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Demand-side innovation

Newly released guidance aims to expand public technology procurement in Brazil

A handbook recently published by the Institute for Applied Economic Research (IPEA) provides a set of recommendations toward expanding the use in Brazil of public technology procurement, a demand-side innovation instrument that has so far seen limited adoption. The 106-page manual gives policymakers guidance on how to wield the government’s buying power to create solutions to problems in the public interest, such as developing vaccines or technologies to improve urban mobility. It also contains information on criteria for selecting suppliers and the circumstances in which technology procurement is feasible.

The publication, which is available to download at, discusses opportunities created by new regulations on public procurement adopted by the Federal Government in 2018. “These regulations provide the legal certainty needed for the Federal Government to engage firms to conduct research and development [R&D] projects involving a high degree of technological risk, such as a vaccine for the dengue virus,” explains one of the authors of the handbook, economist André Rauen of IPEA.

Government agencies in Brazil have so far benefited from the regulations only to a very limited extent. Under the new rules, the technological maturity of an innovative product is measured on the basis of its Technology Readiness Level (TRL), a method created by NASA in the 1970s that measures maturity on a scale of 1 (basic research) to 9 (product on the market): the greater the maturity of the technology, the lower the inherent risk. Technology procurement can be used for goods and services that are potentially feasible but have not yet been developed, ideally at a TRL of between 2 and 8. “For readily available products, other instruments like competitive procurement or direct purchasing are recommended. Technology procurement should also not be used where the idea is in a preliminary stage and requires further basic research,” explains Rauen, who also participated in drafting the new law.

The regulations include provisions on supplier compensation methods, which can be in the form of milestone payments to ensure the partner is compensated for their R&D effort even if the project is unsuccessful. The guide prescribes five methods of payment, ranging from lump-sum pricing to reimbursement plus an extra fee. “Agreements can now be tailored to the level of uncertainty in each project,” says Rauen. Ownership of intellectual property rights in project deliverables also needs to be agreed in advance. “Depending on the complexity of the project, the government can transfer ownership rights entirely or partly to the supplier. This can provide an incentive for firms to participate in a project,” says Rauen.

The guide also recommends creating technical committees of experts with experience in applied technologies to advise the government. The duties of these committees include monitoring project execution and ensuring the project is implemented efficiently. “The committee can also assist in measuring the amount of research effort expended by the supplier and helping government officials to understand scientific problems,” says Rauen. The aim in publishing the guide is to activate Brazil’s innovation ecosystem, he explains. “In public technology procurement, the government specifies exactly what it wants to achieve. The technology is then the means, rather than the end,” says Rauen. “Because private companies are generally averse to the risk inherent in innovation, the government needs to assume part of the risk to enable ambitious projects to be developed in industry. Otherwise technological development cannot be achieved,” says Rauen. Economist Carlos Grabois Gadelha, who coordinates prospecting effort at Oswaldo Cruz Foundation (FIOCRUZ), notes that the risk that the technology will not be adopted by the market needs to be taken into account. “One of the critical factors in innovation is the market horizon. Innovation needs buy-in from society.”

Sirius, Brazil’s synchrotron light source program, was launched prior to the 2018 regulations but used a similar procurement approach. The project was launched in 2012 at the Brazilian Center for Research in Energy and Materials (CNPEM), in Campinas, São Paulo State, as a joint effort involving over one hundred suppliers, mostly local tech firms. “Many of the components needed for the project were already available on the market,” says physicist Antonio José Roque da Silva, managing director at CNPEM and head of the Sirius program. But because many components involved in a high degree of technology risk, the center—which operates as a social organization under the oversight of the Ministry of Science, Technology, Innovation, & Communications—chose to pay these suppliers on a milestone basis. In some cases, multiple suppliers were engaged to develop prototypes for a given piece of equipment. The best prototypes were then selected and a smaller group of suppliers was engaged to build the actual equipment. One of the lead partners in the project, Brazilian motor manufacturer WEG, was awarded a contract to supply a set of 1,036 electromagnets, which are used in particle accelerators to steer the beam of electrons. “Participating in the project both tested and built our capabilities to work on large-scale science projects,” says WEG director Luís Alberto Tiefensee.

But well before the new regulations were introduced, the government had on many occasions used its buying power to advance ambitious projects in Brazil. During the military regime (1964–1985), for example, public technology procurement helped to develop research capabilities at companies such as Embraer and Petrobras. Embraer’s first aircraft were commissioned by the Brazilian government. This helped the company to build its technology platform and eventually develop into one of the world’s leading aircraft manufacturers. More recently, Embraer developed the largest military transport aircraft ever built in Brazil, the KC-390, after it received an order from the Brazilian Air Force (FAB) in 2009 for aircraft to transport troops, cargo, and for rescue operations. The FAB chose to commission two prototypes at a total cost of R$3 billion, without organizing a competitive procurement process, which is a common practice when other competing options are not available. But the agreement did not accommodate the potential failure of the project due to the inherent technology risk. “Regardless of the risk, the prototypes had to be delivered. The project was fortunately a success, but this method of procurement placed all the risk on the supplier,” explains Rauen.

Infographic Alexandre Affonso

Engaging companies and nonprofit organizations to carry out R&D activities without competitive procurement was already permitted within the legal framework created in 2004 with the introduction of the Innovation Act. The rules, however, were not clearly articulated, Rauen says. This explains why the government allocated a negligible R$150 million to technology procurement over the five-year period of 2010 to 2015, says Rauen.

Government-led development of technology products and solutions has been a practice for decades in the US, where approximately 30% of government R&D spending is invested through this type of procurement. The Federal Acquisition Regulation (FAR), adopted in 1974, was among the sources of inspiration for Brazil’s regulations. The FAR recognizes relationships between the government and private suppliers as a partnership rather than as a routine commercial transaction. “One of the industries that benefits most from US government technology procurement is defense,” notes economist Nicholas Vonortas, a professor at George Washington University, who has previously authored studies about the innovation ecosystem in Brazil. Technology procurement accounts for 90% of the budget of roughly US$3 billion for the Defense Advanced Research Projects Agency (DARPA). Projects launched at the agency enabled the development of stealth technology for military aircraft and submarines; the first packet-switching network, ARPANET, the precursor of the internet; and the Global Positioning System (GPS).

Another source of inspiration for Brazil’s regulations, says Rauen, is Horizon 2020, the European Union’s framework program for research and development, with a budget of €76.4 billion for the period 2014–2020. One-third of this amount goes to technology procurement, which in Europe is referred to as Pre-Commercial Procurement (PCP), an approach widely used in healthcare. One of the projects funded by Horizon 2020 is MAGIC, a consortium of institutions based in Northern Ireland and Italy that is developing solutions to improve quality of life for people who have suffered a stroke. “The initiative is in clinical trials, with three companies testing prototypes,” says Julie-Ann Walkden, a project coordinator at the Irish Department of Health. One of these prototypes is a device that uses artificial intelligence to monitor patient performance in physiotherapy.

In addition to identifying problems for which solutions are not available on the market, the government also needs to keep abreast of research trends developing globally, says Portuguese engineer Hugo Tamagnini Gonçalves, a specialist in government procurement. “Governments need to understand the technological limitations of products already on the market and what challenges are being addressed by academic institutions,” says Gonçalves, who works as a project development manager at Forum Virium Helsinki, in Finland. The organization is currently advancing a program called FABULOS (Future Automated Bus Urban Level Operation Systems), to procure a fleet of self-driving minibuses through a consortium of six European countries. The initiative is still in a theoretical research phase and has a budget of €5.5 million, 90% funded by Horizon 2020 and 10% by consortium members.

Technology transfer

While public technology procurement is still relatively uncommon in Brazil, a similar model has gained greater traction in recent years, especially in healthcare. Since 2012, the government has used the buying power of the National Healthcare System (SUS) in a more coordinated manner to develop local capabilities to produce goods that are highly weighted in the balance of trade, in a strategy known as Industry Development Partnerships (PDPs). The difference in relation to government technology procurement is that in PDPs the drug or equipment is already available on the market but currently needs to be imported for use in the SUS. Brazil’s healthcare procurement spending in 2015 exceeded R$16 billion, more than a third of total federal government spending. The PDP approach was used, for example, for the immunosuppressant tacrolimus, a drug that reduces immune system activity to prevent organ rejection. The drug is used on a continuous basis by around 30,000 people in Brazil and is now produced by the Institute for Drug Technology (Farmanguinhos) at Oswaldo Cruz Foundation (FIOCRUZ) in Rio de Janeiro. “PDPs have helped Brazil to build biotechnology capabilities through knowledge transfer,” says Carlos Gadelha, an economist at FIOCRUZ who served as Secretary of Science, Technology, and Strategic Inputs at the Brazilian Ministry of Health between 2011 and 2015. Governments should also consider opportunities for incremental innovation through projects building on existing technologies, says Gadelha. “Solutions to the many challenges facing Brazil will be found not only in radical innovation. Technology transfer can also help to build R&D capabilities in Brazilian industry,” he explains.