Government support and international loans help develop niche sectors in Peru

Recently announced international loans and sustained government efforts continue to push innovation forward in Peru. Government support has increased in recent years, contributing to the development of a stronger institutional framework and increasing support to various sectors. While many areas are yet to benefit from financing in innovation, there are other driving forces that can help push exploration and innovation forward, such as a search for competitiveness, diversification and sustainability in businesses.

Recent Funding

The World Bank recently announced the approval of two innovation-oriented loans in Peru, one addressing institutional shortcomings and the other focused on sector-specific developments. On January 11, 2017, the World Bank declared it would be supporting the strengthening of the science, technology and innovation (STI) system in Peru, and approved a $45m loan, with a maturity of four years, a repayment period of six years and a five-year grace period.

Among other things, the World Bank’s project will support the institutional framework of the STI system, including building institutional capacities at the National Council for the Development of Science, Technology and Technological Innovation (Consejo Nacional de Ciencia, Tecnología e Innovación Tecnológica, CONCYTEC), the governing body of the STI system, and supporting the evaluation of the efficiency and effectiveness of such key instruments as the National Fund for Scientific, Technological and Technological Innovation Development (Fondo Nacional de Desarrollo Científico, Tecnológico y de Innovación Tecnológica, FONDECYT).

A few days later, on January 27, 2017, the Word Bank approved a $40m loan, with a repayment period of nine-and-a-half years and grace period of five-and-a-half years. The loan aims to improve the sustainability of industrial and artisanal fishing and raise the productivity and diversity of the country’s aquafarming segment.

The World Bank reported that the financing of the loan would be channelled through the National Programme for Fishery and Aquafarming Innovation, and would contribute to enhancing Peruvian fishery and aquafarming value chains as well as lessen dependence on fish catching. Peru is one of the leading producers of fish in the world, providing nearly 20% of global fish catches, especially of small species such as anchovies. Additionally, fishing has been a key part of the economy in Peru, accounting for 7% of exports in the past decade. This programme is said to have a total cost of $120.9m, of which the Ministry of the Economy and Finance is set to provide 66.9% of the total, or $80.9m.

Public Function

While there are no statistics available on overall research and development (R&D) spending per source of financing, in-country sector specialists told OBG that the funding scenario in Peru is roughly in line with the average seen in Latin America and the Caribbean. Consequently, the majority of financing for R&D originates in the public sector.

“In Latin America and the Caribbean, about twothirds of R&D funding is government-financed,” Claudia Suaznábar, lead specialist at the Division for Competitiveness and Innovation of the Inter-American Development Bank (IDB), told OBG. “Given the dearth of financing for innovation in the private sector, the state plays a central role, kick-starting financing for innovation so that the private sector may gradually follow suit and top it up.”

Funding

According to the Ibero-American and Inter-American Network of Science and Technology Indicators (Red de Indicadores de Ciencia y Tecnología Iberoamericana e Interamericana, RICYT), governments accounted for 61% of Latin America and Caribbean financing into R&D in 2014, in US dollars adjusted for purchasing parity. The remainder was contributed by public and private companies (34%), the higher education sector (3%), non-profit organisations (1%) and foreign entities (1%). If looked at from the viewpoint of resource execution, governments accounted for the largest share with 36% of the total, followed by higher education with 30%, public and private companies with 28% and nonprofit organisations with 7%.

Government Spending

Peruvian spending in science and technology R&D has increased in both absolute and relative terms. Measured by RICYT in US$ current prices, domestic expenditure in R&D grew 93.6% between 2011 and 2014, rising from $142.23m to $275.37m. Relative to GDP, it increased from 0.08% to 0.14% in the same period.

“The challenge going forward is to sustain and increase support for the advancement of R&D and innovation in Peru,” Suaznábar said.

Key Obstacle

The majority of companies, regardless of whether they are involved in innovative activities, identify the lack of financing and high financing costs as the chief obstacles to innovation in Peruvian manufacturing. As the National Policy for the Development of Science, Technology and Technological Innovation states, companies do not have enough financial sources at their disposal to fund technological innovation activities. Private sector lenders have refrained from creating specific products due to the risk associated to innovation-related activities and the lack of a critical mass of companies in this field. Likewise the state itself has not set forth enough financial instruments to support the promotion of technological innovation.

Financial aid on offer for technological innovation are limited or non-existent, and as a result many turn to alternative sources of financing, which are more costly, thereby reducing the probability of innovative activities taking place. Additionally, state funding concentrates on subsidies directly delivered to companies.

The results of the 2015 National Poll on Innovation in the Manufacturing Industry, published by National Institute for Statistics and Computing (Instituto Nacional de Estadística e Informática, INEI) in February 2017, back up CONCYTEC’s assessment.

Support Instruments

While only 4% of companies approached by INEI in the aforementioned poll admitted to employing government support towards funding innovative activities, it may be worth looking at their awareness and usage of public policy instruments in this area. Between 2012 and 2014, 50.8% of companies polled by INEI said that they were aware of public policies supporting innovation in Peru. Government support programmes employing subsidies, such as Innóvate Perú and FIDECOM-FINCYT, stood out among the fray as the most well known (51.8%), followed by CITES technological services (34.6%), export promotion programmes (31.8%), the R&D tax incentive (27.1%), entrepreneurship programmes (17.1%), FONDECYT (15.2%), technical assistance programmes supporting technology absorption and business management (13.6%), and others (3.8%).

Among those aware of such instruments, 24.9% had applied for government support, the majority of which (46.9%) were for public programmes employing subsidies, followed by export promotion programmes (26.5%). Ultimately, 81.4% of those that applied for government support were successful in their applications. Conversely, of those that did not apply for government support (75.1%), 61% declared that the available instruments did not meet their needs, while 39.2% cited bureaucratic difficulties as the reason for not applying. It therefore appears that existing instruments leave a significant range of unfulfilled needs.

Unturned Stones

There are specific areas where investment in innovation may develop Peru’s comparative advantages, as seen in the recent case of the World Bank’s support to fishery and aquafarming.

“There are still many niche sectors in Peru that could thrive with investment in R&D and innovation,” Suaznábar told OBG. “In areas like climate change, bioeconomics or biodiversity Peru could create value based on its vast natural resources.”

Peru’s exposure to international markets may work as a positive push factor in this regard. In other words, increased global competition may drive exporting Peruvian companies to innovate, so as to improve their competitiveness, diversify their destination markets and ensure the continued sustainability of their businesses.