THE BREAKDOWN OF THE INNOVATION FUNDING

STATE CAPACITIES AND DEVELOPMENT IN EMERGING COUNTRIES State capabilities and limits to innovation funding policy in Brazil

and production investments started to generate revenues. In 2010, the other concessionaires generated obligations of R$11.5 million, which jumped to R$137 million in 2015, an increase of over twelve times, according to ANP.⁶⁵

5.2.2 – Funttel

Over the 2001–2013 period, Funttel raised almost R$5 billion, but disbursed only 25% of this total due to contingencies that limited operational capacity and the reach of the fund’s action. In 2013, with the launch of InovaTelecom, a partnership between MCTI and the Ministry of Communications, Funttel committed R$640 million, of which R$200 million was effectively transferred to Finep. The initiative funded non-reimbursable grants for joint projects and research credit loans, and is a good example of the possibilities of coordination between the MCTI and its agencies with other ministries to leverage additional resources for innovation.

5.2.3 – Electricity

Between 1999 and 2007, there were nine investment cycles and around R$1.6 billion was invested in 4,628 projects, according to information released by the R & D Committee for the electricity sector.⁶⁶ Keeping track of how the instrument evolved over time is a challenge, however, since there is no systematic form of public disclosure of information on the resources collected for, or invested in, R & D by the electricity sector. Thus, little is known about the allocation of these resources and the actual results of the efforts made so far.

State capabilities and limits to innovation funding policy in Brazil

leverage a new industrial leap, from the perspective of attracting investments to technology-intensive sectors, which demand innovation and, moreover, that it would be possible to rely on production of industrial manufactures and services based on domestically developed technologies. In a context of ever-increasing internationalization, a re-launch of the manufacturing industry would represent a possibility for the country to pick up the old project of achieving a certain level of technological autonomy and, for the most optimistic and ambitious, of catching-up at least with the emerging economies, a group to which Brazil seemed to belong.

It was already known that sectoral funds money, while allowing more than doubling FNDCT’s budget, would be insufficient if the private sector did not sustainably adopt projects that encouraged investment in new science-based technologies. The resources to offset financial risk and technological uncertainties should have been more significant, but it was necessary to mobilize additional sources from the credit market, whose spread and interest costs could be subsidized, and also the modern venture capital market, more suitable in the long run as it would not overburden participants with debt. Therefore, the financial sharing between the public and private sectors would be sufficient to stimulate this change, based on the expectation that private investors would have a great interest in projects with a high potential for profitability.

The consolidation of democracy with the change of government, and the new regime’s project envisaging a greater insertion of the lower-income strata of the population into the domestic consumer base, seemed to foster even more optimism, already recovering after the initial shock of the Real Plan and with the gradual improvement of macroeconomic conditions amidst the turmoil of the 1997 and 1999 international crises. It was this encouraging scenario that enabled the construction of the support structure for ST&I, which should have engendered a new configuration for the Brazilian NIS.

But what has been seen is that the fruits harvested are far paltrier than what was expected. What was unthinkable in the early 2000s became painfully real in the 2014–2016 period. The shrinking of financial support was a reality, and jeopardized not only the future trajectory but also all that had been built, some of which with great difficulty, given that the process itself was not as smooth as

STATE CAPACITIES AND DEVELOPMENT IN EMERGING COUNTRIES State capabilities and limits to innovation funding policy in Brazil

67 Because the period of the data extends up to the recent past, the current name of MCTI has been kept.

expected. The contingency retentions of funds and the reorientations in resource allocations were also factors leading to the unrealized expectations.

Between 2001 and 2016, MCTI’s budget⁶⁷ was of around R$100 billion (in current values). Of this total, 86.3% was committed and only 70.6% cleared (set aside, or liquidated) and made immediately available for the outlay, as can be seen in Figure 7 below. This distribution reveals that almost 30% of the budget was not disbursed to support the planned activities, representing a significant loss to the S&T system, which depended on these resources, over the fifteen years under review.

Figure 7. MCTI’s executed budget, 2001–2016 (Brazilian reals, millions, in current values)

Source: Ministry of Planning

Over this same period, FNDCT’s budget was about R$37 billion (in current values). Of this total, 65% was committed and only 46% cleared (set aside, or liquidated) – in other words, nearly 54% of the FNDCT budget was not disbursed to support the planned activities, a grave loss for innovation and even more for the NIS over the fifteen years under review (Figure 8). When it comes to the General Budget of the Union, it is always possible to argue that the budget is based on a

State capabilities and limits to innovation funding policy in Brazil

forecast of the revenue, and that contingency saving is used to adjust the expenses in light of eventual shortfalls in revenue.⁶⁸

Figure 8. FNDCT executed budget, 2001–2016 (Brazilian reals, millions, in current values)

Source: Ministry of Planning

The FNDCT comprised about 37% of the total MCTI budget over the period.

Of the total worth of the fund, about 94% came from sectoral funds and only 5.8% from the National Treasury’s ordinary sources. Over the years, the National Treasury allotment was around R$33–34 million, representing a decreasing proportional share as the sectoral funds resources grew, as shown in Figure 9 below.

One may note in the data released by the Ministry of Planning that in 2012 (long before the post-2014 crisis) and in 2016 there was practically no National Treasury allotment for the FNDCT. Created as an additional source of funding, in practice the sectoral funds gradually replaced the regular National Treasury outlay.

The difficulties in actually spending the approved budget can be better identified when analysing the special operations, which involve allocating FNDCT

68 The so-called ‘contingency reserve’, which consists of the ‘estimated amount’ to be saved, was around R$8.1 billion, corresponding to approximately 22% of the total voted budget for the FNDCT from 2002 to 2016, according to budget information obtained from the Ministry of Planning (code# 0998 - contingency reserve - and # 0Z00 - financial contingency reserve). In summary, of the difference of approximately R$20 billion between the current allocation and the amount paid out, approximately R$8 billion was already provided for in the contingency reserve.

STATE CAPACITIES AND DEVELOPMENT IN EMERGING COUNTRIES State capabilities and limits to innovation funding policy in Brazil

resources to innovation support instruments, such as interest rate equalization, grants and venture capital investments, including liquidity guarantees. The data show that only 66.5% of the passed budget – the appropriation bill (leis orçamentárias, LOA) – for these operations actually reached their projects and activities.

Figure 9. Ordinary National Treasury resources (source code # 100) allotted to FNDCT (Brazilian reals, thousands, in current values)

Source: Ministry of Planning

Interest equalization was the instrument that was cut the least, so that 95% of the funds that were approved in the budget were cleared. The grants or economic subsidies, on the other hand, in their two moments – the period under law 10332/01 and that under the innovation law 10973/04 – suffered expressive contingency reductions. In the first case, the cleared value represented a mere 45% of the voted budget, in the second 54.6%. Venture capital participation was even more affected:

only 34.8% of the voted budget was effectively cleared for expenditure. And for venture fund liquidity guarantee, only 51% of the voted budget was cleared over 2002–2016, as shown in Table 4 below.

It is worth noting that the total budget for all special operations between 2002 and 2016 – about R$6 billion – was less than the amount saved as ‘contingency reserve’ as previously seen, the latter having been set at R$8.1 billion.

State capabilities and limits to innovation funding policy in Brazil

An analysis of the trajectory of the budget’s level and disbursement reveals that, in practice, the sectoral funds did not provide significant new, stable resources for the system that was expected. They essentially replaced the regular Treasury budget allotment and were submitted to the same restrictive and unpredictable logic in budget planning and execution as were regular Union funds, which is incompatible with the funding needs of an S&T system.

The evolution of FNDCT as part of the MCTI budget – which could inspire a positive interpretation – in fact points to the ‘misuse of function and purpose’

of the sectoral funds. This distortion is directly reflected in the allocation of the assets, which were originally supposed to fund specific projects and programs, particularly those meant to encourage innovation, and which gradually started to fund broader ministry activities, including those maintaining the system.

Table 4. FNDCT budget for special operations: Voted budget and cleared sums (2002–2016) (Brazilian reals, in current values)

Code a nd type of special operation Voted budget Cleared Cleared/Voted 0741 – Interest rate equalization

(rebate) on funding for technological innovation

(Law 10322/01)

2,087,340,455 1,987,951,336 95.2%

0743 – Economic subsidies (grants) to companies with an industrial technological (PDTI) or agricultural technological development program (PDTA – Green-Yellow Fund – CT-Verde Amarelo – Law 10332/01)

54,621,169 24,572,426 45.0%

0A29 – Economic subsidies (grants) for technological development projects (Law 10973/04)

3,233,739,089 1,765,296,776 54.6%

0745 – Incentives for technology-based companies through capital participation (seed money) CT-Verde Amarelo – Law 10332/01 and/or investment in innovative companies

630,978,722 219,727,436 34.8%

0748 – Incentive for investments in science and technology through liquidity guarantees instruments (CT-Verde Amarelo – Law 10332/01)

37,065,847 18,956,769 51.1%

Total 6,043,745,282 4,016,504,744 66.5%

Source: Ministry of Planning

STATE CAPACITIES AND DEVELOPMENT IN EMERGING COUNTRIES State capabilities and limits to innovation funding policy in Brazil

From a more realistic perspective, reviewing MCTI and FNDCT budgets over the fifteen-year period but considering the cumulative inflation of the period, which was of 127.67% according to the IGP-DI index, one may note that MCTI’s budget benefitted from real growth until 2005. However, from then on there were fluctuations around a relatively stable value (circa R$9–10 billion). In FNDCT’s case, the 2008 budget was almost double that of 2001, the year Law 10332/01 was passed and when a number of important sectoral funds were launched, including the Green-Yellow Fund (CT-Verde-Amarelo). Nevertheless, from that year on stagnation prevailed until 2015, when conditions deteriorated and resources all but disappeared: the voted budget for 2016 returned to a pre-sector-fund level, even below that of 2003 (Figure 10).

Figure 10. MCTI an d FNDCT annual budgets, 2001–2016 (Brazilian reals, millions) (updated September 2016)

Deflator: IGP-DI index, from January to December; measured each December except 2016, measured January–September.

Source: Ministry of Planning

As indicated at the beginning of this chapter, over the last seventeen years the NIS has grown exponentially and created a demand that is much higher than the available resources, the real growth of which did not exceed 50% in its best year, 2013. For most of the period, however, real resource growth was 25% to 30% compared to 2001, before the launch of the sectoral funds. This mismatch

State capabilities and limits to innovation funding policy in Brazil

69 The Social Fund was constituted in 2010 by Law 12351. The allocation of oil resources is provided for in Law 12858 of 09/09/2013. The Social Fund’s objective is to be ‘a source of financial resources for social and regional development, in the form of programs and projects in the areas of poverty reduction and development: I – education; II – culture; III – sports; IV – public health; V – science and technology;

VI – the environment; VII – mitigation and adaptation to climate change’. Such broad, general-purpose funds are the most common type, and most often manipulated by the government to purposes at odds with their claimed destination.

between the system’s resources and the of demand for funding on one hand, and the growth and availability of these resources on the other, seriously jeopardizes the State’s ability to act, puts the entire structure at risk, and exposes the actors to a situation similar to that faced by the scientific community in the late 1990s when the sectoral funds were created as a lifeline.

This mismatch worsened after 2014, when resources from CT-Petro (‘Financial Compensation for the Exploitation of Oil or Natural Gas’, Source

#142) were transferred to the Social Fund⁶⁹ and stopped being earmarked solely for FNDCT. The instability in funding for the S&T system – an instability that in the fifteen years of the system’s existence has proved to be subtle, short lived and has become mired in more difficulties. It is worth recalling that from 1999 to 2012, the CT-Petro fund comprised no less than 37% of the funds collected by FNDCT, according to ASCAP / SEXEX / MCT data.