A Strategy to Reach Decentralization and Qualitative Reform of

Brazilian Public Services

Proposition of Action to Brazilian Public Administration

QUALITATIVE REFORM STRATEGY 2

Brazil’s Economic Challenges

1940 1950 1960 1970 1980 1990 2000 2010

1315.18 16.1

21.4 22.21

18.2416.68 17.5

2.7 3.42 4.22 3.71 2.68 2.58 1.92 2

14.216.4

20

25.2 25.2

3335 35

FISCAL LOAD

PUBLIC INVESTME

NT

TOTAL INVESTMENT

QUALITATIVE REFORM STRATEGY 3

Gross Saving Rates (% of GNP)

2005 2006 2007 2008 2009

17 17

18 18

16

QUALITATIVE REFORM STRATEGY 4

Total Public Investment Rates (% of GNP)

1940 1950 1960 1970 1980 1990 2000 2010

2.73.42

4.223.71

2.68 2.581.92 2

QUALITATIVE REFORM STRATEGY 5

Main Causes of Low Public Investment Rates

O Low ProductivityO Excess of Current ExpensesO Waste and CorruptionO Lack of PlanningO Decisions Made only through

Political Criteria

QUALITATIVE REFORM STRATEGY 6

REVENUE DISTRIBUTION AMONG FEDERATE ENTITIES

60

25

15

Federal State Municipal

QUALITATIVE REFORM STRATEGY 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 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 9

FSIF Financial Prospectives (GNP of US$ 2,3 trillions)

LEVEL OF GOVERNMEN

T

MANDATORY SAVINGS (% OF TOTAL INCOME)

INVESTMENT (% OF

SAVINGS)

ESTIMATED SAVINGS

AMOUNT PER YEAR (in US$

Billions)

ESTIMATED INVESTMENT AMOUNT PER YEAR (In US$

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 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 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 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 13

New Public Accounting and Public Investments

QUALITATIVE REFORM STRATEGY 14

In The Short RunO 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 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 FSIF

Quotas)

Intangibles

QUALITATIVE REFORM STRATEGY 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 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 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.