How to boost government saving and investment in Brazil

1. A Strategy to Reach
Decentralization and
Qualitative Reform of Brazilian
Public Services
Proposition of Action to Brazilian Public
Administration

2. Brazil’s Economic Challenges
FISCAL LOAD
35 35
33
25.2 25.2
21.4 22.21
20 TOTAL INVESTMENT
18.24 17.5
16.4 16.1 16.68
15.18
14.2
13
PUBLIC
4.22 3.71
INVESTMENT
2.7 3.42 2.68 2.58 1.92 2
1940 1950 1960 1970 1980 1990 2000 2010
QUALITATIVE REFORM STRATEGY 2

3. Gross Saving Rates
(% of GNP)
18 18
17 17
16
2005 2006 2007 2008 2009
QUALITATIVE REFORM STRATEGY 3

4. Total Public Investment Rates
(% of GNP)
4.22 3.71
3.42
2.7 2.68 2.58
1.92 2
1940 1950 1960 1970 1980 1990 2000 2010
QUALITATIVE REFORM STRATEGY 4

5. Main Causes of Low Public Investment
Rates
O Low Productivity
O Excess of Current Expenses
O Waste and Corruption
O Lack of Planning
O Decisions Made only through Political
Criteria
QUALITATIVE REFORM STRATEGY 5

6. REVENUE DISTRIBUTION AMONG FEDERATE ENTITIES
15
25
60
Federal State Municipal
QUALITATIVE REFORM STRATEGY 6

7. What Got to Be Done Without Further Delay?
O Increase saving rates in the 3 levels of
government: Federal, State and Municipal.
O Increase total public investment rates at
least to 10% of GNP, in order to assure a
steady and sound GNP Growth of at least
5% a year.
O Redistribute investment resources between
the 3 levels of government, to decentralize
and easy the fiscal burns of states and
municipalities.
QUALITATIVE REFORM STRATEGY 7

8. How to Reach It?
O By reforming the Fiscal Risponsibility Law (Lei de Responsabilidade
Fiscal) to turn mandatory a level of savings (and so of Investment)
to the 3 levels of government.
O Savings of 3 levels of government should be gathered in the form
of FISF Quotas, in a Federative Savings and Investment Fund
(FSIF, similar to education’s FUNDEB), funds to be rescued under
certain rules.
O FSIF would make a redistribution of investment funds between the
3 levels of government, easing the unbalance of today.
O FSIF should be administred by BNDES, who would appraise the
proposed projects and liberate the funds to finance them.
QUALITATIVE REFORM STRATEGY 8

9. FSIF Financial Prospectives
(GNP of US$ 2,3 trillions)
LEVEL OF MANDATORY INVESTMENT ESTIMATED ESTIMATED
GOVERNMENT SAVINGS (% OF (% OF SAVINGS INVESTMENT
TOTAL SAVINGS) AMOUNT PER AMOUNT PER
YEAR (in US$ YEAR (In US$
INCOME) Billions) Billions)
FEDERAL 6 15 48 12
STATE 2.5 25 20 20
MUNICIPAL 1.5 60 12 48
TOTAL 10 100 80 80
QUALITATIVE REFORM STRATEGY 9

10. FSIF Investment Rules
 Savings will be recovered by the levels of
government only by presentation of
projects in areas to be specified by law, to
be appraised and approved by FSIF
manager (BNDES).
 To each state and city will be assured
access to investment funds by at least the
amount of their own saving.
 Acess to investment funds in excess of
their own savings will depend on certains
circunstances, to be regulated by law.
QUALITATIVE REFORM STRATEGY 10

11. Possible Consequences of the FSIF
Strategy to Public Services
 Increase government saving rates
 Increase public investment, boosting the economy in
general
 Reach a desirable, rational and beneficial
Decentralization of resources to the state and municipal
level
 Promote a Qualitative Reform of public administration
 Allow the implementation of projects in key areas of
government, renewing infrastructure and public
services
 Boost public services’ efficiency and quality
 Reduce public debt in the long run
QUALITATIVE REFORM STRATEGY 11

12. Possible Consequences of FSIF to
Taxpayers and Society as a Whole
 Allow consistent reduction of interest rates
 Easy taxation burns
 Get a steady growth of GNP
 Easy inflationary pressures
 Better public services
 Allow private investment to grow steadly
 Allow investment to ameliorate the
infraestructure in the country and in the
cities
 Better quality of life to the population
QUALITATIVE REFORM STRATEGY 12

13. New Public Accounting and
Public Investments
QUALITATIVE REFORM STRATEGY 13

14. In The Short Run
O Legislation would be passed allowing the
Sub-National Federate Entities, during the
first five years , to transform part of their
debt into capital, as Quotas of FSIF
O The amount of debt to be transformed into
capital (FSIF Quotas) would correspond to
1.5% of gross (Municipios) or 2,5% (States)
of the fiscal year total revenues of the Sub-
National Federate Entities
O Question: How would this operation be
accounted in the public entities balance
sheet?
QUALITATIVE REFORM STRATEGY 14

15. Short Run Balance Sheet (?)
ASSETS LIABILITIES
Current Assets Current Liabilities
Non-Current Assets Non-Current Liabilities (Less
Deduction to Invest in FSIF
Quotas)
Fixed Assets Net Worth= Public Savings
(Capital coming from
Deductions of Public Debt as
Intangibles
FSIF Quotas)
QUALITATIVE REFORM STRATEGY 15

16. IN THE LONG RUN: SOME QUESTIONS TO THE NEW
PUBLIC ACCOUNTING SPECIALISTS
When new public sector accounting rules are fully
enforced, is it possible that, in a public balance sheet,
Net Worth = Public Savings= FSIF Quotas? If so, then:
 How large has PS to be to generate “public value” ?
 How PS cope with the cost of capital in the public
sector (interest paid in public debt?)
 How to measure ROI in public sector through PS?
 All this point to the need of building up a culture of
assets and liabilities management in government, as
done in a private company, what certainly will
demands public sector task force preparation and
training
QUALITATIVE REFORM STRATEGY 16

17. How Public Balance Sheet will be In The
Long Run, Under NPA?
ASSETS LIABILITIES
Current Assets Current Liabilities
Non-Current Assets Non-Current Liabilities
Fixed Assets Net Worth(=Public
Savings)=FSIF Quotas
Intangibles
QUALITATIVE REFORM STRATEGY 17

18. Conclusions
 Increasing Savings and Investment by government
is a key issue to transform Brazil into a real
developed country, socially fair.
 Increasing S and I by government should be
reached by a strategy based upon a change in the
Fiscal Risponsibility Law, in order to become
savings and investment mandatory, gathered in a
Federative Fund.
 This would bring positive consequences to the
public services and to society as a whole.
 In the future, when New Public Accounting Rules
are fully deployed, public Saving and Investment
levels should be considered the rate of success or
failure of a public administration.
QUALITATIVE REFORM STRATEGY 18