THE INNOVATION FUNDING ‘STANDARD’

5.1 – From strategic projects to funding source fragmentation: On consolidating a political support base for the scientific community

Between 1997 and 2015, no less than 42,633 non-refundable projects were funded, 9,576 by Finep and 33,057 by CNPq (these numbers are a reasonable approximation).⁶⁴ At Finep, the greatest number of contracts was between 2004 and 2006, and at CNPq, between 2007 and 2013. However, not all of CNPq’s funding contracts pertained to research projects; a large number involved grants to researchers involved in projects funded by Finep or to participate in science and technology events (Figure 1).

Figure 1. Number of projects funded by CNPq and Finep, 1997–2015, with non-refundable assets from FNDCT

64 Operations involving interest rate equalization (rebates) are not considered in the numbers and values to follow. This information includes the projects contracted with STIs (via partnerships), with companies (via grants), joint projects (Science and Technology Institutions with companies), scholarships of several kinds and modalities and salary grants for researchers working at company facilities, known as ‘researcher subsidies’ (governed by Law 11196/05 but disbursed only once, for a single public notice).

Source: MCTI. Accessed March 30, 2017.

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

Figure 2. Disbursement by CNPq and Finep, 1997–2015, of non-refundable resources (Brazilian reals, millions, in current values)

Source: MCTI. Accessed March 30, 2017.

The sum worth of the contracts, in current values, was approximately R$16.2 billion, of which R$13.7 billion went to RD&I projects supported by Finep, and R$2.5 billion to projects supported by CNPq (Figure 2). It should be noted that the country saw economic growth until 2010 and since then there has been economic instability, which intensified considerably after 2015.

In terms of the number of funding contracts, around 44.7% of the projects contracted by Finep and 98.4% by CNPq were done through open public calls.

Those contracted by commissioning were 32% in the case of Finep and 1.2% in the case of CNPq. About 19% of the outlays disbursed by Finep covered participation in events, and 4% were made through direct letter of invitation.

In terms of value, 43% was distributed to projects approved in open public calls. The projects funded by commissioning consisted of 50% of the contracted value. In the case of CNPq, projects submitted through open public calls absorbed 87.6% of the contracted value (Figure 3).

State capabilities and limits to innovation funding policy in Brazil

Figure 3. Participation in number and cost of projects funded with FNDCT assets, per demand source (in %)

*Includes forty-two projects funded under Inova Empresa via grants.

Source: MCTI. Accessed March 30, 2017.

The average annual value of the projects funded by Finep was around R$1.4 million, while the average value of the projects funded by CNPq was around R$75,309 (note that a large part of this corresponds to the grants to researchers involved in the aforementioned projects funded by Finep).

Credit instruments showed a positive evolution and, as mentioned, registered a significant expansion as of 2009, when the contracted value practically doubled in relation to the previous year. In 2013 and 2014 the rise was even sharper, respectively reaching nearly four and five times the value contracted in 2008.

In the case of the BNDES, as of 2005–2006 the institution beefed up its actions in direct support of innovation, acting fundamentally but not exclusively through reimbursable instruments (credit) and variable capital (venture or seed). In 7 years, there were 977 credit operations (direct and indirect, that is, those managed by BNDES and through accredited banks) and variable capital to support RD&I in a total disbursed amount of R$10.3 billion.

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

Figure 4. Finep credit contracts, 2003–2014 (in current values)

Source: Finep – annual reports and other official documents.

Between 2011 and 2013 about R$4 billion was transferred from the Investment Support Plan (PSI) to Finep to compose agency funding sources, as can be seen in Figure 5 below.

Figure 5. BNDES’s disbursed sums though credit operations, 2006–2013 (Brazilian reals, millions, in current values)

Note: Total number of operations: 977; excludes operations with the BNDES Credit Card.

Source: BNDES, obtained in a document prepared for CNI-MEI.

State capabilities and limits to innovation funding policy in Brazil

In addition to these sums, R$18.5 million were disbursed in order to finance 1576 operations from 2009 to 2013 via the BNDES Credit Card.

The impact of the Investment Support Plan on BNDES was also important, as it enabled an increase in operational capacity over the period by adding an additional R$3.6 billion, approximately, to the budget from 2009 to 2013, according to CNI/MEI, as per Figure 6 below. However, regardless of the expressive values of BNDES and Finep funding, it must be pointed out that the number of companies that benefitted was quite small, less than one thousand. Notwithstanding these being large companies, probably with significant leadership potential across several productive chains, the results of these investments have not impacted, at least until 2015, foreign trade or innovation indicators as measured by PINTEC.

Figure 6. Investment Support Plan resources allocated to BNDES innovation operations (Brazilian reals, millions, in current values)

Source: BNDES, for CNI-MEI

Actions for innovation pursued by BNDES were significant and consistent with its mission as a development bank. Its participation in the providing of credit for projects under the Inova Empresa of 2013 was fundamental to broaden the scope of the planned actions. However, credit is an appropriate instrument to fund only certain types of innovation projects, such as incremental innovation and / or R & D projects with low technological risk. Companies are less likely to finance through reimbursable credit projects involving breakthrough rather than incremental innovation, where the uncertainties are high and the expected results have longer payback periods, even if funding is available under favorable financial

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

conditions. Perhaps this explains why the data released by PINTEC – the main tool for information on innovative activities among companies – does not record any significant step forward that might have been fostered by BNDES as a funding agent for innovation.

In the OECD countries, market instruments play an important role in mobi-lizing resources for innovation. In Brazil, these markets are still underdeveloped;

many are still being structured, supported by strong incentives and the participa-tion of public policies and public-sector instituparticipa-tions including Finep, BNDES, Desenvolve SP, and regional and State banks.

Finep’s data on this market are the most visible. According to the agency, since the beginning of the INOVAR program, thirty-four FMIEEs have been approved, of which twenty-eight are still in operation. Together, these mutual funds invested in at least 167 ventures across a range of sectors (Finep management report, 2015). According to the Anjos do Brasil, an association of angel investors, this market’s growth over the first years of the current decade was over 35% per year. By 2011 there were already 5,300 angel investors and approximately R$450 million invested. The potential, according to the organization, is of 50,000 angels with the capacity to mobilize up to R$5 billion and invest in 11,000 start-ups per year. These numbers, however, are not restricted to investments in technology-based ventures.  

Finep significantly increased their credit operations, if for no other reason than for several years the government deliberately injected ample funds into the economy for countercyclical purposes. These resources ‘overflowed’ to the S&T area through BNDES’s loans to Finep. In addition, Finep borrowed from FNDCT, the resources of which also increased over the years. However, beginning in 2012 there was a slacking off of this process and, in 2014, the flow was practically cut off, affecting an institution that already had a high degree of indebtedness and representing the return of financial instability to the ST&I area. The following section discusses the funding pattern adopted and the setbacks suffered in recent years.

State capabilities and limits to innovation funding policy in Brazil

5.2 – The participation of other public institutions in funding R & D MCTI has remained the main articulator of ST&I policies in Brazil, but other ministries maintain important programs and take actions that directly and indirectly support innovation, the most visible being the Ministry of Agriculture, Livestock and Supply (MAPA) through Embrapa, with a budget of R$2.9 billion in 2015, and the Ministry of Health, through the Oswaldo Cruz Foundation (Fiocruz), with a budget of approximately R$2.7 billion in 2013 and 2014. It is important to highlight that the projects and actions in the ST&I area of these and other ministries are conducted with little or no coordination with the MCTI.

One exception is the relationship established between MCTI and the Ministry of Development, Industry and Commerce (MDIC), or more specifically between Finep and BNDES.

A brief summary of the funding provided by the other instruments discussed herein follows.

5.2.1 – The 1% Clause

Between 1998 and 2016, the Research and Development Investment Clause under the Concession Contracts for the Exploration, Development and Production of Oil and Natural Gas, generated obligations of approximately R$11.3 billion, a significant amount when considering R & D investments in Brazil. However, almost 95% of this was Petrobras’s obligations and only R$593 million came from other concessionaires.

The obligations created for Petrobras by the 1% Clause have contributed positively to the transformation of the Leopoldo Américo Miguez de Mello Research and Development Center (Cenpes) into a world-class research institution. It has also helped boost scientific and technological competence in a number of teaching and research institutions, today responsible both for training the qualified human resources the sector requires, and for generating knowledge and conducting research of interest to the sector as a whole, not only for Petrobras.

On the other hand, concentration in a single company makes it difficult to reduce the asymmetries in innovation capacity and in generation of knowledge in the local chain and may introduce an undesirable dependency among the research systems of universities and institutes as regards funding from Petrobras. Between 2010 and 2016, obligations from other concessionaires increased as exploration

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.