______________________________ José Roberto R. Afonso, Geraldo Biasoto e Ana Carolina Freire

1. Brazilian (Low) Public Investment ______________________________ José Roberto R. Afonso, Geraldo Biasoto e Ana Carolina Freire CEPAL, 31/01/2007 19ª Seminário Regional Política Fiscal

2. Index • Brazilian experience: an interesting case study • International comparison • Evolution of investment in Brazil • Reflections • Different types of investment projects • Alternatives

3. The Brazillian problem: low growth

4. Brazilian Experience: an Interesting Case Study • One of the highest tax burden of the world (about 40% of GDP in 2006); • All fiscal targets set by the IMF have been systematically met; • Nevertheless, the public sector’s debt pile continues fairly high compared to that of similarly sized emerging economies (about 49% of GDP)

5. Brazilian Experience: an Interesting Case Study • In the new century, the public sector has been registering a historic low in investment, even lower than the average levels seen elsewhere in Latin America; • An increasing, and already the major part of expenditure on capital formation by public sector authorities, has become decentralized; • Consequence: a low in public investment in infraestructures.

6. Low public investment – international comparison See Afonso, Schuknecth e Tanzi, (2003) e (2006).

7. Low public investment – international comparison

8. Low public investment – international comparison

9. National Investment Tax % of GDP

10. Real Investment Rate - Gross Fixed Capital Formation as percent of GDP : 1995/2003(at constant prices)

11. Public Sector Borrowing Requirement – 1995/2003

12. Public Administration Borrowing Requirement - 1995/2003 In percent of GDP 1995 1996 1997 1998 1999 2000 2001 2002 2003 CURRENT REVENUES 34.43% 34.25% 34.10% 35.90% 37.78% 38.64% 40.28% 42.37% 42.35% CURRENT EXPENDITURE 39.91% 37.31% 36.35% 41.65% 42.79% 41.24% 41.64% 44.07% 45.31% Consumption 19.60% 18.49% 18.20% 19.13% 19.08% 19.06% 19.25% 19.93% 19.72% Interest 6.30% 5.10% 4.60% 7.31% 8.39% 6.76% 6.84% 7.74% 9.11% Other Transfers and Subsidies 14.01% 13.72% 13.55% 15.22% 15.32% 15.42% 15.56% 16.39% 16.48% GROSS SURPLUS -5.48% -3.07% -2.25% -5.75% -5.01% -2.60% -1.36% -1.70% -2.96% CAPITAL EXPENDITURE 2.92% 2.25% 1.94% 1.93% 1.32% 1.69% 1.89% 2.00% 1.50% Gross Fixed Capital Formation 2.54% 2.31% 1.98% 2.80% 1.73% 1.90% 2.20% 2.20% 1.70% of which: infrastructure investment 0.93% 1.08% 0.84% 1.09% 0.52% 0.61% 0.68% 0.52% 0.43% Net Acquisition Of Nonfinancial Assets 0.00% 0.00% -0.17% -1.02% -0.47% -0.47% -0.36% -0.14% -0.05% Net Transfers 0.38% -0.06% 0.14% 0.16% 0.07% 0.27% 0.05% -0.06% -0.14% Float, Errors and Omissions 2.51% 0.01% -1.45% 0.74% 0.48% -0.06% -0.89% -0.88% -1.27% PRIMARY SURPLUS 0.41% -0.20% -1.04% 0.36% 2.54% 2.41% 2.70% 3.16% 3.38% OVERALL SURPLUS (PABR) -5.89% -5.30% -5.64% -6.95% -5.85% -4.35% -4.14% -4.58% -5.73% Prepared by the authors. Primary Sources: IBGE (Brazilian National Accounts - 2003); primary and gross balance and interest expenditure, Bacen (Central Bank). Infrastructure investment - own estimating about GFCF expenditure in energy, comunications, transport and sanitation, by central plus subnational governments. Coverage: (only) public administration (excludes public enterprises). Public Administration Borrowing Requirement – 1995/2003

13. Public Administration in Gross Fixed Capital Formation (1901-2003): Low during the last fifteen years

14. Decentralization of Public Administration Gross Fixed Capital Formation (1947/2003)

15. Public Administration: Low in the Share of National Capital Stock (1950/2003)

16. Low in Public Sector Gross Fixed Capital Formation in Infraestructure (estimated): 1995/2003(as percent of GDP at constant prices)

17. Public Sector: Gross Fixed Capital Formation in Infrastructure (estimated): 1995/2003As percent of Total GFCF

18. Public Sector: Gross Fixed Capital Formation in Infrastructure 1995/2003

19. Reflections • Management of fiscal crises: • Fiscal adjustments combining strong tax burden increases and intense low in public investments • Restrictions to public debt for all purposes (capital os current expenses) • Privatization restricted to some sectors

20. Reflections • The management with foreign capital flows needs a government intervention that implies in fiscal costs to Treasury • The efforts to decrease the internal debt-GDP aresterilized by the level of interest rate • Demand restricted by tax and low real expenses (high level of interest payments) • Private investment decisions against low public investment in infrastructure

21. Reflections • The adjustment shape lead us to a trap: it’s impossible to enlarge the public investment tax with out a decrease in primary surplus or a new fiscal configuration • The relation between the public and the private sectors in Brazil are complex: there are not easy solutions • The Brazilian case is hard to compare to other international experiences = state presence at the birth of most sectors, regulation questions, federative issues

22. Opening a Fiscal Space to the Investment in Infrastructure • Brazil – the public financing profile is still a problem. • Inefficiency of government efforts on partnerships (PPP) or project exclusions from fiscal targets (PPI) • Need to carry on profitable projects and those with positive externalities

23. The questions • How increase public investment with out deterioration in private expectations on public deficit? • Is there a manner to increase the allocation efficiency instead a high level of public investment?

24. Different types of investment projects Three types could be treated differently: • The 1st type would be the project with an adequate internal rate of return, as compared to the placement of notes in the market • The 2nd type would be that which has, in its initial stages, an internal rate of return inferior to the cost of raising funds in the market, but that IIR reaches a normal rate during the operation period • The 3rd type would be that project which really could not be expected to provide an internal rate of return demanded by the market over the course of its lifetime, but there are positive externalities (in social or economic sense)

25. Different types of investment projects In all cases: private management and resources borrowed from market (specific bonds for each project) In 2nd and 3rd cases: the gap against the IRR would be consider a disbursement; the Treasury would response by the equalization (accounting like deficit) The deviation of projects from the parameters initially drawn up would be treated specifically: increase deficit, annually added to PSBR

26. Different types of investment projects • Enforcement on the administration by goals • More transparency in fundamental projects • Examination by financial market • Credibility in public accounting measures • Rebuild the public debt in other foundation

27. Different types of investment projects • One is not looking to merely mobilize resources for investment - the idea is also to develop actions that are managerially efficient and worthy of financing for the market • The differential should not however be given by the governmental structure but rather by the market • The financing of such projects should involve specific resources, raised directly from the market

28. Alternatives a) division line in the balance sheets: current x investments b) OECD proposals: to deduce investment expenditures related to capital depreciation c) anti-ciclical fiscal policy • monitoring exceeding resources destined to public investment. • Risk of a anti-cyclical fiscal policy: lack of public investments during the cycle´s ascension can not be on to the responsibility of the private sector. d) separating public spending between public enterprises and public administration

29. Alternatives • Exclusion of public enterprises from the PSBR and NPSD; • PSBR and NPSD concepts; • Revenue earmarking for investments; • Tax treatment of capital goods.