Performance Budgeting and Cost Accounting in Brazil: The State of São Paulo´s recent experience

1. Performance Budgeting and CostAccounting in Brazil: The State of São Paulo´s recent experience Asia-Pacific and Latin-America Interregional Forum on Managing for Results Decentralization and the Changing Role of Central Finance Agencies Inter-American Development Bank Manila, November, 2012

2. The State of São Paulo *GDP between the Netherlands ( US$ 840 – 17th) and Turkey (US$ 778 – 18th) • 34% of the total Brazilian GDP: • - 7% of the agribusiness production; • - 40% of the industrial production; • - 34% of the services activities; • 23% of total exports and 36% of total imports of Brazil and • 40% of the total tax collection; • Main gas reserves of Pre-Salt and estimated oil production of 1.8 million gallons/day (2015 a 2031). 2

3. São Paulo´s Fiscal adjustment The Fiscal Adjustment process in the State of São Paulo began in 1995, focusing mainly on three major aspects: 1. Asset restructuring and implementation of a broad privatization program; 2. Debt restructuring: states fiscal agreement with the Federal Government (PAF), which refinanced most of the state´s debt; 3. New management procedures and control systems – which improved tax collection and reduced tax evasion without raising taxes; more efficiency in government spending mainly by reducing public expenditures.

4. São Paulo´s Fiscal adjustment Institutional Framework The fiscal adjustment has been nationally implemented under the strict limits imposed by • The States Debt Restructuring and Fiscal Agreement (PAF: Programa de Reestruturação e Ajuste Fiscal, 1997) between the central government and most of the states of Brazil, including São Paulo • The Fiscal Responsibility Law (FRL), 2000 and the Fiscal Crimes Law (FCL), 2000

5. São Paulo´s Fiscal adjustment • Fiscal Adjustment Program in the State of São Paulo: Important Measures • Expenditures control included: the revision of services and construction contracts and the adoption of programs for voluntary retirement (15,000 employees retired between 1995 and 1998); • Control of public expenditures was implemented through various measures, specially the modernization of existing IT infrastructure, which also improved transparency, accountability and social control of the state management, such as: Financial Administration and Execution System (SIAFEM) and the State level public purchases and procurement System (BolsaEletrônica de Compras - BEC).

6. Total Revenues (R$ billion) 6

7. Total Expenditures (R$ billions) 7

8. Investments distribution *Non-Depedent SOE Companies do not depend on the State’s treasury resources to fund their current expenditures. Source: SIGEO Investments distribution

9. São Paulo fiscal overviewPrimary Surplus (R$ billion) 9

10. Net Debt/Net Current Revenues 10

11. Performance Budgeting • Background – the introduction of Performance Budgeting in the State of São Paulo • 1988 Federal Constitution: program budgeting already incorporated in the multi-year plan (PPA) - in the State of São Paulo: fully adopted in the PPA (2000-2003) • 1995 Federal State Reform Plan (Plano Diretor de Reforma do Aparelho do Estado - PDRAE): established management autonomy and commitment to results in all the three levels of government and in the three branches • In the State of São Paulo: LC 846/98 – contract management, Payment by Results (Sec. Education and Finance) • Results-oriented strategic management and contractualization • FAD (IMF) technical assistance • Implementation of both Programs: Performance Budgeting and Public Cost Accounting System

12. Performance Budgeting • Performance Budgeting: • Set goals with sector linkage regarding the strategic guidelines of the government defined in the PPA; • Identify data and information that are required to generate indicators, and define the goals to be reached based on the timeliness of the PPA; • The current PPA needs to incorporate some changes to improve its management for results approach on information, standard nomenclature and concepts, and allow for its execution to effectively generate useful information on decision-making; • Pilot project - Secretariat of Penitentiary Administration (2013) opportunity for training, testing and adjusting the new methodology; • Implementation of the new methodology on the existing financial execution systems (SIAFEM) by 2014; • Training program - implementation of the new methodology

13. Performance Budgeting • Performance Budgeting: • Preparation of a Manual on Managing for Results on Performance Budgeting - gradually implement the new methodology in all the state´s entities • Effective implementation horizon of the new PPA methodology is 2016-2019, the next three years should be used to test and refine the instrument.

14. The State of São Paulo´s Public Cost Accounting System (SCSP) • FAD (IMF) technical assistance, IDB loan (PROFISCO) • Provide consistent information to support decision making; strong link between costs of services and the activities, according to the multi-year plan (PPA) → a ‘toolbox’ that enables managers to improve the operational and strategic management of their public sector units. • Benchmark costs for public services (provided by public entities of the same sector, such as: schools, hospitals, prisons...) by using a standard methodology for all the state´s entities: using the data of the existing financial execution systems (SIAFEM) • Support the formulation of the multi-year plan (PPA) as well as the budget plan itself, bringing more realism and accuracy to the financial forecasts • Better accountability and transparency with quality information on the costs of public services

15. The State of São Paulo´s Public Cost Accounting System (SCSP) • In its first stage, the system will aim at estimating the cost of public services at the cost center level (hospitals, schools, penitentiaries, etc.), • Due to its conceptual and operational complexity, the implementation will be gradual and based on pilot projects in four different secretariats, such as: Health, Education, Penitentiary Administration and Social & Educational Services for criminal teenagers (CASA Foundation). • Pilot projects: identify the products and services provided by each unit, as well as its organizational structure; describe its responsibilities, activities, existing physical and financial resources, its clients and its main operational systems.

16. The State of São Paulo´s Public Costs System (SCSP) • The definition of services to use the new system should be aligned with the services identified in the PPA 2012-2015 and its subsequent revisions, according to the new methodology of managing for results on performance budgeting. • The Finance Secretariat (SEFAZ) will be responsible for the regulation, supervision and quality control of the cost accounting generated data, as well as the validation and production of cost accounting reports.

17. Conceptual and Logic Model of São Paulo´s Public Cost Accounting System SIAFEM (incl.payroll) PPA (SIMPA) Property/Estate Warehouse Siafísico/BEC (public purchases and procurement state system) SUCCESS CRITERIA: - Alignment - Sustainability - Availability - Use - Utility -Replicability Methodology? Systems? Information Systems -WP1 – Publc Services -WP2 – Cost Methods -WP3 – SIAFEM -WP4 - Questionnaire Governor PPA (planners) Budget authorities Sectorial Secretaries Sec.of Finance Sec. of Management Public Entities Managers Ajdusted Financial Execution Decision making - Academic research - International experience - Characteristics of public services - Decision making models - Adherence to the State of SP´s reality - Availability of systems and resources - Existing legislation $ Management Evaluation and Control Information on Costs # Methodology State Assembly State Audit Courts Society Quant. MAIN PRODUCTS: - Working Papers - Manual (handbook) on Costs - Reports on pilot projects - Specifications on the conceptual model for costs using existing systems - Reports on Costs model - Training program - Communication model General Cost objects What kind of information does each of these agents need? Specífic: 4 pilot projects Cost center Aggregated Service 1 1) Health,2)Education, 3) Prisions and 4)Soc.Educational services for criminal teenagers (Fundação CASA). Budget PPA (activities) Proposed Methodology

18. Public Private Partnerships Projects (traduzir) Thank you. Giulia Puttomatti Cabinet Advisor – Foreign Funding Dept. Finance Secretariat of the State of São Paulo giulia@fazenda.sp.gov.br Av.Rangel Pestana, 300 – 3th floor 01017-911 São Paulo - SP 18