Participation of the Federal Government in Science, Technology and Innovation during the Temer Tenure
While the country is in the middle of electoral campaigns, we have made a brief analysis of the main events along the past two years related to Science, Technology and Innovation in Brazil.
Taking into account the proximity of the elections in Brazil and the recent news on budget cuts to the area of science, technology and innovation (“CT&I“)[1], we deem it pertinent to analyze the measures taken during the tenure of Michel Temer.
The importance of public investment in the sector, as well as the elaboration and implementation of public development policies, is undeniably relevant to the economic and social development of the country, as discussed below. Thus, a clear understanding of the scenario in which Brazil is today will allow us to set new goals for the future. The purpose of this article is to get to know the main measures taken by the federal government and its municipalities during President Temer’s mandate in the field of CT&I demonstrating the importance of direct and indirect participation of the public power in the sector.
At first, we will make a brief presentation on the relevance of public investment in CT&I, demonstrating how this should be connected to investment by the private sector and not just a substitute for the other. Afterwards, we will list the main promoted sectoral events that we deem pertinent in the period. Finally, we will assess the general scenario of the current moment under the terms of CT&I.
Relation between development and public investment in CT&I
To Celso Furtado, “development is invention because it has an element of intentionality” and the conditions for it to take place have presented themselves historically. The level of development of a country also depends on the “existence of a surplus of resources created by the social division of labor”. When such accumulation leads to the creation of values for different segments of the society, (without being retained only for a select group) we have development. In short, in the process of technical improvement human beings have the tools to create surplus and then use such means in order to improve the quality of life of the society.[2]
Still, Furtado believes that: “Nothing is more characteristic of an industrial civilization than the channeling of its inventive capacity for technological creation, that is, to open the way to the process of accumulation.” Based on this reasoning, it is clear that to overcome underdevelopment it is necessary that there be investment in research, allowing technological innovations to aid in the process of accumulation of surplus then distributed socially.[3]
The technological dependence of peripheral countries on central countries is one of the most difficult obstacles to overcome, since the latter “impose the introduction of consumption patterns in the form of new end-products that correspond to a degree of accumulation and technical sophistication that do not exist in a society that modernizes belatedly”[4]. In other words, the peripheral countries that entered the capitalist model belatedly assume a predominantly consumer position of high value-added goods (due to the intense level of technological development that these products represent within the international division), while exporting low value-added goods always representing a flow of enrichment to countries with technological know-how, hence the capital accumulators (countries known as developed countries or central countries).
If to Celso Furtado one of the main challenges for overcoming underdevelopment is “a greater degree of autonomy in foreign relations that limits the drainage of the surplus as much as possible,” we need to find mechanisms to develop technology in order to maintain the capital produced by the country within itself, subsequently, gaining space in the international market as an exporter of technology and no longer just as an importer. But how to do this?
One of the clearest ways is investment in CT&I. Such an investment can be made by both the private and public sectors. It usually occurs by combining both as each has a different function. Economist Mariana Mazzucato in her Ted Talk “Government – investor, risk taker, innovator”[5] exposes how the negative stereotypes of governments being rigid and inefficient end up hampering their participation in the new technology development sector by driving innovation.
The capacity of the State to assume economic risks inherent to the development of basic technology (which does not always turn into a product) allows for greater flexibility in research, unlike in some laboratories of private institutions where the ultimate goal is necessarily the release of some product or service. Another way that the public and private sectors relate is through promotion by the State. In this model, the state invests public resources in private CT&I development initiatives either by “giving” money through subsidies to encourage development in a certain strategic area or by providing low-interest resources, reducing the institution’s economic risk in the CT&I development process. The Financiadora de Estudos e Projetos (“Finep“) was created by the Brazilian government precisely for such purpose.[6]
Taking technological development risks is costly; however, there is a transformative potential by generating resources for the country in different ways, not only through taxation[7]. With that in mind, Mariana Mazzucato demonstrates that, although the Iphone was invented by Apple, a private institution, the technologies that make it useful have been funded and invented by the US government, such as the Internet, GPS, microchips, touch screen, among others.
When these technologies were being developed it was not known that they could have a marketing application, but the fact that they were researched and financed, nonetheless, guaranteed incalculable advance.
It is important to note that many countries already make government efforts in CT&I to create a virtuous cycle of innovation and enrichment, while others are seeking to reap the benefits of this effort in the future. Israel is an example of success in the first case.
Since 1984, through the Law of Encouragement of Industrial Research and Development, the government subsidized CT&I projects, making them interesting and potentially lucrative to the private initiative[8].
Subsequently, this program was continued by the Israeli Innovation Authority, which is an autarchy of the Israeli government, responsible for policies and for fostering innovation and economy.[9] CT&I spending in the country in 2015 accounted for more than 4% of its GDP.[10]
On the other hand, Kenya is an example of a country that is striving to create investment structures in CT&I. In 2008, the country released the “Kenya Vision 2030” program which seeks to industrialize the country and raise the quality of life of the population through various initiatives. [11]
Within this program, the construction of the city of Konza is planned for 2030. The 15 billion dollars already invested in the project seek to create a city that is a technological hub for startups and CT&I.[12]
According to Soraya S. Smaili, professor and dean of the Federal University of São Paulo, “recent data presented to the University Council of the Federal University of São Paulo (Consu/Unifesp) by the president of the Financiadora de Estudos e Projetos (Finep), Marcos Cintra, revealed that for each unit of the currency invested in C&T, about 3 to 4 units of the same currency are generated in the form of economic and social development in any country”.[13] This demonstrates quantitatively the transformative potential of public investment in the sector.
- Merger of the Ministry of Science Technology and Innovation (“MCTI”) and the Ministry of Communications (“MC“) into a single Ministry of Science, Technology, Innovation and Communications (“MCTIC“)
Looking to the reduction of the number of ministries, one of his first deeds as President of the Republic, was the merger of MCTI and MC into MCTIC despite strong resistance from the scientific community. Such resistance can be seen in the manifesto sent to Temer by 14 sector institutions one day before he took office.[14] Among the various arguments brought forward, the scientific community organizing the manifesto states:
“The difference of the procedures, goals and missions of these two ministries is huge. The MCTI agenda is based on criteria of scientific and technological merit, the programs are formatted and evaluated by technical committees that have the participation of the scientific community and also of the business community involved in research, development and innovation activities. Such systematics is very different from that adopted by the Ministry of Communications, which involves political relations and management practices that are far from the everyday life of the MCTI.”
During the public hearing that discussed the possibility of the merger, Gilberto Kassab, who later became the MCTIC minister, said: “I am committed to maintaining the ministry’s programs and trying, along with Congress, to reverse the trend of budget reduction of the area”[15] despite defending the merger as a necessary measure to reduce the size of the public machine[16].
After the merger, the interpretations regarding the consequences for the country come with opposing opinions. On May 28, 2018, Kassab wrote an article in which he expressed his views on the results[17] of the merger since that month was the second anniversary of the creation of MCTIC. The minister acknowledged the resistance of the scientific community but said that the measure had brought countless gains for the industry. In his words:
“By merging the areas of Communications and Science and Technology, the federal government brought synergy to areas that are connected in the 21st century, areas of public management that are interrelated. (…) In general, areas such as Information and Communication Technologies are now treated more closely, resulting in greater efficiency in the execution and planning of actions. As an example, the interlocution of the telecommunication and research and innovation sectors at the governmental level, a direct result of this merger, is much more functional today.”
However, representatives of the scientific community tend to disagree with this view. The presidents of the Sociedade Brasileira Para o Progresso da Ciência (“SBPC“), Ildeu de Castro Moreira, and the Academia Brasileira de Ciências (“ABC“), Luiz Davidovich continue to warn of the dangers of the merger. Davidovich says:
“In the first place, I recognize the efforts of the minister to seek to increase the budget of his Ministry, thus benefiting the science of Brazil. On the other hand, from the beginning we were against this restructuring that joined the Ministry of CT&I with Communications. And we continue to think that this junction does not help the system. For example, I cannot see the connection between the Empresa de Correios e Telégrafos and CNPQ and Finep. It should also be noted that these bodies, which once had a prominent position within the Ministry, have fallen in this hierarchy. A large number of organizations became part of MCTIC, which undermines the activity of the portfolio in defense of science and technology“.[18]
The “Letter of Pernambuco”, published on May 21 is the result of the cycle of seminars “Public Policies for Brazil that we want” conducted by SBPC presenting 12 proposals for CT&I policies in Brazil. These proposals to be presented to presidential candidates include “the re-creation of the Ministry of Science, Technology and Innovation entirely devoted to this area”. Thus, the scientific community is still opposing to this merger.[19]
- Budget cuts
The budget cut in the CT&I sector probably represents one of the main points in the sector’s discussion at the moment. With Constitutional Amendment 95, passed in 2016, federal public spending has been frozen for 20 years in order to prevent it from growing more than inflation, popularly called the “spending ceiling”. However, the amendment that came into force in 2017 froze spending even from key sectors such as CT&I and education.
In addition to the fact that the resources currently available to MCTIC are significantly smaller than in the past, the portfolio nowadays includes the communications sector, which makes available resources even more scarce because they have to be divided with another agenda.
According to Elton Zacarias, executive secretary of the portfolio:
“The ministry has been suffering from very large budget constraints and the prospect is that the situation will deteriorate due to the spending ceiling. In 2015 we had a budget of around R$ 9 billion for funding and investment. In 2018 we have a budget of R$ 3.9 billion, an amount that has already suffered a contingency of 14%. We have less than 50% of the budget of five years ago and with prospect of getting worse.”[20]
The president of the National Council for Scientific and Technological Development (“CNPq“) Mário Borges also commented on the cuts and how they affect the National Fund for the Development of Science and Technology (“FNDCT“). “The FNDCT has had very significant contingencies. From the collection of R$ 4.5 billion this year, we will have less than R$ 1 billion to work, which also includes what is available to Finep. We need people and resources to work.”
These cuts, therefore, not only affect the MCTIC’s ability to operate and the institutions that rely on on-lending as reflected in the availability of resources for investment in the sector, since FNDCT, for example, is one of FINEP’s main sources of funds which is the country’s main public institution for the promotion of CT&I, both in relation to the public initiative (through non-reimbursable resources) and the private initiative (through reimbursable resources).
- Angel investment regulation
As a result of the pressure exerted by the market Complementary Law n. 155 was enacted dated October 27, 2016 (“LC 155/16“) which in addition to other matters, dealt with angel investment. One of the modifications provided by law was in regard to the taxation of the operations; for that reason, with the purpose of regulating the matter a year later Normative Instruction of the Federal Revenue of Brazil n. 1719 of 2017 (“IN RFB nº 1719/2017“) was issued.
LC 155/16 first appeared with the intention of amending Complementary Law n. 23, dated December 14, 2006, aiming to reorganize and simplify the methodology for calculating the tax due by opting for the Simples Nacional. The possibility of framing into the SIMPLES regime is of extreme importance to most of the emerging companies in the country. Therefore, this law is relevant, among other reasons, for updating the annual limit of gross income for configuring companies apt of the Simples Nacional, allowing most of them to benefit without the angel investment affecting the possibility of configuration.[21]
In addition to the amendments to the Simples Nacional, Articles 61 A, B, C, D of the law specific innovations for the angel investment market, with the explicit aim of fostering this activity in the country[22]. Thus, the law regulates the sector through the creation of a legal instrument called “Participation Contract” that provides for the reduction of legal risks for the activity, making it more attractive and thus appealing for private capital to be invested in CT&I of emerging companies.[23]
These specific articles of LC 155/16 provide, for instance, for the “non-partner” status of the angel investor defending the company’s capital from corporate risks connected to the disregard of the legal personality of the invested company, in addition to creating a standard norm for angel investor remuneration, among other innovations, as detailed in our specific article on the subject.[24]
IN RFB n. 1719/2017 published in the Federal Official Gazette on July 21, 2017, was provided for in § 10 of article 61-A of LC 155/16, which establishes regulations by the Ministry of Finance on the taxation of income from investment by contract of participation. In other words, the law waited for the regulation in the taxation on the financial return of the angel investor.
Thus, according to article 5 of the normative instruction, “the income resulting from capital contributions made in the manner provided for in this Normative Instruction are subject to withholding income tax “and their rates vary according to the period the capital was invested, so that the tax decreases over time. The rate varies from 22.5% (twenty-two dot five percent), in participation contracts with a term of up to 180 (one hundred and eighty) days to 15% (fifteen percent), in participation agreements with a longer term to 720 (seven hundred and twenty) days.
The opinion of many agents of this market is that the regulations made by the Federal Revenue made it impossible to execute participation contracts for high taxation, causing the angel investors to choose to continue using other legal instruments, as occurred before the law. Some of the contracts that have been used again are those of mutual convertibles into equity interest, purchase option, among others.
- Promulgation of Decree n. 9283/2018 and its impact on the New Legal Framework for Science, Technology and Innovation
There is a set of norms that establishes measures to encourage innovation and scientific research in the productive environment, aiming at technological training to promote autonomy and development of the national and regional productive system. This set is composed of the New Legal Framework for Science, Technology and Innovation, Law n. 13243, dated January 11, 2016 (“Law 13243/16”) and by Law no. 10973, dated December 2, 2004 (“Law 10973/04”). Both were recently regulated by Decree n. 9283, dated February 7, 2018 (“Decree 9283/18”)[25], which completely revoked the previous decree in this matter (Decree 5563, of October 11, 2005).
As Laws 10973/04 and 13243/16 were enacted during Dilma Rousseff’s tenure, we shall consider briefly Decree 9283/18, which was promulgated during the Temer period. This is a fairly long norm with 84 articles bringing specific definitions to the agents of the sector, defining powers, guaranteeing greater autonomy and enabling partnerships between agents of different nature always aiming at the promotion of CT&I in Brazil.
Decree 9283/18 was well received, mainly because the norms that it revoked and replaced were ample and they raised doubts as to its applications. This made it difficult for agents interested in the development of the sector due to legal uncertainty.
Eduardo Altomare Ariente and Daniel de Oliveira Babinski in a text published in Conjur[26] listed the main advances brought by the Decree, to wit:
“(a) introduction of new rules and procedures for the formalization of legal instruments for investment, partnerships and technology transfer between public and private actors; (b) new rules for granting economic subsidies; (c) regulation of the technological bonus, how to subsidize micro-companies and small and midsized companies, for the payment of sharing, use of technological research and research infrastructure and payment for technology transfer; (d) regulation of technological orders, contracting modalities by the public authority of a non-profit research institution, with a waiver of bidding, for innovation activities involving technological risk, for solving a specific technical problem or obtaining a product, service or innovative process; (e) the creation of specific and simplified procedures for accountability, with priority given to results obtained; (f) facilitation of the re-allocation of resources within CT&I projects; (g) priority in the customs clearance of goods, inputs, raw materials, machinery, equipment, devices and instruments, spare parts and accessories; (h) incentives for the internationalization of public ICTs; and (i) exemption from the IPI (Tax on Industrialized Products) and the II (Import Tax) that may be incurred in the execution of CT&I projects developed by companies.”
Besides these changes brought by the norm, it is important to point out another victory for the sector. The possibility that autonomous social service entities (those of the so-called “S system”) can acquire corporate participation in companies as a means to foster the sector. This understanding is possible because Article 78 of Decree 9283/18 equated autonomous social services with private development agencies, authorizing them to conduct certain activities provided for in Law 10973/04: “Art. 78. Private development agencies, including autonomous social services, by their own powers, may conduct the activities referred to in art. 3, art. 3b, art. 3º-D and art. 19 of Law 10973 of 2004.”
As we explained in our specific article on the subject[27]:
“Because of what was stipulated in article 78, we understand that the provisions which relate to the development agencies in Decree no. 9.283/18 will therefore apply to autonomous social service entities, thus increasing their possibilities for investment in companies. The article mentions that these activities can be executed by the entities’ own competencies, which indicates the importance that the activities performed are in accordance with the articles of incorporation of the entity, without any conflict with the corporate purpose.
Article 19 of Law n. 10973/04 is in fact that which provides on the authorization of the direct purchase of equity interest (expressly, in its paragraph 2, item III), besides stipulating the forms in which it should occur. The caput states that the applicable entities shall promote and encourage the research and development of innovative products, services and processes in Brazilian companies and in private non-profit Brazilian entities, by granting financial, human, material or infrastructure resources to be adjusted in specific instruments and bound to research support, development and innovation activities, to meet the priorities of national industrial and technological policies. “Another important point, therefore, is that the companies or entities supported must be Brazilian.”
Although it is too early to assess the impact of this norm on the industry, many lawmakers see the changes it has brought with good eyes.
- Loan agreement between the Inter-American Development Bank and Finep for investment in CT&I
The Inter-American Development Bank (“IDB”)[28] and Finep[29] signed a US$ 600 million contract to finance innovation projects in the country on August 1, 2018. Minister Gilberto Kassab stated that this amount corresponds to the first payment in a credit line of US $ 1.5 billion. Although the agreement was signed with Finep, the Union is the guarantor of such financing. In addition to the first payment made available by the BID, the program will have a compensation of US$ 103.6 million of Finep’s own resources, making a total of US $ 703.6 million only in the first phase.[30]
According to Finep: “The program seeks to address important challenges such as the scarcity of private investment in innovation, the low complexity of the productive structure and the lack of entrepreneurial dynamism. In addition, it intends to increase financing for innovation in strategic sectors prioritized by the National Science, Technology and Innovation Strategy.”[31]
According to the company, the program has four main components:
“The first of which is the support for innovation in seven strategic priority sectors: chemical industry, mining and mineral processing, advanced biofuels, agribusiness, food and beverages, information and communication technologies, health and metallurgy. Innovation projects will be financed through non-reimbursable resources for enterprises and non-reimbursable resources for scientific and technological institutions.
The second line of support seeks to promote the modernization of micro, small and midsized companies with innovative potential for the adoption of technologies. The projects will be presented in an “open window” system and indirectly funded by Finep through development banks and authorized agencies at regional and state levels.
The third component will support the growth of innovative technology-based ventures, financing their needs at an early stage to help them cross the so-called “death valley” and advance to the final stages of product development, marketing and/or expansion of the productive scale. Finally, the fourth component will finance experimental initiatives for open innovation and studies of prospecting and technological guidelines in priority sectors, as well as strengthening Finep’s institutional capacities to broadcast knowledge and assess the impact of its interventions.” [32]
- Regulation of equity crowdfunding by the Securities and Exchange Commission (“CVM”)
In May 2017 the CVM published CVM Instruction 588, regulating investment-based crowdfunding. The regulation allows platforms in the Internet to approach emerging businesses, startups, interested investors and regulates this triple relationship.
This type of investment is very popular around the world and it is an instrument of incentive to innovation by private investment. Studies indicate that this type of investment spent 139 billion dollars worldwide in 2015.[33]
Finally, although this measure has been received with optimism by the market, the instruction is still very new to produce data proving its success. Therefore, it is a regulatory measure by the State to favor private investment.
- Facilitation of investment by funds in emerging companies by CVM
CVM Instruction 578, of August 2016, promoted several changes in the operation of Investment Funds in Participations (“FIP“). Among the changes is the creation of FIP categories, especially, Seed Capital and Emerging Companies that facilitate investment in startups.
FIP Seed Capital also authorizes investments in limited companies with annual gross revenue of a maximum amount of R$ 16 million. Prior to these changes only public limited companies (open and closed) could receive the resources of FIP.
The Emerging Companies FIPs are aimed at investments in companies at a more advanced stage in relation to FIP Seed Capital, being able to invest in limited companies with annual gross revenue of more than R$ 240 million and a maximum of R$ 300 million.
Thus, the CVM presents another instrument that can encourage CT&I through private investments. A similarity to the case of CVM 588 is the insufficiency of data to measure its success due to its short period of operation.
Conclusion
Although many changes have occurred in a short time, it is not possible to say that CT&I was a priority in the Temer period. The advances promoted by the regulation of angel investment and Decree n. 9283/2018 are undeniable, however, most of the actions occurred with the withdrawal of public capital from the sector which makes it appear that the other measures were alternatives to avoid the consequences of the abrupt budget cut. Measures such as the Decree and the loan with the IDB reinforce this understanding, however, experts warn of the serious risks that this can generate in the future, since many researches which started today will only bring results in a decade or more.
As we have mentioned, the mere change from public investment to private investment is not a healthy alternative if we consider that each plays a different role. Research fellowships, public laboratory maintenance resources, and amounts for researches in progress need to continue in the industry; and attempting to replace it with a totally private model can have negative consequences.
Expectations are high on the sequence of good regulatory initiatives that have taken place, however, despite budget cuts to the industry. Thus keeping up dialogue with the entities that continue to press for the return of the original form of the Ministries, constructing solutions in a democratic manner aiming at the economic and social development of the country.
