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Interview

Luis Fernandes: The motor of development

Finep President modernizes management to turn technological innovation into an agent of growth

LEO RAMOSEvery Friday, at 3:00 p.m. sharp, Luis Fernandes, the president of Finep (Project and Study Financing Agency), leaves his office near  Flamengo beach in Rio de Janeiro to go to the International Relations Institute of PUC-Rio (the Pontifical Catholic University of Rio de Janeiro),where he teaches political economics and international relations. The rest of the time he spends running Finep. He is determined to turn technological innovation into one of the key motors driving Brazilian development, a complex task that will take several years of massive investment and awareness building to come true.

Sérgio Rezende, the Minister of Science and Technology and previously head of Finep, realized the agency’s core role in this effort. And he knows that to perform this, it is not enough to merely provide the agency with funding. It will be necessary to modernize its structure, do away with some of its red tape and make it more agile. It is no coincidence that whenever he refers to Finep, Rezende adds a qualifier before it: Finep, in his words, has become the “new Finep” and Luis Fernandes was chosen to make such a reality fit the adjective.

As a former executive secretary at the Ministry of Science and Technology (MST) and a former member of the Economic and Social Development Council of the Presidency of the Republic during the current government, Fernandes already dealt with this issue from 1999 to 2002, as the scientific director of Faperj, the Carlos Chagas Filho Foundation for Research Support in Rio de Janeiro. Upon joining Finep in June of this year, he had to rush not only to do what had already been planned but also to try to implement the necessary changes quickly.

The rush intends to turn 2008 into a great year, with a record budget of R$ 2.8 billion. The sector funds, some of which are still part of a contingency reserve, are being progressively released. Innovation grants for companies will increase substantially, while strictly complying with a national industrial policy.

Luis Fernandes has spent most of his life in Rio de Janeiro, though he was born on the small Galveston Island in Texas, USA, where he spent only 10 months. His father, a virologist, was at that time doing post-doctoral work at a biomedical research center. Fernandes later returned to the US on receiving a scholarship to do his undergraduate course at Georgetown University. His interest in international relations stemmed from the fact that it did not exist in Brazil in the 70’s , as an academic field. He later did a Ph.D. in political science at Iuperj (the Rio de Janeiro University Research Institute). Today he has published dozens of books, mainly studies about the transformation of  world order and the political economics of development, such as “O enigma do socialismo real: um balanço crítico das principais teorias marxistas e ocidentais” (Ed. Mauad, 2000) and “O manifesto e o ‘elo perdido’ do sistema internacional” (Contexto Editorial, vol. 10, nº 1, 1998).

In the interview below, Fernandes explains how he plans to get Finep to fulfill the government’s expectations and says what he thinks about innovation.

Ever since his appointment, Minister Sérgio Rezende has been talking about a “new Finep”. What does that mean?
Finep turned 40 in 2007, but it hasn’t stayed the same throughout this period. It’s always changing and, one must admit, not always for the best. It enjoyed a golden age from the 70’s to the early 80’s. During the time it was the executive administrative office of FNDCT (the National Fund for Scientific and Technological Development), Finep had the role of structuring the National System for Science and Technology. CNPq, (the National Council for Scientific and Technological Development) did too, but was less geared toward the system’s infrastructure and more toward research projects. São Paulo may be the exception, because it already has FAPESP, a strong foundation that has managed to become consolidated, with a pattern of regular funding at state level that is unique in this country. Finep played a major role up to the 80’s, and its investments peaked at some $ 800 million in 1979 (figures adjusted to December 2005 levels).

So this level of investment happened a long time ago. 
Precisely. Afterwards the institution slipped into a gradual  process of decline regarding its capacity; the FNDCT values released became smaller and smaller and, by the 90’s, it was facing a serious crisis. The budget totaled about R$ 100 million, just about a vegetative amount. An attempt was made to expand its  capacity for performance in the 90’s by expanding its activities with paid back loans, but this didn’t always have the necessary collateral and led to a very high level of default on Finep loans, as much as 60% for one series of investments.

And how did Finep recover?
Recovery began in the late 90’s and mainly at the beginning of this century, by setting up sector funds.  They were devised as financing lines within FNDECT, with Finep acting as the latter’s executive administrative office. This is what led to the recovery of its investment capabilities. Carlos Américo Pacheco, who is currently a member of the São Paulo government, played a key role in this, as did the former Minister of Science and Technology, Ronaldo Sardenberg, during president Fernando Henrique Cardoso’s second term.

During this time, were you already working with innovation at Faperj? 

I was its scientific director and I introduced the issue of innovation as a theme for  the science and technology fields to focus on carefully. Within the government, at that time, the lack of a clear national industrial policy was predominant. The idea was that the market itself would be the most efficient resources allocator and, thus, that niches would emerge spontaneously rather than being government-induced. The problem was that, as a result, funding agencies became rather disconnected from each other because they lacked a national innovation policy or an industrial policy to comply with. On the other hand, they had been created in the field of science and technology with a view to complementing federal investments.

The objectives lacked clarity? 
There was no national industrial policy connected to the actions of funding agencies. This generated dispersion and segmentation. Each agency had its own investment agenda and its own priorities which were not linked together into a national innovation project.

Were resources under contingency at that time? 
The funds were created and then the money was put under contingency. There were two stages. One was explicitly putting them under contingency, but this was questioned legally, because as resources from the science and technology area, they could not be retained.

In other words, this was illegal.
Undoubtedly. However, the economic area of all governments is always very creative and not only in the current government. And they invented a new category: the contingency reserve. Because the funds couldn’t be frozen directly, but these resources could go toward forming a contingency reserve. And that is what was done.

In practice, it seems to be the same. 
Only the calculation of the amount of money obtained changed. It continues to be a calculation in which the money collected accrues, in nominal terms. But this does not guarantee its execution.

How much is the retained contingency, at present? 
As from 2005, these amounts started to drop. However, previously, the contingency reserve reached as much as 60%, which is very high. When the funds were created, they were meant to complement rather than supplement the investments already made in the system. In practice, this didn’t happen. In other words, investments shrank, especially those of the Ministry of Education in the federal universities, which then redirected a significant part of their funding needs to these funds. In this case, instead of becoming an additional source of resources, they largely replaced other sources of investment that had shrunk.

Do you mean that instead of using the money for Science and Technology research, it was used to cover infrastructure needs? 
That’s it. One of the most important uses of the funds to date is providing research infrastructure for universities and public institutions, laboratories and libraries. There would be no problem with this had it not occurred after a reduction from another source.

Were these issues verified when you were at the MCT? 
Most of them. What we introduced with Finep, which at the time was led by Sérgio Rezende, now a Minister, was a new fund management model, which aimed at integrating all the activities. The objective was to fight fragmentation and segmentation, integrating them through a focus on the national innovation industrial policy that the government had just launched in early 2004, including priority sectors, a promising exports area, and more or less precise guidance about the national industrial policy’s priorities. Here at Finep we set up the Coordination Committee for Sector Funds and we proposed to the management committees of each fund an agenda of integrated actions, which we have called transversal actions. Transversal because they rely on resources from several funds. The idea is that the major actions they fund should comply with the national innovation policy based on the industrial policy. Perhaps this policy’s most important element is stating that innovation is the motor of sustained economic development. It was a new priority for innovating national technological development.

Was this the first time that innovation became a federal government priority? 
Yes, at least where greater preciseness and objectiveness are concerned. Even before, though innovation was already one of the MST’s concerns when it created the sector funds, its actions were still very segmented. There was the fund for oil, for agribusiness, for biotechnology, for health, etc. In other words, there was no integration under the umbrella of a national innovation policy and an industrial policy centered on innovation. We provided this integration. In the government’s internal discussions, little by little we showed the relevance of the Science and Technology area for the policies and development priorities of the federal government itself. Finep, whose budget was more flexible in terms of mobilization for our purposes, acquired an increasingly central role in the federal government’s agenda. This became more and more of a central issue in the federal government’s agenda, leading, in turn, to a substantial growth of resources for two fundamental lines. First, the funds were progressively “decontingencied”. Actually, this isn’t quite the right word, because it was a contingency reserve, but it means a progressive reduction of the funds earmarked for the contingency reserve. The commitment that was made when the FNDCT regulation bill was submitted was to entirely eliminate the funds’ contingency reserve by 2010.

And what is the level of the contingency reserve today? 
23% of the total amount. Which means, overall, some R$ 2 billion released for investment and about one fourth of this, some R$ 500 million, retained in the contingency reserve. A bit less, perhaps. This figure is more than twice the amount, in constant values, of the historical peak in 1979. Going back to your first question, about what “new Finep” means: we are entering an operation in which, via the FNDCT, we can execute ten times as much as we did five or six years ago. We’re operating with a budget in 2008 that is at least five times larger than it was some five or six year ago, via refundable credit. It’s at a  new level. Within this, one of the key issues for us, perhaps the most important one, is that up to now we’d been working with two lines: financial support for science and technology infrastructure and non-refundable financing, which is essentially what FAPESP works with. And the other line, which consisted of refundable credit for corporate research and development. At low interest rates, because they are equal to the resources of the Green & Yellow Fund, which is one of the sector funds.

So, in other words, you were making loans to industry, but at very low interest rates. 
At equalized rates. As a priority area for the industrial sector, it may currently have become a negative interest rate in real terms. As a result of the Innovation Law, we created a third tool, that of economic subvention for corporate R&D, which didn’t exist before. Something that developed countries had been doing for a long time.

Is this very recent?
We released a second public notice in September. The first was released one year ago. It is a modality created by the Innovation Law, which only became viable in operating terms through the regulation of the law in 2005 and inclusion in the 2006 budget. This created a third action path for Finep.

And to whom does this money go?
To companies in this country, provided the innovation activity through R&D is carried out here. 38 themes in five major areas were identified, which are actually technologies that need to be nationalized.

What are these areas?
One is nanotechnology, another is health biotechnology. The third we call the strategic area; it covers defense and public safety, essentially. The fourth one is biodiversity and health. And the last concerns technologies for social development. Within these areas, 38 concrete themes were identified. In other words, technological innovation needs that should be nationalized by Brazilian companies.

As a result of this will it be possible to respond to the modernization that the MCT aims at? 
The new Finep, besides requiring new procedures and mechanisms for this unprecedented level of resources, by improving our financing capacity substantially, should also promote the integration of all these tools. So far, according to Finep’s prior history, we had different sectors operating with different tools without much integration between them. Now we have instituted ten integrated programs to encompass these three areas. I’ll give you an example: one of the first financing projects that I witnessed here when I became president. It was a São Paulo company in the pulp and paper field that was asking for a loan for an innovation, research and development project. We granted it, but when we discussed the project at Finep’s executive office, someone asked: “Where does this company get its raw material from?” We discovered in the project itself that it was from a paper scavengers’ cooperative. It just so happens that in the social area we have an aid program for paper scavengers co-ops. And one  wasn’t talking to the other. Today, we want the ten newly instituted integrated programs to encompass the entire set of Finep tools, so as to expand their potential to develop the country.

A São Paulo businessman voiced a similar criticism when I told him I’d talk directly with Finep’s president. He said “the development funding guys don’t talk to the financing guys.”
It’s what used to happen. And it’s a major problem because red tape increases and money takes longer to be released. That was the first issue we attacked.

That’s not something one can solve from one day to the next?
Of course not. I took over in June, the executive directors’ office was restructured in late July and one has to meet the 2007 budget, which was already large. I think the full impact of the changes will only be felt in 2008, because by then all the planning will be done taking them into account. We still have traces of the previous operations.

Does integration apply for what is outside Finep, such as BNDES, the National Economic and Social Development bank, for instance?
This is another point. There is, in the institutional culture of both organizations, a certain jealousy, although not, of course, at the professional executive level. Actually, the way we and BNDES senior management see things, our roles are complementary. In general, we don’t overlap. I mean, there may be some overlapping areas, but that can be easily solved. Our mission is to foster the generation of knowledge whereas the BNDES mission is to popularize the application of knowledge. From the conception point of view, they are complementary missions. We have carried out a number of approximation and integration actions. The MST is working on an action plan extending to 2010 that involves a strong partnership with other ministries and the BNDES too.

I’ve noticed that both the Finep site and you refer to the institution as an innovation agency. Has the idea of its being merely a financing agency been dropped? 
The name Studies and Projects Financing Agent won’t change. It’s tied up with the BNDES back in its early days. To begin with, Finep used to provide support for pre-competitive projects that  were later submitted to BNDES for financing. They were mainly engineering projects. Later, after the FNDCT was created, Finep’s mission changed, in that it became FNDCT’s executive administrative office and became an agency that promoted development, though mainly geared toward the infrastructure of the National System of Science and Technology. As this role dwindled, working with companies as a development agency increased. In other words, it loaned funds for technological development work. This was the branch that grew. The truth is that thanks to this recomposition of tools, it became a broader agency, whose chief focus is encouraging innovation using a range of instruments. That is why I like the idea of a Brazilian innovation agency. It’s more precise than a studies and projects financing agency.

What would a businessman who read this interview and realized he could get aid from Finep have to do to ask for it? 
Finep works with a range of finance lines for companies. Interested businessmen can monitor the public notices that are released and look for information on our website [www.finep.gov.br] or call the Customer Service Sector  [(21) 2555-0555].

Simon Schwartzman, former president of the Brazilian Geography and Statistics Institute (IBGE), told us in an interview that it’s the public sector that should create demand because it has a large purchasing capacity in fields where important research and innovation work is required. Do you agree with this?
For almost half a century, Brazil went through a major national development effort;  sometimes one forgets this. Eventually the model petered out. But from the 30’s until the debt crisis of the 80’s, the country had one of the world’s highest rates of ongoing economic growth. It was an industrialization effort governed by a rationale that economists, or some of them, called import-substitution industrialization. In other words, the domestic market was protected and an effort was made to replace industrial imports by domestic industry, through financial aid. Domestic does not necessarily refer to the enterprise’s capital structure. Innovation, however, was not a core issue for this model. The idea was to attract investments, because they would come hand in hand with technological packages to be applied here. Still, in general, they were technological packages that were outdated at the corporation’s headquarters, though they were competitive here because the market was protected. This eventually led to a corporate culture that didn’t focus on innovation. As from 2000, the IBGE started doing a study, called Pintec (Technological Industrial Innovation Research), which took an X-ray of innovation in the country. Previously, it only took industry into account, whereas now certain services and telecom areas were included, as they are crucial for innovation today. The latest Pintec shows 33 thousand innovative companies, but when these figures are broken down, it can be seen  that any purchase of machinery is defined as innovation. And this isn’t really R&D. The volume of companies that are truly involved in generating knowledge, which leads to innovations, is still very limited in Brazil. From this standpoint I agree with  Simon Schwartzman that the government must play an inducing role; as part of this induction, the State should become the innovation risk partner of business. We find ourselves in a far more competitive market, in which the cost of obtaining funding to finance innovation is far higher in Brazil than abroad, because of our high interest rate. A market where the governments of countries that are at the cutting edge of technology strongly subsidize innovation activities.

Do all technologically strong countries subsidize this activity? 
Yes, all of them. In the United States, the subsidies are even stronger because of the defense industry. In South Korea, which is always used as an example for Brazil, the government invests massively in innovation. South Korea even chose the companies that were to be the structurers of different sectors and heavily subsidized the production chains. In this context, our domestic entrepreneurs really must be encouraged to invest in technological innovation.

Who receives the bulk of Finep’s money? Small companies? 
No; it varies. We have specific programs for small companies. A subvention program that is run together with FAPESP, PAPI [Intellectual Property Support Program] is linked to Pipe [Small Company Technological Innovation Program]. In these cases, we are talking about micro and small companies. We also have Inovar, a program that funds the creation and consolidation of technology-based companies. And many others. The subvention applies to any company, provided it produces the technological innovation set out in those themes.

The 2008, R$ 2.8 billion budget is a record. Is this materializing thanks to the release of funds? 
No. Overall, it’s R$ 2 billion from FNDCT and R$ 800 million for loans. This is connected to the different conditions of our operation with the BNDES, involving an attached fund, FAT [Workers Support Fund]. We also work with FAT, but on the fund raising side. And with terms that aren’t very favorable. This is a weakness. We still don’t have an attached fund. What was done for the 2008 budget was to work beyond our two traditional funding sources, the FND [National Development Fund] and FAT. The FNDCT itself became a source of funding with terms that are far more advantageous that the Fat and FND terms. So it’s as if we were establishing a Finep funding system for its repayable actions. This is very important, because it also provides us with institutional stability over time.

The ideas of the Austrian economist Joseph Schumpeter have come back into fashion recently. Are you one of his fans? 
Schumpeter is important. I’m a professor of international economic policy and international relations. He is a thinker who covers a very broad area and who has books on the sociology of imperialism. One of his classics, “Capitalism, Socialism and Democracy” is important for political theory because it addresses the issue of party systems, with electoral schemes, with a realistic political analysis. As an economist, one of his chief contributions was dealing with the issue of innovation and associating this with dynamics that he called creative destruction. According to him, technological innovations destroy old models, but create a new market.

Do you like the theme, as addressed by him?
Yes I do, although he tends to have an absolute view of the market’s dimension in the promotion of innovation. It’s as if inducing innovation via competition were one of the market’s own dynamics. Hence the rationale of the creative institution, which in his view is inherent to market economies. What is not covered by this is the government’s inducing role regarding innovation, which has been assumed by the state in all the experiments. So this other dimension is underestimated in his interpretation.

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