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Multiple links in the innovation chain

FINEP celebrates its 50th anniversary with a broad mandate and a funding crisis

FINEP ARCHIVES A hologram illustrating key events in FINEP’s 50-year timeline, exhibited at the Annual SBPC Meeting in JulyFINEP ARCHIVES

The Brazilian Funding Authority for Studies and Projects (FINEP), Brazil’s foremost federal agency supporting innovation, completed 50 years of service in 2017 with a broad mandate that includes investing in research projects and infrastructure, providing credit facilities and grants for innovative companies, and supporting startups. The Agency’s 50th anniversary has provided an opportunity for discussion on the future of the institution, which has supported more than 30,000 projects to date but has seen its activities decline due to budget constraints, and is now redesigning its profile. “Uniquely, FINEP has a twofold mandate: it is both a development agency managing grants and non-repayable funds provided to researchers and businesses, as well as a development bank of sorts, offering credit facilities for innovation in industry,” says FINEP president Marcos Cintra, an economist and former congressman. “Today, however, our role as a bank has become overweighted, while our role as a development agency has contracted. This is worrying because, worldwide, the public sector has played a critical role in fostering science and technology,” he says.

Grants for research projects and infrastructure have declined from 18.6% of disbursements in 2016 to 8.6% this year. Similarly, non-repayable funds for businesses in the form of grants, loans with subsidized interest rates and direct investment accounted for 12.9% of FINEP investment in 2017, decreasing from 15.1% in 2016. Conversely, business credit facilities have expanded to 78.5% of current disbursements from 66.3% last year. “In 2010 there was a balance in funding allocations between our two mandates,” Cintra recalls. But the demand for business loans has since fallen short of supply, with businesses reluctant to increase indebtedness, while the supply of funds for research and grants has, inversely, fallen short of demand.

FINEP ARCHIVES The instrument of investiture of the first executive board, December 12, 1967FINEP ARCHIVES

This shift in the agency’s funding mix has been driven by the current economic retraction: FINEP’s annual disbursements of roughly R$3.7 billion in 2015 and 2016 were half the amount disbursed in 2014, and are likely to decline further still this year. FINEP manages funds from a wide range of sources, including international lending transactions and public funds. But its foremost source of funding has always been the National Scientific and Technological Development Fund (FNDCT), the federal government’s primary instrument for supporting research. The agency borrows 25% of fund assets for repayable loans and returns the funds as they are repaid by borrowers. It also operates as the executive office responsible for managing FNDCT fund assets, which are largely sourced from sectoral science and technology funds created in the late 1990s and funded by tax revenues from the relevant segments of the economy (see Pesquisa FAPESP, issue No. 256).

With FNDCT experiencing dramatic funding constraints since 2014, FINEP’s assets under management have increasingly shrunk. In 2016 the agency allocated only R$58.6 million to support for research and development projects, down from R$526 million in 2010. And the outlook remains uncertain. In 2010, a total of R$4 billion was invested with FNDCT funds. By 2016 that investment had declined to R$1 billion. Available funds for the current year have declined further to just R$700 million, and the proposed budget for 2018 is R$1.2 billion. A solution to address the shortage of funding, Cintra says, would be to transform FINEP into a financial institution so it could source funds from the market.

ANTÔNIO ALBUQUERQUE / PUC-RIO NÚCLEO DE MEMÓRIA ARCHIVES Pelúcio Ferreira (center, wearing a dark jacket) during a visit by a FINEP delegation to the Pontifical Catholic University of Rio de Janeiro (PUC-Rio) in 1981ANTÔNIO ALBUQUERQUE / PUC-RIO NÚCLEO DE MEMÓRIA ARCHIVES

Feasibility studies
FINEP’s first executive board took office on December 12, 1967, but the agency’s origins date further back. In 1965, the Institute for Applied Economic Research (IPEA), an agency under the Ministry of Planning, instituted the Fund for Studies and Projects. The new fund was proposed by minister Roberto Campos (1917–2001) and the then president of IPEA, João Paulo dos Reis Velloso (1931), to finance the feasibility studies needed to obtain international project funding for major engineering projects. The feasibility studies for the Rio-Niterói Bridge and for the expansion of Brazil’s transportation infrastructure during the military regime were sponsored by the fund. FINEP was created in July 1967 with the transformation of the fund into a public company.

Its mandate to invest in science-related infrastructure came shortly thereafter with the creation of FNDCT in 1969 and with FINEP being designated as fund manager in 1971. A key figure in the agency’s development was Minas Gerais-born economist José Pelúcio Ferreira (1928–2002), who became president in 1971. Having worked as an economist at the Brazilian Development Bank (BNDE) and being linked to Reis Velloso, who became Minister of Planning under the Medici and Geisel administrations, Pelúcio brought to FINEP his experience with the Technical-Scientific Development Fund (FUNTEC), which was funded with 2% of the development bank’s profits. Created in the early 1960s, FUNTEC channeled funds to train high-caliber professionals for industry and university-run development projects. FUNTEC’s first contract established a master’s degree program in chemical engineering in 1963, leading to the creation of the Alberto Luiz Coimbra Institute for Graduate Studies and Engineering Research (COPPE) at the Federal University of Rio de Janeiro (UFRJ).

“FINEP was designed around the findings of a report by a BNDE study group, which concluded that Brazil had already built reasonable and diversified industrial capabilities but remained heavily dependent on imported machinery and equipment and lacked university training for research in support of industry,” says Luiz Martins de Melo, a professor at the Institute of Economics at UFRJ and a scholar of the history of FINEP and FNDCT investment. “The goal was to create graduate programs and research institutes modeled after US universities, as well as providing grants for staff to study abroad.”

FINEP received ample funding in the 1970s and used it toward investment in research infrastructure, developing university departments and graduate programs. During that period, the number of FNDCT funding transactions grew steadily from 26 in 1972 to 201 in 1978, with an average transaction value of US$2 million per project. “A clear indicator of the important role FNDCT played in institutionalizing scientific and technological research in Brazil in the 1970s was the significant increase in the number of graduate programs in Brazil, from 125 in 1969 to 974 in 1979,” said Reinaldo Guimarães, a physician and researcher, in an article about the fund written in the early 1990s.

FINEP ARCHIVES In its early years, FINEP funded feasibility studies for the Rio-Niterói BridgeFINEP ARCHIVES

FINEP further expanded its influence on the science and technology scene in 1974 with the creation of the Program for Support of Local Technological Development (ADTEN). The program provided credit facilities for research and development from an allocation of up to 30% of FNDCT funds. “ADTEN’s charter was the first document to explicitly outline an innovation funding policy for Brazil,” says Melo of UFRJ. From the outset the program focused on engineering projects, corporate R&D centers, product and process innovation and cross-border technology transfer. With inflation then skyrocketing, loans were repaid at a discount on part of the monetary correction.

FINEP’s mandate was further expanded with the implementation of the 2nd National Development Plan (PND) from 1975 to 1979. “The PND explicitly articulated the need to bridge gaps in Brazil’s industrial capabilities for basic inputs and to create capital goods companies in response to a paradigm shift in manufacturing,” says Melo. “This was the beginning of a golden period that saw the emergence of some of the crown jewels of local industry, including Metal Leve and Freios Varga. FINEP provided funding for auto parts manufacturer Metal Leve’s R&D center in Detroit.” These companies would later be sold to multinationals during the Collor administration, Melo recalls.

EMBRAER The agency supported the development of Embraer’s Tucano trainer in the 1980sEMBRAER

In the 1980s, a decrease in federal fund allocations to FNDCT led to budget fluctuations. In 1985 FINEP migrated from the Ministry of Planning to the Ministry of Science and Technology created under Brazilian President José Sarney. From US$60 million in 1985, the federal government provided US$90 million in FNDCT investment over the next three years. Then in 1989 a hyperinflation crisis left FINEP decapitalized. It was only in the late 1990s that a solution would be found to provide a regular stream of funding through the creation of sectoral funds managed by committees linked to the relevant segments of the economy. “FINEP had a larger volume of assets under management, but less autonomy to manage them than it had in the 1970s,” says Melo.

FINEP’s first initiative to be funded out of sectoral funds in 2000 was Inovar, a capacity-building program for small and medium-sized enterprises. Between 2001 and 2010, the improving economic environment helped to free up FNDCT funds and led to increased FINEP disbursements. “It was a very positive period in which we could focus on a number of strategic projects while also supporting innovation in industry,” recalls political scientist Luis Fernandes, who served as president of FINEP between 2007 and 2011. During this period, Brazil’s innovation framework incorporated a number of new instruments, including credit facilities for innovation under the country’s industrial development policy as well as other instruments under the Innovation Act of 2004, such as grants and venture capital investments in innovative companies.

FINEP’s investment capacity shrank in 2012, Fernandes says, with the creation of the Science without Borders academic exchange program, which was discontinued last year after spending R$13.2 billion, with part of the funds sourced from FNDCT. “This created a distortion in the way FNDCT was designed to operate. Sectoral funds were originally created to supplement investment in science and technology in Brazil, not to replace ministry budgets for standing science and technology programs such as Science without Borders,” says Fernandes.

“FINEP’s ability to integrate a wide range of instruments around strategic objectives has made it an irreplaceable institution and it must now reclaim its role in supporting innovation as the economy recovers,” he notes.