Prepared by an IMF staff team consisting of Teresa Ter-Minassian (head), Alvaro Manoel, Luiz de Mello, and Gerd Schwartz, based on a mission that took place during September 3-14, 2001.
An enterprise is considered to be publicly owned either when it is wholly owned by the public sector or when more than 50 percent of the company’s ordinary (voting) shares are owned by the public sector. Ordinary shares have to amount to a minimum of 33 percent of total shares (i.e., ordinary shares plus nonvoting preferential shares). With the inclusion of the central bank, the Brazilian definition of general government is broader than the one used by the Government Finance Statistics (GFS) manual.
As of July 2001, there were a total of 22 public financial institutions (out of a total of 264 financial institutions), of which five were federal institutions, six were federalized former state banks that are slated for privatization in the near future, and 11 were owned by the states (of which one is slated to be privatized in the near future). The public financial institutions accounted for 42 percent of total banking system deposits, and 39 percent of total assets. The five federal institutions—Banco do Brasil (BB), Caixa Econômica Federal (CEF), Banco Nacional de Desenvolvimento Econômico e Social (BNDES), Banco do Nordeste (BNE), and Banco da Amazonia (BASA)—accounted for 35 percent of total deposits (mostly in BB and CEF) and 35 percent of total assets. A report on the federally-owned financial system (“Instituiçoes Financeiras Públicas Federais—Alteraativas para a Reorientacao Estratégica”) was published in June 2000.
Complementary laws can be viewed as “enabling legislation.” Like constitutional provisions, complementary laws set out general principles, applying to all levels of government, but they also address specific aspects of a given subject. Since their use is provided for in the Constitution, complementary laws prevail over ordinary laws and cannot be modified by them. Complementary laws have to be approved by each chamber of congress with an absolute majority of the respective members.
The Constitution also allows for temporary extraordinary taxes in the case of foreign war, However, the Constitution also sets explicit restrictions on taxation (Article 150), including, among others, that a tax cannot be collected in the fiscal year in which the law that instituted or increased the tax was published (the so-called “annuality principle”). It also establishes a tax-exempt status for temples of any cult; the property, income, and services of political parties (including their foundations); of worker unions; of nonprofit educational and social assistance institutions; and for books, newspapers, periodicals, and the paper intended for printing these.
Law No. 5172/66 of 1966.
This can be done by different legal instruments, like complementary laws or provisional measures.
Article 167 specifies, among others, that borrowing should not exceed capital expenditures (“golden rule”), which is equivalent to requiring at least equilibrium in the current budget.
A complementary law to substitute law No. 4320/64 is currently under discussion in congress.
The article mandates that the government’s budget proposal be examined by both houses of congress through a joint budget committee (CMPO); all amendments have to be consistent with the PPA and the LDO. Amendments for additional expenditure have to be matched by canceling other expenditures (excluding payroll, debt service, and transfers), and/or additional revenue resulting from errors and omissions. The submission of amendments follows internal regulations of the CMPO, in addition to the rules set by the congressional rapporteur’s report on the budget proposal.
The federal budget includes as financial revenue BCB income from domestic debt operations, foreign exchange and gold transactions, and international reserve operations; seignorage is excluded from the federal budget. Revenues from federal government deposits with the BCB and the holdings of treasury securities in its portfolio are netted out in the consolidation of BCB and federal government fiscal statistics.
Similarly, according to the LRF (Article 36), public financial institutions at all levels of government are not allowed to lend to their main shareholder. As a result, state-owned banks are no longer allowed to lend to state governments, and federal banks like the National Development Bank (BNDES) can no longer finance federal government projects. However, BNDES can continue to lend to states and municipalities within the limits on portfolio composition set by the CMN.
Also, starting two years after the publication of the LRF, (i.e., in May 2002) the BCB will no longer be able to issue public debt titles in its own name.
Also see Senate Resolution 96/89. A new government proposal to limit the stock of outstanding federal guarantees to 60 percent of net current revenues is under discussion in the Senate.
While the economic (aggregate demand) impact of these liabilities mostly occurred in the past, their impact on the public debt statistics is only recorded at the time they are securitized. To preserve the information content of the public sector borrowing requirement (PSBR) for a given year, the value of these securitization operations has been excluded from the PSBR, while their impact on the public debt is recorded as an adjustment to the debt stock. All interest payments resulting from these operations are included in overall interest payments, and therefore affect the PSBR.
The main past liabilities being recognized include those accumulated by the Housing Mortgage Insurance/Subsidy Fund (FCVS) during the past three decades, and those related to the recapitalization of some federal banks on account of quasi-fiscal losses incurred in the past. Possible liabilities to be recognized in the future mainly relate to areas in which there are pending cases in the courts, including the losses incurred by a few sectors due to government-imposed price freezes under past failed stabilization plans, the monetary correction applied to savings accounts frozen in March 1990, and interest penalties paid on tax arrears since 1996. In addition, the government has carried out some clean-up operations. This has included, for example, an exchange of illiquid low-interest debt for liquid debt titles that pay market interest rates, as in the case of the Severance Pay Fund (FGTS); and assets swaps, as in the case of the recent strengthening of the capital base of some federal banks. The LRF requires that the LDO for each level of government include a Fiscal Risks Annex assessing the scope of contingent liabilities and their likelihood of turning into actual liabilities.
For BB, 25 percent of its demand deposits and 40 percent of its savings deposits are directed toward agriculture; for CEF, 65 percent of its savings deposits are directed toward the housing sector. CEF has recently suspended all financing out of its own resources for the housing loan program to middle-income households, and will have the cost (subsidy) of loans to low-income households explicitly paid out of the federal budget.
The TJLP (plus a base spread and a sector-related risk spread) is also applied to BNDES investment lending operations. Export financing loans are remunerated by a mix of rates and tied to basket of currencies.
For example, fuel prices used to be kept artificially low, resulting in significant Josses for the government-owned oil company (Petrobrás) that were recorded in the “Petroleum Account.” In late-1998, the accumulated losses were covered by a government debt issue to Petrobrás. Although the fuel price structure introduced in 1998 still contains some cross-subsidies on oil derivatives at the consumer level, the automatic fuel-price adjustment mechanism introduced in 2000 aims at ensuring that there is no overall subsidy. As a result, the Petroleum Account has remained in approximate balance since then, and the account is expected to be phased out in 2002 when the domestic oil market is to be liberalized.
BNDESPAR, fully-owned by BNDES, was created in 1982 and became a public company in January 1998. It is currently the most important venture capital agency in Brazil.
In addition, public enterprises and mixed public/private enterprises may not be granted fiscal privileges that are not extended to companies of the private sector. In general, the Federal Accounting Council (CFC) establishes the uniform accounting principles that are applicable to enterprises independent of their ownership. The largest public enterprises (e.g., Petrobrás) are organized as mixed (i.e., public/private) stock companies and ruled by law No. 6404 of 1976; like private stock companies, they are supervised by the National Securities& Exchange Commission (CVM) and subject to annual audit requirements. An exception to these general procedures, is the binational entity Itaipu, which is jointly owned by the governments of Brazil and Paraguay, and is audited by independent private-sector auditors.
General accounting standards are comprehensive, but in some respects still fall short of international standards (e.g., the stringent requirements of the US GAAP).
Generally, purchases of shares by the federal government have aimed at promoting the strengthening of capital markets, regional development, and strategic sectors; other acquisitions resulted from the transfer of ownership to the government of extinct companies, and the debt renegotiation agreements with the states (e.g., shares received as payment for state debt), All expenditures in these regards are recorded in the budget.
The role of the CVM has recently been strengthened through increased financial autonomy and fixed mandates for its directors, as stipulated in the new corporate law that came into effect in November 2001.
These include the National Telecommunications Agency (ANATEL), created by Law No. 9472 of July 1997; the National Electric Energy Agency (ANEEL), created by Law No. 9427 of December 1996; the National Petroleum Agency (ANP), created by Law No. 9478 of August 1997; the National Water Agency (ANA), created by Law No. 9984 of July 2000; the National Supplementary Health Agency (ANS), created by Law No. 9961 of January 2000; the National Sanitation Oversight Agency (ANVS), created by Law No. 9782 of January 1999; the National Space Agency (AEB), created by Law No.8854 of February 1994; the National Overland Transportation Agency (ANTT), and the National Waterborne Transportation Agency (ANTAQ), both created by Law No. 10233 of June 2001. Also, there are various entities that guard against noncompetitive behavior, and/or have oversight on mergers & acquisitions, including the Consumer Rights Protection Agency (CADE), the Secretary for Economic Justice (SDE) of the Justice Ministry, and the Secretary for Economic Monitoring (SEAE) of the MoF.
Law No. 8112/90 of December 1990.
See Lei da Improbidade Administrativa (No. 8429/92).
See Código de Ética Proftssional do Servidor Público Civil do Poder Executivo (Decree No. 1171 of June 22, 1994).
Being a decree, rather than a law, noncompliance with the decree’s stipulations can have no adverse consequences in a strictly legal sense. See Commissão de Ética Pública, Projeto: Identificação deModelos e Práticas de Gestão de Ética na Administração Pública Federal Brasileira (Executivo Federal), (Final Report of August 30, 2001).
Law No. 10028/00 of October 19, 2000.
The “Code of Conduct for the Senior Government Officers at the Federal Executive Branch,” which was approved by the President on August 21, 2000.
The “Ethics Code and Standards of Professional Conduct for Administrators of Public Debt” from February 2001, for more information, see http://www.stn.fazenda.gpv.br/hp/codigo_etica.asp.
There has been full compliance with these requirements. Until early September 2001, three officials had been dismissed by the President because of noncompliance.
See Provisional Measure 2143-31 of April 2, 2001. The CGU has a staff of about 60; investigations are frequently carried out with the help of the SFC. The CGU website contains information on all ongoing and completed investigations.
A monthly budget execution report is published in the DO. Information on the operations of the central government excluding the BCB is available through the SDDS.
To achieve further improvements in subnational government financial management, and support implementation of the debt restructuring agreements, the central government, in cooperation with multilateral institutions, devised a Modernization Program for State Fiscal Administration (PNAFE); PNAFE promotes the restructuring, modernization, and strengthening of the institutions responsible for state-level fiscal management, both on the revenue administration and the public expenditure management sides. In particular, PNAFE provides technical and financial support for projects that aim to improve the legal framework for government financial management; integrate, and strengthen financial management, auditing, and internal control; and ensure that state governments levy all taxes in accordance with the legislation. A similar Modernization Program for Municipal Fiscal Administration (PNAFM) was set up recently.
Since September 2001, the BCB also provides a series with cash-basis accounting for domestic debt indexed to the foreign-exchange rate.
Tax expenditures are calculated for each tax separately, following the methodology summarized at the SRF website. For instance, for the Industrial Products Tax (IPI), tax expenditures are calculated based on the average tax rate for each product. Similarly, for the corporate income tax, tax expenditures are calculated based on actual deductions in individual enterprise tax returns. For enterprises reporting under the presumed profit regime for taxing small enterprises, tax expenditures are calculated relative to the marginal rate that would be applied to the turnover bracket for each enterprise. At the federal government level, tax expenditures have remained fairly stable over time at approximately 1.6 percent of GDP, and were granted predominantly in the context of regional development programs.
The PPA must be submitted to congress by the executive branch by August 31 of the first year of its four-year term; congress then has until December 15 to approve it. Once enacted, the PPA is in effect until the end of the first year of the next administration. The LDO bill must be submitted to congress by the executive branch by April 15 of each year; congress then has until June 30 to approve it, The LOA bill must be submitted to congress by the executive branch by August 31 each year; congress then has until December 15 to approve it.
Fifteen days after sending the budget proposal to the congress, the executive branch also provides complementary and more detailed information in more than 30 documents.
The SIAFI system also generates budget execution information on a cash basis (expenditure and revenues), as such published in the STN monthly report.
Although the government often resorts to supplementary budget provisions, budget alterations during the year have tended to be marginal and mainly related to the switching of budgetary provision between different items of expenditure.
In the last three years, this maximum percentage has been 10 percent. Supplementary budget appropriations can also be used for reallocating budgetary appropriations.
Law 8666 of June 1993.
The executive branch has 60 days after the beginning of the legislature session (around the middle of February each year) to prepare and send to TCU the annual government accounts. The TCU, after receiving it, has 60 more days to prepare a prior opinion that is sent to the congress (Article 71 of the Constitution).
The cities of São Paulo and Rio de Janeiro are audited by their respective municipal courts of accounts.
Reconciliation is needed between debt information from the National Treasury’s SIAFI and the central bank because of differences in accounting and registration procedures.