Supporting Canadian NGO’s

            Besides the international NGO’s that focus on increasing transparency of transactions by government and private institutions and organizations, there are Canadian NGO’s that will be good allies to Brazil’s negotiation.  For instance, Probe International is an NGO based in Canada focusing on the Export Development Corporation (EDC) financing program. The organization has for almost 20 years scrutinized the numerous international projects financed through the EDC. They have written various articles in journals and newspapers across Canada opposing the EDC on grounds that the programs it sponsors are usually damaging to the environment. Probe International argues that because of the secretive nature of the agreements made in the EDC to finance projects abroad, the projects are not scrutinized properly, meaning that they tend to have no account for environmental or social impact in the countries needing the loan.

            Embraer should contact the NGO and show their support for Probe’s activities, and request that they continue to scrutinize the EDC loans granted to Bombardier, and request this information from them. Similarly, if Embraer discovers insightful information relating to substantial EDC subsidies given to Bombardier, they should send it to Probe International, so that they can act on this at the domestic level in Canada. Embraer may also provide some funding to the NGO.

            Another potential ally is the Canadian Taxpayers Federation. The Federation is responsible for analyzing the use of taxes in Canada to satisfy the citizens’ interests. Several articles have been written about the damaging effects of the Canadian subsidies that are supposed to be helping the fledging domestic sectors. In an article in January of 2001[1], the Federation argues that the Canadian government is funding significant amounts to the aircraft industry on R&D projects, which is costing the taxpayers dearly. Therefore, they would be useful allies to pressuring the government to remove or lower the aircraft sectors’ subsidies.

Justifying the R&D Tax Bill to the WTO

            If the WTO questions the intentions of the R&D tax bill, the Brazilian trade delegates should be ready to justify its purpose. Brazil should argue that its ‘developing country’ status means that it is afforded special consideration in the WTO rules because its economy needs to adjust to modern global competition. This means that Brazil can maintain its development policies for longer than a developed country, if properly justified. From this view, Brazil’s effort to improve its transportation industries and infrastructure is understandable and should be seen as a legitimate domestic policy that will help the country adjust to the international trading world. Further, the WTO can be reminded that an efficient transportation system will favor the Brazilian citizens to travel, as well as companies in their supply chains, and enhance the conditions for international trade. 

            Additionally, there are no legal precedents for claiming that such policies run counter to the multilateral trading system. Most developed and some developing countries have had R&D fiscal incentives in place for decades. Most of their policies apply ‘across-the-board’ to their various sectors, and some grant preferential incentives to specific sectors. So, if the WTO were to dispute our proposed R&D tax bill, they will have an extensive challenge in bringing similar R&D policies around the world to a new standard. Even if it were to reach this point, the developed nations would be the ones with the most to lose, while Brazil’s economy would be relatively unaffected. 

Domestic Strategy 

Objective: To campaign for a tax law granting tax credits for investments in R&D at two levels: a higher credit for the transportation industry, and a lower one for all other industries. The goal is to prepare Embraer for the negative impact from a restricted Proex subsidy by campaigning for a tax law that will save the company enough funds, and maintain its competitiveness. 

Action Plan 

Establish a Business Coalition 

            Embraer will form a coalition of domestic transportation companies who will definitely want the proposed tax law with the higher tax credit for their industry. They will be invited to attend a presentation on the purpose of the coalition, and the details of the campaign. During this meeting, they will be informed of the benefits that they will gain from the law, and how it will boost their competitiveness. Embraer will need to convince them of the need for the law, and the reasons behind the transportation sectors having a higher incentive than the others. Once this group is convinced and organized, the coalition will be expanded to other companies that engage heavily in research and development. Letters will be sent to these companies explaining the purpose of the coalition, and how they stand to benefit from it. The National Confederation of Industries (CNI) will be the forum for informing the members of the coalition about the need of the proposed tax law for the Brazilian economy. The federation not only already has a large membership of firms that are likely to join the coalition; they also have the facilities, expertise and resources for conducting and collecting economic research. 

Establish a Legislative Coalition 

            The Ministry of Science and Technology, and the Ministry of Transportation will be the first legislative group to be contacted. Embraer will explain the proposed law, and give economic data of the benefits to be made to the companies and the economy as a whole. The Ministers will be ensured full support from the coalition, whose members will be identified to them, and then they will be told that this coalition will expand after the campaign begins. The Ministry of Development, Industry and Commerce (MDIC) will be invited separately to explain to them the similarity between this proposal and the IT Law (8.248/91). Embraer will explain to this Ministry that this proposal will not overlap with the IT Law, and that the whole economy stands to gain from it. Their experience in this field will be greatly appreciated, and again they must be ensured that there will be enough support both pragmatically and vocally. They will share the main difficulties experienced in passing the IT Law back in 1991, at least by those members who are still present in the Ministry, as well as the challenges to extending the Law in January of 2001. The legislative strategy will be shaped according to the information and recommendations they provide.  

            It will be important to get the approval of the proposal by the Ministry of Finance. However, they will take more convincing before they become part of the coalition, considering their main concern of the amount of tax revenues they will forego with such a tax bill. 

Legislative Strategy 

Lobbying 

            After building the business and political coalition, we need to start lobbying the local and state politicians to facilitate their understanding of the R&D tax bill and support it. As pointed out above, Congressmen are more likely to support policies that are endorsed by governors or mayors of their respective states. Members of the business coalition will need to contact their local political representatives, whether it is the mayor of their city or the governor of their state, and express their support for the R&D tax bill. These businesses should set up meetings with their respective politicians to clarify what the purpose of the bill is, and how it will raise the competitiveness of local firms, which should lead to job creation, the installation of new plants, and other spill-over effects to the whole economy. The business should also give a ‘leave-behind’ to their politicians, in case they are unable to arrange for a private meeting with them. The leave behinds can either be a standard one prepared by the coalition personalized to the mayor or governor, or one written by the company. 

            Once the business coalition has made their local politicians aware of the advantages to their cities and states from having the R&D tax bill, our efforts should shift to the Congressional level. Support for our bill in Congress will come from a majority of the government’s (PSDB) coalition, and those who voted in favor of extending the IT Law earlier this year. We can send letters to them mentioning the date of when MDIC will introduce the bill into the Chamber. Along with these letters, should be memos explaining the benefits of the bill to the various groups in Brazil, while depicting the urgency of this bill and urging them to vote in favor (see Annex D).  Similarly, we should send letters and memos to those Congressmen we believe are taking a neutral stance on this proposal, who are likely to be neutral towards the IT Law. Finally, our coalition should contact specific members of the opposition party to support the passage of the bill. Indeed, there was a surprising portion of the opposition coalition that voted in favor of the IT law, stating that they believe that greater R&D investments are needed in the Brazilian economy. This included members of the PT (Labor) party, which is surprising in that it clashes with the party’s traditional stance of strongly opposing any policies that favor mechanization in production systems. 

            Indeed, we can expect opposition from the Labor party, and the Unions, which we have to tackle. We have two options:

(1)   Push ahead without the Labor party and hope that they do not instigate additional resistance in Government; or

(2)   Add clauses to the R&D tax bill that will make it more attractive to them. An idea would be to add a clause requiring applicants for the tax credit to recognize trade unions in their corporate planning sessions. At least one seat may have to be reserved in these meetings for members of their respective trade unions. In return, we expect the Labor party’s support for the bill. 

In Congress 

            The first step will be to introduce the R&D tax proposal to the Brazilian Congress. The Chamber of Deputies will hear the proposal presented by the President of the National Confederation of Industries (CNI), Mr. Carlos Ferreira, who will explain the reasoning behind the proposal, and the role it will play in supporting economic development of various industries. Once the Chamber has had time to consider the proposal, they will delegate the Committee on Economics, Industry and Commerce to evaluate the R&D tax proposal if they are convinced of the urgency of the proposal. Being the case, they will decide to include it in the year’s legislative program. The coalition will need to strive to convince the members of the Committee of the importance of the proposal. This will be done through scheduled visits by key Members of the Coalition, phone calls, letters, and memos underlining the economic boost that the various industries will gain from the proposal.  

            The Ministry of Finance will be approached by representatives of the business coalition and the ministers of the political coalition to persuade the Ministry of the net effect of increased tax revenues owed from companies. Studies will show the growing performance resulting from the R&D tax incentive, and in turn this will lead to additional taxes owed to the government either through income tax, or other taxes involved in business activities in Brazil, which as stated above are numerous. The coalition will need to present the Ministry of Finance with research showing the increase in taxes paid by the IT companies since the inception of the IT Law in 1991 compared to what would be paid without the IT Law. In particular, the coalition will need to clarify that the studies showing that the taxes foregone by the government from the IT Law amounted to between R$ 610 million and R$ 1.3 billion (approximately between US$ 250 and US$ 540 million) did not account for this increase in taxes paid resulting from increased business performance of the IT sector. 

            In order to appease the resistance expected from the segment of the PFL party, lead by Antonio Carlos Magalhães, who will be arguing against the proposal, they will need to be contacted and explained how the benefits should not distort investments flowing to the FTZ in Manaus, or from the Northeastern region. Studies will be sent to these PFL politicians indicating the difference in incentives between locating a company in the FTZ and anywhere else in the country, illustrating how the benefits from the R&D tax proposal are only minor in comparison. While the coalition will be lobbying the PFL to convince them that the poorer Northeast will benefit equally from the proposed law, they will be open to suggestions on adding clauses that grant higher tax incentives to that region. However, it will be made clear to them that this clause will only be added if they guarantee full support in Congress to approving the Law. 

            The coalition will also need to send ‘information packs’ about the economic implications of the tax proposal. These packs will include economic data of the expected benefits generally to the nation, as well as information particular to the state, and key municipalities. The specific information will include lists of the key companies that will stand to benefit within their state or district, with estimates for the increase in R&D expenditures, and expected increase in revenues from the resulting innovation of the local companies. Further, the information packs will include economic studies highlighting the expected increase in Foreign Direct Investments resulting from a business climate conducive to research and development.

Research Strategy 

            Further research will be needed in the following areas: 

·       Economic studies showing the spillover effects from R&D investments to other sectors and to society as a whole. Also, research estimating the job creation from the proposed bill, both in the R&D fields and at the production level. This can be found through thorough research in numerous public economic information sources, either in government agencies, or public universities.

·       Economic research indicating the potential growth in FDI resulting from the incentive on R&D investments in Brazil. Research contracts should be ordered from the most reliable economic research institutes in Brazil. These include: ‘Instituto Economico Industrial’ (IEI), ‘Associação Nacional de Pesquisa, Desenvolvimento e Inovação’ (ANPEI), and ‘Rede Nacional de Pesquisa’ (RNP).

·       Investigate whether Bombardier benefits form any other forms of government subsidies. Find details of the forms of subsidies offered by the Economic Development Corporation to Canadian firms. Also, quantify the financial support given to Bombardier.

Institutional Strategy 

            The issue of approval that was considered a problem by the IT companies who were applying for the tax exemptions must be dealt with in order to make the implementation of the R&D tax law more efficient and successful. SEPIN, the agency responsible for assessing the eligibility of companies for the tax incentive, will need to be given the necessary resources in order to make the approval process less bureaucratic. In order to achieve this, SEPIN should receive the computer equipment and software that will make registering faster and more reliable, as well as more staff to process the applications in order to cut down the workload of the existing staff. This step will ensure that companies will not be discouraged from applying for the tax exemption because of the sluggishness of going through the procedure.

Public Relations Strategy  

            My public relations strategy will involve several approaches to informing both companies, and politicians of the benefits of the tax proposal and the importance to Brazil’s economic development.

Companies 

            Companies will need to be informed about the benefits of the R&D tax proposal through newspaper articles, mailings, and business forums (especially those relating to economic development, R&D, and innovation).

Newspapers 

            The three newspapers most read by business executives and decision-makers are: the Gazeta Mercantil, o Estado de São Paulo, and O Globo. Advertising describing the benefit from the proposal should be purchased to be placed on the three newspapers on selected days of the week when readership is highest, namely Sunday, Monday and Tuesday. A half-page ad would be enough to explain the purpose of the proposal, where key figures are presented pointing to the increase in competitiveness of firms investing in R&D. 

            Op-Eds should be written to these three newspapers explaining the need for the tax proposal to boost the competitiveness of Brazilian businesses in order to be able to compete abroad. Such emphasis will appeal to the readers because of the numerous articles pointing to the negative aspects of Brazilian performance internationally in business. There have been plenty of articles criticizing the lack of tools and infrastructure to allow companies to gain market presence abroad. Further, the growing concern about opening national borders to foreign goods has created fears that Brazilian companies are losing to foreign competitors and costing Brazilians their jobs. Although there have been many articles countering such arguments, particularly in the more liberal newspapers, like the Estado do São Paulo, they have not gained as much attention or acceptance as expected. Therefore, one strategy to reach the companies and the people is to emphasize how the R&D tax law will enhance the quality of Brazilian goods, thereby ensuring their international competitiveness. 

            Meetings will have to be arranged with the newspaper editors, to provide more convincing facts about the net long-run benefits of a tax credit for R&D investments, so as to counter the numerous reports showing how much the government is losing out on from the IT Law.

Mailings 

            Information mailings should be sent to medium-to-large businesses that are not already included in our business coalition. The information pieces sent to these companies will include a letter explaining the purpose of the R&D tax law; an explanation of how they stand to benefit from the extra credit provided to the transportation industry; economic research showing the return on investments in R&D in Brazil; studies showing the benefits that the IT Law brought to the IT sector; and a survey asking the companies about their intentions of investing in R&D (see Annex C). The purpose of the survey will be to collect estimates of how much the companies are planning to invest in R&D in the coming years, and how much more would be invested with the R&D tax bill in place. Analysis of the responses will allow for estimates of the growth in R&D resulting from the tax incentives of the bill, and also to allow for better government budget planning, ensuring that the bill remains viable for the Ministry of Finance.

Business Seminars 

            Seminars should be organized by the Federation of Industries to inform companies of all sizes about the benefits of having a policy conducive to higher R&D investments domestically. A few larger conferences will be held with a Panel of experts, and more entertainment to attract a higher group of guests from the business community. Banquets will accompany these as well as other entertainment. The panel presenting in the seminar will consist of a representative of Embraer, a leather company, a biotech company, a small electronics producer, and an economist. After the presentation, a Q&A session will allow the participants to field their concerns and doubts they may have about the R&D tax proposal. These seminars will be held in the Federation of Industries of key states that have strong industrial and manufacturing industries. Advertising for the seminar will be carried out through the federations, and admission will be free of charge with a limit of two representatives per company who will be required to register in advance by mail or telephone. 

Politicians 

            The task of informing politicians will involve using newspapers, a press conference, and a ‘tele-novela’ to inform the public of the R&D deficit in Brazil and the need to encourage R&D investments.

Newspapers 

            As mentioned, the three newspapers most read by business executives and decision-makers are: the Gazeta Mercantil, a Folha de São Paulo, and O Globo. While the Folha voices a slightly more liberal view, the Globo shows a more socialist perspective of issues, while the Gazeta is seen to be the most neutral newspaper in Brazil.[2] A half-page ad should be purchased in the newspapers highlighting the economic benefits that an R&D tax credit brings to the company and industry, as well as the spillover effects to the economy and society as a whole.  Op-Ed pieces should be sent to these newspapers to give statistics of the expected growth in R&D expected from the application of the law, as well as the increased returns to the businesses. Hopefully these statistics will at least be used by other regular Op-Ed writers of these newspapers. Op-Ed’s will also be sent to other newspapers read by politicians in the most economically developed states, namely Sao Paulo, Rio de Janeiro, Minas Gerais, and Rio Grande do Sul. The newspapers in these states are: ‘Estado de Sao Paulo’, ‘Litoral’, ‘Zona Sul’, ‘Gazeta Paulista’, and  ‘Horizonte’.

Tele-Novela 

            Tele-novelas play an important role in modern Brazilian culture. Not only do they shape discussions at social gatherings and in the home, they also act as a guide to the social values and, more relevant in this case, inform the public of problems or new developments in the political and business sphere of the country. Soap operas have been used by interest groups to push specific issues to the front of people’s minds and shift their opinions according to the group’s agenda, such is the case with the AIDS epidemic. The aim is to turn the issue into a concern of the citizens who then demand that their local politicians act on it.  This tactic was used in 1994 to push for a credit program for micro-enterprises in the services sector. A coalition of micro-enterprises convinced the director of a soap opera playing on Globo channel, which has the highest viewer ratings, to place the issue of the lack of credit for micro-and-small businesses in his soap opera. A few months later, a credit program that had been stagnant in Congress was implemented by BNDES directed specifically at micro-entrepreneurs in the services sector. 

            Our coalition should convince the director of one of the prime-time soap operas (there are 3 soap-operas playing daily in the Globo channel alone) to insert the issue of a lack of R&D culture in Brazilian businesses. An idea would be to have a businessman facing difficulties in a highly competitive market, and realizing that in order for his business to outpace its rivals he needs to invest in R&D to differentiate their products. At this point the businessman should make sharp criticisms of how expensive it is to engage in R&D in Brazil, and even compare it to the situation in developed countries like the U.S. where there are various government sponsored R&D programs and incentives available for companies. This strategy should shape the public opinion about the importance of R&D in any economy. In turn, the public will more likely support the local politicians who campaign in favor of a bill that provides incentives for investing in R&D in Brazil.

Press Conference 

            A press conference should be held to announce to the media the introduction of the R&D tax proposal in Congress that will take place soon. The location should be either at the Science Department of the State University of Sao Paulo (USP), or at the Institute of Technological Development in Sao Paulo. While the former would show the educational benefit of having increased R&D activities in the business sector, the latter would convey a more professional image to the purpose of the proposal. Both are located in downtown Sao Paulo, thereby ensuring the presence of the media. Another option is to host the press conference at an innovation or technological trade show, where some media specialized in technological issues would already be present. A media advisory (see Annex D) will be sent out to the main newspapers, radio and television stations a week before the event. 

            At the press conference will be the President of the CNI, along with politicians supporting us, economic researchers, and perhaps an actor or actress from the soap opera. The actor or actress from the soap opera will explain how the R&D tax bill is proposed in the story, and how the character they represent states the need for such a bill in Brazil. The presence of a soap opera character at the press conference should assure a bigger media presence. The goal is to portray wide support from varied interest groups towards the R&D tax bill, and to clarify how it is not just the companies that benefit, but the whole economy. 

Building Domestic Consensus on the Proposal 

Political Coalition 

            When approaching the key ministers who we want part of our coalition, it must be made clear to them that this initiative emerged from a need for more R&D in Brazilian businesses. The Ministers should understand that the outcome from the R&D tax law will be a lot more significant than improving the competitiveness of domestic companies. It should be clarified how R&D has spillover effects to other sectors of an industry, and also to the economy as a whole. Further, it should be mentioned that job creation could be expected from increased R&D spending, not only through increased sales and exports, but also because of the jobs specific for R&D activities that will be opened. The choice of arguments to be emphasized will, of course depend on which specific politicians are in the meeting. For instance, when meeting with the Minister of Finance, evidence of the growth in tax collection from the IT firms benefiting from the IT Law needs to be provided. Or, when presenting the proposal to Congress, it should be highlighted the expected growth in research education programs that will be created as part of the agreement that benefiting companies will need to donate 1% of their R&D expenses to educational institutions specializing in science and research. 

Political Opponents 

            Knowing that politicians in Brazil are hardly loyal to their party’s central beliefs, we can approach members of the opposing groups individually to get them to support our bill.  The expected opposition from the labor party should be reduced through our reconciliation of their interests of the R&D bill. Early discussions with politicians should indicate the form for the conditions that the politicians would like to see added to the bill in order to make it acceptable to them. Our coalition should be prepared to offer specific clauses that may for instance, require that a certain percentage of the labor force be unionized, or something along these lines. 

Negotiating with the members of the political opposition in the PFL and PMDB parties, especially with Senator Antonio Carlos Magalhães, will be the coalition’s most difficult challenge. Considering that combined the opposition forms a significant group in both the Senate and the Chamber, they could strike a blow to our efforts in passing the bill in Congress. In order to appease Senator Magalhães, we have to reassure him that the R&D tax bill will not affect the existing investment flows to the Northeastern region, or to the FTZ in Manaus. Here again our coalition needs to be prepared to offer some concessions in the form of clauses in the R&D bill granting higher fiscal benefits to companies located in the less-developed northeast region.

Plan Schedule 

            So, the plan is to build the coalition, then launch the media campaign, while pushing the bill up through Congress and finally intensifying our lobbying efforts to ensure that the bill is passed before the Presidential elections in October 2002.  Here is a proposed schedule for our strategy:

Timetable for the Implementation of the R&D Tax Bill 

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