Brazil
Technical Assistance Report-Public Investment Management Assessment

Brazil is the largest country in Latin America with a varied geography and a population of over 200 million spread across 26 diverse states, generating wide-ranging infrastructure needs. Over the decades, many government investment initiatives have been launched to address these needs, however there remains a significant infrastructure gap in Brazil which continues to hamper growth potential. Over the past two decades, public investment has been considerably below the regional and income group averages and this has translated into much lower capital stock. Public investment averaged around 2 percent of GDP during the period 1995 to 2015, compared with 6.4 percent for Emerging Market Economies (EME) and 5.5 percent for Latin American Countries (LAC). As a result, public capital stock in 2015 was only 35 percent of GDP compared with an average of 92 for EME and 87 for LAC.

Abstract

Brazil is the largest country in Latin America with a varied geography and a population of over 200 million spread across 26 diverse states, generating wide-ranging infrastructure needs. Over the decades, many government investment initiatives have been launched to address these needs, however there remains a significant infrastructure gap in Brazil which continues to hamper growth potential. Over the past two decades, public investment has been considerably below the regional and income group averages and this has translated into much lower capital stock. Public investment averaged around 2 percent of GDP during the period 1995 to 2015, compared with 6.4 percent for Emerging Market Economies (EME) and 5.5 percent for Latin American Countries (LAC). As a result, public capital stock in 2015 was only 35 percent of GDP compared with an average of 92 for EME and 87 for LAC.

Executive Summary

Brazil is the largest country in Latin America with a varied geography and a population of over 200 million spread across 26 diverse states, generating wide-ranging infrastructure needs. Over the decades, many government investment initiatives have been launched to address these needs, however there remains a significant infrastructure gap in Brazil which continues to hamper growth potential.

Over the past two decades, public investment has been considerably below the regional and income group averages and this has translated into much lower capital stock. Public investment averaged around 2 percent of GDP during the period 1995 to 2015, compared with 6.4 percent for Emerging Market Economies (EME) and 5.5 percent for Latin American Countries (LAC). As a result, public capital stock in 2015 was only 35 percent of GDP compared with an average of 92 for EME and 87 for LAC.

Given the current limited fiscal space, the government is seeking to improve public investment efficiency and to promote more private sector investment through concessions. With the recent economic recession and the large drop in revenues, debt has increased above the EME average. This, combined with budget rigidities and rising mandatory spending, reduces fiscal space for capital spending.

The government recognizes that improving the efficiency of public investment is essential to enhance the quality of infrastructure and to meet citizens’ needs. There is significant room to improve public investment efficiency. The efficiency gap between Brazil and the most efficient countries with comparable levels of public capital stock per capita is 39 percent. The gap is wider than the average for the EME (27 percent) and LAC (29 percent).

Strengthening public investment management (PIM) institutions will help to close this efficiency gap. The mission assessed the strength and quality of PIM using the IMF’s Public Investment Management Assessment framework (PIMA).1 It found that the majority of Brazil’s public investment institutions are of medium strength on paper (i.e. institutional strength). However, implementation is variable and effectiveness is weak in many areas. Figure 0.1 shows the areas of relative institutional strength and weakness.

Brazil’s PIM institutions are stronger than the averages for EMEs and LAC in some areas and comparatively weaker in others. The stronger areas include national planning, budget comprehensiveness, company regulations and monitoring of assets. The weaker areas are in the allocation and implementation phases, especially project appraisal and selection, protection of investments, funding availability and project management. The majority of institutions, are assessed as medium or low in terms of practical implementation and effectiveness.

Figure 1.
Figure 1.

Institutional Strength of Public Investment Management Institutions

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: Staff estimates

The most significant areas of weakness are in the strategic prioritization of investment and project selection and appraisal. There is a lack of high-level guidance on priorities and poor coordination across levels of government. There are no central guidelines on project appraisal and selection. These weaknesses often result in poor quality projects, which affects project implementation. This combined with a lack of capacity at the subnational level and among some spending ministries, poor project management and uncertain funding, contributes to weak project execution, cost overruns, delays and poor-quality infrastructure.

These issues reflect the complexity and fragmentation of the PIM system. This is a common challenge in federal systems, especially when there are a large number of actors and modalities for financing and executing public investment. In Brazil, these actors include the federal government, subnational governments, state-owned enterprises (SOEs), public banks, concessionaires and extra-budgetary funds. This fragmentation at vertical and horizontal levels leads to a lack of uniform practices and approaches. A strong legalistic approach prioritizes compliance over efficiency and outcomes; and complex, detailed-oriented systems, exacerbate the lack of strategic direction and prioritization.

Reforms in many areas are underway to seek to address these challenges. In 2016, to promote private investment, the government launched a program to better coordinate and centralize concessions. The Ministry of Planning, Development and Management (MPDG) is developing central project selection guidelines. The Casa Civil is working on a long term national investment plan. The legal framework has been reformed to improve SOE governance, and there are draft laws on improving the governance of regulatory agencies and updating the public financial management (PFM) system, which includes proposals for a national investment project pipeline.

Taking into account these initiatives and the assessment’s results, this report provides ten main recommendations to strengthen PIM and improve its effectiveness. Table 2 presents an action plan for implementing these recommendations over the short and medium term and Chapter IV provides a detailed discussion on each recommendation. The high-priority recommendations are as follows.

Table 1.

Summary Assessment

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Table 2.

Action Plan

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Increase budget flexibility and develop medium-term frameworks. Create fiscal space for public investment by reviewing mandatory spending, indexation practices and tax expenditures. Strengthen the medium-term perspective on fiscal and budget management to create a more realistic alignment between planning, budgeting and the availability of public funding.

Strengthen strategic prioritization of public investment and develop a prioritized portfolio (bank) of high quality projects. Prepare a national strategy for investment which focuses on a national vision and broad strategic objectives. Develop a prioritized portfolio of major (e.g., above 50 mn Rs) high-quality projects and develop a standardized process for other public investment projects.

Improve coordination between federal and subnational governments in investment planning and review funding mechanisms. Find a better balance between the need for federal oversight and greater devolution of accountability to subnational governments. Build subnational PIM capacity and reduce the fragmentation of federal funding. Pilot a program-based approach to transfers for social infrastructure projects in one or two high capacity states.

Strengthen and standardize procedures for project preparation, appraisal and selection. Establish and codify in legislation a new rigorous process for appraisal, approval and selection of large public investment project proposals. Introduce and produce central guidelines to standardize processes of project appraisal, to be applied to all capital investment (See annex 5).

Enhance the predictability of funding for major capital projects. Strengthen budget preparation to enhance the realism of capital budgets. Prioritize major capital projects within annual commitment ceilings. Revise budget regulations to allow for multi-year appropriations in special cases.

Enhance project management capacities and accountability. Prepare a government decree regarding key parameters and responsibilities for management of public investment projects, including assignment of accountability to specific project managers. Develop comprehensive guidelines for project management across government. Conduct training for federal and subnational program managers and staff.

Modernize public procurement. Update the procurement framework for major projects by removing barriers to foreign participation, enhancing competitive outcomes and striking a better balance between price and quality in project bidding.

Other medium-term priorities include improving the strategic framework for PPPs and concessions, improving the independence of regulatory agencies, and developing systematic approaches for maintenance planning, budgeting and execution.

I. Trends in Public Investment in Brazil

A. Trends in General Government Investment and Capital Stock

1. General government investment in Brazil has consistently lagged behind the averages for emerging market economies (EME) and Latin American countries (LAC). In Brazil, it has represented between 1 and 3 percent of GDP over the past 25 years. However, general government investment has been on average, three times higher in EME and 2.5 times higher in LAC more than four times higher in other BRICS2 countries (Figure 2).

Figure 2.
Figure 2.

General Government Investment: Cross-Country Comparisons

(% of GDP)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: WEO and staff estimates based on official data.

2. Over the past twenty-five years, general government investment in Brazil has mostly followed the economic cycle. It rebounded after the early 1990s recession to reach a high point in 1992, at 3.1 percent of GDP (Figure 3). It then went through a period of slow erosion for almost ten years, in times of relatively slow growth, reaching a low point in 2003 (1.1 percent of GDP). In the boom period of the mid to late 2000s, general government investment steadily climbed back to its long-term average of 2 percent of GDP. But the recession that Brazil experienced in recent years has once again diminished the level of investment carried out by general government. According to IMF projections, general government investment is expected to be cut by one-third in 2017 relative to its 2014 level3. Over the period, the contribution of general government investment to total investment and, hence, to GDP growth has been fairly low. While GDP growth has been quite volatile over the period, the variation in general government investment has remained limited.

Figure 3.
Figure 3.

Brazil: General Government Investment and Real GDP Growth

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

3. General government investment represents a small share of total investment, and other sources of investment have not filled the gap relative to EME. General government investment has been on average 2.1 percent of GDP over the past 25 years (Figure 2), or about 10 percent of Brazil’s total investment over the period (Figure 4). This is not compensated for by higher private investment as might be observed in other countries, since private investment levels in Brazil (16 ½ percent of GDP) have also been slightly lower than the average for emerging economies (17 percent of GDP). This is in spite of Brazil’s relatively higher incidence of concession/PPP investments and the large share of investments undertaken by state-owned enterprises (See L.B.).

Figure 4.
Figure 4.

Brazil: Share of General Government Investment in Total Investment

(% GDP)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: WEO and staff estimates based on official data.

4. The sustained weakness of general government investment has led to a slow and continuous erosion of the public capital stock. Relative to other BRICS, EME and LAC countries, Brazil’s public capital stock as a share of GDP has been on average less than half of these country groups (Figure 5). In Brazil, the public capital stock has declined by close to a quarter between the early 2000s and the early 2010s. Though investment programs have had a positive effect on the capital stock, the improvement in recent years is mostly on account of the denominator declining due to the deep recession. In terms of public capital stock per capita, Brazil is also ranked low relative to several comparable countries (Figure 6). In 2015, the Brazilian public capital stock per capita is similar to Argentina and Chile, however it is significantly lower than other BRICS and Mexico, Uruguay, and Malaysia.

Figure 5.
Figure 5.

Public Capital Stock: Cross-Country Comparisons

(% GDP)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Figure 6.
Figure 6.

Public Capital Stock per Capita: Cross-Country Comparisons (2015)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: WEO and staff estimates based on official data.

5. The combination of revenue shocks, high debt and significant budget rigidities have impeded Brazil’s ability to increase its general government investment. Public debt has increased significantly over the last few years (Figure 7). The impact of the recession on revenues and political difficulties in implementing major saving initiatives has limited the fiscal space available for new spending and demanded sizeable spending cuts. Investment has particularly suffered. Brazil stands out in the region, for having both record-high levels of current spending and among the lowest levels of capital expenditure (Figure 8). This situation is largely due to budget rigidities, which come from mandatory spending items, revenue earmarking and indexation. Though difficult to undo, these mechanisms may be reformed in the context of the expenditure rule established in late 2016 (see Institution 1). Such reforms will be necessary to avoid discretionary spending, and especially capital expenditure, carrying the bulk of the ongoing fiscal consolidation efforts.

Figure 7.
Figure 7.

Brazil: Non-Financial Public Sector Balance and Gross Debt

(% GDP)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: WEO and staff estimates based on official data.
Figure 8.
Figure 8.

LAC Region: Current vs Capital Spending

(average of last 5 years)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

B. Composition of Public Sector Investment

6. In 2015, 22% of capital spending funded by the federal government focused on economic infrastructure, a limited share relative to other emerging countries. In Brazil, data on the composition of capital spending by function executed by each level of general government is unavailable. However, a breakdown by function is possible for capital spending funded by the federal government (Figure 9). This includes direct capital expenditure, as well as transfers to subnational governments for capital spending and capital injections to state-owned enterprises (SOEs). Although comparability with other emerging countries is limited, economic infrastructure in Brazil represents a relatively small share of total capital spending compared to EME countries (Figure 10). The importance of direct SOE investment and the growing use of concessions for the construction of economic infrastructure (especially in energy and transportation) could in part account for this.

Figure 9.
Figure 9.

Brazil: Capital Spending Funded by the Federal government per Function

(2015, %)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: Staff estimates based on official data. Note: 1/ Economic infrastructure includes public investment for transportation infrastructure, energy and industry, among others. 2/ Social infrastructure comprises public investment in education, health, housing, social protection and recreation and culture. 3/ The « Other » category comprises public investment for general public services, safety and public order and the environment.
Figure 10.
Figure 10.

EME: Capital Spending Executed by the General Government per Function

(2015, %)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

7. Though subnational governments and state-owned enterprises (SOEs) execute most public sector investment in Brazil, the federal government is an important source of funding for these investments. Public sector investment is the sum of general government investment and investment carried out by SOEs. Over the 2012–2016 period, SOE capital investment accounted for about 1.6% of GDP and 38% of public sector investment (Figure 11). The largest part was carried out by Petrobras and Eletrobras. States and municipalities executed 44% of public sector investment, with less than 20% of the total by the federal government. The share of public sector investment directly executed by the federal government is limited, however it is an important source of funding for other public investment. The federal government has funded 17% of subnational investment through capital transfers over 2012–2016, while SOEs have received capital injections, amounting to about 4% of their investment over the same period.

Figure 11.
Figure 11.

Brazil: Public Sector Investment Execution: (% by level of government)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: Staff estimates based on official data. Note: Average over the 2012–2016 period. Federal government includes extra-budgetary funds and the Minha Casa Minha Vida housing program. Data is on a commitment basis.

8. Brazil’s recourse to public-private partnerships (PPP)/concessions4 has significantly increased since the early 2000s, leading to a larger stock of projects than EME and LAC. In 2014, the current capital stock from PPP/concession projects has reached more than 10 percent of GDP, more than three times the average of other BRICS. It has been progressively rising, especially between 1999 and 2003, and in more recent years because of the Olympics (Figure 12). In 2014, the annual amount of PPP investments was almost equivalent to the total for general government investment (Figure 13). This is expected to rise in future years, as the fiscal space for general government investment remains slim.

Figure 12.
Figure 12.

Public-Private Partnerships Capital Stock

(% of GDP)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: Staff estimates based on official data.
Figure 13.
Figure 13.

Annual PPP investments

(% of GDP)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: Staff estimates based on official data.

II. Efficiency and Impact of Public Investment

9. Access and quality of infrastructure in Brazil shows a relatively mixed picture. Brazil fares well on access to basic infrastructure when compared with the regional average, while its results are more mixed relative to other BRICS or EME (Figure 14). Brazil fares better than the EME and other BRICS averages in terms of public education infrastructure but lower in terms of public health. This picture does not capture the differences between the urban and relatively wealthier areas, which are often better equipped and the rural and poorer regions.

Figure 14.
Figure 14.

Measures of Infrastructure Access: Cross-country Comparisons6

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: World Bank World Development Indicators.

10. Brazil, however, lags behind comparators in terms of infrastructure quality, as revealed by a selection of World Development Indicators (WDI). In terms of kms of roads per capita, Brazil is above the LAC and EME average, however it has one of the lowest share of paved roads in the world both in absolute terms and relative to GDP per capita. WDI reveals that only 13% of the total road network was paved in 2010 compared with 53% in India and 61% in China. The efficiency of the power network is also below the average for other BRICS.5

11. Infrastructure quality in Brazil is perceived overall as significantly lower than the EME and LAC averages (Figure 15).7 This perception has been deteriorating since the beginning of the decade, and the gap relative to other BRICS, EME and LAC has been widening. This is consistent with the fact that these other countries have on average invested more in upgrading and maintaining their capital stock than Brazil has been able to.

Figure 15.
Figure 15.

Perceived Infrastructure Quality: Cross-Country Comparisons

(2006–2015)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: World Economic Forum

12. IMF analysis indicates that there is significant room for improving the efficiency of public investment in Brazil. Taking the measures of infrastructure output—infrastructure access and quality— and mapping them against the public capital stock per capital shows an investment efficiency frontier (Figure 16). PIE-X is the hybrid indicator which combines physical and survey-based quality indicators grading countries on a scale from 0 to 1. A country with a score of 1 is considered to have reached the efficiency frontier, meaning it is the best performing country in terms of access and quality of its infrastructure, given its level of public capital stock per capita. The distance of a country’s score to 1 is called the investment efficiency gap. PIE-X reaches 0.61 in Brazil, below the average scores of 0.71 for LAC countries and 0.73 for EME (Figure 17). Brazil has an efficiency gap of 39%, meaning that at least one country gets 39 percent more benefit from the same amount of spending. Brazil’s efficiency gap is wider, by at least 10 percentage points, than the averages for EME (27%) and LAC (29%).

Figure 16.
Figure 16.

Efficiency Frontier

(hybrid indicator)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: IMF staff estimates.
Figure 17.
Figure 17.

Efficiency Indicator

(PIE-X)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

13. Relative to other EME and neighboring countries, Brazil fares average on other measures of public investment performance. The volatility of investment has remained limited, much lower than Mexico, on par with Argentina or Malaysia, but higher than China or the United States (Figure 18). However, churn, that is the volatility of the sectoral allocation of investment, has been significantly above the EME average (Figure 19). According to the 2016 Transparency International Corruption Perception Survey, which rates and ranks countries from the least to the most corrupt, Brazil ranks 79th (out of 176 countries). Brazil ranked 70th ten years ago, indicating a worsening in the perception of corruption relative to other countries and its own historical position. In 2016, Brazil’s score (40) on the transparency corruption index was close to the LAC average (41) and below the global average (43) (Figure 20).

Figure 18.
Figure 18.

Volatility of the Sectoral Allocation of Investment

(average 2010–13)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: IMF staff estimates.
Figure 19.
Figure 19.

Churn

(average 2010–13)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: IMF staff estimates.
Figure 20.
Figure 20.

Corruption Perception Score

(2016)

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: Transparency International. Note: A higher score indicates a lower level of corruption. The countries with the highest score are Denmark and New Zealand in 2016 (90). The USA ranks 18th, and Russia ranks 131st out of 176 countries.

III. Public Investment Management Institutions

A. Overview Assessment

14. This section evaluates the fifteen PIM institutions in terms of their strength and effectiveness. The summary results are presented in Figure 21. The institutions are divided into three phases of the PIM cycle: (i) planning of public investment; (ii) the allocation of resources to the right sectors and projects and (iii) the implementation of investment projects.

Figure 21.
Figure 21.

Strength of Public Investment Management by Institution

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: IMF staff estimates.

15. The assessment evaluates the strength of the institutions, as well as their effectiveness using the methodology set out in Box 1.

Public Investment Management Assessment Methodology

For the purpose of the assessment of public investment management in Section III, two dimensions were assessed for each institution:

Institutional strength: Institutional strength assesses the design of the processes, laws, systems, and managerial tools implemented from a design point of view. It is based on the questionnaire presented in the IMF Board Paper, Making Public Investment More Efficient. This questionnaire comprises of 15 institutions each with three indicators. For each indicator, three possible scores are set (low, medium, and high). The scoring of the three indicators per institution are aggregated using simple averaging. The following color code was used and scores for the institution were assigned according to the following principles:

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Effectiveness: The effectiveness assesses how well the institution is implemented in practice and whether it achieved the envisaged results. It was assessed qualitatively, for each institution as a whole, based on evidence (e.g., numerical, reviews and assessment of (international) organizations and audit reports). The following color code was used:

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16. In conducting this assessment, it was important to understand the Brazilian context, the Brazilian public investment management system is characterized by a large number of players for financing, executing and controlling public investment. Figure 22 provides detailed overview of the key players and their roles in the PIM system, including the federal government, subnational governments, SOEs, public banks, concessionaires and extra-budgetary funds. This fragmentation is both vertical and horizontal and leads to a lack of uniform practices and approaches.

Figure 22.
Figure 22.

Role of Key Institutional Players in Public Investment Planning, Implementation and Auditing

Citation: IMF Staff Country Reports 2018, 249; 10.5089/9781484372050.002.A001

Source: IMF Mission

B. Planning Sustainable Levels of Public Investment

1. Fiscal Principles or Rules (Institutional Strength — Medium, Effectiveness — Low, Reform Priority — High)

17. The 2000 Fiscal Responsibility Law (FRL) and Constitutional Amendment No.95 (EC95), which established a new expenditure rule, form the backbone of Brazil’s fiscal framework. Fiscal policy is guided by a quantitative target for the primary balance of the non-financial public sector.8 As required by the FRL, this is target is set out in the Budget Guidelines Law (LDO) for the budget year and two forward years. The primary balance target is now complemented by a constitutional fiscal rule on federal primary expenditure, established by EC95 in December 2016, which essentially freezes real primary spending at its 2016 level for the next twenty years. The scope of both targets includes capital expenditure, and there is no specific permanent provision aimed at protecting capital spending. 9

18. In addition to these two provisions, there are a set of rules limiting the accumulation of government liabilities. According to the Brazilian Golden Rule credit operations cannot exceed projected capital spending, (article 167 of the Constitution and art 12 of the FRL).10 Exceptions include supplementary or special credits, for example for natural disasters. Article 30 of the FRL mandates that the President propose to the Senate debt limits for federal, state, and municipal governments. Article 31 establishes an automatic adjustment mechanism to bring excessive debt back within the limit within three years. The Senate has established a debt limit for the states and for municipalities (see Institution 3); however, it has not in practice set a limit for the federal government. The LDO provides projections of net debt for the budget year and two forward years, but they do not constitute binding targets. Senate Resolution No. 48 (2007) caps the stock of guarantees by the federal government at 60% of net current revenue.

19. The fall in revenues due to the recent recession and large and rising mandatory spending has led to a ramp-up in debt and to severe cuts in investment spending. The most severe recession since the early 1990s caused a drop in government revenue, while expenditure continued to grow (Table 3). As a result, gross debt has risen by nearly a third in only three years. The fiscal framework, which is still very short-term oriented, has been unable to contain this ramp-up. The fast-changing macro-fiscal environment over the period led to delays in the adoption of the LDOs and to several in-year revisions of the primary target, which has enabled the government to keep to the target. To date the golden rule has been complied with. The TCU has an important and clear constitutional mandate to assess compliance with fiscal rules including the new expenditure rule.

Table 3.

Fiscal Developments in Brazil 2013 – 2017 (general government, percent of GDP)

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Source: World Economic Outlook (October 2017). NFPS refers to non-financial public sector. 2017 data is IMF estimates.

20. The adoption of the new expenditure rule represents a significant shift to a more medium-term perspective. The rule is binding from the fiscal year 2018. This renewed commitment to fiscal discipline, however may be hindered by the rigidity of expenditure and the need for structural reforms. Mandatory spending and constitutional indexation mechanisms, which have kept expenditure on an upward trend, do not leave much fiscal space for discretionary expenditure, including public investment. As a result, capital expenditure has been top of the list for expenditure cuts, general government investment has been cut by more than 25% since 2013.

21. Reducing the rigidity of the budget and setting up medium-term frameworks is important to ensure that some fiscal space can be allocated to investment in the near future, and should be a high priority. The social security reform is one of the key structural reforms that could curb the growth of current expenditure and free up fiscal space in the medium-term. This reform will however not be sufficient in ensuring compliance with the expenditure rule – a wide review of all mandatory expenditure, indexation mechanisms and tax expenditures would be helpful in identifying low-hanging fruit for reform. Developing a medium-term fiscal strategy and medium-term fiscal and budget frameworks could also support the implementation of the rule, by providing a more forward-looking strategic approach to decision-making on fiscal policy priorities and objectives. These tools can also help support allocation of fiscal space to investments (See institution 6). Finally, international experience shows that medium-term expenditure rules are more effective in ensuring fiscal sustainability when combined with a debt anchor, especially when expenditure rules do not cover all public spending, as is the case in Brazil.

2. National and Sectoral Planning (Institutional Strength — High, Effectiveness — Low, Reform Priority — High)

22. A large number of national and sectoral strategies dealing with public investment coexist and they contain varied information on costs and performance indicators.

  • National programs for public investment include large investment initiatives such as the PAC (see Box 2 for more details). Information on cost estimates for the construction phase of major investment projects can be found on the program websites, as well as aggregate costs per sector. Performance targets focus on outputs (e.g. kilometers of road or railway, number of hospitals built) rather than on outcomes (e.g. reduction in poverty rates or increasing life expectancy). An elaborate reporting process exists for PAC projects, with biannual updates to Congress on the execution of the program and on its performance targets.

  • The Plano Pluriannual (PPA), through its programmatic approach, provides an overview of key strategic areas for public investment. However, the PPA is a four-year plan for all public policies of the government rather than a pure public investment strategy. Still, it provides aggregate planned capital expenditure per program, detailed information on the costs and execution of major investment projects, as well as some associated output targets and realizations (see Institution 6).

  • Sectoral planning documents are available for many key sectors such as energy, transport and logistics, health, education or sanitation. They provide a detailed view of the investment needs, but the aggregate costs of these strategies are usually not clearly communicated. They often cover a longer timeframe than the PPA or the PAC. For example, the National Energy Plan covers 25 years and the National Plan for Basic Sanitation is for 20 years. The most sophisticated sectoral planning instruments have been produced by specific agencies outside of the spending ministries, such as in the energy (Empresa de Pesquisa Energética, EPE) and transportation sectors (Empresa de Planejamento e Logistica, EPL), the latter placed under the authority of the Presidency and the SPPI. The Ten-Year Plan for Energy Expansion (PDE) and the soon-to-be-published National Plan for Logistical Integration (PNLI) provide detailed projections and mapping of energy and transportation expansion needs for the next 10 (PDE) and 20 (PNLI) years. The 10-year National Plan for Education and the 4-year National Health Plan also contain elements on social infrastructure needs. All of these sectoral planning documents are mostly output-oriented, with a few exceptions (sanitation, education).

Timeline of Major Public Investment Programs in Brazil

This box provides a timeline and a brief description of the major public investment programs in Brazil over the last two decades.

1996–2003: “Brazil in Action, Advance Brazil” (Brasil em Ação, Avança Brasil) programs sought to reduce the execution time of priority investments, particularly in the transport sector. The government scaled up the initial Brasil em Ação program and expanded the number of projects, creating the Avança Brasil program.

2005–2007: Pilot Project of Investment (Projeto Piloto de Investimento or PPI) had a portfolio of R$11.6 billion or 0.15% of GDP. Its objectives were to attract the private sector and to give visibility to governmental activities.

2007-today: Program of Growth Acceleration (Programa de Aceleração do Crescimento or PAC), was an expansion of PPI. PAC envisaged investment activities in several sectors including highways, railways, energy, airports, urban transportation, telecommunications, and urban development (sanitation and housing). In its first phase (2007–2010), US$ 150 billion was allocated to the program, while its second phase (2011–2014) had commitments of US$ 500 billion. Initially, PAC provided greater oversight and a clearer prioritization of sectors, however, over time more sectors were added and the implementation of projects became more decentralized. In the second phase, more than two- thirds of projects were executed by subnational governments. The selection and screening of projects was not technically driven and projects seldom underwent substantive economic evaluation. This limited the effectiveness of streamlined funding arrangements and stronger monitoring during the implementation phase. Despite the exemptions and benefits derived from participation in this program, the project execution rate was low between 2007–2015, only 37 percent of projects were completed (TCU 138 Opinion). Due to the recession, the third phase (2015–2018) has seen its scope gradually reduced. The initially funding for PAC projects in the 2017 budget has been significantly decreased from R$ 37bn to R$ 19bn.

2013–2016: Program of Investment in Logistic Infrastructure (Programa de Investimentos em Logística or PIL), was established as a large PPP and concession program. It envisaged the construction and operation of 7,500 km of roads, 10,000 km of railways, and 159 ports totaling R$ 240 billion. The PIL sought to improve the review and the pipeline of potential projects; to apply more arduous appraisal standards; and to remove bottlenecks that prevented better outcomes from investment in the past. A second phase was launched in 2015.

2016-To date: Investment Partnership Program (Programa de Parcerias Privadas or PPI), was established in 2016 under the Office of the Presidency, with several PIL projects rolled into this program. This program seeks to attract private investment and to streamline and centralize the selection of concession projects.

Source: Mission staff

23. The effectiveness of these strategies for planning has been undermined by weak prioritization, unrealistic costing and multiple congressional amendments. The large and intricate web of strategies and plans described above has been unable to provide clear strategic guidance for public investment. This has been especially clear in the current context of shrinking fiscal space, with too much to do and too little money. The PAC, which effectively targeted major economic infrastructure projects when it was created, is today clogged by thousands of small-scale projects. Although it has been revised and streamlined in recent years, and it is monitored extensively, the PPA’s use in decision-making is limited, as it is still too detailed and it does not rely on a realistic macro-fiscal scenario or on clear costing guidelines (see Institution 6). Parliamentary amendments, which may fund capital projects which fall outside of the scope of any existing strategy or plan, have also contributed to deepen the gap between planned and actual investment for ministries which carry large portfolios of local-level projects (e.g. Ministry of National Integration, Ministry of Cities).

24. In recent years, the Casa Civil has tried to better prioritize investments. The Presidency has defined a set of “priority projects” of national interest for which it provides support, guides decisions and monitors closely. This includes seven infrastructure projects or initiatives, the PPI, and the Broadband Development Program. In addition, under the current constrained fiscal environment, a list of PAC projects which are close to completion have been prioritized for funding by a committee comprising the Presidency, the MPDG and the MOF.

25. However, in order to stabilize investment priorities over time, there is still a need for a clear national investment strategy and this is a high priority. This would outline key priorities for the medium- and long-term, in line with sectoral planning instruments. The “long-term strategic development plan” that the Casa Civil is currently considering in a draft law on the general governance of the Union, would set long-term goals and targets for the country, and could play such a role. This document could be an anchor for a new prioritized and affordable pipeline of major projects, relying on realistic costing and transparent selection processes.

3. Central-Local Coordination (Institutional Strength: Medium, Effectiveness: Low, Reform Priority: High)

26. The federal government oversees subnational borrowing operations and many capital transfers, but local investment is largely not coordinated with federal priorities. The federal government has an important role in monitoring and supporting the funding of subnational investment. A Senate resolution11 sets clear legal limits on subnational governments’ borrowing: net debt to net current revenue ratios are capped for states (200%) and municipalities (120%). These ratios are regularly monitored by the Treasury. Furthermore, credit operations cannot exceed capital spending according to the Golden Rule (see Institution 1). To borrow, subnationals require a formal authorization from the MOF. On top of this monitoring, the federal government supports local investment financially, as subnational governments benefit from transfers from the federal budget, some of which may be earmarked for investment projects under specific programs. On average over the last five years, these transfers funded 17% of investment projects executed locally and 28% of the investment funded directly or indirectly (transfers, capital injections) by the federal government (Table 4). Though the amount of these transfers is available in the budget, capital budgets of local governments are not discussed by the central government, and there is no consolidated view of total planned investment by states and municipalities.

Table 4.

Capital Transfers from the Federal Government to Subnational Governments

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Source: MOPG and staff estimates.

27. The coordination between federal and local investment strategies suffers from the fragmentation of transfers, low local capacity and federal micro-management. Discretionary capital transfers most often take the shape of convênios13, grant agreements on a project-by-project basis, usually monitored from beginning to end by the public bank Caixa Economica Federal (see Box 3). These agreements between spending ministries and subnational governments may either be concluded after a call for local project proposals under a specific initiative, or be already planned for explicitly in the budget or in the PAC. Multiple convênios can sometimes be concluded for a single investment project. Convênios can also be the result of congressional amendments and can significantly impend the investment plans set by spending ministries14 (also see Box 6). This fragmented system is difficult for spending ministries to manage, they may end up supporting portfolios of thousands of small-sized projects. Subnational governments may not have sufficient capacity to properly prepare and execute projects, as project preparation, appraisal and selection and management are often weak at the subnational level.

28. Finding a better balance between federal oversight and fiscal devolution is a high priority. Currently, ministries are involved in selecting minor projects in many states and municipalities for example the Ministry of Health has over 38,000 projects. Ideally, spending ministries should avoid such involvement with individual micro-level projects and focus on programs or initiatives, with devolution of the allocation of resources to the local level. However, weak project management capacity in subnational governments has been a hurdle: attempts at more devolved models in the recent past have failed to deliver satisfactory outcomes.

29. A gradual adoption of program-based grants could avoid the need for central government involvement in capital project execution and monitoring. However, to be successful, new reform proposals should acknowledge the significant need for capacity building at the local level, and the fact that some subnational governments, especially in urban and wealthier areas, may be better prepared than others for greater devolution of responsibilities and it may require a more risk based approach.

Capital Transfers to Subnational Governments in Brazil

Brazil is one of the countries in Latin America with the most decentralized execution of public investment. Subnational capital spending is financed from the states and municipalities’ own resources, borrowing and federal government transfers both automatic and discretionary. Federal discretionary grants finance a wide set of activities at the subnational level and uses a variety of design, management and monitoring arrangements. Each ministry uses its own methodologies for assigning grants and monitoring their execution.

In the current framework, there are three types of discretionary transfers. Voluntary transfers through which a federal agency (usually a ministry) funds projects or activities by states and municipalities. The second mode is the grant or covenant, which the Federal Government uses to transfer funds and monitor the entire cycle of the program or activity financed through the grant. In general, this role has been fulfilled by Caixa Econômica Federal (CEF). Almost all capital transfers currently use this modality. The third is the partnership agreement initially restricted to civil society organizations. This instrument has been used for PAC projects to speed up the release of funds and the progress of works previously selected.

All activities financed by voluntary transfers are explicitly identified and allocated in the Federal budget. Each ministry distributes resources through their decentralized programs. Such programs are generally designed to solve externalities, diseconomies of scale and technical capacity deficiencies. However, during the budget process, legislators can introduce amendments that, if approved, change the resource allocation proposed by the Executive. Once the budget is approved by Congress and sanctioned by the President, each ministry chooses the most relevant programs and annually publishes a call for states or municipalities to submit proposals. Alternatively, a ministry can identify specific local needs and provide resources for the development of a program in the municipalities of a region or a group of states that has been prioritized.

The ministry that grants the transfers is responsible for guiding, monitoring, and evaluating the implementation of the programs that it finances. The granting agency is also in charge of signing agreements and issuing norms and guidelines for the release of financial resources. These responsibilities even include verifying that the procurement legislation is applied adequately. Given the wide geographical spread of the grant agreements, monitoring, controlling and certifying compliance are not trivial logistical issues. For the beneficiaries of grant agreements, although they receive technical assistance from the ministries and the CEF, preparing the proposals and fulfilling all obligations during the execution of the project, especially for those of smaller and low technical capacity, can be very challenging.

Source: Mission Staff

4. Public-Private Partnerships (Institutional Strength — Low, Effectiveness — Medium, Reform Priority — Medium)

30. Despite an elaborate legal framework, there is neither a published strategy for PPPs and concessions, nor criteria for selection of projects, nor are associated risks recorded. In this report, following international practice, the term public-private partnership is used to include concessions, in which users pay for the service, as well as projects for which the government pays. In Brazil, the term is usually used more narrowly to refer to the second type of projects only. Concessions and other types of PPPs are governed by two separate laws15, which set the conditions under which these arrangements may be conducted. Concessions are the main modality of partnership with the private sector at the federal level. Despite the current priority given to this investment track, to circumvent the lack of fiscal space, there is no published strategic document on concessions which would provide a sense of the government’s medium-term plans, including priority sectors and projected outputs and outcomes. There is no list of standard criteria for entering into concession arrangements.

31. Value-for-money analysis does not appear to be systematic across sectors, and there is neither a standard published methodology nor a dedicated unit for such analysis.16 There is transparency on individual concession projects, as contracts are usually publicly available on the websites of regulatory agencies. However, there is no consolidated view of existing and planned concession projects in Brazil. Finally, though total federal government payments for PPPs other than concessions are limited to 1% of net current revenue (Article 22 of the PPP law), there is no similar limit on concessions. Contingent liabilities associated with federal concession projects, explicit or implicit, are not limited and are not analyzed or reported in a consolidated way.

32. Recent reforms have centralized the selection of major concessions and are improving the effectiveness of the project cycle. The launch of the PPI and the placement of its secretariat (SPPI) within the Presidency are attempts to reinforce coordination and centralize capacity for PPPs and concession project preparation. PPI is among the “priority projects” Casa Civil oversees. It acts as a coordinator of the different players involved in project preparation and appraisal, including line ministries, the MPDG and agencies such as the EPL. It also helps expedite tender preparation and environmental licensing, which have been significant bottlenecks in recent years. PPI has become an identified source of information for investors, both domestic and foreign, to obtain details on how to bid for projects. Overall, the SPPI has been relatively effective in delivering new projects. According to the SPPI, a dozen major concession infrastructure projects have been signed. There is only limited fiscal space for the launch of new publicly-funded investment projects, therefore the focus is on attracting private investment. After Board meetings, the SPPI publishes updated lists of “qualified” projects. However, the strategy and criteria for pre-selection of projects within the PPI scope have not been published yet, and many concessions, including unsolicited bids, still fall outside of the scope covered by the PPI initiative.

33. The publication of a strategy for PPPs and concessions and the consolidation of information on the existing portfolio and its associated fiscal risks are medium priorities. For the first time this year, the annex on fiscal risks attached to the LDO contains a section on risks associated with PPPs and concessions. Though it is an important first step, the section remains largely qualitative, especially on concessions. A list of the current portfolio of concessions at the federal level, as well as other types of PPPs at the subnational level, could reinforce transparency on risks associated with these arrangements. Indeed, even though concessions may not involve explicit contingent liabilities, concessions can lead to implicit contingent liabilities (and significant revenue losses) for the government. Potentially resulting in cases were the government could need to step in if the private concessionaire fails and may need to provide the service either temporarily or on a permanent basis. The current practices for PPP/concession are discussed in Annex 4 and compared with good international practices.

5. Regulation of Infrastructure Companies (Institutional Strength — High, Effectiveness — Low, Reform Priority — Medium)

34. There is competition in most markets for economic infrastructure, and federal oversight of investment and financial performance of SOEs. Most markets for economic infrastructure are competitive in Brazil, with domestic and foreign competition. The share of the private sector can be significant – railways, ports and most toll roads are concessions run by the private sector. Telecom operators have been private since the privatization of the sector in the late 1990s. Foreign companies are present in some sectors, such as electricity generation and transmission, and even dominant in mobile telecommunications or urban mobility. SOEs are very important players in the infrastructure sector, especially Petrobras and Eletrobras (94% of total planned SOE investment for 2017). After being agreed by the Executive Boards, the investment budgets of all 133 federal non-dependent SOEs are sent to the government for review. These investment budgets are consolidated and approved by Parliament and published as part of the annual budget law. MPDG publishes a consolidated financial view of the SOE portfolio annually. Since late 2016, quarterly bulletins provide additional information on SOE’s financial performance and execution of investment.

35. There are still barriers to effective infrastructure market access, and regulatory agencies in Brazil, which are not fully independent especially financially. Brazilian private companies and SOEs have a comparative advantage in understanding the complexity of bidding for infrastructure concessions. In effect, several markets are still often concentrated around large state-owned enterprises and their subsidiaries, such as Eletrobras in the electricity sector, or Brazilian private companies, such as in the sanitation sector, in which four Brazilian companies hold 80% of the market share. Activities and prices on these infrastructure markets are regulated by a number of formally independent federal agencies, such as ANEEL in the electricity sector, and the Independent Regulator for Land Transport (ANTT) in the highway sector and the Independent Regulator for Telecommunications (ANATEL) in the telecom sector.

36. In the energy and transportation sectors, the agencies act both as regulators for the sector and as authorities in charge of tendering and contracting concession projects. This may lead to conflicts of interest and sudden changes in regulatory practices. 17 Regulatory agencies have suffered from delays in the nomination process for board members and from budget sequestration, which may have hindered the implementation of their mandate. 18 Best international practices and guidelines recommend that objective, impartial and qualified agencies be guaranteed through role clarity, appropriate funding and independence of leadership. 19,

37. Clarifying the role of regulatory agencies and strengthening their independence is a medium priority. A draft law approved by Senate in 2016 could contribute to improving the independence of agencies. The draft includes limitations on the duration of vacancies and a reform of the appointment process: appointments would still be ultimately decided by the President; possible choices would be restricted to options prepared by the Board based on a list of professional criteria. In line with OECD guidance on the independence of regulators, the budget of the agencies should be protected so that their resources remain as stable as possible. The separation of the regulation and contract management functions should be made clear to avoid potential conflicts of interest in the future. 20

C. Allocating Investments to the Right Sectors and Projects

6. Multi-Year Budgeting (Institutional Strength — Medium, Effectiveness — Low, Reform Priority — High)

38. The 2016–2019 PPA comprises a detailed set of programs, projects and activities for each spending ministry. Projections of the total capital costs (Annex III) and projections of expenditures for the four years of the plan (Annex II) are included for each program, with projections for 2016 in the latter linked to the LOA for 2016. Budgeting is done on an annual basis, with expenditure ceilings for spending ministries provided only for the coming budget year. Full life-cycle costs, which includes operating costs and maintenance, for major projects are currently not published, neither in the PPA nor the annual budget process. The LDO 2018 foresees that the costs of the projects, considering the life cycle, will be included in the complementary information to LOA 2018. An annual monitoring report is prepared on PPA implementation and sent to Congress. The 2016 report included for each program the original four-year PPA projections, the original and revised LOA 2016 current and capital budget allocations, as well as the amount actually spent in 2016.

39. The effectiveness of multi-year planning for public investment is weakened by the lack of a rolling medium term budget process to translate projects in the PPA into budget allocations over time. The PPA is not framed within a realistic macro-fiscal scenario and does not actively guide the budget process since it is too detailed and project costs have not been based on clear costing guidelines. The four-year cost projections of projects in the PPA are not broken down by year, and they are not all updated. The monitoring report sent to Congress mentioned above does not include all projects (only those with expenditures during 2016) and it does not provide updated projections for the remainder of the PPA period (2017–2019). There is no mechanism (e.g. through project codes) to link measures in the budget to those in the PPA. Given that projects in the PPA have an expected lifetime of up to 20 years, focussing on a four-year segment does not indicate efficient investment planning. It results in spreading resources thinly across a large number of un-prioritised projects, and projects in the current PPA may not be found in the next one.

40. Planning and budgeting would be strengthened through the introduction of a rolling medium-term budget framework and this should be a high priority. The establishment of indicative medium-term budget ceilings21 within a realistic medium-term fiscal framework would increase the predictability of resources to spending ministries and thereby improve the efficiency of investment planning. In addition, a rolling medium-term perspective would provide a mechanism for the incorporation of future recurrent costs associated with investment projects and provide a framework for the preparation of life-cycle project costs to facilitate the analysis of longer-term financial feasibility. Nonetheless, the introduction of a medium-term budget framework will be a substantial challenge and require significant capacity building across government and with Congress. Brazil has many of the components of medium term frameworks in place, and recent reports by the IMF have provided guidance on a step by step approach for fully implementing a medium term fiscal framework and moving to a medium-term budget framework.22

7. Budget Comprehensiveness (Institutional Strength — High, Effectiveness — High, Reform Priority — Low)

41. Significant capital spending is undertaken by extra-budgetary entities, but with legislative authorization and disclosure in budget documentation. In 2016, an estimated 66% of total federal-level public investment was executed collectively by SOEs or extra-budgetary funds. The LOA contains information on capital expenditures by all sources of federal-level funding, including expenditures by spending ministries and agencies from the federal government’s main revenue fund (incorporating transfers to sub-national governments, extra-budgetary funds, SOEs (budgetary dependent and non-dependent) and external financing. 23,24,25 All such expenditures are shown by the relevant spending ministry, including capital financial injections to SOEs (referred to as financial inversions). Transactions on federal-level PPPs (including concessions) are shown by ministry and agency in Volume I of the LOA (e.g. revenue stream generated by concessions).26

42. Budget comprehensiveness could be enhanced through providing greater information on capital expenditures financed through non-budgetary sources, relative to other areas this is a low priority reform area. Additional information, including a listing, with associated balances for, all extra-budgetary funds, as well as summarized financial information on all PPPs/concessions and SOEs could be provided in an annex to the LOA. In addition, a quantitative analysis of the PPPs/concessions and associated fiscal risks, including implicit contingent liabilities, could be provided in the relevant annex to the LDO (See institution 4).

8. Budget Unity (Institutional Strength — Medium, Effectiveness — Medium, Reform Priority Medium)

43. Budgets for capital and current expenditures are prepared by a single ministry and presented in a single document. The MPDG is responsible for managing the integrated budget process. The process for preparing budgets for current and capital spending at the spending ministry level is undertaken by a unit for planning and budgeting. Expenditures for both current and capital expenditures by ministry are shown in Volumes III, IV and V of the LOA. All budget tables include details by spending ministry and distinguish clearly between capital and current spending using a classification consistent with international standards. These expenditures are presented by spending ministry but not by program.

44. While project-related current costs are included in the LOA, the expected future operational costs of projects are not. Project-related non-capital (capitalised) costs associated with undertaking the projects are included in the LOA under GND (economic item class) 3. While the on-going operational and maintenance costs associated with capital investment projects are calculated for some projects, this is not systematic. For example, the project fiche used by some ministries for new projects does not require information on these costs. The information is not used in the budget preparation and is not included in the LOA, the PAC or the PPA.

45. The efficiency of capital investments would be improved by a budget process that enabled future recurrent costs to be incorporated into the process. Preparing budgets over a medium-term horizon, with indicative ceilings over the medium term, would enable spending ministries to undertake investment projects more efficiently, including calculating the on-going costs to operate and maintain the asset and ensuring the provision of these costs in the budget. In the absence of a medium-term framework, capital investment projects risk taking much longer to complete due to lack of consistent and predictable funding and/or poorly utilised due to insufficient provision for operation or maintenance.

9. Project Appraisal (Institutional Strength — Low, Effectiveness — Low, Reform Priority — High)

46. Project appraisals for capital project proposals are not systematically undertaken or published. There are no centralized procedures in place requiring spending ministries to appraise projects financially or economically as part of project preparation. There is no documentation on standard methodologies for cost-benefit analyses or value-for-money analyses in relation to deciding on funding modalities (e.g. between budgetary resources and PPPs/concessions). No central agency provides support to spending ministries for the appraisal of projects. While some spending ministries do undertake some financial and/or economic analyses, this is not systematic. Cost estimates for project proposals are prepared on the basis of detailed norms based on unit costs. However, the under-estimation of project costs would suggest that these norms are not effective at estimating the true costs of projects.

47. In practice, there is little analysis of the economic or financial feasibility of capital projects as part of project preparation. The main type of project analysis that is undertaken is technical engineering (design) work and legal compliance (e.g. for potential PPI projects). Some ministries prepare options analyses and assess risks, particularly SOEs considering projects for potential private sector participation. However, this is not the usual practice of ministries, and there is little or no cost-benefit analysis carried out. There is a parallel track of preparation for projects which are prepared by spending ministries for budgetary funding and those which are considered to be of potential interest to the private sector. There is no value-for-money analysis undertaken which compares the relative value-of-money of different funding modalities to determine which provides the best value for the government.

48. In order to improve the outcome of public investment spending, there should be a greater focus on preparing good quality projects, this should be a high priority. Consistent audit report findings cite weaknesses in project preparation as a key factor in poor capital investment. Project appraisals are a key element in the project cycle to assess the economic and financial feasibility of the project and identify potential risks (see Box 4). Procedures and methodologies should be established for both costing and appraising project proposals, with the level of complexity required for the appraisals based on the size of the project. These should be accompanied by detailed guidelines and capacity building for central and spending ministry staff. In some countries, appraisals for spending ministries are carried out by staff from a central institution (e.g. Ministry of Planning) or an independent agency. In others, independent reviews of appraisals are carried out to assess the underlying assumptions and check for potential optimism bias which can be a common feature of project appraisals, particularly those prepared by the sponsoring spending ministry.

Analytical Techniques Used in Project Appraisals

A variety of techniques to evaluate options is available. These appraisal techniques can be applied to a variety of forms of analysis. The main techniques used (most of which involve discounting in one form or another) are:

Net Present Value (NPV) Method: Revenues of a project are estimated, net of outgoings, and then are discounted and compared with the initial investment. The preferred option is that with the highest positive net present value.

Internal Rate of Return (IRR) Method: The IRR is the discount rate which, when applied to net revenues of a project sets them equal to the initial investment. The preferred option is that with the IRR greatest in excess of a specified rate of return.

Benefit-Cost Ratio: The benefit-cost ratio is the discounted net revenues divided by the initial investment. The preferred option is that with the ratio greatest in excess of 1. In any event, a project with benefit-cost ratio of less than 1 should normally not proceed.

Source: Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector, Ministry of Finance, Ireland.

10. Project Selection (Institutional Strength — Low, Effectiveness — Low, Reform Priority — High)

49. There are no standardized criteria for selecting projects, neither for spending ministries to select projects for the pipeline of capital projects nor for the MPDG to select projects for inclusion in the annual budget. In the form of the PAC, the government maintains a pipeline of approved major investment projects for inclusion in the annual budget. Each spending ministry has its own set of criteria for selection of major projects for approval for the pipeline but these are neither detailed nor published. The quality and comprehensiveness of these criteria varies across spending ministries. For some ministries with sector strategies, the criteria include alignment with their strategic priorities, as well as with national priorities, degree of complexity of the project and of project management (e.g. risks), and costs relative to likely resource availability.

50. The process for selecting projects to be put forward for inclusion in the PAC pipeline and for putting forward for budget financing (non-PAC) is the responsibility of spending ministries. The proposals for PAC inclusion are sent to the MPDG. The selection of major projects for inclusion in the PAC pipeline is made by the PAC Management Committee (CGPAC)27 on the basis of project details provided by spending ministries and joint discussions. As noted in Box 2, PAC II expanded extensively the number of projects included in the pipeline and over the years this has resulted in a long wish list of projects. While this long list continues to exist on paper, given limited available resources, the budget for PAC has been reduced considerably and focuses on prioritizing projects which are near completion for inclusion in the budget. New projects (or increases in their scope) can now only be added to the pipeline if a ministry identifies another project (or part of one) to remove. As discussed in Section B, PAC is now subject to sequestration.

51. The selection of potential PPI projects is taken by the Council of PPI on the basis of potential for attracting private sector interest.28 For other concessions and for non-major (non-PAC) projects, the selection is made by the relevant spending ministry. The government does not systematically undertake a central review of major project appraisals before decisions are taken to include projects in the budget. Currently, projects are selected for funding in the LOA primarily on the basis of the level of project completion, in order to minimize the costs of interrupting the project and on political priorities. An example of selection criteria used in Australia is shown in Box 5.

Selection Criteria used for Major Infrastructure Projects in Australia

The key selection criteria used for major infrastructure projects in Australia include:

  • Form part of a set of coherent proposals for a long-term package of reforms (for example, demand management measures and governance arrangements) and investments, which are the direct result of thorough and evidence-based infrastructure planning processes and the resulting strategies – and which are clearly presented in that context;

  • Support Infrastructure Australia’s strategic priorities, including proposals which reflect the national strategies that have been developed by Infrastructure Australia;

  • Clearly identifies and quantifies the problem and explains why solving that particular problem is being prioritized against other potential problems;

  • Are a sophisticated package of both reform and investment initiatives, with a focus on reform initiatives. All capacity investment initiatives should demonstrate why making more efficient use of the existing network, for example through regulatory or pricing reform, is not a better solution; and

  • Are backed by comprehensive and robust demand/price forecasting; capital and operating cost estimates, and economic cost-benefit analysis.

Source: Infrastructure Australia

52. The efficiency of project selection is undermined by the lack of a single and effective gate-keeper either for adding to the pipeline or for inclusion in the final budget. In practice, projects may be selected by the MPDG, by the PPI Council, or by Congress, in the form of Congressional amendments (see Box 6). Projects selected by Congress are not necessarily taken from the pipeline of ready-prepared and approved projects.

The Impact of Congressional Amendments on Public Investment in Brazil

The Brazilian constitutional and legal framework enables the creation of reserved funding for congressional amendment. Constitutional amendment No.86 (2015) mandates that 1.2% of the net current revenue29 of the Union shall be put aside every year for individual congressional amendments made to the budget bill – approximately 8 billion R$ in 2015. In recent years, the LDO has also put aside 0.8% of net current revenue for group amendments.

Congressional amendments introduced before budget approval create a gap between strategic investment planning by spending ministries and the eventual budget allocation. Approximately 10,000 amendments are proposed every year.,. Most of these amendments affect the capital budget by introducing new small-sized investment projects and modifying the planned allocation of resources. Amendments are not screened for coherence with the ongoing national investment strategies and they can be disconnected from actual local needs. They often rely on loose preparation and weak appraisal. Ultimately, congressional amendments represent a large portion of the adopted investment budget. For example, amendments reached more than 60% of the appropriations proposed by the Ministry of Cities in 2015.

Congressional amendments are also a source of inefficiencies during budget execution. The execution of most amendments relies on convênios, which have to be monitored by the spending ministries. This is especially the case for the Ministries of National Integration and of Cities, which receives a greater share of individual amendments. Finally, as the release of funds for amendments may be used by the Executive as leverage for legislative support in Congress, the timely and effective use of resources is a secondary consideration.

Ministries have factored in these constraints by reaching out to Congress before and during budget approval, with limited success. The Ministry of Transportation organizes meetings with Congressmen before and during the discussion of the PLOA in order to present their priorities and convince them on technical grounds. Other ministries, such as the Ministry of Science and Technology, publish booklets specifically aimed at presenting priority initiatives to Congressmen and convincing them of contributing to them.

Sources: Mission, World Bank (Raiser et al., Back to Planning: How to Close Brazil's Infrastructure Gap in Times of Austerity, 2017).

53. A more rigorous and disciplined approach to selecting projects to be funded from federal resources would improve the efficiency and outcomes from public investment, developing this approach should be a top priority. The MPDG is working on a draft decree to set out standardized criteria for project preparation and selection, to be applied to all types of infrastructure projects including PPPs/concessions. As part of these draft criteria, spending ministries preparing projects will be required to undertake project appraisals, including financial and economic analysis (e.g. see Box 7). Requiring project appraisals and standard selection criteria, including specifically measuring projects against government’s strategic priorities, will improve the quality of prepared projects and by identifying early on projects that are not feasible reduce the potential waste of resources.

54. In addition, in the proposed draft revised PFM law there is a proposal in place to establish a “project bank” to act as a pipeline of major projects. The draft Law proposes to establish a national system of national public investment, which would include a bank of well- prepared projects. Formulation of these projects would follow standardized methodologies, norms and procedures established by the Executive. The Law would cover all public investment funded by public resources from all levels of government.

D. Delivering Productive and Durable Public Assets

11. Protection of Investment (Institutional Strength — Low, Effectiveness — Low, Reform Priority — Medium)

55. Formal rules provide little protection of capital spending during budget implementation. There are annual appropriations for project outlays and budget documents provide no information on total project costs, neither capital costs nor lifecycle costs.30 Virement from capital to current spending during the year is allowed, within limits established in the annual budget law (LOA), and requires approval from MPDG. There is no mechanism for carry-over of budget appropriations, but commitments are carried forward for payment in subsequent years. Commitments known as RAP (Restos a Pagar) can be divided into two types. The first comprise “unprocessed” commitments, where funds are reserved for specific purposes in the budget execution system SIAFI, but accrued expenditure has not taken place. The second is “processed” commitments, where the goods and services have been received and there is a legal obligation to make payments.31 These committed yet unpaid expenditures compete with the approved budget in the use of financial resources. 32 RAPs are not formally considered carryovers. There are no limits to RAPs and the s to ck o f commitments, but unpaid expenditures amounted to some 2.4 percent of GDP at the beginning of 2017.

UK Gateway Review Process for Large Public Investment Projects

In order to improve the efficiency of public investment projects, the UK government established a gateway review process for large projects. This process is a formal, independent, and targeted review of the planning and implementation of a project at key stages during its life-cycle. There are five gateway review stages: three before the contract award and two afterwards. Gateway reviews are rapid exercises, undertaken by an experienced team of up to 4 people, taking an average of 3–4 days to complete. The review uses a traffic-light system, assigning Red/Amber/Green status to the program or project, with red signaling immediate remedial action. The review report is provided to the official accountable for the project, who is accountable for the implementation of recommended remedial action and program/project progression. These reports are used for sharing applicable lessons more widely. A typical gateway process is illustrated below.

uA01fig02

56. Actual budget practices do not provide predictability of capital budget funding. The PPA and the PAC do include data on total costs of most major projects, but these are not updated in line with the budget, so estimates will often be outdated. Spending ministries’ ability to commit funds for future years does allow for some degree of carry forward but the decisions regarding additional funding for prior commitments, above what has been appropriated in the budget, are ad-hoc and unpredictable. In 2016 the Treasury released about 12 billion Reals more for payment of PAC expenditures than in the original budget, to allow for clearance of some of the prior PAC commitments. Table 5 gives an overview of total PAC allocations, prior commitments and payments in 2016, as well as data for the three ministries with the highest PAC budget allocations for 2016 – the Ministries of Cities, Transport and Defense.

Table 5.

Clearance of Prior Commitments Under PAC in 2016

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Source: MOF, staff estimates

57. Improvements in protection of investment during budget execution should be a high priority. Protection of investments over the implementation period is weak and this contributes to project delays and cost overruns. Improvements in this area would allow spending ministries to plan their investments on a realistic and predictable basis, and would enhance the credibility and quality of the project planning and prioritization. Improvements could include more comprehensive and consistent disclosure of total project costs in budget documents, a restrictive approach to virements from capital to current spending, and a formalized carry-forward mechanism for major investment projects.

12. Availability of Funding (Institutional Strength — Medium, Effectiveness — Low, Reform Priority — High)

58. Cash forecasts are prepared regularly and donor funding is well integrated into cash management. Ministries get indicative commitment and payment ceilings for the year, but these may be adjusted downward during the year. Budget and cash flow forecasts are updated every second month, and revised ceilings are announced in bi-monthly updates of the presidential decree on budget allocation. Donor funds are not always included in the TSA, but donor funding is included in the budget, and cash management is consolidated. Donor funding is very limited at the federal level and does not undermine consistent cash management.

59. Budget sequestration and cash rationing is applied regularly and hinders efficient capital project implementation. In recent years, limits on budget commitments and cash payments have been reduced regularly during the year to remain within the primary target or because of adjustments to that target. This has had significant, negative impacts on project implementation. These changes give line ministries little time to adjust commitment plans and create uncertainty for planning the implementation of public investments during the year. Table 6 provides an overview of budget sequestration and cash rationing for PAC expenditure, through subsequent reductions in the annual ceilings during the execution of the 2017 budget in the first half of the year.

Table 6.

Impact of Budget Sequestration and Cash Rationing on PAC in the 2017 Budget

(accumulated annual limits, million Real)

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Source: Presidential decrees 8.961, 9.018, 9.040, 9.062 and 9.113.

60. Budget sequestration is one of the major causes of recent capital budget under- performance, and improvements in this area is a top priority. When line ministries become uncertain about whether approved and budgeted capital projects will actually be funded and executed during the year, this undermines their incentives for rigorous project preparation and effective project management. One possible solution could be to prioritize major capital projects within realistic and predictable annual commitment ceilings, effectively excluding these projects from the bi-monthly revisions of budget ceilings. Before 2015, this has been the case for all PAC projects, however the current proposal would be to have this focused on a narrower set of priority projects which are near completion.

13. Transparency of Budget Execution (Institutional Strength — Medium, Effectiveness — Low, Reform Priority — Medium)

61. PAC projects are subject to systematic monitoring but the transparency of procurement is limited. PAC projects are subject to central monitoring of financial and physical execution by the MPDG, using dedicated information systems for this purpose (SISPAC and SGPAC). Project updates are received from line ministries twice a year, and there are sectoral meetings to review project implementation and identify challenges. There is no mechanism for central monitoring of non-PAC investment projects. The President’s office monitors about 40 high-priority programs, including some major investment projects. National procurement law prescribes that capital projects should be tendered competitively. The government procurement portal provides information on individual procurements, but there is no statistical or analytical information.

62. Weak procurement practices reduce the effectiveness of capital budget execution and there is no systematic ex post audit. Most capital projects are tendered nationally, as international tendering is very rare although the PPI is encouraging this approach. International companies can participate in national tenders, either as part of a consortium or on their own, and some contracts have been awarded to international companies. Whereas central monitoring covers both financial and physical execution, the focus seems to be on financial performance at a program level. The application that allows for physical monitoring of individual projects (SGPAC) was deployed in 2016, and is still not fully operational. There is no clear evidence regarding to what degree central monitoring leads to active intervention in projects at risk. Both the CGU (the internal auditor) and TCU (the external auditor), audit the effectiveness of government programs and publish separate reports

63. for each program.33 There is, however no standard requirement or mechanism for ex post audit of major capital projects, and neither the CGU nor the TCU systematically carry out such audits.

63. There is a clear scope to improve the transparency of budget execution, but some of these improvements will require broad, long-term efforts. The most important step in the near term would be to establish mechanisms for systematic ex post audit of capital projects. More proactive project monitoring and extended use of international tendering are important in the medium term. The institutional strength and effectiveness of procurement arrangements are discussed in more detail under Institution 17 and in Annex 2 of this report.

14. Management of Project Implementation (Institutional Strength — Low, Effectiveness — Low, Reform Priority — High)

64. There are no standardized approaches to the management of major capital projects. There is no requirement that project implementation plans are prepared prior to PAC project approval or prior to the allocation of budget funding. Most major projects are implemented by agencies, SOEs or subnational governments. Whereas the ministries monitor project implementation, they do not appoint senior responsible officers for each major project. In the implementing agencies, responsibilities for project implementation is generally allocated to organizational units or teams, and it is not common practice to appoint project managers that are fully accountable for effective implementation of the project. The ministries provide semi-annual reports on implementation of PAC projects in their sector to the MPDG. These reports identify any needs for adjustments in project cost estimates. Proposals for adjustments are reviewed by the PAC technical committee and approved by the management committee. These adjustments do not include fundamental review and reappraisal of projects. Budget implications of PAC project adjustments are reflected in budget submissions for the following year.

65. Major capital projects have generally had very significant cost overruns and delays. These are illustrated in Table 7. A recent study by the World Bank and audit reports highlight that cost overruns, delays and poor project management are common, especially at subnational levels. There is no general framework for capital project management, but some institutions are taking steps to increase their effectiveness in this area. The national highways administration (DNIT) established an office for project management in 2016 and are developing a framework for consolidated management of investment projects over their lifecycle. The federal savings bank Caixa, which finances many smaller investment projects at the local level and also implements projects on behalf of the federal government, have quite stringent mechanisms for project implementation, including a requirement that project implementation plans be prepared before funds are disbursed.

Table 7.

Cost Overruns and Implementation Delays for Major Projects34

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Source: IMF, staff estimates.

66. The budget execution rate for PAC overall has been weak. The World Bank estimates that between 2001 and 2015 the federal government and SOEs executed less than 30 percent of planned investment expenses. 35 Using a shorter time frame, according to the NGO Contas Abertas, for the 60,000 undertakings between 2007 and 2015, only 37% were finished, another 34% were delayed, and the remaining have yet to be started. The weak execution rate for capital projects included in the PAC cannot be attributed to sequestration since it was exempt prior to 2015. Indeed, the World Bank and audit reports have highlighted poor project selection and design, low capacity and poor management of projects.36

67. The persistent cost overruns and project delays can partly be attributed to weak planning and unrealistic costing. During implementation, project specifications are changed making them more expensive, and contract amendments may be signed without formal amendment of the project. The quality control from contracting agencies is often lacking.

68. Until 2015, PAC projects were exempted from budget sequestration and cash rationing associated with achievement of the primary budgetary surplus target. PAC projects have also been subject to simplified procurement and environmental licensing procedures, but this has not significantly reduced implementation problems. A probable explanation is that PAC projects also suffered from original planning and appraisal shortcomings which could not easily be overcome during implementation, even with simplified procedures. There is also extensive fragmentation of project structures and funding arrangements. Ministries divide projects’ work into several components, which often have different funding sources. For instance, the Ministry of Health monitors more than 38.000 projects, mainly at the sub-national government level.

69. Effective project management is currently not a key focus for implementing ministries and agencies, and this area should be a high priority and strengthened considerably. Whereas ministries and agencies put significant emphasis on monitoring of projects, there is much less focus on actual project management. The failure to assign clear responsibilities and accountability for project implementation is striking in that regard. Some good international practices are presented in Box 8.

Good International Practices for Project Management

In many countries, government agencies provide guidance on project management and training of project managers. In the UK, there are numerous resources available for project managers, including training on introduction to project management focusing on four steps of project management which are discussed below.

Project Start-Up: Before starting a project, it is vital to gain the commitment of the business to the proposed project. The outputs must be clearly defined and agreed, along with the measures (critical success factors) against which the outputs will be judged. It is also vital to ensure there are adequate numbers of staff with the required skill set and experience for the task. The project must have a clearly defined and agreed output which contributes to overall business objectives and an unambiguous business case.

Project Delivery: Project delivery entails breaking the project down into stages, reviewing, reporting and deciding whether to continue or not. These are all activities that happen at the end of a stage, prior to commencing the next. The rest of the organization needs to be aware of the project’s progress, especially where other parts of the business will take delivery of the projects outputs or products. The complexity and context for the project will determine whether the implementation phase of the project is carried out in a single stage or broken down into two or more stages so that appropriate levels of management control can be applied. A stage plan contains the level of detail required for controlling the project day-to-day by the project manager.

Project Closure: Projects must be closed in a controlled manner, whether it has been completed according to plan, has been abandoned or failed. Crucial to this phase is the documentation of what went well and what did not. Set up formal controls for implementing project closure whether closing goes to plan or is premature. Produce an end project report, and ‘lessons learned’ reports. Document any ‘unfinished business’ so that those responsible for managing a service or contract after the project closure will be aware of these issues

Review: Plan to carry out a post implementation review – this could be weeks/months/years after project closure depending on the types of benefits expected to be realized. The project only plans for a post implementation review; the actual review would be carried out by the business side that leads on assessing benefits realization. The main purpose of a post implementation review is to answer the question: Did we achieve the benefits set out in the business case? If not, why not? Did we achieve more?

Source: IMF Mission Staff

15. Monitoring of Public Assets (Institutional Strength – Medium, Effectiveness – Medium, Reform priority: Low)

70. Non-financial assets are accounted for and reported in financial statements. Accounting is done by each ministry, and consolidated by the Treasury to prepare the annual financial statements. Balance sheets include non-financial assets and depreciation is included in operating statements based on asset-specific analysis. Currently, the detailed accounting practices are largely determined by each ministry. Ministries determine the scope and frequency of asset surveys, as well as the valuation principles and depreciation rates for different classes of assets. The same applies to sub-national governments, which provide their annual financial statements to the Treasury, but no detailed accounting data.

71. The government is implementing a major accounting reform, which will enhance the scope and consistency of general government accounting considerably over the coming years. The on-going program aims to introduce several different international public sector accounting standards (IPSAS), and will apply to state and local governments as well as to the federal government. The implementation plan for the accounting reform is outlined in a government regulation. 37 It includes 19 different implementation steps, of which steps 7 – 9 are particularly important for monitoring of assets. These steps are based on IPSAS 17 – Property, plant and equipment. The accounting reform will give the treasury access to accounting data at all levels of government, and facilitate full and accurate reconciliation and reporting on general government financial transactions. Table 8 gives an overview of the timetable for introduction of asset accounting according to IPSAS 17 at the different levels of government.

Table 8.

Timetable for Introduction of New Accounting Standards

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Source: Portaria STN Nr. 548

72. The mission emphasizes the importance of the ongoing accounting reforms, and has no additional recommendations in this area. The efforts to strengthen accounting, in particular by gradually introducing IPSAS and incorporating sub-national governments in the accounting framework, will help create a solid basis for monitoring of public assets.

IV. Reform Priorities and Recommendations

Based on the analysis in this report, this chapter makes recommendations on how to address the weaknesses identified under each pillar and in cross cutting issues. It discusses how to improve the strength and effectiveness of PIM institutions. The recommendations discussed below are grouped according to reform priority.

A. High-Priority Recommendations

Recommendation 1: Building on existing initiatives, increase flexibility in the budget and develop medium-term frameworks.38

Issue: In the challenging economic and political environment of recent years, public debt has been on the rise and fiscal space has shrunk. Earmarked revenue, fast-growing large mandatory spending programs and generous indexation practices have constrained the budget and left little room for discretionary spending, including public investment. The current fiscal framework, despite possessing elements of a medium-term framework, including a new rule on primary expenditure, remains short-term oriented and does not promote strategic decision making on fiscal policy and budgeting. More robust frameworks are needed to strengthen and integrate the top-down and bottom-up aspects of budgeting. This can help create a more realistic alignment between planning, budgeting and the ultimate availability of public funding.

Recommendation: Create fiscal space for public investment by improving flexibility in the budget and by strengthening the medium-term perspective in fiscal and budget management, while maintaining fiscal discipline.

Implementation measures:

Short-term measures

  • Review mandatory spending and indexation practices, and implement measures that could temper or constrain their growth within the limits defined by the Constitution.

  • Develop and publish a fiscal strategy statement ahead of each annual budget.

  • Develop a fully-fledged medium-term fiscal framework for ensuring better top-down strategic guidance for the budget process and the setting of relative priorities, supported by new and improved tools for macro-fiscal projections.

  • Set up a high-level Fiscal Committee comprising the MOF, the MPDG and the President’s Office to coordinate macroeconomic, fiscal and budget issues, supported by a technical committee.

  • Starting with a few major spending ministries, develop a medium-term budget framework for ensuring a strong alignment between planning, budgeting and execution for public investment (among other spending) within rolling, multi-year fiscal constraints. The technical committee should take the lead with SOF leading the work with major spending ministries.

  • Develop baseline estimates for major ministries ahead of the 2019 budget process.

  • Adopt an internal debt target.

Medium-term measures

  • Expand coverage of the MTBF to all ministries.

  • Publish forward estimates and use updated baselines in budget ceilings.

  • Expand the fiscal strategy statement by including a formal debt path to guide fiscal policy.

Recommendation 2: Strengthen strategic prioritization of public investment and develop a prioritized portfolio (bank) of high quality projects.

Issue: Public investment management is hampered by a lack of high-level guidance on the priorities of each level of government and confused accountabilities, as well as the lack of an effective national strategic infrastructure plan (to date) to guide public investment decisions. The current pipeline of major projects (PAC) is not effective at providing a targeted, prioritized portfolio of implementable projects consistent with medium-term resources.

Recommendation: Develop a broad (not detailed) high-level national investment strategy to guide sector planning, this strategy would outline the national priorities for public investment and identify key sectors.

Implementation measures:

Short-term measures

  • Prepare a national strategy for investment which focusses on a national vision and broad strategic objectives, overall and by sector, but does not include a list of projects

  • Rationalize the current pipeline of projects to focus only on major public investments

Medium-term measures

  • Create and maintain a prioritized portfolio of high-quality major projects consistent with the MTFF/MTBF and using the strengthened procedures for project preparation and appraisal suggested below (recommendation 6).

  • Ensure spending ministries rationalize their internal (non-major) project investment portfolios, focusing on a limited number of projects which: (i) are necessary to achieve the sector’s strategic objectives; (ii) are high-quality projects; and (iii) can be implemented with existing capacity and existing resources. The rest should be removed.

Recommendation 3: Improve coordination between federal and subnational governments in investment planning and review funding mechanisms.

Issue: Consolidated information on local investment plans is lacking to ensure proper coordination with national and sectoral investment strategies. Spending ministries have to manage thousands of small-sized projects which are not clearly prioritized. Subnational governments suffer from a lack of capacity in project preparation, appraisal and management. Congressional amendments, which can be mandatory, may significantly hinder the implementation of sectoral investment plans and may impact the quality of local infrastructure, with low concern for the efficiency of projects.

Recommendations: Find a better balance between the need for federal oversight and greater devolution of accountability to subnational governments, by building public investment management capacity at the local level and by gradually reducing the fragmentation of federal funding.

Implementation measures:

Short-term measures

  • Generalize a program-based approach to transfers for social infrastructure projects to one or two pilot states whose capacity is relatively high, leaving precise allocation choices to the pilot states. Such specific purpose grants would be designed on a program or initiative basis, rather than requiring central oversight on a project-by-project basis. Such grants could be based on a formula (equal per capita amount, or according to the value of services delivered). They could be paid as a block reimbursement to a state, or could transit via the State Participation Fund. See Annex 3 for a description of how block grants and formula based transfers work in Australia, Canada and India.

  • Require projects funded by congressional amendments to be accompanied by a cost-benefit analysis and an assessment of their coherence with sectoral needs.

  • Avoid having several funding arrangements for a single project.

  • Develop specific training programs on project management for subnational government staff (see recommendation 6).

Medium-term measures

  • Extend the program-based approach to other states and large municipalities.

  • Introduce risk-based monitoring of projects at the subnational government level, focusing on large, complex and high-risk projects.

  • Limit congressional amendments on capital investment to existing programs or initiatives in the PLOA.

Recommendation 4: Strengthen and standardize procedures for project preparation, appraisal and selection.

Issue: There is no effective gatekeeping function for inclusion of projects in the budget, and the selection of projects is made without regard to economic (cost/benefit) or financial feasibility or their alignment with strategic priorities. The preparation of good-quality projects is hampered by the lack of a proper appraisal process and a formal process for staged project approval, with decision steps requiring clear criteria, justification and sign-off before moving to the next stage.

Recommendations: First, formalize and document procedures for a strengthened public investment project cycle, including project identification, initial screening, preparation, appraisal, review, approval and selection, consistent with the budget cycle. Annex 5 presents a new process for improving project preparation and selection for major and non-major projects in Brazil. Second, develop and introduce standard guidelines for this strengthened investment project cycle. For projects above a certain threshold require these analyses before deciding on the funding modality.

Implementation measures:

Short-term measures

  • Establish and codify in legislation a new rigorous process for preparation, appraisal, approval and selection of large public investment project proposals

  • Introduce a formalized process for project decision-making at all stages of the project cycle, including a formal yes/no decision step (with justification and sign-off) for project selection (by spending ministry or central institution), based on clear criteria for each decision step.

  • Introduce a standardized process of project appraisal (with varying levels of complexity based on thresholds) to be applied to all capital investment. Require that major investment projects be subject to detailed cost-benefit/financial feasibility analyses, with the results used to select projects meeting minimum economic/financial feasibility criteria.

  • Prepare detailed methodological guidelines on realistic project costing.

  • Introduce standardized methodological guidelines on project appraisal techniques.

  • Provide training to spending ministries on undertaking project appraisal and costing techniques.

Medium-term measures

  • Establish a central cadre of specialists (e.g. in the MPDG) to provide technical advice and support to spending ministries on carrying out economic and financial analyses, including VfM.

  • Introduce standardized procedures for conducting VfM analyses and require projects in the prioritized portfolio to carry out VfM analyses before deciding on the funding modality (e.g. budget or PPP/concession).

  • Prepare methodological guidelines on VfM analytical techniques.

  • Publish the results of major project appraisals.

Recommendation 5: Enhance the predictability of funding for major capital projects.

Issue: Funding of public investments is highly unpredictable. There is significant uncertainty about the availability of resources to implement projects over the lifetime of the project, and even during the budget year. There is no mechanism for multi-year appropriations. Ministries are allowed to carry over commitments from one year to the next, but it is highly uncertain whether and when these commitments will actually be financed. Capital investment plans are generally unrealistic, and execution rates for capital investments are low. The uncertainty about whether planned and approved projects will actually be implemented undermines the incentives for realistic planning and effective project implementation.

Recommendation: Enhance the realism of capital budgets and the predictability of funding for major capital projects, to allow ministries, agencies to plan and implement projects as effectively as possible.

Implementation measures:

Short-term measures

  • Prioritize major capital projects within annual commitment ceilings and avoid reduced cash allocations for these projects during the year

Medium-term measures

  • Revise budget regulations to allow for multi-year appropriations in special cases

  • Revise budget regulations to allow carry-forward of budget authority for multi-year capital projects, within transparent and clear limits

Recommendation 6: Enhance project management capacities and accountability.

Issue: There is no standardized framework for management and implementation of major public investment projects, and project execution effectiveness is very low. Ministries and agencies focus on monitoring of projects rather than on pro-active management. There is very poor accountability for project implementation results at all levels of government. There is a presumption that many local governments are ill equipped to manage federally funded projects. There are no mechanisms for ex post evaluation of projects and no systematic learning from past project implementation results.

Recommendation: Enhance the effectiveness of project management, preparation and implementation by creating a clear and consistent framework for management of public investment projects, by holding managers accountable for results, developing guidelines and training programs and by creating mechanisms for learning from past performance (see Box 8).

Implementation measures:

Short-term measures

  • Prepare government decree regarding key parameters and responsibilities for management of public investment projects, including assignment of accountability to specific project managers

  • Update budget regulations to require ex post review of all major capital projects, with subsequent compilation and cross-cutting analysis

  • Consider consulting with the TCU to assess interest in conducting ex post audits of capital projects

Medium-term measures

  • Develop comprehensive guidelines for consistent management of public investment projects at all levels of government

  • Provide centralized resources and funding and consider establishing a separate agency to support project preparation and management for major projects, including to support sub-national efforts.

  • Conduct training programs for project managers and other project implementation staff, for both federal and local government staff

  • Update budget regulations to require that project implementation plans are prepared prior to budget funding decisions

  • Include 10 – 20 ex post audits of capital projects in CGU annual work program

Recommendation 7: Modernize public procurement.

Issue: In practice, there are significant barriers for foreign firms seeking to bid for public works in Brazil, with apparently scarce examples of major contract awards to foreign companies. It is vital from an investment efficiency perspective that continuous improvements are made to the differentiated procurement framework (RDC) for major projects. The focus on the lowest price appears to be at odds with ensuring an appropriate quality of projects and their related infrastructure and services and a full life-cycle costing approach to infrastructure investment.

Recommendation: Update the procurement framework for major projects to remove barriers to foreign participation, to enhance competitive outcomes and to strike a better balance between price and quality in project bidding.

Implementation measures:

Short-term measures

  • Conduct an independent ‘first-principles’ review of the RDC to assess its performance and options for improvement along two specific dimensions: international participation and price versus quality.

  • Create a central oversight mechanism and guidelines to ensure quality and consistency in RDC bidding documents and practices.

Medium-term measures

  • Publish an annual procurement plan to foreshadow upcoming requirements in advance of formal tendering processes for specific projects.

  • Set targets for increasing the number and diversity of participants in RDC processes.

  • Publish regular reports containing summary data and analysis on the outcomes of RDC procurement processes.

  • Conduct ex post reviews of RDC procurement processes, particularly where there has been a small number of bids, non-participation by foreign firms or any irregularity.

  • Establish an independent complaints and dispute resolution body for major projects.

B. Medium-Priority Recommendations

Recommendation 8: Improve the strategic framework for PPPs and concessions and strengthen analysis.

Issue: The creation of the Secretariat for the PPI (SPPI) has centralized the selection of major concession projects and helped remove bottlenecks in the project cycle. However, many concessions still fall outside of the scope of the SPPI and unsolicited bids are common. There is no consolidated vision of the existing portfolio of concessions and PPPs in Brazil. Despite the current emphasis on delivering major infrastructure projects through PPPs and concessions, there is no public strategy guiding the selection of projects or guiding the activities of the SPPI. Communication on fiscal risks is limited to a short section in the Annex on Fiscal Risks attached to the LDO. See Annex 4 for a more detailed assessment of the Brazilian PPP and concessions framework.

Recommendation: Reinforce prioritization and transparency within the PPP and concession framework by clarifying the national strategy for PPPs and concessions, in line with the National Investment Plan, by reinforcing the disclosure and management of fiscal risks and by further centralizing the selection process.

Implementation Measures:

Short-term measures

  • Publish a national strategy for PPPs and concessions, detailing the criteria for appraisal and selection of projects, and providing a prioritization of projects or sectors

  • Ensure that value-for-money analysis is conducted at a central level for all new potential concessions or PPP projects.

  • Develop a database and publish a list of the largest federal concessions and PPPs, as part of the annex on fiscal risks, with an evaluation of the revenue flows, assets and liabilities involved for each, and a demonstration that the ceiling for government payments associated with PPPs is complied with.

  • Ensure that unsolicited bids fit within national and sectoral planning and are made subject to competitive auction.

Medium-term measures

  • Ensure centralized oversight of all new federal- or SOE-level concessions and PPP projects and analyse the sustainability and fiscal risks associated with each project in its appraisal phase, both for federal and subnational projects.

  • Extend the published list to subnational PPPs and concessions, with an evaluation of the revenue flows, assets and liabilities involved for each, and a demonstration that the ceiling for local government payments associated with PPPs is complied with.

Recommendation 9: Improve the clarity of roles and independence of regulatory agencies.

Issue: Regulatory agencies act both as regulators for their respective sectors and as authorities in charge of tendering and contracting concession projects. This may lead to possible conflicts of interest or sudden changes in regulatory practices. There have been cases of funding volatility, political interference in the appointment of regulatory agency board members and delays in the nomination process.

Recommendation: Strengthen the financial and managerial independence of regulatory agencies and establish a clear separation between the regulatory functions and the concession contract management functions.

Implementation measures:

Short-term measures

  • Review and adopt the current draft law on the governance of regulatory agencies, in line with OECD guidelines on regulatory independence, to improve the independence of the appointment process and cap the duration of vacancies on the Boards of these agencies

  • Provide technical justifications to all changes in regulations.

  • Ensure stable and predictable resources for the agencies through new guidelines in the LDO

Medium-term measures

  • Explore new self-funding possibilities (fees) to further secure the budget of regulatory agencies.

Recommendation 10: Develop systematic approaches to maintenance planning, budgeting and execution.

Issue: There does not appear to be a systematic, cross-government approach to assessing maintenance needs to preserve the stock of public capital. In practice, it is also difficult to gauge the extent to which even specific maintenance budgets are being executed. Ensuring adequate maintenance funding links to the need for a multi-year approach for public investment and greater protection of the investment budget, together with requirements for life-cycle costing of major projects and more standardized procedures and practices for other public investment.

Recommendation: Develop systematic approaches to maintenance planning, budgeting and execution.

Implementation measures:

Short-term measures

  • Ensure future maintenance spending is captured in the full life-cycle costing of new projects, cost-benefit analyses and value-for-money analyses.

  • Assign a ‘marker’ within the budgeting and accounting systems to facilitate better tracking of maintenance budgets and their execution.

Medium-term measures

  • Develop a standardized approach to be employed by relevant ministries to evaluate annually current and capital maintenance needs over a rolling 3–5-year horizon.

  • Integrate maintenance spending within MTBF.

Brazil: Technical Assistance Report-Public Investment Management Assessment
Author: International Monetary Fund. Fiscal Affairs Dept.