How a museum fire helped shape Brazil’s endowment fund regulation

. Feb 22, 2019
national museum endowment funds Rio's 200-year-old National Museum was destroyed last year

On September 3, 2018, Brazilians woke up to a loss for which may never be compensated. The country’s 200-year-old National Museum burst into flames, turning its vast collection to ashes and exposing decades of neglect toward the country’s cultural heritage. Unlike most cases, the museum fire actually inspired action to solve one of the sector’s main problems: its sheer lack of funding. The country decided to settle on a way to use endowment funds to support culture and education in Brazil.

Endowment funds are created using financial donations to support a cause or institution. The money is invested in financial markets and its profits are used to fund all kinds of projects: museum conservations, academic or medical research, college scholarships, humanitarian actions, and environmental protection initiatives. Since the main capital is preserved, endowment funds are seen as a perpetual source of money for tertiary entities, guaranteeing their financial sustainability in spite of paltry government resources.

</span></p> <div id="attachment_14271" style="width: 1010px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-14271" loading="lazy" class="size-full wp-image-14271" src="" alt="national museum fire" width="1000" height="666" srcset=" 1000w, 300w, 768w, 610w" sizes="(max-width: 1000px) 100vw, 1000px" /><p id="caption-attachment-14271" class="wp-caption-text">Rio&#8217;s National Museum in flames</p></div> <p><span style="font-weight: 400;">The model is well-established around the world. In the United States, billion-dollar endowments support some of the country&#8217;s most prestigious universities. Harvard University, for instance, has a fund worth </span><a href=""><span style="font-weight: 400;">USD 39.2 billion</span></a><span style="font-weight: 400;">, accounting for </span><a href=""><span style="font-weight: 400;">35 percent of the university’s income. </span></a></p> <p><span style="font-weight: 400;">In Brazil, this kind of investment has been discussed and tested for decades, already to some success. For example, the </span><a href=""><span style="font-weight: 400;">endowment fund for Fundação Getúlio Vargas&#8217; law school</span></a><span style="font-weight: 400;">, one of the most prestigious private colleges in Brazil, started receiving very small donations and now manages almost BRL 3 million in assets, providing scholarships for students that cannot afford tuition fees. </span></p> <p><span style="font-weight: 400;">However, there wasn’t any specific legal framework for these funds, which created a lack of legal security for their implementation on a broader scale. After the museum fire, the government saw endowment funds as an opportunity to guarantee resources for these institutions and presented a decree to regulate them, passing over the heads of bills which were already being discussed in Congress. In a matter of a few months, the measure become law, but not without controversy. </span></p> <p><span style="font-weight: 400;">“We had the fire and the subsequent feeling that society needed to come up with a quick answer to address what happened. I think the fact that endowment funds appeared as this answer shows how mature the debate already was in Brazil. Though it would have been better to have a bill [as opposed to a decree], I believe that we were able to achieve results anyway,” said Aline Viotto, Advocacy Coordinator at </span><a href=""><span style="font-weight: 400;">GIFE</span></a><span style="font-weight: 400;">, an association that supports private investments in social affairs.</span></p> <h2>Only fools rush in</h2> <p><span style="font-weight: 400;">But, as we say in Brazil, haste is the enemy of perfection. Approved during the </span><a href=""><span style="font-weight: 400;">last days of Mr. Michel Temer&#8217;s tenure as president</span></a><span style="font-weight: 400;">, the bill had to be <a href="">signed by President Jair Bolsonaro before coming into effect</a>. Elected under </span><a href=""><span style="font-weight: 400;">a strong fiscal adjustment platform</span></a><span style="font-weight: 400;">, Mr. Bolsonaro vetoed what experts considered a core point in the law: tax incentives. </span></p> <p><span style="font-weight: 400;">Most of the instruments created to support culture and education in Brazil have some sort of tax break as a counterpoint. One example is the </span><a href=""><span style="font-weight: 400;">Rouanet Law</span></a><span style="font-weight: 400;">, which allows the government to surrender tax revenue if companies invest the money sponsoring cultural initiatives.</span></p> <div id="attachment_14272" style="width: 1010px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-14272" loading="lazy" class="wp-image-14272 size-full" src="" alt="harvard university" width="1000" height="674" srcset=" 1000w, 300w, 768w, 610w" sizes="(max-width: 1000px) 100vw, 1000px" /><p id="caption-attachment-14272" class="wp-caption-text">Harvard University has an endowment fund worth USD 39.2 billion</p></div> <p><span style="font-weight: 400;">“Fiscal counterparts are a major part in encouraging donations in Brazil. Including some sort of tax benefits would have made [the law] a home run. Though I do think the law has merits, such as ensuring legal security and fostering the media buzz around the topic, some challenges are still to be faced, such as the way the funds are taxed,” says Rafael Andrade, a director at FGV’s Law school endowment fund.</span></p> <p><span style="font-weight: 400;">In Brazil, donations for the tertiary sector are taxed just like any others—inheritances, for example. Endowment fund donations are not only subject to that, but the funds are also taxed on the profit they generate in financial markets—the very same money that supports the initiatives. “That is something the law didn’t fix. I hope that, if we have a better fiscal scenario in the future, the government may be able to offer tax exemptions,” explains Mr. Andrade.</span></p> <h2>Compliance issues</h2> <p><span style="font-weight: 400;">One of the law’s major concerns is how to guarantee the money will be properly used. The separation between managing and implementing entities was adopted as a compliance tool. That means one entity receives the resources, and another actually uses them.</span></p> <p><span style="font-weight: 400;">According to Beatriz Martinez, a specialist in estate and succession law at the Ulhôa Canto advocacy firm, “the law, if applied, seems fit to guarantee good compliance for endowment funds. There are solid compliance and transparency rules, such as managing resources in an independent manner, aiming to avoid political interference and corruption risks,” which were demands of the donors, as she pointed out.</span></p> <p><span style="font-weight: 400;">But should the fear of corruption restrict the access to more funds? </span></p> <p><span style="font-weight: 400;">Jair Bolsonaro vetoed the possibility for foundations to have endowment funds, considering that it could </span><a href=""><span style="font-weight: 400;">“compromise the segregation of roles”</span></a><span style="font-weight: 400;"> and “harm the policy’s credibility.” </span></p> <p><span style="font-weight: 400;">For the foundations, this was a big blow. According to Fernando Peregrino, president of </span><a href=""><span style="font-weight: 400;">Confies</span></a><span style="font-weight: 400;">, a council that represents foundations supporting research in 133 universities in Brazil, they are already working to remove the presidential vetoes in Congress, as they do not agree with the concerns raised. </span></p> <p><span style="font-weight: 400;">“The veto mentions a conflict in interests. What conflict? We do not perform the research, we just manage the resources. (&#8230;)  Besides, it’s been 25 years since we were established by law, there’s credibility, we have control mechanisms. Our foundations at Confies manage more than BRL 5 billion each year. How come we cannot manage a fund?” questions Mr. Peregrino.  </span></p> <h2>Beyond the vetoes</h2> <p><span style="font-weight: 400;">Although the vetoes are seen as negative additions to the law, they are not the worst obstacle. The fact is that Brazil does not have a culture of donations and that translates into the low level of engagement from society in social issues or economic stimuli. </span></p> <p><span style="font-weight: 400;">In fact, universities such as the University of São Paulo, the largest and most important in the country, </span><a href=""><span style="font-weight: 400;">rely almost 100 percent on government funding</span></a><span style="font-weight: 400;">—and their budgets are almost completely hamstrung by payroll, leaving little room for research or other investments. </span></p> <p><span style="font-weight: 400;">The government is the major sponsor for R&amp;D in Brazil and the investment is minimal compared to other countries. </span><a href=""><span style="font-weight: 400;">According to the most recent data</span></a><span style="font-weight: 400;">, Brazil invested 1.27 percent of its GDP on science and technology. Meanwhile, </span><a href=""><span style="font-weight: 400;">a study by Brazil’s national industry confederation</span></a><span style="font-weight: 400;"> estimates American and Chinese investments in the field at 2.7 percent and 2.3 percent of their GDP, respectively.</span></p> <p><span style="font-weight: 400;">The consistency of funds is another issue. </span><a href=""><span style="font-weight: 400;">From 2015 to 2019</span></a><span style="font-weight: 400;">, the budget of the Ministry of Science and Technology Ministry was cut by almost BRL 3 billion, which may be explained by the financial crisis. </span></p> <p><span style="font-weight: 400;">Obviously, endowment funds are not the only option for financing, but they may be one of the most reliable alternatives in difficult times, when there is a scarcity of resources. A GIFE study conducted among its members shows that between 2014 and 2016, those who had 30 percent of their budgets funded by endowment funds lost 2.19 percent of their volume of investments, while the entire study population lost 25.62 percent. </span></p> <p><span style="font-weight: 400;">The sector’s hope is that the new law, coupled with more knowledge about endowment funds, may help them to become a more popular tool and perhaps change the Brazilian mindset. </span></p> <p><span style="font-weight: 400;">“I don’t think that not having a donation culture means that Brazilians are not sensitive to it. It just means that it is not a habit. I believe that we need better projects. When you have that and legal security, it is easier to have donations,” says Mr. Andrade.

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Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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