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CENTRO BRASILEIRO DE RELAÇÕES INTERNACIONAIS
ARTIGOS
VOLUME 3 - ANO VII - 2012
www.cebri.org.br
Explaining the BNDES:
what it is, what it does and
how it works
Seth Colby
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Seth Colby
CEBRI Artigos
Volume 3 - Ano VII - 2012
Explaining the BNDES:
what it is, what it does and
how it works
Autor: Seth Colby1
Seth Colby is the 2012-2013 Visiting Researcher at the Brazilian Center for International Relation (CEBRI) and a
PhD Candidate in International Affairs at the Johns Hopkins School of Advanced International Studies. Mr. Colby has
previously held the Executive Director position with the Bernard L. Schwartz Forum on Constructive Capitalism. His
past professional experiences also include the financial sector (Citigroup) and international development organizations
(Ashoka: Innovators for the Pulbic, Banco Inter-Americano de Desenvolvimento, United States Peace Corps).
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Explaining the BNDES: what it is,
what it does and how it works
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Preface
With the purpose of contributing to the production of knowledge in the field of International
Relations, with a special emphasis on aspects related to Brazil’s insertion into the world stage, the Brazilian Center for International Relations (CEBRI) established a program through which selected guest
researchers develop their activities at the Center’s headquarters in Rio de Janeiro.
In 2012, Seth Colby, a doctoral candidate at Johns Hopkins School of Advanced International
Studies, became CEBRI’s first Visiting Scholar. Previously, Seth Colby held the position of Executive
Director at the Bernard L. Schwartz Forum on Constructive Capitalism, a research center, and also
worked at the Leadership Academy for Development, a program that provides training in the areas of
governance and private sector to develop world leaders.
Thus, it is with great satisfaction that we present a publication containing the article that resulted from the research that Seth Colby conducted as a Visiting Scholar at CEBRI. The text provides
an analysis of institutional solutions to overcome industrial policies’ problems and the selected case
study is the Brazilian development bank, Banco Nacional do Desenvolvimento Econômico e Social
(BNDES). After analyzing the actions that support development in Brazil, the author seeks to analyze
whether this model would suit other markets, especially other developing countries.
We recognize that this topic is of crucial importance nowadays, when developed nations are
facing economic constraints and emerging powers increase their presence in the global scene. We truly
hope that this publication will contribute to a better understanding of mechanisms that can foster
development.
Maria Fatima Berardinelli Arraes de Oliveira
Director of CEBRI
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Explaining the BNDES: what it is,
what it does and how it works
1. Introduction
The Banco Nacional de Desenvolvimento Econômico e Social (BNDES) is Brazil’s premier development bank, providing the bulk of long-term credit in the country and assisting in the implementation of industrial policy. The bank provides more than 70 percent of long-term bank lending in the
country (see Figure 1), and it is the largest source of investment in industry and infrastructure after retained earnings (see Figure 2). The BNDES provides subsidized financing in a country where credit is
expensive by international standards. Despite the below market rates that it provides to its costumers,
the bank is extremely profitable. In 2011, the BNDES generated US$ 4.5 billion in profit. In the same
year, it lent three times more than the World Bank and is now the largest creditor in South America.
The growing relevance of the BNDES inside and outside of Brazil has prompted greater interest in the organization. This document provides a brief overview of the development bank, explaining
what it does in the Brazilian context. It compares the performance of the BNDES to other banking institutions and discusses the organizational mechanisms that explain the bank’s operational efficiency.
Figure 1: Bank loans in 2011 (maturity 3 years or more)
Source: BNDES
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2. Brief history
Key Figures (2011)
Founded in 1952, the BNDES was designed to mobilize and channel investment into economically productive projects.2 In the years after World War II, the United States pledged a large foreign
aid package to Brazil that was intended to alleviate infrastructure bottlenecks. In order to receive these
funds, the federal government needed a local institution that could allocate financing using economic
criteria. Brazil created the BNDES, a state-owned development bank, to serve this function. With
time, the bank emerged as one of the primary conduits for state investment, developing expertise in
economic analysis and planning in the process.
The activities of the BNDES reflect the changing economic policies of the country. In the
1950s, the bank supported infrastructure projects and basic industries. In the 1970s, it supported an
import substitution industrialization policy that focused on the domestic production of capital goods.
Its focus switched to privatization and competitiveness in the late 1980s and 1990s.
In recent years, the bank has assumed a more active role, supporting strategic sectors of the
economy and financing the international expansion of national champions. It has also resumed its role
as a major financier of infrastructure projects.
The BNDES was originally called the Banco Nacional de Desenvolvimento Econômico (BNDE) until the “S” was added
in 1982. To avoid confusion, this dissertation will use the BNDES to refer the development bank regardless of the time
period.
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3. Why does the BNDES exist?
Economists like Gerschenkron (1962) have argued that states can mobilize savings and channel
investment in the absence of a developed financial system. According to this argument, the role of the
state should diminish as economic modernization occurs.
When the bank was created in 1952, the government was the only actor that could feasibly mobilize the levels of savings needed for investment. The country did not possess a sophisticated financial
industry with the required expertise. International capital flows were extremely restricted, and local
projects had difficulty accessing foreign investment. The private markets failed to supply the financing required for economic growth. The BNDES was thus an institutional solution to a market failure.
Sixty years later, the BNDES continues to play a dominant role in the economy despite the existence of sophisticated domestic financial markets and greater openness to international capital flows.
What explains the continued relevance of the bank in a more modern Brazil? The government relies on
the development bank to provide three distinct functions in the economy (see Table 1). 3
Figure 2: Sources of investment in industry and infrastructure (2001-2011)
Source: BNDES
Due to its limit in scope, this document does not evaluate whether or not these interventions are justified (i.e the
benefits of the interventions outweigh the costs) in the Brazilian case.
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3.1 Role 1: Response to market failure
The BNDES is an institutional response to perceived market failures in the domestic financial
market. The cost of credit in Brazil is among the highest of any major economy in the world. 4 The
annual interest rate on a business loan can range from 30 percent to 50 percent per year in the private
markets.5 In such an environment, the federal government feels compelled to provide subsidized credit
to productive sectors of the economy via the BNDES. For this reason, the bank is the primary source
for long-term credit within the country. 6 It also channels finance to areas of the economy that are underserviced by the private financial system like small-and-medium sized companies. The bank provides
subsidized credit to such areas giving little weight to the impact of a specific loan on the structural
profile of the economy. This type of blanket intervention is sometimes classified as a horizontal, meaning that policy is applied to all businesses within the economy/sector.
3.2 Role 2: Promoting economic upgrading
The BNDES also engages in activities that attempt to upgrade and modernize the economy.
These interventions are predicated on a Schumpeterian (1934) view of economic development that
focuses on the qualitative difference within the economy. Production and technological power are
asymmetrically distributed among agents, resulting in reinforcing comparative advantages. According
to this line of analysis, governments and other agents can reallocate the concentration of technological
and productive capacity creating new comparative advantages. In this role, the BNDES attempts to
modify the structure of the economy, channeling subsidized financing to strategic sectors.
Brazil has launched a number of economic programs designed to restructure and modernize
its productive capacity to varying levels of success. These programs include the Plano de Metas (19561961), Primeiro Plano Nacional de Desenvolvimento (I PND) (1972-1974), the Segundo Plano Nacional
de Desenvolvimento (II PND) (1975-1979), and the Política Industrial, Tecnológica e de Comercio Exterior (PITCE) (2004-2008).
For a discussion of the causes of high interest rates in Brazil see (Segura-Ubiergo 2012).
These rates started to decrease in 2012 when the central bank lowered the SELIC, the benchmark overnight interest rate.
6
It is possible that the BNDES’ dominant position in the country’s credit markets crowds-out private sector activity,
which would suggest that the Bank aggravates the very problem that it designed to mitigate.
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Explaining the BNDES: what it is,
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This strategy involves specific interventions that favor one sector over another. Credit given to
projects thought to have larger spillover effects receive larger subsidies than credit channeled to a lower
priority sector. These types of interventions are classified as vertical, policies that target individual sectors or firms.
3.3 Role 3: Counter-cyclical lending
The third role played by the bank is that of a counter-cyclical lender in which it channels
credit to the business sector during economic downturns. Lending from the private sector tends to
be pro-cyclical. Banks extend credit during economic upturns and remove credit during economic
downturns, magnifying the volatility of the business cycle. In response, the government compels the
BNDES to increase lending to mitigate this problem. Neo-Keynesians have documented the instability of the financial system and argued that government should intervene to mitigate its inherent
volatility (Minsky 1984).
This role is a relatively new for the bank. The first time it engaged in counter-cyclical lending
was in 2003 when private creditors reduced lending because they were worried about the economic
implications of President Lula’s electoral victory. The Bank also engaged in counter-cyclical lending in
the aftermath of the 2008 Global Financial Crisis.
Table 1: Roles of BNDES
Source: Author
3.4 Which role are you talking about?
The fact that the BNDES engages in horizontal and vertical interventions complicates research
efforts that measure the impact of its activities. The BNDES, acting as the primary supplier of longterm credit, disburses large volumes of credit placing little importance on externalities and technologi10
Seth Colby
cal spillovers. The BNDES, acting as an organization that promotes economic upgrading, selectively
disburses credit and ranks projects in terms of their development impacts. Because the bank does not
publicly distinguish between the two types of activities, outside researchers struggle to isolate the impacts of the two types of activities.
The market failure and the Schumpeterian rationales are not mutually exclusive, and they often
call for similar policies. Nonetheless, much of the debate surrounding the efficacy and use of the bank
can be traced to the competing motivations for the organization’s existence. Studies that measure the
impact of BNDES credit on the productivity of its clients, often do no detect a positive correlation
(Sousa 2010; Lazzarini, Musacchio, and Bandeira-de-Mello 2012). Studies that measure the qualitative (or structural) impacts of the bank’s activity on the national economy generally do find a relationship between Bank’s activities and economic upgrading (Martins 1985; Sikkink 1991; Geddes 1994;
Bachiller Cabria 2012)
4. BNDES activities
The activities of the bank are diverse, providing financing to firms of all sizes as well as public
agencies. The bank supports activities in the agriculture, service, and industrial sectors. It finances
infrastructure projects and export activities, acting in a similar function to the Export-Import Bank
of the United States.
The BNDES has three subsidiaries that focus on distinct activities. The BNDES Participações
S.A (BNDESPar) engages in capital market transactions ranging from venture capital investment to
equity purchases in the secondary market. FINAME finances the purchase of equipment and other
basic inputs. BNDES Limited finances the international expansion of domestic firms.
Loans in excess of R$10 million are granted directly by the BNDES. Smaller transactions are
conducted indirectly through local commercial banks. Indirect lending is based on a wholesale lending model where the BNDES lends to retail banks that in turn lend directly to customers at subsidized
rates. The model allows the development bank to disburse large amounts of credit to clients throughout the country while maintaining a relatively small staff of around 2,500 employees (see Table 2).
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Explaining the BNDES: what it is,
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Table 2: Cost structure for BNDES loans
Source: BNDES
5. Funding sources
The bank has privileged access to below-market funding, allowing it to offer below-market (or
subsidized) loans to its costumers. Funding sources include retained earnings, loans from the National
Treasury, the Fundo de Amparo ao Trabalhador (FAT), PIS-Pasep, international loans, and capital
market operations (see Table 3).
Capital derived from the National Treasury, the FAT, and PIS-Pasep is provided at a below
market rate called the TJLP (Taxa de Juros de Longo Prazo). Set by the National Monetary Council,
the rate serves as a benchmark rate for subsidized credit in Brazil. The SELIC rate, the overnight rate
set by the central bank, serves as the benchmark for the country’s private credit markets. SELIC rates
were well over 10 percent for prior to 2012 (see Figure 3). 7
7
In 2011 and 2012, the SELIC rate fell significantly reaching a low annual rate of 7.25%.
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Table 3: BNDES Fundig Sources
The government provides subsidized credit to key sectors of the economy via the BNDES and
other public banks to mitigate the cost of credit in a high interest rate environment. The difference
between the SELIC rate and the TJLP determines the size of the subsidy offered by the BNDES. A
larger difference between the two rates implies a larger subsidy. The difference in rates has decreased
as interest rates have declined (see Figure 3).
It is the Brazilian taxpayer that bears the cost of the subsidy. The government borrows at the
SELIC rate and lends to the BNDES at the TJLP rate, resulting in a loss. A crude way to measure the
cost of the subsidy can be calculated by subtracting the TJLP rate from the SELIC rate and multiplying that figure by the total amount transferred to the BNDES. This method overstates the cost because
it does not account for the certain benefits like dividends paid by the bank to the federal government
and the indirect benefits of the bank’s lending activity. 8 In the case of funds deriving from the FAT
and the PIS-Pasep, workers are forgoing a higher return on investment when they are forced to loan
to the BNDES at the TJLP rate.
In theory, BNDES lending should stimulate economic growth, which boosts tax receipts. These indirect effects of bank
activities are difficult to measure however. For an example of article attempting to quantify the secondary benefits see
(Pereira, Simões, and Carvalhal 2011).
8
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Explaining the BNDES: what it is,
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Figure 3: TJLP and SELIC Rates (1995-2012)
6. Relation to rest of federal government
The BNDES is an enterprise wholly owned by the federal government that reports to the Ministry of Development, Industry, and Foreign Trade (see Figure 4). The BNDES is a public enterprise
that is directly answerable to the executive—the president of Brazil. Its interactions with the legislative
branch mainly involve briefings and consultations, giving Congress little direct power over the Bank.
Figure 4: Hierarchy of federal government and BNDES
Source: author
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The executive sets the agenda and mandate for the development bank, but bank personnel have
autonomy in terms of lending criteria and the approval of particular loans. The executive mandates
what must be done, and the BNDES decides how it will be executed. Various economic programs such
as the Plano de Metas, II PND, and the privatizations of the 1990s were political directives delegated
from the executive, yet the bank used its expertise and operational autonomy to decide how best to
implement these programs. The BNDES serves an additional role in the policy planning process. It is a
source of economic ideas that influence national political discourse. The technical ideas that originate
in the research department have influenced the economic agenda of several presidential administrations.
Figure 5: Role of BNDES in economic planning process
Source: author
Figure 5 shows the how the BNDES can influence economic policy. It can influence the national political agenda through the economic ideas that it articulates and promote, or it can modify
existing policy during implementation.
7. Evaluating operational performance
7.1 BNDES as a bank
Banks intermediate credit between savers and borrowers within the economy. A more efficient
bank can provide the credit intermediation service at a lower cost than a less efficient bank. By several
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Explaining the BNDES: what it is,
what it does and how it works
accounts the BNDES has achieved greater levels of profitability and efficiency than its counterparts.
This holds true when the Brazilian bank is compared to other development banks operating around
the world as well as when it is compared to private banks operating in Brazil.
A common way to compare the financial performance is to use accounting ratios. Table 4 lists
a set of ratios for a group of national and multi-lateral development banks. Return on equity (ROE)
and Return on Assets (ROA) are two financial ratios that measure how efficiently a firm uses investor
capital and capital stock, respectively. The BNDES has a higher ROE and ROA than other development banks listed. The Brazilian bank also generates more net income per employee and disburses
more loans per employee, suggesting that the added value of each employee is higher for the BNDES.
Table 4: Comparison of major development banks
A critique of state-owned banks is that they tend to be less efficient than their private sector
counterparts (La Porta, Lopez-de-Silanes, and Shleifer 2002). According to this argument, public
banks are not as exposed to market forces and thus have less incentive to intermediate credit in the
most cost-effective way. Despite being state-owned, the BNDES intermediates credit a cost that is less
than most private banks in Brazil. One simple measure of cost effectiveness is the net-interest margin
(NIM)—the average difference between the interest charged on the loan and the costs involved in
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making that loan (administrative costs, taxes, cost of capital, etc). Figure 6 shows the NIM for different banks operating within Brazil. BNDES has the lowest NIM of the banks surveyed, charging on
average 2.4 percent for all types of financial disbursements. The intermediation costs of BNDES loans
are even lower at 1.4 percent.
Somewhat unusual for a public institution, the cost structure of the BNDES is lower than its
private counterparts. Figure 7 shows the Cost-To-Income (CTI) ratio for banks operating within Brazil. CTI is the ratio of operational costs to operational (gross) income. This ratio measures the relative
costs involved with lending operations. The BNDES has a ratio that is roughly one third that of the
average competitor.
Figure 6: Average net interest margin of selected Brazilian banks (1996-2009)
Source: (Lazzarini, Musacchio, and Bandeira-de-Mello 2012)
Figure 7: Cost to income ratio of selected Brazilian banks (1996-2009)
Source: bankscope
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Explaining the BNDES: what it is,
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7.2 Explaining financial performance
There are two basic variables that affect the profitability of a firm—revenues and costs. The
profitability of the BNDES has increased substantially in recent years while operational costs have
remained relatively stable (see Figure 8).
Like most banks, the BNDES generates revenue using two basic strategies: 1) charging a spread
on the loans it makes and 2) investing its capital. Most of the increase in revenues in recent years has
come from investment rather that intermediating credit. In 2003, revenue from credit intermediation
was worth R$ 3.4 billion while revenue from investment R$ 1.5 billion. In 2011, revenue from credit
intermediation rose to R$ 6 billion while that from investment grew to $7 billion (see Figure 9).
The BNDES is the primary source of long-term credit in the country, and the bank may use
its dominant position to extract monopolistic rents from its clients. The data does not support this
view however as the NIM charged by the BNDES is lower than other private banks. Between 1996
and 2009, the average ROE for private banks in Brazil was 21.2 percent versus 14.9 percent for the
BNDES, suggesting that it was not employing a strategy of profit-maximization. 9
Figure 8: Non-interest operational costs and net income of BNDES (1996-2010)
Source: BNDES annual reports
9
Source: Bankscope
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Privileged access to more credit worthy borrowers could boost the bank’s bottom line. Given
the lower interest rates charged by the BNDES, troubled companies might default on other lenders
before they decide to default on the bank’s loans. The extremely low default rates of the BNDES suggest that this might be the case (see Table 5). Efforts to crowd-in private sector investors and encourage
them to co-invest with the BNDES should mitigate this effect since this would give private investors
access to the credit-worthy clients of the BNDES.
Figure 9: BNDES income from interest and investments (2003-2011)
Source: BNDES
Table 5: Default rates
Source: BNDES and Brazilian Central Bank
BNDES classifies default as any loan that is 30 days overdue. The Brazilian central bank classifies default as any
loan that is 90 days overdue.
Profits may also derive from access to below-market cost of capital. The BNDES does not “capture” the profits that are associated with a subsidized lending source when making loans. It passes the
bulk of the subsidy onto its client base. The interest margin charged to its customers—NIM— at 1.4
percent is the lowest among the Brazilian banks listed in Figure 6, suggesting that little revenue is
derived from lending.
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Explaining the BNDES: what it is,
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Access to subsidized funding does enhance bank revenues stemming from capital investment.
Lazzarini et al (2012) estimate that the weighted average cost of capital is 5-10 percent lower than the
SELIC rate. This implies that the BNDES can make profits by simply re-investing its subsidized funds
in government bonds. In reality, the bulk of this subsidy is passed onto its clients when it extends
credit at a below market rate. The bank does park the subsidized funds in government bonds while
the capital is waiting to be deployed, and it is in these moments that the bank profits from the interest
rate differential.
It is important to note that significant investment revenue comes from the asset management
arm BNDESpar, which does not have direct access to subsidized funding sources. BNDESspar assets
have appreciated considerably since 2000, which contributes to the bank’s overall profitability.
In summary, a low cost structure, access to more credit-worthy clients, and a subsidized funding source all contribute to the impressive financial performance that the BNDES has produced in
recent years.
7.3 BNDES as a development bank
The “D” in the BNDES is for desenvolvimento, Portuguese for development. The title implies an
added sense of purpose and responsibility that goes beyond being a commercial bank. It is important
to ask whether the welfare gains that result from the bank’s activities outweigh the cost of the subsidy.
The lack of publicly available data regarding BNDES lending increases the measurement challenge. It releases very little information regarding individual loan data, complicating any attempt to
independently test for productivity gains at the firm level. As a result, researchers have to rely on aggregated data or measure lending indirectly.
It is very hard for researchers to detect effects using aggregated data. As mentioned above,
BNDES acts as a bank lending at subsidized rates to entire sectors of the economy, giving little importance to the development impact of a given loan. But BNDES also acts as a development institution where individual loans are issued precisely because of their anticipated impact. Distinguishing
between the two types of lending is complicated.
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Studies that distinguish between the two types of lending generally find evidence that certain
types of BNDES financing boosts firm productivity. Ottaviano and Sousa (2007) study two classes of
BNDES lending. The first class is a program that provides preapproved credit for capital purchases.
The second class is when BNDES actively participates in the approval process. The authors find that
the second type of lending boosts firm productivity but the first type does not. Coelho and De Negri
(2010) find that productivity gains associated with bank lending rises as firm size increases.
Studies that do no distinguish between broad-based lending and targeted lending generally find
no significant effect of BNDES activities on firm behavior. Sousa (2010) finds no effect of bank lending on firm productivity. Inoue, Lazzarini, and Musacchio (2011) find that BNDES lending boosts
productivity for firms that are finance constrained but find no effect when that constraint is relaxed.
Lazzarini, Musacchio, and Bandeira-de-Mello (2012) argue that borrowers benefit from lower financing costs rather than productivity increases.
At a more macro-level, BNDES lending does have an apparent effect on investment and employment. Borrowing firms are more likely to generate jobs and offer better pay (Torres Filho and
Puga 2006). Figure 10 shows the positive relationship between BNDES lending activity and investment levels in Brazil. The graph indicates that there is a diminishing rate of return in terms of bank
disbursement on investment levels. While disbursements nearly doubled between 2007 and 2010, the
country’s investment rate only increased by 2 percentage points of GDP. This suggests that while the
bank does support investment in country, its effects are limited.
Figure 10: BNDES disbursements and investment rates (1995-2011)
Source: BNDES, IBGE
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Explaining the BNDES: what it is,
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7.4 Do political interests affect lending behavior?
One of the central points of disagreement regarding development banks is whether they are
used for political purposes or whether they actually stimulate economic development. Castelar Pinheiro (2007) finds no evidence that the BNDES credit is being directed for political purposes. Other
studies do find linkages between political influence and the likelihood of receiving BNDES funding
(Carvalho 2010; Lazzarini, Musacchio, and Bandeira-de-Mello 2012).
There are two potential explanations for the presence of such a relationship. Politicians may
influence BNDES decision-making, causing the bank to make loans that it would not make in the
absence of coercive pressure. The other possibility is that the BNDES loans to successful firms, and
successful firms in Brazil tend to have a close relationship with elected officials. The two possibilities
differ in the direction of causality. In the first possibility, special interests cause the bank to lend to
certain companies. In the second possibility, lending opportunities associated with economic activity
prompt the BNDES to extend credit to these areas. The first possibility suggests that there is a problem
with institutional independence of the BNDES. The second possibility suggests that political actors
impact economic activity in Brazil, and BNDES lending simply reflects those trends.
The two studies that find a relationship between political influence and lending behavior do
not try to isolate the causal direction. Lazzarini et al. admit that BNDES is not prone to political manipulation and the second of the two possibilities is a more likely explanation for the relationship. A
review of the bank’s loan application process discussed later shows that it is very difficult for outsiders
to manipulate the loan approval process. This suggests that political interests have little influence over
specific lending decisions. If a relationship between BNDES lending and political influence exists, it
reflects the systemic prevalence of political influence in economic decision making in Brazil rather
than the political capture of the bank itself.
7.5 Crowding-in or crowding-out?
A common critique levied against the BNDES is that it displaces private sector activity, meaning that it uses its privileged access to below-market funding to outcompete private entities and stymies the development of financial markets. This critique implies that if the BNDES were to reduce the
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amount of credit that it extends, private financial institutions would enter into the market and supply
the country’s long-term credit needs.
There are reasons to be skeptical of this claim. The financial industry is the most profitable
sector in the Brazilian economy, and it has little incentive to invest in riskier long-term assets as long
as interest rates remain elevated. Banks and investors can make healthy returns investing in low-risk
government bonds. The incentive structure is changing as interest rates have come down in 2011 and
2012. Investors in search of yield will have to extend credit to the private sector in longer durations.
Prior to 2012 however, investors had little incentive to inhabit the market space of the BNDES.
In the case of large Brazilian firms, there is still a case to be made for BNDES lending. Critics
argue that the government should not be subsidizing credit for firms that can access the cheaper interest rates available in the international markets. Firms that borrow abroad to pay for domestic projects
are exposed to currency risk. They have to borrow in a foreign currency (usually US dollars) to finance
an investment in Brazilian Reais. Financial products that hedge currency risk are still very expensive
due to the large interest rate differential between Brazil and the developed economies. Thus, there is a
reasonable argument to be made that the domestic cost of capital is prohibitively high for large firms
as well and that access to subsidized credit from the BNDES may be appropriate in some cases.
Brazil’s reliance on one state-owned financial institution to provide the bulk of long-term financing is far from ideal. Until investors have an incentive to provide long-term credit in larger supply, BNDES will continue to dominate the market space however. Bank management, recognizing
the drawbacks of the bank’s dominant position, has created programs intended to crowd-in private
investment, favoring projects that leverage private capital and supporting the development of domestic
capital markets.
8. Explaining the operating efficiency of the BNDES
Creating a government institution that is capable of identifying and financing investments using economic criteria is difficult. Many governments have created development banks that have failed
to perform effectively, be it for political interference or be it for insufficient capacity (Sapienza 2004;
Dinç 2005; Khwaja and Mian 2005; Claessens, Feijen, and Laeven 2008; Cole 2009; Dinc and Gupta
2011). The BNDES is unique in having achieved reasonable levels of operational efficiency.
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Explaining the BNDES: what it is,
what it does and how it works
8.1 Private sector efficiency in a public organization
It is helpful to discus challenges involved in the creation and maintenance of efficient public
sector organizations. The public sector is often perceived to be slow and inefficient in comparison to
the private sector. Performance in the two sectors differs because they are beholden to two distinct
systems of incentives and constraints. The incentives found in the private sector are generally more
straightforward. Businesses usually have only one stakeholder of importance: an owner (or shareholders) who is concerned with profitability. The ultimate goal of the agent is profit, an output that is
straightforward to measure.
The system found in the public sector is more complex. The public sector often has multiple
stakeholders, which place varied, and often conflicting, demands on the agency. Some stakeholders
are concerned with inputs as well as outputs. For example, agencies might be required to contract
only unionized labor, meet a particular diversity requirement, or follow predetermined environmental
standards. There is also a greater scrutiny on the method (or means) of operation in the public sector.
Not only do citizens care about the impact public program, they are more likely to care about how the
program was achieved.
Private firms may impact different groups, but the overarching concern is profit. Governments
often require public agencies to perform several tasks that are not unified by a single-bottom line.
Moreover, the outputs are often difficult to measure. How do you measure the output of the foreign
ministry?
In the private sector, aligning the interest of the employee with the firm usually involves linking
their compensation to the firm’s profitability. Public organizations usually have a standardized salary
scale complicating the use of performance based-incentive schemes. In its place, public organizations
often try to cultivate a sense of mission or purpose that depends on a fierce dedication to a particular
group or ethical goal.
8.2 BNDES: A hybrid structure
The operational performance of BNDES derives from a hybrid organizational structure that
combines incentives found in the private sector with those found in the public sector (see Table 6).
The organizational structure incentivizes its staff to pursue profit and long-term financial sustainabil24
Seth Colby
ity while a values-based mission encourages personnel to work for the public interest, specifically the
economic development of the country. A special legal structure insulates the bank against interference and grants it high levels of operational autonomy, and a technocratic ethos that is cultivated and
enforced internally incentivizes personnel to competently implement policies. The mix of formal and
informal mechanisms explains how the BNDES manages to simultaneously defend its interests, maintain its financial viability, and administer sophisticated investment strategies with efficiency.
Table 6: Incentive Structure in Private Sector, Public Sector, and BNDES
Source: Author
The incentive structure that governs the BNDES resembles the private sector much more than
the average state institution. The organization is structured as a bank, and the money that it disburses
must be repaid with interest. The primary measure of performance is the financial health of the organization. Protection of the balance sheet is a central concern for leadership and staff, and they refuse
to agree to any activities that pose a legitimate risk to the financial sustainability of the organization.
The legal structure that defines the relationship of the BNDES with the rest of the government
restricts the channels of influence. Unlike many agencies that must report to the executive and the
legislature, the executive is the only part of government with major influence over the bank (see Figure
25
Explaining the BNDES: what it is,
what it does and how it works
11). The executive has control over the appointment of senior staff and budgetary issues. The legislative
branch has few formal mechanisms with which it can use to exert influence over the bank. Reporting
to only one source helps clarify the objective of the organization and reduce the chances that it receives
conflicting mandates that undermine operational performance.
Figure 11: BNDES Relationship with External Actors
Source: Author
An assertive and independent staff limits external influence over the organization. The bank’s
bylaws state that political appointees can fill only two percent of the staff positions. While the executive can choose to augment funding with transfers from the National Treasury, the bank has access to
several independent funding sources that do not require external approval (e.g. retained earnings, the
FAT, and issuing debt in the markets). Budgetary and personnel decisions provide limited opportunities to exert influence over the bank.
While the bank is insulated from external influence, performance depends on the competence
and the professional conduct of its staff. The internal governance structure incentivizes employees to
make decisions that support the mission and values of the organization. All permanent staff must sit
for a rigorous examination that tests for professional skills, and only those with the highest scores are
admitted. Normally, only those applicants who score in the top 99th percentile are granted employment. The bank invests in human capital, dedicating significant resources to the continued training
and education of its staff.
26
Seth Colby
A system of formal and informal mechanisms creates an incentive system that aligns the staffs’
interest with the long-term success of BNDES. The loan approval process requires the signatures of the
technical team reviewing the request, all levels of management, and a vote from the bank’s governing
council (see Figure 12). If a problem arises regarding a particular loan years later, all those who sign
off on the investment can be called in for questioning. Decisions are frequently made at the committee
level. This approach assures that decisions are reviewed and approved by staff members with different perspectives and expertise, increasing levels of transparency and accountability. Working groups
involved in the loan-making process are typically made up of an economist, lawyer, engineer, and an
accountant.
Figure 12: BNDES credit approval process
Source: Author
Since most staff spend their entire careers at the bank, they are aware that they will be held accountable for a decision years after it was made. A mission or dedication to the development of Brazil
influences staff behavior as well. This esprit de corps is a tool commonly used in the public sector to
incentivize behavior in accordance with the organizational interest.
27
Explaining the BNDES: what it is,
what it does and how it works
9. BNDES: an exportable development model?
Governments looking to invest in the economy often lack an efficient mechanism in which to
do so. While state-owned banks have been considered prone to rent-seeking and low levels of operational efficiency (La Porta, Lopez-de-Silanes, and Shleifer 2002), the BNDES has managed to avoid
these problems, suggesting that it has lessons to offer for other countries wishing to create and improve
upon similar organizations.
9.1 Development banks must respond to local conditions
Development banks are created to address particular deficiencies in the local markets. For
example, some banks are focused on providing financing for small and medium-size businesses while
others focus on sectors prone to excessive volatility. Since development banks are created to address
local problems, it is unlikely that the entire form and function of a bank could be transported successfully from one country to another.
One of the primary roles of the BNDES is to supply reasonably priced credit to private companies, mitigating the deleterious effects of a high-interest environment. Countries with lower financing
costs are less likely to need a development bank that plays such a role. Other roles of the BNDES like
targeted lending that promotes economic upgrading and counter-cyclical lending may have greater
applicability in other countries depending on their local needs.
9.2 Development banks must be well-run
While development banks serve different purposes in different situations, operational performance is a fundamental requirement of any successful bank. Organizational traits that encourage efficiency and accountability are not endemic to the Brazilian context. Those interested in replicating the
operational performance of the BNDES in other countries should consider institutional mechanisms
that restrict influence over the bank, protect operational autonomy, provide metrics for performance,
attract high levels of human capital, and create an internal governance structure that aligns employee
interests with those of the organization. When it is possible, it is helpful to replicate and mimic the
incentive system found in the private sector to the extent that it is possible. The need to generate a
minimum return on investment and an incentive structure that encourages employees to work towards
28
Seth Colby
the long-term interest of the organization help improve organizational performance in many different
environments.
A study of the BNDES offers lessons for other developing countries trying to create capable
state institutions, yet the most important lessons are less about what the Bank does and more about
how it manages to accomplish its tasks with relative efficiency.
29
Explaining the BNDES: what it is,
what it does and how it works
Work Cited
- Bachiller Cabria, Juan Vicente. 2012. El BNDES y las estrategias de desarrollo económico en
Brasil. Banca pública de desarrollo, instituciones gubernamentales y trayectorias de intervención estatal
(1952-2010), Facultad de Derecho, Universidad de Salamanca.
- Carvalho, D.R. 2010. “The Real Effects of Government-Owned Banks: Evidence from an
Emerging Market.”
- Castelar Pinheiro, Armando. 2007. “Bancos públicos no Brasil: para onde ir?” In Mercado de
Capitais e Bancos Púvlicos: análise e experiências comparadas, edited by Armando Castelar Pinheiro and
Luiz Chrysostomo de Oliveira Filho. Rio de Janeiro: ANBID.
- Claessens, Stijn, Erik Feijen, and Luc Laeven. 2008. “Political connections and preferential
access to finance: The role of campaign contributions.” Journal of Financial Economics no. 88 (3):554580.
- Coelho, Danilo, and João Alberto De Negri. 2010. Impacto do financiamento do BNDES
sobre a produtividade das empresas: uma aplicação do efeito quantílico de tratamento. Working paper,
IPEA.
- Cole, S. 2009. “Fixing market failures or fixing elections? Agricultural credit in India.” American Economic Journal: Applied Economics no. 1 (1):219-250.
- Dinc, I. Serdar, and Nandini Gupta. 2011. “The Decision to Privatize: Finance and Politics.”
The Journal of Finance no. 66 (1):241-269. doi: 10.1111/j.1540-6261.2010.01631.x.
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Journal of Economics no. 120:1371-1411.
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- Lazzarini, Sergio, Aldo Musacchio, and Rodrigo Bandeira-de-Mello. 2012. What do Development Banks Do? Evidence from Brazil, 2002-2009. http://ssrn.com/abstract=1969843.
- Martins, Luciano. 1985. Estado Capitalista e Burocracia no Brasil pós-64. Vol. 82: Paz e Terra
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- Minsky, Hyman. 1984. Can “ it” happen again?: essays on instability and finance. Armock, NY:
ME Sharpe
- Ottaviano, Gianmarco, and Filipe Lage Sousa. 2007. The effects of BNDES loans on productivity of Brazilian manufacturing firms. In Working Paper.
- Pereira, Thiago Ravelo, Adriana Simões, and André Carvalhal. 2011. Mensurando o Resultado Fiscal Das Operações de Empréstimo do Tesouro ao BNDES: Custo ou ganha líquido Esperado
para a uniáo? . In Texto para Discussão IPEA.
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