and food processing.
2. Several projects in high technology areas like biotechnology and microelectronics.
3. IMany projects in the field of environmental protection.
4. More than two-thirds of the companies are from the SMEs.
5. Over 60 technology institutions are helping industrial firms including 20 CSIR laboratories,IlTlilSc, several laboratories set up by the government (Ministry of Textiles, Industry and Electronics),research foundations and many universities.
6. For a large number of Tis, this is the first interaction with the industrial firms.
7. About 60% of the companies are interacting with the Tls for the first time.
8. SPREAD has spurred several companies to go for major R&D initiatives which they could nothave done on their own.
9. S,PREAD has leveraged R&D budgets of the companies by a factor of 3 to 4.
10. Participation in the SPREAD programme has helped many Tis in institutionalising mechanism forinteraction with the industry on a sustained basis.
37
Annex 4
COMPARISON OF THE ORIGINAL PLAN AND THE ACTUAL IMPLEMENTATION
TI SPREAD
No. of projects planned 12-15 60
Average assistance per project US $ 2.6 million US $ 0 .25 million(expected) or Rs. 45 million or Rs. 4.2 million
(@ Rs 17/US$) (@ Rs 171US$)
Average assistance per project US $ 1.1 million US $ 0.17 million(actual) or Rs. 43 million or Rs. 6.5 million
(@ Rs 39tUS$) (@ Rs 39/US$)
Funding available originally US $ 40 million US $ 15 millionor Rs. 680 million or Rs. 255 million(@ Rs 17/US$) (@ Rs 17/US$)
Funding available at the project US $ 41 million US$ 25 millionclosure
Disbursements made US $ 37 million US $ 17 millionor Rs. 1425 million or Rs. 656 million(@ Rs 39/US$) (@ Rs 39/US$)
The total sanctions under the TI programme are Rs. 1425 million and under the SPREAD programme areRs. 656 million. The year-wise disbursements are given below:
Year Year-wise Cumulative
Spread TI Spread TI
1990-91 0.00 23.50 0.00 23.50
1991-92 7.60 73.90 7.60 97.40
1992-93 4.10 13.90 11.70 111.30
1993-94 73.90 96.00 85.50 207.30
1994-95 132.00 118.30 217.50 325.60
1995-96 101.80 107.00 319.30 432.60
1996-97 192.60 139.70 511.90 572.30
1997-1998 143.80 842.30 655.70 1414.60
(Rs. in million)
It can be seen that the major sanctions and disbursements took place in the last 2 years of operation.This was partly due to various measures taken by ICICI for utilisation of the total funds including revisionof the maximum project assistance under the SPREAD programme from Rs. 150 lacs to Rs. 500 lacs,extensive promotional efforts aimed at technology institutions and major project under CSIR restructuring.It can also be seen that the disbursements for the year 1993-94 are less than 37% of the sanction amountin the TI programme and about 25% in the SPREAD programme. This poor disbursement to sanctionratio is due to the non availability of funds from the GOI for about 2 years. During this period ICICI hadadvanced the commercial funds to the sub-borrowers on the loss making basis. ICICI also had tosuspend further disbursements until the signing of the supplementary subsidiary agreement with the GOI.
It has been observed that except the exceptions of the year 1996-97, the reimbursement from the GOIhas occurred only in the month of March of every year irrespective of ICICI being regular in submission ofits reimbursement claims from time to time. This had put a great constraint on the ICICI's ability toeffectively implement the programme. Finally, in the last year of implementation the requirement ofresources was more than the reimbursements received from the GOI. GOI refusal to provide advanceand erratic reimbursements compelled ICICI to invest substantial funds on a loss making basis for a longperiod of time.
Japanese Grant
This component of the project was complemented by a technical assistance grant of US$ 2 millionprovided by the Government of Japan. This grant would finance not only technical assistance to ICICIand BIS but also studies to further assist the development of industrial technology in India. In particular,these fijnds would support laboratory safety system and clientele R&D needs of the CSIR network as wellas upgrading the NCL's management information and planning system. ICICI would receive technicalassistance in technology development management through collaboration with comparable entities inother countries as BIS would help Indian exporters relate Indian to international standards.
39
AIDE MdEMOIREIndustrial Technology Development Project (Project ID 9895)
Supervision Mission (June-July 1997)
Introduction:
1. A Supervision Mission was carried out by Melvin Goldman and Sanjay Kathuriafrom June 24-July 3, 1997. The principal aims were similar to the previous mission:help plan the remaining project execution, particularly regarding use of funds; plan theeffective use of remaining funds in the Japanese grant component; and to try to deal withthe bottlenecks preventing the flow of funds to the project. The mission visitedBangalore, Mumbai, Hyderabad and Delhi and met with the executing agencies (venturecapital companies (VCCs), CSIR and ICICI), some of the assisted companies andinstitutions, the Over the Counter ExcharLge of India (OTCEI), and the Department ofEconomic Affairs (DEA) of the Government of India. The mission would like to recordits appreciation for the hospitality and courtesies extended to it.
The Loan
Venture Capital including the Software fund
2. The table in Annex I summarizes the expected use of funds in the remainingperiod of the loan i.e., until December 1997. The mission found that the pace of activityin TDICI has now picked up considerably, particularly on the software fund. The missionreviewed and approved three investments by the software fund, which means that thecumulative commitments to date are about US$ 5 million. By December 1997, TDICIexpects to take the cumulative commitments to at least US$ 10 million, and this figurecould conceivably be higher, given the efforts at marketing the fund and the deals in thepipeline.
3. Apart from the software fund, TDiCI expects to utilize its full allotment of US$33 million on the traditional venture capital component i.e. the remaining US$ 1.5million. APIDC would also use its full allocation of US$ 3 million (i.e. use remainingUS$ 2 million). GVFL has already been given a total allocation of US$ 9.25 million,and it has indicated that it may be able to use up to US$ 10 million, or another US$ 4million (approx.) in the remaining period. Moreover, additional funds beyond theallocations of US$ 9.25 million (GVFL) and 3 million (APIDC) would be available incase these VCCs are able to utilize extra funds by December 1997.
4. As indicated in Annex I, an amount of about US$ 16.3 million could not beutilized at the end of the project period. ][t is therefore agreed, as per the request of theDEA, that the mission will initiate steps to cancel US$ 10 million from the loan.
40
5. Despite repeated pleadings, the guidelines for venture capital are restrictive in thatthey do not give favored tax treatment to the use of standard forms of venture capitalfinancing, such as quasi-equity in the form of preference shares and various convertibleinstruments. The mission recommends that the Central Board of Direct Taxes take afresh look at these issues.
The Credit
6. TIs and SPREAD. As highlighted during the previous mission in February1997, disbursing the Credit is dependent on immediate and efficient transfer of resourcesby the Government to ICICI, to provide the TIs and companies with sufficient funds forinvestment. ICICI has delayed execution of many sub-projects for lack of funds, evenafter providing a sum of Rs 200 million from its own resources (which, given its cost ofcommercial funds, constitutes a loss since it has to on-lend at zero percent to TI clients orsix percent to SPREAD clients). Moreover, the required resources are not evencounterpart Government funds, but those that are to be reimbursed entirely from thecredit (see also para 10 below). This has become a critical issue since we are now in thefinal months of this project, which is also one in which sanctions and commitments haveaccelerated very sharply. Despite these problems, the TIs and assisted companies haveresponded very well.
7. CSIR: Progress has been made particularly on the three CSIR laboratories.However, the HQ still lags although some training activities have been carried out. Asstated in the previous mission reports, a team with time dedicated to the reform programneeds to be in place to ensure smoother progress in implementation and to bring to theattention of senior management issues when they arise. This reform team would furtherneed to be complemented by suitable consultants in addition to what has been done sofar, as well as intensive monitoring and follow-up by ICICI's technology group.
Japan Grant
8. There remains over $1 million equivalent of funds to be used, principally forCSIR studies, training and technical assistance. Most of this has been programmed.Progress has been made in defining the OTCEI program . A proposal has also beenagreed in principle to fund the development of an Indian based VC training program.
9. Annex III shows the projected use of resources from the Japan grant.
Outstanding Issues
10. The principal issue relates to funds and the inadequacy of flows from theGovernment to ensure that the project will be completed in time and the entire IDA credit
41
disbursed. Between 1991-92 and 1995-96, the Government had advanced funds toICICI. However, in 1996-97, the year in which project execution accelerated sharply,enormous backlogs of ICICI claims for reimbursement are pending with the Government.For example, out of a total claim by ICICI between July 1996 and March 1997 of Rs 380million, the Government released only Rs 193 million, and that only in March 1997.Further claims of Rs 92 million have since been filed by ICICI, and we understand thatclaims for another Rs 120 million will be filed in July 1997. As shown in Annex II, thereis still an unutilized amount of US$ 30.4 million in the Credit, or Rs 1082 million. ICICIplans also indicate that they expect to use up the entire resources available. In contrast,the Government has budgeted only Rs 400 million in 1997-98 for Credit 2064-IN, whichis completely inadequate. We urge the Government to increase the allocation in theBudget at the first available 3pportunity to Rs 1250 million (which would take care of thebacklog of past claims by ICICI), as well. as to release immediately the funds for claimsalready filed by ICICI.
11. Although such problems have not arisen so far in Loan 3119-IN, they will ariselater in the year since TDICI is accelerating its use of the Pilot Software Facility of US$15 million. Undisbursed funds in Loan 3119-IN as of June 30, 1997 were US$ 33.8million, which would be US$ 23.8 million after cancellation. It is urged that Governmentenhance its existing allocation for Loan 3119-IN to Rs 800 million so that there is nobottleneck in the implementation of venture capital and pilot software financing over theremaining period of the loan.
Strengthening the Technology Group
12. There is also a need to inject more experience, know-how and vision into theTechnology group (TG) and ensure that once the project is completed, technologyfinancing by ICICI continues. Demand by industry and TIs is increasing rapidly andICICI's leadership is ready to build up a nmore substantial effort. There remains little timeto prepare for the Bank's exit. The ICICI TG agreed to draw up a business plan and seekpartners for exploring the setting up of ICICI Technology Bank. This should beencouraged and the Japan Grant can be availed of for this purpose as well as for trainingICICI staff (see also paras 14 and 15 of the February 1997 Aide Memoire).
13. The mission found further evidence of the entrepreneurship and technologicaltalent that the project has helped unearth in the small-scale sector. Presentations made byassisted companies showed the crucial role of SPREAD resources in one case and PilotSoftware in another. Both companies have the potential to become world-class players.
14. It has been amply demonstrated that small companies play a critical role in theprocess of technical change. The Worlcd Bank's project has also demonstrated that ifproperly nurtured, many small companies have the potential to grow and becometechnological leaders. The mission recommends that the Government continue to supportactivities that nurture technological start-ups, such as ICICI's TG as well as venturecapital.
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Annex I
Loan 31190
Venture Capital Component
Pr ojected use of funds: July - December 1997 ($ million)
TI)ICI
a) Out of previous agreement of $ 33 m 1.5
b) Pilot software 10.0-15.0*
GVFL 4.0
AF'IDC 2.0
Total 17.5-22.5
Undisbursed funds as of June 30, 1997 33.8(including special account)
Amount likely to be unutilized 16.3-11.3
Amount recommended for cancellation 10.0
Rupee resources needed in Budget in event ofutilization of US$ 22.5 million Rs. 800 million
* (TDICI will try to use the entire facility of US$ 15 million)
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Annex 11
Credit 20640: SPREAD and TI
US $ million
Undisbursed amount as of June 30, 1997(including Special Account) 30.4
L. CSIR (expected claims)
(Rs million)HQ 135CGCRI 100lIP 150IICT 140
Total CSIR (includingRs 110 million alreadydisbursed) 525 14.8
I. SPREAD and TI (expected claims)
(Rs million)TI 230SPREAD 190Disbursed already to TIand SPREAD but notclaimed so far 184
Total TI and SPREAD 604 17.0
Total expected claims by ICICI (including US$ 4 millionalready disbursed) on World Bank US$ 31.8 million
44
Annex Ill
Japanese Grant 27000 US Dollars
Unutilized as of June 30, 1997 1,150,000(including special account)
1. CSIR
a. Expenditure incurred but yet to be claimed 329,000*(Rs. 11.84 million)
b. Expenditure committed and approved byWorld Bank for July-Dec. 1997. 335,000
c. Unallocated 65,000
Total CSIR claims expected 729,000
11. ICICI
a. Cross-Country Conference 80,000
b. Consultancy for preparing Business Plan 75,000(resource persons from ANVAR and BHR to come to India)
c. Visit by senior ICICI Management - 2 persons for 5 days 25,000to Korea
d. Training support to assisted institutions and companies 25,000(assisted by BHR)
e. Evaluation of TI program 15,000
f. Upgradation of Information Technology resources 15,000at ICICI
g. Collaboration with CIl (subject to approval) 5,000
Total ICICI claims expected 240,000
45
Ill. OTCEI (through ICICI)
a. Trading in Unlisted Securities: cost to World ]3ank 20,000
(World Bank to provide consultant fees and per cliem overseas;OTCEI to provide travel costs)
b. National Securities Clearing Corporation 15,000
c. Provision for training in India by overseas experts inmarket making 65,000
Total OTCEI claims expected 100,000
IV. GVFL and APIDC(through ICICI)
Training for GVFL 12,000Training for APIDC 5,000
V. Indian Venture Capital Association
Training and Case study preparation 60,000
Grand Total 1,146,000
* If this is recovered at historical exchange rates, the US$ amount may be higher