Investment Policies, Development Finance and Economic Transformation: Lessons from BNDES

João Carlos Ferraz, Luciano Coutinho1

Summary

This article analyses the extent to which the Brazilian Development Bank, BNDES, responded to investment policy directives and the consequences its finance had in the Brazilian economy between 2007 and 2015. Anchored in an analytical framework that draws relational linkages from policy directives to policy impacts and extensive empirical evidence, it is demonstrated that BNDES has adequate form, function, technical autonomy and capacity to accomplish its investment encouragement mission. Most financing went to policy priorities and beneficiaries turned projects into new or expanded utilities, production capacity and capabilities. Consequent positive impacts in terms of growth in employment, updated facilities and the expansion of goods and services were observed. It is hoped that this article can contribute to a growing literature concerned whether and how the State institutions can effectively contribute to sustainable economic development.

Resumo

Este artigo analisa como o Banco Nacional de Desenvolvimento Econômico e Social (BNDES) respondeu às diretrizes de políticas de investimento entre 2007 e 2015. Com base em um quadro analítico que estabelece vínculos relacionais das diretrizes até os impactos do financiamento, demonstra-se que o BNDES teve forma, função, autonomia técnica e capacidade adequadas para realizar sua missão de incentivar investimentos. A maior parte dos financiamentos foi para prioridades políticas (policies) e os beneficiários expandiram capacidade de produção e capacitações com impactos positivos em termos de crescimento no emprego, instalações atualizadas e crescente oferta de bens e serviços. Espera-se que este artigo possa contribuir para uma crescente literatura sobre se e como instituições do Estado podem contribuir para um desenvolvimento econômico sustentável de forma efetiva.

Keywords: Brazil; Investment and Industrial Policies; Development Banks; Institutional Development; Policy Effectiveness

JEL: O25, O16, G23

1. Introduction

The role of development banks (or development finance institutions, DFIs) in economic development is an issue of increasing economic relevance and academic and policy debates. Controversies exist not only because of divergences of visions among economists but also because sound analytical frameworks and extensive, reliable evidence are still scarce.

Their mission may include: (i) financing new economic activities or the expansion of existing capacities and capabilities and the inducement of positive externalities; (ii) supporting the development of financial markets; (iii) contributing to systemic stability when taking up a countercyclical role and, (iv) supporting national or local public policies development and long-term planning. Although they have similar generic missions, diversity of forms and functions is a marked feature among them. But they are economically relevant: in 2013, the 23 members of the International Development Finance Club had combined assets of around US$ 2.8 trillion (IDFC 2014). Development banks have explicit support from National States through different instruments: sovereign back-up guarantee (ICO, JFC, Caisse Dépôts and KfW in Spain, Japan, France and Germany, respectively); tax exemptions (KfW, JFC and Business Development Bank of Canada); access to para-fiscal resources (BNDES, Korean Development Bank and ICO); direct capital injections from Treasuries or Central Banks (China Development Bank). 1 João Carlos Ferraz: Professor, Instituto de Economia, Universidade Federal do Rio de Janeiro. He was Executive Director and Vice President of BNDES between May 2007 and May 2016. Luciano Coutinho: Professor, Instituto de Economia, Universidade Estadual de Campinas. He was President of BNDES between May 2007 and May 2016. This article does not, in any way, reflects BNDES positions. Nevertheless, it is dedicated to all BNDES employees, truly servants of the public interest.

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The object of this article is to analyse: (i) the extent to which the BNDES effectively allocated finance and had the capacity to respond to investment policy directives and, (ii) the consequences its finance had in the Brazilian economy between 2007 and 2015. The time frame coincides with the recent economic up and downwards cycle the Brazilian economy went through.

BNDES is a diversified development bank. Between 2007 and 2015 financial concessions averaged 13.5% of Brazil´s total fixed capital investment. According to the Brazilian Statistical Office, in 2011, manufacturing firms with revenues above R$ 90 million were responsible for 84% of total industrial investment. At BNDES, in that same year, this largest bracket of firms represented 78% of total financial concessions to the industrial sector. Loan concessions or project finance can be directly contracted by clients for projects above a threshold (approximately US$ 7 million). At least 40% of financial concessions are on-lending operations: commercial banks access BNDES funds and extend credit to their clients assuming corresponding credit risks. When operating as second tier, BNDES imposes conditionalities to favour exports, regional development and MSMEs (Micro, Small and Medium Enterprises). A BNDES guarantee fund is available to mitigate the associated risks incurred by commercial banks in lending to MSMEs. The bank also has an investment arm, BNDESPAR. In 2015, the market value of its equity portfolio amounted to US$ 13.2 billion with a direct stake in 48 different funds. It is also Brazil´s Eximbank for the export of capital goods and engineering services. From internal sources and donations, the institution provides grants to non-profit organisations for environmental, technology, cultural and social projects. BNDES operates under close scrutiny of the Central Bank.

We propose to address the following questions: to what extent public policy directives were translated into BNDES priorities? To what extent financial concessions represented BNDES priorities? Did BNDES routines ensured the reliable and sustainable accomplishment of its missions? Did disbursements result in the expansion of capacities of beneficiaries? Did added capacities imply positive impacts?

The analytical framework is set in the next section. This framework proposes, as analytical steps, three policy phases: policy formulation, policy absorption and operationalisation and policy implementation with deliveries and impacts. Subsequent sections deal with each one of these phases. Thus, section 3 provides the necessary information on policy directives prevailing in Brazil. This is the reference for the following section that examines the extent to which BNDES incorporated these directives in its actions. This section also analyses whether BNDES had the technical autonomy and the financial resources to decide which projects should be supported. Section 5 provides empirical, quantitative evidence to analyse the extent to which these internal capacities were translated into financial concessions that impacted the economy in the direction of proposed policy directives. The final section summarises our main findings.

1. Policy directives and policy capacities: analytical framework and evaluation methodology

The support for our analytical framework comes from a literature concerned with the executive capacity of public agencies to effectively implement policy directives: political economy institutionalists, evolutionary, development finance and public policy management.

We were inspired by institutionalists authors concerned with guiding rules of institutions -and their evolution in time- based on “stylised facts and theoretical conjectures concerning causal mechanisms” (Hodgson1998:173). To further specify the analytical components of our framework, Chang (2006:2) was useful when he argues that, “we may say that there are certain functions that institutions must serve if they are to promote economic development, and that there are certain forms of institutions that serve these functions the best.” The author proposes the “encouragement of investment” as a critical function to be performed by public institutions. The notion of “mission-oriented” institutions, to describe development banks is also useful (Mazzucato 2016). This article intends to examine BNDES form and function (to support Brazilian investments) in time. As scale and scope matters in any financial industry, was BNDES balance sheet sufficient and its instruments adequate to perform mandated missions?

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From a different angle, the World Bank proposes three institutional functions –commitment, coordination and cooperation- as critical determinants of public policy effectiveness (World Bank 2017). These are behavioural, even normative concepts: policy effectiveness would be ensured if any institution, anywhere, anytime is committed to its mandates, if it operates in coordination and in cooperation with other public, private and societal institutions. These are generic and behavioural concepts not easily empirically tested. Even so, we ask whether in BNDES recent performance these three behavioural functions were present.

To empirically investigate whether BNDES had not only the financial resources but the objective capabilities to perform mandated missions we relied on another strand of the literature. Karo and Katell (2013:4) argue that, with few exceptions, “the literature on economic development has so far not tried to deliver a systematic framework to understand how and why public-sector capacities and in particular policy capacities change and co-evolve with other variables in the capitalist systems.” More importantly, they argue that the policy debate undervalues implementation phase. Our intention is to contribute to fill this void with the case of BNDES.

The first step in this direction is to define policy capacity. According to Wu, X., Ramesh, M., Howlett, M. (2015:166), “(p)olicy capacity is defined … as the set of skills and resources—or competences and capabilities—necessary to perform policy functions”. In this direction Karo and Kattel (2016:13) indicate that the public management literature specifies “phases” of policy-making: agenda-setting, policy-formulation, policy adoption, policy implementation, policy evaluation and review. This discussion led to the analytical framework (Figure 1). In it (and running the risk of over simplification), a stylised sequence of related processes is designed, with corresponding specific policy phases, each one liable to empirical verification. Relations are not always unidirectional: in most instances, as depicted by straight and dashed lines, bidirectional relations exist. But, given the objectives of this article and for explanatory purposes a logical sequence of phases -each with specific activities- will be analysed in the coming sections.

Figure 1 Analytical Framework: From Policy Directives to Policy Impacts

Development challenges

Policy Directives

Operational & Financial Capabilities

Expansion of Infrastructures Industrial Competitiveness Productive Inclusion

Financial Concessions

Additional Capacities and Capabilities

Effectiveness

TI

ME

SOCIETY

BNDES Priorities

Policy Phases

Phase OnePolicy Formulation

Phase Two

Policy Absorption

Operationalisation

Phase Three

Implementation

Deliveries

Impacts

External and Internal Processes

Source: Authors elaboration

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Two semicircles surround the framework to depict the influence of two relevant but exogenous factors: time and society. Understanding the importance of time in the process going from policy definition to policy implementation and policy impacts is relevant. Societal influences are also of paramount importance. Public institutions in democratic systems are not insulated from the legitimate pressures exerted by relevant actors, like business associations and civil society. In short, policy processes. from agenda-setting to finance concessions are modulated by negotiations with relevant actors for the acceptance of operational rules. It is relevant though to examine the extent to what an executor agency, such as BNDES, has the necessary means to avoid being capture by specific interests that would jeopardise policy goals and the agency´s balance sheet.

In terms of relational phases, firstly, at the discourse level (Phase One), in any country, responses to development challenges are encapsulated in government plans, translated into directives to different executor institutions. Of relevance at this point is the fact that in Brazil, specific development priorities and corresponding policies were endorsed by voters in four successive presidential elections, between 2002 and 2014. Thus, although topic changes have occurred, for more than a decade policy directives were quite similar as it will be examined in the next section.

Secondly, as mentioned above, to be effective public policies must be translated into actions. That is, public policies demand close alignment between directives and the priorities of executor agencies. Contributions from the latter to policy design certainly exist but the political prerogative lays with the former. This will be examined in the section dealing with Phase Two.

Thirdly, and taking BNDES’s mission into account, institutional priorities must be translated into financial concessions. Priorities are made explicit in terms of credit conditions and revealed as a relevant proportion of resource allocation. The extent of BNDES’s contribution to policy directives is finally to be revealed if financing beneficiaries are capable to turn investment projects into operational plants and installations and to deliver specific goods and services. With the passage of time, the bank´s effectiveness can be established in terms of the extent to which the added capacities have positive impacts in different domains of Brazilian socio-economic life: competitiveness, welfare, etc. It is at this stage (Phase Three) that the pertinence of policy directives is finally revealed.

From this analytical framework, the following questions can be drawn up: to what extent policy directives (agenda-setting and policy formulation) were translated into priorities and operational policies (policy-adoption)? To what extent financial concessions (implementation) represented BNDES priorities? Did BNDES routines ensured the reliable and sustainable accomplishment of its mission? Were innovations introduced in internal processes and in financial instruments? To what extent these innovations were taken up by clients? Did disbursements result in the expansion of capacities of beneficiaries? Once put in motion, did the added capacities imply positive impacts (effectiveness)?

Most of the evidence for the analysis of Phase Three was derived and updated from BNDES Monitoring and Evaluation System aimed at the “analysis of results generated by the Bank’s performance in all these aspects, in addition to the financial and economic aspects” (BNDES 2016:31). The System uses financial indicators, related to disbursements and, to assess capacities and impacts, different financial, economic and technical indicators, in accordance with the nature of the supported investment.

So far, we discussed policy formulation and policy implementation issues. However, one crucial subject, where the economic debate is very acute, still must be taken up: the nature and the scope of development banks functions. Although one may find nuances among different authors, two major contraposing visions exist: one where public agencies should be restricted to act pointedly in situations of “market failures”; the other where private and public sources of finance are complementary but the State has a strategic role in setting and shaping directions.

For the first, competitive and informed financial markets (should) prevail and provide optimal solutions for the financing of an economic system. Flexible interest rates constitute the allocative instrument for excesses or insufficiencies. The extreme pro-market vision comes from those who argue that the lack of private sources of finance credit is due either to financial repression and/or to the crowding out impacts of

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better terms of credit offered by public agencies. While they would theoretically accept these practices if grounded on any type of market failure, this literature strand discusses only partially the other side of the coin: why a given structure of market interest rates, biased to the short term, can hardly induce long term investments. If that is the case, development banks would then practice policies to mitigate existing malfunctions of the private market. The Brazilian case is exemplary as this article will try to demonstrate.

Moreover, for many authors there is a firm belief that public finance is unavoidably inefficient because: (i) of inherent political interference in executor agencies; (ii) finance is mostly provided for those that could raise capital elsewhere and, (iii) agencies choose and pick the wrong winners. Most of the pro-market literature calls for corrections (by public action) in cases of market deviations: insufficient coordination or non-competitive markets, information asymmetries, externalities (positive or negative), among others. It is interesting to note that depending on the width used to define each these failures, a more or a less pro-active intervention by the State could be justified within such framework.

The political influence argument must be placed in its proper place. First, in any open society, economic agents try to influence political leaders towards their interests. If convergences between the public interest and the private interest exist, grounds for negotiations and agreements exist. This would be reflected at the agenda setting and policy formulation phases. Second, very seldom, especially in democracies, executor agencies sit on ivory towers, taking insulated (from the political domain or from interested parties) decisions. It is natural that relevant interests are expressed by economic agents and it is in the public interest that these are duly considered by public servants. Thus, to place the “political influence” debate in a proper perspective it may be useful to bring to fore two concepts.

The two concepts are political autonomy and technical autonomy. The political autonomy is referred to the political domain, where an elected administration sits and takes decisions based on its policy platform and on permanent political negotiations with stakeholders. These are translated into directives that are then put forward to executor agencies. The latter may be called to participate in the process of agenda setting but the ultimate decision lays with the Executive Power. In short, executor agencies have some but a limited political autonomy depending on the specificities of national environments. On the other hand, to perform its development functions any executor agency requires technical autonomy capacity. That is, in the case of a development bank, the collective capacity of staff to approve or reject projects based exclusively on explicit project and credit evaluation criteria (technically, legally, economically and financially, permanently scrutinised by the Brazilian banking supervisory agency). To address these issues we will examine internal processes to establish whether technical autonomy exists at BNDES.

Those recognising an active role for the State in long term financing come from different traits but they usually consider that market forces cannot or are not able to deal with uncertainty. Any economic decision involves expectations in relation to the future, which is increasingly unknown with the passage of time. Thus, time and the nature of the investment define the extent of uncertainty of an investment project: when an investment is novel; when an investment maturity is long; when there is turbulence in the financial, economic and/or political ambiance. If uncertainty prevails, even if resources are available, market sources may not be willing to provide funds for an existing demand, regardless the price mechanism. In this respect, Brei and Schclarek (2017:13) found, for Latin America and the Caribbean “robust evidence that national development banks and public retailed-oriented banks increase lending in response to crisis periods relative to normal times, while domestic and foreign banks decreased their lending relative to their normal lending patterns”.

Mazzucato (2016:141) when discussing innovation policies and their executor agencies is emphatic about mission-oriented institutions: “missions imply setting the directions of change”. To increase their capacities to evaluate and define courses of action public agencies should be pro-discovery, learning-

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intensive institutions. If they are trend-setters, these agencies naturally face risks. If risks are taken, rewards from positive returns should be made available, obviously subject to evidence based, sound evaluations. Such pro-active stand on the role of the State is mostly in relation to (uncertain) development challenges such as innovation and climate change and these are issues to be examined in the case of BNDES.

Moreover, assuming a Gerschenkonian stand, the scope of the mission of a development bank may be directly related to challenges a society faces at specific moments of time. In Germany, “KfW has played an integral part in the support of development and use of green technology and the financial sector precisely because of a combination of its general economic mandate, its hybrid financing structure, its technical expertise, and its participation in national policymaking (Moslener, Thiemann and Volberding 2017:11). In China, the China Development Bank “keeps a close relationship with the state in terms of the national plans” (Xu 2017:23) and… “CDB plays the role as a key shaper to the financial market and the credit system” (Xu:2017:11).

BNDES is an interesting case for most of the issues discussed in this section: the period under analysis is marked by Investment Policies prioritising innovation, climate change, regional development, competitiveness, infrastructure and MSMEs. These policies were active during most of the upswing trajectory of a Brazilian economic cycle, coinciding with the recent international financial crisis. The counter-cyclical role was actively played by BNDES, as most development banks elsewhere. But Brazil has its economic particularities. As it will be shown, even during the growth period, the term structure of interest rates remained high and volatile and a short term oriented financial industry prevailed. BNDES role, therefore, was much wider relatively to countries in which the private financial industry also plays a relevant role in long-term financing.

2. Phase One. Policy formulation in a specific economic ambiance

Table 1 provides a panoramic view of the Brazilian economy and three sources of dynamism -the external sector, the internal market and investment-, for three periods -2000-2006, 2007-2013 and 2014-2015. With differences of degree, these three sources of dynamism evolved in similar directions, propelling the Brazilian economy into an up and then a downswing of an economic cycle.

The first Lula Administration (2003-2006) prioritised austere macroeconomic management. As a result, it consolidated the Cardoso legacy and paved the way for a growth period. The upswing of the cycle occurred during the second Lula Administration (2007-2010) and the first Dilma Administration (2011-2014): investment and wage bills were expanding ahead of GDP and international commodities prices were favouring the export sector.

Compared to other nations, the country was relatively successful in crossing over the 2008/9 international financial crisis. GDP fell 0.2% and investments 9.9% in 2009. In the following three years (2010-2012), GDP expanded 4.4% and fixed investment (GFCF) 9.3% on average. The second half of 2013, though, marked the beginning of a turn-around in the political climate and economic cycle, yet to be better explained. A symbolic event was the June mass demonstrations demanding better public services. But other factors were concurrently contributing to the diversion of the growth trajectory: a difficult international context, falls in commodity prices, frustrations in the ruling political coalition, adversities in the management of the fiscal policy, the unveiling of corruption scandals and the fall of confidence levels among economic agents.

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Table 1: Sources of growth in the Brazilian economy: a cycle perspective

Indicators Average 2000-2006 Average 2007-2013 Average 2014-2015GDP Growth (% pa) 3,3 3,9 -1,9Terms of Trade (% pa) 1,0 2,5 -7,3Terms of Trade (2006=100) 95,6 114,4 108,7Wage Bill (% pa) (1) 1,6 5,6 -1,2GFCF/GDP (%) 18,1 21,2 20,5Variation of investment (% pa) 2,5 7,4 -9,4Sources: IBGE, Quarterly National Accounts and Monthly Employment Survey; Funcex, Indices of Foreign Trade.(1) Wage bill: first available information refers to the period 2002-2006

In terms of policy directives, while the recent economic inclusion drive in Brazil has been well documented (Campello and Neri 2013), not much is known about Investment Policies and their directives. Table 2 informs the set of policies put in motion since 2004 to provide the necessary references for BNDES future course of action2. Even with circumstantial changes of names of programmes, Table 2 informs the existence of sectoral plans for a relatively long period of time.

Table 2: Selected Investment Policies in Brazil, 2004-20153

Investment Policies

2004 2005 2006 2007 2008 2009 2010 2011

2012 2013 2014 2015

Infrastructure PAC - Growth Acceleration Programme

IndustryPITCE – Industrial, Technology and Trade Policy

PDP - Productive Development Policy

PBM - Plan Great Brazil

Science, Technology, Innovation

Firm Innovation (Inova Empresa)

PACTI - ST& Innovation Action Plan

ENCTI - National ST& Innovation Strategy

Environment PNMC - National Climate Change PlanRegional Development

PNDR National Regional Development Plan

Source: Compilation based on different government plans. In Portuguese: PAC: Programa de Aceleração do Crescimento; PIL: Programa de Investimento em Logística; PITCE: Política Industrial, Tecnológica e de Comércio Exterior; PDP: Política de Desenvolvimento Produtivo; PBM: Plano Brasil Maior; PACTI: Plano de Ação para Ciência, Tecnologia e Inovação; ENCTI: Estratégia Nacional de Ciência, Tecnologia e Inovação; PNMC: Plano Nacional de Mudanças Climáticas; PNDR: Plano Nacional de Desenvolvimento Regional

The 2007 Growth Acceleration Programme, PAC, was launched to revert the practically stagnant investments in infrastructure since the debt crisis, within a new institutional framework: strong centralisation of decision-making at the highest government level; budget allocation exempted from fiscal constraints; regulatory agencies actively involved and explicit efforts to bring in private investors through concessions and PPPs. Even if still unsatisfactory, investments in infrastructure to GDP increased from

2 Other policy initiatives that also guided BNDES (i.e. exports) were also existent but they were left out given the scope of the empirical analysis.3 Further information about each of these policies and plans can be found in: http://www.pac.gov.br/sobre-o-pac, http://www.abdi.com.br/Paginas/politica_industrial.aspx, www.mct.gov.br/upd_blob/0225/225828.pdf, www.mct.gov.br/upd_blob/0214/214525.pdf,http://www.mcti.gov.br/documents/10179/1712401/Estrat%C3%A9gia+Nacional+de+Ci%C3%AAncia%2C%20Tecnologia+e+Inova%C3%A7%C3%A3o+2016-2019/0cfb61e1-1b84-4323-b136-8c3a5f2a4bb7,http://www.mma.gov.br/clima/politica-nacional-sobre-mudanca-do-clima,http://www.mi.gov.br/politica-nacional-de-desenvolvimento-regional-pndr.

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1.78% in 2007 to 2.30% in 2014, in line with the US and Western Europe average but below the 3.5% world average (Inter B. 2016, MGI 2016).

Industrial and innovation policies were in action since 2004. The 2004-2007 PITCE (Industrial, Technology and Trade Policy) placed priority to industry after a long period of policy inaction. It had thematic and sectoral focuses: innovation and exports and technology-intensive activities (capital goods, electronics, pharmaceutical, software). PITCE introduced a new institutional framework: tax incentives for innovation; agencies to promote industrial development and exports and a high-level tripartite forum to promote consensus on industrial strategies and priorities. PDP (Productive Development Policy, 2008–2010) priority was the promotion of investments for a wide range of sectors and the internationalisation of Brazilian leading firms, in a context of economic growth and improvements in terms of trade. This policy was very functional during the international crisis as it allowed for the introduction of countercyclical measures. PBM (Plan Great Brazil, 2011–2014) maintained the scope and breath of PDP but it had a defensive character given the continuation of the international crisis, appreciation of the Real and fierce competition from imports. In Science, Technology and Innovation, two major initiatives were sequentially implemented (PACTI, ENCTI) followed by one (Inova Empresa) that was specifically designed to support the business sector. The National Climate Change Plan is related to international compromises Brazil has agreed upon while the Regional Plan is aimed at correcting regional differences in Brazil.

BNDES absorbed the programmes in its internal priorities as it has done since its foundation in 1952. It was an active participant of supporting infrastructure projects in the early 1950s, and the automobile and other industries, later in that decade. It financed State Owned Enterprises (SOEs) throughout the 1970s, under the framework of multiannual plans. In the early 1990s, BNDES was the privatisation agency of most of these SOEs. When the recent investment drive occurred, the institution supported projects by those privatised entities (BNDES 1954, 2012).

Throughout the years BNDES staff has been called to support the design of the economic, technical and legal specifications of sectoral and thematic plans. But, as Colby (2013:223) demonstrates, BNDES “can inform and influence policy-making, but the ultimate entity responsible for the approval of policy are elected officials or those overseeing the government”. In short, the bank is a participant of agenda-setting within the limits of political autonomy that are defined at each moment of the Brazilian history. In the case of the period under analysis it was not different. BNDES participated in the executive secretariats of different policies but always in a technical support role. Strategic decisions such as in relation to resource allocation or the extent of benefits were always taken at the Executive levels.

Also along its history BNDES has enjoyed technical autonomy to accomplish missions. It is protected by a legal structure that “granted high levels of organizational autonomy. This protection boosted the insulation of the organization because outside actors did not have the legal authority to influence particular hiring or loan-making decisions” Colby (2013:238). This technical autonomy is performed by its Weberian bureaucracy through well-established routines, as depicted in the next section.

3. Phase Two. Policy absorption into priorities and operational and financial capabilities

3.1 Translating technical autonomy into operational routines

Between 2007 and 2015, alignment to public policies were made explicit through BNDES’s planning process.4 Sectoral and thematic priorities were given to infrastructure, industrial competitiveness and productive inclusion of MSMEs. In parallel emphasis was given to three transversal dimensions: innovation, sustainability and regional development.

4 A summary of the Plan is found in its 2014 Annual Report at: http://www.bndes.gov.br/SiteBNDES/bndes/bndes_pt/Hotsites/Relatorio_Anual_2014/estrategia_visao.html

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Priorities were translated into: (i) financial concessions goals to be attained each year, (ii) organisational and human resource allocations and, (iii) financing guidance, in three directions. First, transversal priorities (innovation, sustainability and regional development) were to enjoy the best finance conditions closely followed by infrastructure, industrial competitiveness and productive inclusion. Second, within each sector or theme further differentiation was made: financing conditions for sanitation, for example, were better when compared to roads but greenfield road projects deserved better conditions relative to brownfield projects. Thus, the criteria of differentiation were related to developmental contributions (externalities and social returns, among other) and maturity conditions of projects. Finally, priorities were guideposts to allocate finance resources in periods of funding scarcity.

Although BNDES is a development-oriented institution, being a financial house and regulated in the same mode as commercial banks, it cannot disregard best banking practices and the rules imposed by the regulatory agency. In this regard, it has a long established and proven capacity to discriminate against unsustainable projects, a fact revealed by its very low delinquency rates (0.1% in 2015). This is to be explained by a long-established segregated, impersonal and collegiate decision process. Three issues must be illuminated to examine further the extent to which the institution really enjoys technical autonomy: how a project and credit evaluation is carried out; by whom decisions are taken and how BNDES relates to beneficiaries, along the different stages of project development and implementation.

At a first stage, once submitted by a third party, a basic project proposal is dealt with by two different teams of experts. From the Planning Area, a project is preliminarily analysed in terms of alignment to priorities and operational policies and its technical and financial coherence. In parallel and independently, the Credit Evaluation Area evaluates and rates the credit worthiness of beneficiaries. These segregated evaluations are submitted for preliminary approval to a Project and Credit Evaluation Committee composed by Operational and Support Adjunct Executive Directors.5 If a project is positively recommended (approximately a third of projects do not pass through this stage) then a team of legal, technical and finance experts of a specific Operational Area takes charge to further negotiate its development, always within the policy and credit constraints recommended by that Committee.

At a second stage, a detailed technical and economic project with required environmental licences, guarantees and payback capacity is then prepared by beneficiaries, in interaction with the team of experts of the Operational Area. Once a project proposal is considered complete and sustainable, it is submitted to a final screening process, this time by the Board of Executive Directors. At this stage, although most proposals go through to the contracting stage, a large proportion receive recommendations of improvements on different aspects (legal, guarantees, deliveries, etc.).

Then follows the project implementation stage where disbursements are only made after the demonstration that a specified milestone has been completed and verified by the bank. The monitoring process is parallel to the concession process. Most projects incorporate a logical framework which is then used by the Operational Area, with the support of a specialised department, to monitor BNDES actions. This monitoring process provides the necessary feed-back information for the planning and operational learning processes of the bank.

In balance: to be approved, any project must be aligned with priorities (resonating policy directives) and operational rules and submitted to an evaluation of credit worthiness. There is no space for individual decisions; a typical project is handled and has the signature of at least 30 staff members who become individually accountable by internal or external auditors. Technical autonomy exists and it is ensured by a collective based decision-making process, with well-defined segregation rules. In such ambiance, it is entirely unlikely the hypothesis of political influence in finance concessions, as suggested by Lazzarini et al (2015).

3.2 The building up of financial capabilities (in a short-termism ambiance)5 Adjunct Directors are career BNDES employees. Career employees entered the bank through a very competitive selection system and they tend to remain there during their professional life.

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This section discusses how and why BNDES built up its financial capabilities necessary for mandated missions. By doing so this section will address, provide evidence and contradict critics that argue that BNDES crowds-out the financial industry and that it is a burden on national debt (Musacchio and Lazzarini 2014)

To understand BNDES financial capabilities and operations, two very Brazilian idiosyncratic issues must be made clear. First, throughout its history, BNDES has always been funded by different public sources. Second, BNDES funding and reference rate to operations are denominated to a rate, TJLP, lower than the short-term policy rate (SELIC). Contrary to most countries then, the long-term interest rate in Brazil is lower than the short term one.6

In relation to the first issue, the latest support to BNDES came from loans from the National Treasuries, an anti-crisis policy practiced also elsewhere but not much publicised. The most well-known were aggressive monetary policies (quantitative easing) and/or traditional expansionary fiscal policies, through national budgets. Practiced by Brazil and other countries, the third alternative is to provide loans from National Treasuries or Central Banks to development banks to act countercyclically. Being reliable development banks, finance is effectively channelled to productive ends and eventually paid back. In sequence, then, development banks can also pay back their loans. This is the rationale behind the expansion of operational capacities of many development banks between 2008 and 2015. In fiscal terms, it results in an increase in the gross national debt, but not in the net public debt because loans granted to development banks are accounted as assets in the balance sheet of national treasuries.

To enable BNDES to support the demand for investments, between 2009 and 2015, the Brazilian Treasury provided BNDES with very long-term loans (up to 50 years) that added up to US$ 225 billion. These loans represented around 8.0% of Brazilian Gross Debt by the end of 2015.7 These resources came in addition to long standing funding from the Worker Assistance Fund (FAT), constituted to finance unemployment benefits, and sourced by a levy charged on wage bills. The Brazilian Constitution defines that 40% of the proceedings of this fund is directed to BNDES thus providing the institution with a stable source of funding. As a result of the Treasury loans, between 2007 and 2016, the share of FAT in BNDES total liabilities fell from 52.3% to 22.6% while the Treasury´s share increased from 6.9% to 57.2%8. To finance these loans Treasury issues bonds at market rate while BNDES contracts are denominated in TJLP. Thus, while these two rates differ, fiscal costs will exist.

In 2015 SELIC and TJLP were at 14.25% and 7.5% respectively. Clearly this difference is of paramount economic importance for the country´s fiscal accounts and, naturally, for the real economy. It is necessary thus to estimate the costs and also the potential benefits likely to be incurred as a result of these loans and BNDES extending finance to beneficiaries9. Table 3 shows two very conservative exercises of present net value of fiscal costs and benefits of the Treasury loans, to be incurred along their duration. The first is a Convergence Scenario, the second, a Status Quo Scenario. In the first, SELIC would gradually fall from 14.25% to 8% in 2022. TJLP would also fall gradually to 6%. In that year, a 2% difference between SELIC and TJLP would exist. In the status quo scenario, the SELIC would fall to 10% in 2022 and TJLP evolution would be similar to the previous scenario. In this case, by 2022, a 4% differential between the two indices would exist.

The results are quite interesting. In relative terms, the cost and the benefit to GDP stand at + and - 0.01% for the Status Quo and the Convergence Scenario, respectively. But in Real terms, the values are

6 The TJLP – Long Term Interest Rate- was established in October 1994 to be the reference rate to be charged the BNDES. Until the end of 2016 it was defined quarterly by the economic authorities based on expected inflation target and the country risk premium. Brazilian authorities are in the process of changing the rate reference for BNDES loans.7 Information on each contract is available: http://www.bndes.gov.br/SiteBNDES/export/sites/default/bndes_pt/Galerias/Arqui vos/empresa/download/2015_captacoes_tesouro.pdf8 Nevertheless, currently, to finance on-going contracts, 92% of resources comes from returns on previous operations.9 The Ministry of Finance is required to inform the Congress, periodically, the costs of these loans. Curiously estimates for benefits are not included.

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significant: for the Status Quo Scenario, a net present value fiscal cost of R$ 12.79 billion exists; for the convergence one, a benefit of R$ 32.97 billion is observed10.

Table 3: Net costs and benefits of operations backed by Treasury Loans to BNDES (Net present value -June 2015- to be incurred along 45 years)

Variables Status quo Scenario Convergence ScenarioR$ billion % GDP R$ billion % GDP

SELIC-TJLP cost differential + 199.71 0.08 + 176.05 0.07Value of equalisation + 26.96 0.01 + 21.92 0.01BNDES net margins (charged to firms) (1.8%)

- 129.70 -0.05 - 140.04 - 0.06

Tax collected on additional investment - 84.19 -0.04 - 90.90 - 0.04Net costs (+) or benefits (-) + 12.79 0.01 - 32.97 - 0.01Source: Adaptation from BNDES APE/AF 2015Notes: (i) BNDES net margins: results from financial intermediation of all BNDES operations. These are turned into earnings that eventually are paid back as taxes and dividends to the Treasury (1.8%, the average value between 2009 and 2014); (ii) equalisation programmes: between 2009 and 2015 a large programme (PSI) existed to lower the cost of capital goods. The Treasury assumed the cost differential between rates charged to beneficiaries and BNDES costs; (iii) Tax collected on additional investments. Brazil taxes investments at 24.5%. This tax was calculated only on additional investment that is, investments that only occurred because of BNDES extra funding. It was estimated at 23%, a conservative figure. Rabello, Simões and Carvalhal (2011) and BNDES/APE (2016) estimate additionality at around 38%. In the last line of this table, positive numbers represent net costs while negative costs represent net benefits.

This exercise in fact reveals the potential impact that a 2% differential between SELIC and TJLP can have on fiscal accounts. Assuming there is no permanent curse to the Brazilian economy it is fair to suppose that, as the Brazilian economy evolves towards normality, a convergence of the two rates will occur thus reversing the pure fiscal cost of loans to BNDES11.

In relation to the second issue: the long-term rate being lower than the short term one, the explanation is probably to be found in the term structure of interest rates which is high, volatile and short. As Treasuries are referenced to the SELIC rate and have instant liquidity, a strong incentive for short-term behaviour by economic agents prevails in Brazil. It is no wonder then that almost 70% of funds raised by Brazilian commercial banks by December 2015 were invested in Brazilian treasuries (CEMEC 2016). At the current references, preference for financial (liquid) investments rather than to lock-in resources into fixed capital expenditures seems a rational choice. As argued by Rezende (2015:249-250), “… Brazil’s consistently high benchmark SELIC rate … shifted banks’ portfolio composition towards high-quality short-term liquid government securities holdings “;

BNDES financing at TJLP is only possible because its liabilities are also in TJLP. Thus, this idiosyncratic formula has been designed to mitigate the Brazilian term structure of interest rate anomaly at a quite bearable fiscal cost, especially from an intertemporal, dynamic perspective.

But, even so, to many authors provides funds for those not in need. As Lazzarini et al (2015:237) put it, analysing data from a panel of around 280 market listed firms … (o)ur results indicate that BNDES subsidizes firms that could fund their projects with other sources of capital”. They did recognise, however, that BNDES support could lower “the cost of capital by a percentage differential somewhere between 4% and 12%, which is more or less consistent with the subsidy included in BNDES´s interest rate” (Lazzarini et al 2015: 244). Their article however does not provide evidence on the existence of these “other sources” nor, if they do exist, the costs of raising capital elsewhere. This would be important because the cost of capital defines, ultimately, the feasibility of a capital investment.

10 These results would change even more drastically if two investment consequences were brought into the picture: multipliers on income and taxes from the activities these additional investments imply.11 The severe recession of 2015-2016 resulted in a sharp fall of the rate of inflation. In early 2017 financial markets were expecting SELIC at 8% for 2018, four years ahead of our conservative scenario.

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In relation to the first aspect, it is possible to affirm that the size of the Brazilian market is very limited: private commercial banks hold just above 10% of stock of credits over 5 years. The bond market is also short-term oriented. In 2014, out of the US$ 39 billion bonds issued, only 17% were directed to corporate investments or to infrastructure bonds (equivalent to 0.5% of Brazilian GDP). Being mostly of a short-term nature, the remaining bonds were used mostly for working capital purposes. Another alternative source of finance would be the emission of bonds, denominated in foreign currency, in international markets. However, such bonds would inject foreign exchange variations risks directly into a corporate balance sheet. The cost of neutralising such risks through swap operations is rather high.

Therefore, the cost of private financing a long-term project can be quite substantial. In August 2015, if a BB rated corporation went to international markets for a loan, or was willing to issue a bond in the local market, the cost for raising a 10-year loan would be 22.46% in the external market (US$ loan swapped to R$); and between 14.8 and 16.1% for a local corporate bond. In comparison, BNDES costs were at a minimum of 8.5% (for an innovation project) and a maximum of 13.64% (for non-priority economic activities) plus risk spreads. Conclusions are quite straightforward: access to the international or to the Brazilian financial industry is quite limited and may impose restrictions – in terms of expected rate of return- to willing investors. BNDES conditions may mitigate these shortcomings.

4. Phase Three. Providing finance: implementation, deliveries and impacts

BNDES (2016) summarised 13 external and ‘home-made’ quantitative assessments on the impact of BNDES actions between 2007 and 2015. These studies are concentrated on four themes: investment, employment, exports and productivity. Out of four exercises on the investment impact, three found positive impacts and one was inconclusive; all four studies focusing on employment found a positive relation; and the same was found for the three exercises on exports. The results of the studies on productivity were more diverse: three were not significant, one partially significant and only one found a positive impact of BNDES actions. Lazzarini et al (2015), on the other hand, did not find evidence of increases in investment from a sample of large listed firms.

This section provides further and extensive empirical evidence on the impact of BNDES actions. Departing from policy and BNDES priorities described previously, we will associate financial concessions to what investments meant in terms of capacity expansion and their impacts at two levels: at a more aggregate level, impacts on investment and employment generation, the paramount BNDES functions and at the level of policy directives, divided in two categories: transversal priorities and sectoral and thematic priorities.

Beforehand, though, it is possible to affirm that BNDES priorities (reflecting national policy directives) were responsible for the largest proportion of total financial concessions and that there is a positive evolution along the years: 76% in 2007 and 88% in 2014 of disbursements went to infrastructure, competitiveness -via capital goods financing-, MSMEs, innovation, sustainability and regional development (BNDES 2016).

4.1 Effects of financial concessions on investment and employment generation

Investments in Brazil expanded from 17.8% of GDP in 2007 to 21.3% in 2013, falling to 18.2% in 2015 (Figure 2A). BNDES’s financial concessions seemed to have evolved along a similar trajectory as it went through a growth/decline cycle (Figure 2B). Total disbursements expanded at a real average rate of 12% per annum since 2007, representing 3.4% of national GDP. This growth was particularly significant in the aftermath of the international financial crisis. These figures suggest that along the 2007-2015 BNDES acted pro-cyclically, following the demand for investment financing and counter-cyclically, in 2009-2010, to attend a suppressed demand.

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Preliminary Approvals, a leading indicator for BNDES performance increased from R$ 192.5 billion (2015 prices) in 2007 to a peak of R$ 371 billion in 2012, plummeting afterwards to reach R$ 116.9 billion in 2015 as the economic cycle receded and investment fell back. A similar but less dramatic trajectory can be observed in disbursements. More relevant is the fact that from 2012 onwards the stock of projects started to diminish to the point that disbursements in 2015 were higher than the ‘entry pipeline’ of projects. In summary, investments backed by BNDES were responsible for around 20% of Brazil´s total investments between 2009 and 2015 (BNDES 2016).

Figure 2A: GFKF/ GDP (%) Figure 2B BNDES Disbursement & Approvals

Preliminary Approvals: value of projects approved by the Project and Credit Evaluation Committee to be further detailed and negotiated by Operational Areas with Firms. A detailed project proposal is submitted to another committee (Board of Executive Directors) for final approval and contracting. After contracting is completed, disbursements are carried out according to stages of completion of the project. Source: Elaborated from BNDES 2016

BNDES mission is to contribute to the expansion of investment. In addition, employment generation is of paramount importance. Based on Brazilian National Accounts and using input/output techniques, BNDES (2016) estimated that its contribution to job creation doubled between 2007 and 2014: disbursements were associated to projects that generated or maintained, during the investment phase, 1.1 million jobs or 3.1% of the total Brazilian formal workforce in 2007, and 3.0 million jobs, or 6.1% of total workforce, in 2014.

4.2 Effects of financial concessions in transversal priorities

Financial concessions to transversal priorities is shown in Table 4. The indicator for regional development is disbursements to the least developed regions of Brazil, the North and the Northeast. After 2009 financial concessions in these areas remained relatively constant at around R$ 40 billion, thanks to large infrastructure projects (ports, hydropower plants, roads), part of the PAC -Growth Acceleration Programme- initiative. BNDES’s goals were to provide financial concessions at least in the proportion these regions have in Brazil´s GDP (18.9%). And, in fact, this goal was surpassed as disbursements to these regions between 2007 and 2015 reached 20.2% of total disbursements.

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Table 4: BNDES disbursements to transversal priorities (2015 R$ million) Priorities 2007 2008 2009 2010 2011 2012 2013 2014 2015 % Total

Loans 2007-2015

Regional Development

14,447 19,537 49,555 40,714 39,117 42,892 46,410 42,508 34,359 20,2

Sustainability 12,549 19,973 29,510 25,372 24,394 26,049 29,122 31,284 31,334 14.1Innovation 321 863 562 1,372 2,700 3,288 5,214 5,945 6,020 1.6Source: Elaborated from BNDES 2016Innovation: support to innovation projects and to technology intensive sectors. Sustainability: support to climate change mitigation, hydro plants, renewables and energy efficiency, forests and agroindustry environmental improvements, sewage and solid waste, urban mobility, railways. Regional development: disbursements to the North and North-eastern regions

Financial concessions to sustainability increased steadily along the years, from R$ 12.5 billion in 2007 to R$ 31.3 billion in 2015, or 14.1% of total disbursements of the 2007-2015 period. As shown in Table 5, in terms of capacity expansion, BNDES’s contribution to urban welfare in terms of waste treatment and land preservation in the Amazon region were significant12. But this is an agenda still to be significantly expanded. For instance, only half of households in Brazilian largest 100 cities have access to adequate sewage systems.

Table 5: BNDES contribution to sustainabilityIndicator 2007

installed capacity (A)

2007-2014 capacity

expansion (B)

B/A(%)

Projects contracted

(C)

BNDES share

(C/B) (%)Sewage Litres/second 71,186 49,940 70 28,877 58Solid Waste Ton/day 140,911 48,308 34 28,845 60Amazon: Reserves for indigenous people

1,000 Km2 December 2014 Area1,376

582 42

Amazon: Conservation Units

1,000 km2 December 2103 Area1,273

144 11

Source: Elaborated from BNDES 2016

Significant efforts towards innovation were made (Table 4). Financial concessions to this priority amounted to R$ 321 million in 2007; R$ 2.7 billion in 2011 and R$ 6 billion in 2015. In relative terms the results are superior to innovation efforts in Brazil: in the 2007-2015 period, innovation was responsible for 1.6% of total BNDES’s disbursements; in Brazil, R&D expenditures to GDP stand at 1.2%. The effective results observed in special programmes oriented to software and pharmaceuticals indicate potential space for further advances.

Since 1999 there were policy experiments towards the software industry but it was only after 2004, with the launching of the first industrial policy by the Lula Administration, that the Prosoft programme became fully operational. Since then and up until 2015, the Brazilian Software industry share in the world industry expanded from 6% to 8%, with sales increasing steadily from US$ 6 billion to US$ 27 billion.

12 These and other similar indicators imply relevance. Per se, they do not indicate whether a large or smaller share BNDES held is positive or not.

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At BNDES, during the same period, financial concessions of around US$ 2 billion were provided to software companies. In 2013, a study undertaken by BNDES found that, when compared to a control group, BNDES-supported companies demonstrated more significant results in terms of sales, employment and companies leading mergers and acquisition processes (BNDES 2016).

The Brazilian market for pharmaceuticals and health devices is valued at US$ 33 billion. Sales have been expanding since 2003 at 20% CAGR (compound annual growth rate), while the domestic market share of locally owned companies expanded from around 35% to 50% of total sales. The reasons for this evolution is to be found at the policy domain: an active and articulated policy including the diffusion of generic products, the procurement policies of the Health Ministry and BNDES financing were in place without changes throughout the period. Through a special sectoral programme, Profarma, concessions amounting to US$ 1.7 billion were granted. As a result, installed capacity of firms with BNDES support more than doubled; around 80% of them quality-certified by the Health Authorities. Consequently, companies supported by BNDES delivered 15% of the 3,338 new drugs launched in Brazil between 2007 and 2014 (BNDES 2016).

4.3 Effects of financial concessions in sectoral and thematic priorities

Financial concessions to infrastructure, loans for capital goods acquisitions (as a proxy of industrial competitiveness) mostly through on-lending operations and productive inclusion of MSMEs evolved positively, representing 21,3%, 29,9% and 28,6% of total disbursements between 2007 and 2015, respectively (Table 6).13 The reasons and achievements behind these figures are peculiar to each priority.

Table 6: BNDES disbursements to sector and thematic priorities (2015 R$ million) Priorities 2007 2008 2009 2010 2011 2012 2013 2014 2015 % Total Loans

2007-2015Infrastructure 14,469 16,856 37,790 34,000 35,140 52,139 56,630 55,566 45,644 21.3Capital Goods acquisition

31,421 38,614 34,979 73,277 68,567 54,153 82,794 71,573 32,707 29.9

MSMEs14 16,055 21,846 23,918 45,578 49,660 50,121 63,543 59,374 37,353 28.6Source: Elaborated from BNDES 2016Infrastructure: energy, logistics, shipping, telecommunications, railways, public utilities. Capital Goods acquisition: on-lending loans provided to beneficiaries through commercial banks. These figures do not include the financing of equipment that are part of an investment project. As capital goods embody technical change it is taken as is a proxy to industrial competitiveness. MSMEs: micro, small and medium size firms.

Between 2003 and 2013, infrastructure investments in Brazil increased from 1.6% to 2.4% of GDP. This was a positive performance however still unsatisfactory in relation to existing depressed local demand. BNDES’s contribution there was significant: during this period R$ 348 billion of finance was dedicated to infrastructures. Table 7 provides evidence on the quantitative expansion of infrastructures in Brazil between 2007 and 2014 and indicates that BNDES was behind at least 2/3 of infrastructure contracts. Almost all of these were project finance contracts, around 400, and no defaults were observed by the end of 2015.

13 Percentages are for each priority in relation to total disbursements and they cannot be added up as concessions to capital goods incorporate those for MSMEs 14 These are very aggregate figures. If financial concessions to themes or activities where no MSMEs are to be found (Public Administration or even most of Infrastructure Project Finance contracts), then the share of MSMEs to total disbursements reaches around 50%.

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Table 7: Infrastructure services delivered through BNDES financingIndicator 2007

installed capacity (A)

2007-2014 capacity

expansion (B)

B/A(%)

Projects contracted

with BNDES (C)

BNDES share

(C/B) (%)

Energy generation MW 96,417 37,480 39 24,061 64Roads (concession) Km 9,888 9,575 97 8,674 91Ports (containers) Million

TEU6.500 4.770 73 3,400 71

Rail based urban mobility (subways, etc.)

Km 878 241 28 152 63

Source: Elaborated from BNDES 2016

Despite its economic relevance, there has been no significant and consistent research to examine the impact of investments in infrastructure. There was one exception: a quantitative exercise on the economic and social impacts of 82 hydropower projects, constructed after the second half of the 1990s with BNDES’s support, on the municipalities where they are located at (Assunção et al 2016). This research was concerned not with the ‘macro’ consequences these projects implied due to the increase in the supply of energy nor with environmental impacts on local communities a specific project may have had. Instead, the exercise used econometric models to estimate the ‘micro’ impacts of these projects on the welfare of municipalities. It was found that each investment is very unique in themselves and for the municipalities. But within diversity few common patterns were found. For most of them there is a 5-year cycle, corresponding to the construction period and immediate aftermath, when economic activities expand and contract down. Also, for most municipalities no significant positive impact was found on social indicators (e.g., health and sanitation). The only permanent economic impacts were on formal jobs (an expansion between 8 and 14%) and on the finances of municipalities, due to financial compensations for the use of water and to regulatory royalties. These findings are very relevant for future development policies, suggesting that policies should consider the potential benefits and adverse impacts that infrastructure projects may cause to local communities.

Industrial competitiveness is a very broad issue. A proxy to relate it to BNDES actions is the resource allocated to capital goods acquisition, or embodied technical change. Table 6 above indicates that R$ 488 billion was provided for the acquisition of equipment. These significant resources impacted the performance of Brazilian firms. In BNDES (2016) an attempt was made to compare the performance of large industrial firms supported by BNDES with a control panel. Significant positive results were found for employment, value-added and investment; moderately significant for exports and positive but significant for labour productivity. These findings suggest that BNDES’s actions are more pronounced once installations become operational but tend to decrease as time goes by.

The Investment Sustainability Programme (PSI, the acronym in Portuguese) was launched in the aftermath of the international finance crisis and ended in December 2015. In terms of the objective of this article, the evidence associated with government programme is relevant. The aim of PSI was to lower capital costs of equipment (and innovation) by fixing a rate for capital goods financing and equalising the difference for BNDES direct and on-lending costs. These cost differentials were assumed by the National Treasury.

The programme was subject to analysis on its contribution to boost investments, with econometric methods common to evaluation exercises, which included control over selection bias. Investment and loan concessions by firms using PSI in 2009 and 2010 were compared to a control group. Results were positive and statistically significant in terms of the expected policy goals: in 2009, there was a 40% and, in 2010, a 28% additionality in investments made by those firms receiving PSI support (Machado et al 2014)

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For the productive inclusion priority, and considering loans to MSMEs as a proxy, BNDES provided R$ 466 billion or 28,6% of total financial concessions between 2007 and 2015. More relevant is the fact that throughout the period there was an expressive evolution to this priority. In absolute numbers, while in 2007 BNDES provided finance to 44 thousand firms, in 2013, credit was extended to 279.5 thousand firms.

This performance is to a large extent explained by one specific financial innovation, introduced to reduce financial restrictions MSMEs normally face: the Cartão BNDES (BNDES Card). This is a credit-card running in a system similar to traditional credit cards (pre-approved revolving credit limit) but to be used by MSMEs only for the acquisiton of equipment and inputs for production from an accredited (by BNDES) network of suppliers. BNDES provides funds and defines the basic cost while commercial banks issue the card for their clients, charging a risk spread. The success of this innovation was impressive: the number of firms with Cartão BNDES grew from 18 thousand in 2007 to 208 thousand in 2013; disbursments increased from R$ 837.5 million in 2007, to R$ 11,251.9 million in 2015, a thirteen-fold increase in 8 years. The impact of Cartão BNDES on MSMEs was also relevant, as shown by an econometric study comparing the employment performance of two groups of similar card holders where one group were active users and the other not. The results indicate that, between 2007 and 2009, employment in active card holders expanded more (9.6%) than idle card holders. For the micro-businees segment the difference was even higher: 13% (Machado et al 2011).

5. Balance and lessons

Development banks are very relevant institutions and they must be subjected to the scrutiny of the widest possible range of visions, analytical frameworks, scope of analysis, methodologies and sources of information. But two pre-requisites are absolutely necessary: sound analytical frameworks and quality evidence.

We proposed in this article to answer objective questions: to what extent public policy directives were translated into BNDES priorities and operational policies? To what extent financial concessions represented BNDES priorities? Did BNDES routines ensured the reliable and sustainable accomplishment of its missions? Were innovations introduced in internal processes and in financial instruments and taken up by BNDES clients? Did disbursements result in the expansion of capacities of beneficiaries? Once put in motion, did the added capacities imply positive impacts?

To answer these questions, based on a political economy institutional perspective, we developed an evaluation framework representing a stylised sequence of related processes, and their corresponding policy phases, each one liable to empirical verification. Most questions have a positive answer and we will briefly summarise our findings in this last section. We also want to propose reflections on two issues: firstly, on the key determinant elements of BNDES success; secondly, the roles development banks may play along different phases of an economic cycle.

To be brief and assertive: BNDES is mission-oriented committed: planned priorities were coherent with prevailing policy directives and proposed goals were delivered. Most financing went to priorities and beneficiaries turned projects into new or expanded utilities, production capacity and capabilities. Consequent positive impacts in terms of growth in employment, updated facilities and the expansion of goods and services were observed. Therefore, we have the objective basis to conclude that institutions as BNDES can provide positive and effective public services to societies.

How to explain such performance? The available evidence brought forward in this article allowed us to identify three determinants of success.

Firstly, four consecutive presidential elections, from 2002 to 2014, resulted in Administrations with similar policy platforms. Such consecutive process of political approvals allowed for the longevity of policy priorities which is essential for investment-related policies. Being a long-term, development-oriented institution BNDES was benefitted by such stable policy framework. This is relevant to explain

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the bank´s evolution and performance. The second determinant is related to the institution itself: along its history BNDES accumulated policy capacity and technical autonomy to adequately provide development finance and to encourage investment. How and why this competence was developed in time, though, remains to be assessed. Thirdly, economic and financial means to encourage investment was provided to BNDES. Were the costs shouldered by Brazilians worthwhile? Our cost-benefit analysis (even with all shortcomings of such approach) demonstrates that, in time, benefits will supersede costs. But this is not the end of this matter. Could BNDES have done the same, with less? If we follow Harvey Leibenstein (1978) teachings -as we should- there is always scope for being more efficient, in any organisation. So, while it is quite possible that BNDES could have been more efficient, the extent to which it could have done “more with less” is unknown. More in-depth research on this subject is necessary.

It is also important to call attention to one specific limitations of our analysis; our analytical approach is a stylised relational framework; as such, relevant issues may have been left out. We want to call the attention to a specific one: the inherently contradictory character of pro-development institutions. Once in motion, any investment project changes a given reality – territorially, for example-. The extent to which analytical procedures of a development institution can accurately forecast positive and negative impacts of any given project is an open challenge to researchers, development bank professionals and policy-makers.

On the relations between economic cycle and development banks, our article provided elements to identify three different roles. Firstly, as investment is pro-cyclical and BNDES was the prominent financing agent, this development finance institution acted pro-cyclically. This is a relevant role of development banks. But this is not the end of the matter.

Our evidence showed that finance went to different types of investments and beneficiaries, who acquire or build up capacities with different maturities. A transport company (and resources for this segment were expressive) could acquire equipment almost off the shelf and put them immediately to work. Finance for a large hydropower plant or for a car factory though have different and longer maturities. But investment decisions by all entrepreneurs are based on positive future expectations and, naturally, on the cost of capital that objectively define the rate of return.

But these expectations may not be fulfilled and the Brazilian case is exemplary when the economic cycle turned with investments growing at negative rates from the last quarter of 2014 onwards. Can BNDES be held responsible for an expected future demand not coming through? From a pure financial or economic stand, the answer is a straightforward no. It is simply not correct to blame any financial institution for the non-realisation of expectations of future demand.

Can a development bank act upon negative contexts, when markets reduce or stop providing finance to the economic system? The answer is a categorical yes. But, to be effective, a countercyclical role by a development bank must be adequate and specific to the moment and to the needs of economic agents. In 2009/2010 credit crunch, the challenge was to recuperate an investment trend. There was repressed demand for investment coupled with credit restrictions. So, the solution was to irrigate the system at lower capital costs. Consequently, investments returned. Since the mid 2014 onwards the context became very different: economic recession, negative investment rates, high leverage levels and very cautious bank lending. Thus, since then and with more impetus from 2016 onwards BNDES acted countercyclically by providing working capital and renegotiating terms of credit, in order to keep business afloat. In short, there are different types of the “countercyclical role” a development bank can play. This issue should be part of a future research agenda.

BNDES past experiences suggests that to identify Hirshman´s “hidden rationalities” is indeed a policy challenge. But there is another and even greater challenge. When to initiate, when to end a policy intervention? Or, how to circumscribe a policy initiative to the limits of its effectiveness? In this respect, the tools available to economists are very imperfect: the so-called technically sound methods usually require evidences that are just not available in tandem with policy needs. Necessary and sufficient

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evidence is always late (for policy purposes). How to deal with challenges of this nature? This is really an open question and an institutionalist political economy perspective should take this as a relevant agenda.

The third role a development bank can play is related to uncertain investments in terms of results. Development banks may play a pre-cycle role when supporting very long-term investments or development challenges investments. In such role they would support investments ahead of the coming upswing cycle.

As for the institutional lessons, we hope that this article may have provided substance for the generic statement that “development banks must serve the public interest”. Inspired by BNDES experience, three lessons can be proposed.

The first lesson is that being mission, long-term oriented, development banks must develop the physique de role to deal with development related uncertainties, including market failures. For that, two requirements are necessary. The first is to have development priorities as the primary goal and patience as the attitude to foster and achieve them. The profit motif is essential for the second requisite: a strong, sound, capital base and a long-term balance sheet in order to allow for a consistent and patient engagement in the support of uncertain, risk intensive but development relevant projects.

The second lesson is associated with institutional relations: alignment with public policies, partnerships with the financial industry and constant interaction with financing beneficiaries are very relevant. These demand strong internal capabilities to preserve technical autonomy: to be able to discern, foster, implement and monitor worthwhile projects. An effective public policy demands an effective executor agency; a sustainable financial industry is one that combines the vitality of the private sector with the patience of public institutions; an efficient financing policy requires adequate understanding of beneficiaries´ changing needs. Relational tensions are a matter-of-fact; they cannot be dismissed or overlooked; they must be accepted and dealt with by having the public good as the major reference. The everyday challenge is to foster well-targeted, well-operated, well-resonated development oriented programmes.

The third lesson is related to the efficacy and effectiveness dimensions of a development bank´s actions. Development banks inherently deal with contradictions: any project has impacts of various dimensions. An explicit attitude to recognise the contradictory nature of its mission is of essence. For that, it is necessary to institutionalise systematic and permanent search processes, try out and implement innovative solutions related to: (i) methodologies for identifying tangible and intangible assets of projects and beneficiaries; (ii) guarantees and financial instruments, especially those related to risk capital and risk sharing; (iii) ex-ante impact methods coupled with ex-post monitoring and evaluation processes. These are essential ingredients for internal learning processes and for rendering account to their societies.

Bibliography

Assunção, J. Szerman, D., Costa, F. (2016) Impactos locais de hidrelétricas no Brasil, CPI-PUC, mimeo, Rio de Janeiro

BNDES (2016). Effectiveness Report 2007-2014: The Contribution of the BNDES to National Development”, BNDES, Rio de Janeiro, 2nd Edition

BNDES/APE (2016). O BNDES e a Economia, BNDES, mimeo, Rio de Janeiro

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