Today's Letter IEDI discusses the study "Revisiting Public Procurement of Innovation in Brazil: Legal and Institutional Opportunities," recently published by the Inter-American Development Bank (IDB). The document recognizes the importance of the State's role in creating systemic and institutional conditions so that companies can develop, introduce and disseminate new products, services and processes to markets.

According to the IDB, to this end, the State acts through policies to stimulate the supply and demand for innovation, using a myriad of instruments of reciprocal influence among the actors of the triad: government, private sector and academia. 

Examples of supply-side instruments are research grants, subsidized credit, non-reimbursable concessional financing and tax incentives. Government procurement of innovation, on the other hand, is the instrument, par excellence, of innovation policies on the demand side, creating the conditions for the emergence of innovations or for expanding the demand for new products, services or processes on the market.

Next, the study presents a diagnosis of the Brazilian National Innovation System (NIS) and examines the legal and institutional framework of public procurement of innovation in Brazil, highlighting the obstacles to the use of this important instrument of encouragement of innovation and technological diffusion.

The authors emphasize that Brazil has an institutionally complex NIS, with the presence of consolidated research and teaching institutions in various sectors, a wide range of funding sources and policy instruments aimed at stimulating both the supply and demand for innovation in the economy. 

However, private investments in R&D&I and the number of researchers, scientists and engineers are still low when compared to developed countries. Furthermore, private investments in innovation, which are generally pro-cyclical (they tend to decrease in periods of economic contraction) are, above all, affected by the unfavorable systemic conditions of the business environment.

In the authors' assessment, the performance of the system as a whole is harmed by the focus on, mainly, fiscal incentives in the portfolio of policies to support innovation, and the negative influence of the macroeconomic scenario and fiscal adjustment policies on public investments in R&D&I. 

In 2018, according to the authors of the study, tax incentives represented 56.3% of a total of BRL 24.3 billion in public resources earmarked for supporting innovation, compared to only 16.9% earmarked for public procurement of innovation. 

Although it is the main instrument for public procurement of innovation in the country, technology ordering is still very little used. Current legislation allows the government to contract providers directly, with no need for bidding, to carry out R&D&I activities aimed at solving concrete problems. These typically involve significant technological risk that needs to be shared between the two parties (public sector and private contractor), but even so there is still a lot of legal uncertainty in the application of this type of contract.

According to the authors, a rigid, formalistic and “punitive” culture prevails in public procurement in Brazil, marked by a general law that privileges the “lowest price” and aims to cover the entire heterogeneous set of contracts signed by the government. 

As managers fear being held accountable for their decisions, if any aspect of the contract is interpreted as an indication of illegality, the rigidity of the legal framework of public tenders and contracts has created obstacles to the strategic use of the State's purchasing power, hindering its use as an instrument to stimulate the demand for innovation in the economy. The New Bidding Law approved in Apr'21 may improve this situation.

In light of this diagnosis, the study brings a set of recommendations, both to ensure greater effectiveness of policies to encourage innovation and to expand the use of technological ordering as an instrument to foster innovation in Brazil: 

• Stimulate the coordination and integration of innovation policies, in order to expand their reach and potential for success through the integration of the various policy instruments available at the federal, state and municipal levels.  

• Strengthen and consolidate different management models in Science, Technology and Innovation (ST&I), such as Civil Society Organizations (CSO) and Social Organizations (SO), which combine greater flexibility of action with clear rules of transparency and systems to control the results of their activities. 

• Ensure the diversity and stability of resources for financing ST&I instruments and policies by simplifying the "Lei do Bem" (literally, Good Law) and improving the legislation on endowment funds to finance R&D&I activities. 

• Adopt mission-oriented instruments to articulate demand-side policies that involve academia and the productive sector, using the State's purchasing power to realign the mix of direct and indirect support policies for business innovation in Brazil.  

• Adopt monitoring actions and evaluation cycles of ST&I policies, absent in Brazil, intensifying the use of information and communication technologies for the collection, storage, processing and availability of data on innovation, and demanding that each new intervention in State-funded ST&I be subject to independent evaluation, as timely and comprehensively as appropriate. 

• Bring the innovation agenda to the government's strategic level, through the creation of an Innovation Chamber, directly linked to the Presidency of the Republic, with the function of coordinating bodies and entities dedicated to ST&I, ensuring cohesion and complementarity to their activities. 

• Expand the use of the State's purchasing power as an instrument to encourage the demand for innovation by revising strict, excessively detailed and formal legislation, which causes a significant stalemate in public management. 

• Put into practice the existing regulation of technology ordering, whose characteristics in terms of price and risk collide with the usual behavior of public servants, responsible for decision-making and public procurement. 

• Expand public procurement of innovation through: i) persuasion and advertising actions to consolidate the understanding that the instruments of public procurement of innovation must be interpreted and applied separately from the legislation governing public procurement in general; ii) prioritization of paths already known in innovation contracting, with which managers and control bodies are familiar. 

• Apply more effectively the Law for the Introduction of the Rules of Brazilian Legislation (LIRBL) regarding the control exercised in tenders and contracts, in order to limit the responsibility of public servants for their decisions and technical opinions to cases of intent and gross error.

The full text is available in Portuguese.