## cr18249-brazilta - Chapter IV provides a detailed discussion on each recommendation. The high-priority ## Source details **Canonical URL:** [cr18249-brazilta - Chapter IV provides a detailed discussion on each recommendation. The high-priority](https://www.imf.org/-/media/files/publications/cr/2018/cr18249-brazilta.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18249-brazilta.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18249-brazilta.pdf.json) --- ### Mission, scope and stakeholders - IMF FAD mission conducted a Public Investment Management Assessment (PIMA) in Brasilia, Brazil during August 9-23, 2017. - Mission leaders and participants: Teresa Curristine (lead), Fabien Gonguet, Mary Betley, Matt Crooke, Eivind Tandberg; with IADB and World Bank participation: Andrés Munoz Miranda, Frederico Rabello, Lorena Viñuela; Fabian Bornhorst (IMF Resident Representative). - Hosted by Mr. Felipe Bardella (Coordinator-General, Cesef) and Mr. Marcelo Pioto (Coordinator, Coapi). - Consultations included: Ministry of Finance (MOF), Ministry of Planning, Development and Management (MPDG), Casa Civil, Federal Court of Accounts (TCU), CGU, sector ministries, BNDES, Caixa Econômica Federal, ABCR, SOEs and subnational governments. - Objective: conduct a PIMA using the IMF PIMA framework and present results and reforms with authorities and stakeholders. ### Executive summary — Country context and high-level findings - Country context and constraints: - Brazil: largest country in Latin America; population of over 200 million across 26 states. - Significant infrastructure gap persists and hampers growth potential. - Historical public investment and capital stock: - Public investment averaged around 2 percent of GDP during 1995 to 2015. - Emerging Market Economies (EME) average: 6.4 percent; Latin American Countries (LAC) average: 5.5 percent. - Public capital stock in 2015: 35 percent of GDP; EME average: 92; LAC average: 87. - Fiscal context: - Recent recession and large revenue drop increased debt above EME average. - Budget rigidities and rising mandatory spending reduce fiscal space for capital spending. - Efficiency gap: - Brazil’s efficiency gap relative to most efficient comparators: 39 percent. - Comparative gaps: EME average 27 percent; LAC average 29 percent. - PIMA institutional assessment (summary): - Institutional strength: majority of institutions assessed as Medium on paper. - Effectiveness: variable; weak in many areas, especially allocation and implementation phases. - Stronger areas relative to EME/LAC: national planning, budget comprehensiveness, company regulations, monitoring of assets. - Weaker areas: project appraisal and selection, protection of investments, funding availability, and project management. - System fragmentation: multiple actors and financing modalities (federal, subnational, SOEs, public banks, concessionaires, extra-budgetary funds). - Legalistic approach: prioritizes compliance over efficiency and outcomes, weakening strategic direction. ### High-priority recommendations (overview) - Increase budget flexibility and develop medium-term frameworks. - Create fiscal space for public investment by reviewing mandatory spending, indexation practices and tax expenditures. - Strengthen medium-term fiscal and budget management to align planning, budgeting and funding availability. - Strengthen strategic prioritization and develop a prioritized portfolio (bank) of high-quality projects: - Prepare a national strategy for investment focused on national vision and strategic objectives. - Develop a prioritized portfolio of major projects (e.g., above 50 mn Rs) and standardized processes for other public investment projects. - Improve federal–subnational coordination in investment planning and funding: - Balance federal oversight and devolution of accountability. - Build subnational PIM capacity and reduce fragmentation of federal funding. - Pilot program-based transfers in one or two high-capacity states. - Strengthen and standardize project preparation, appraisal and selection: - Codify rigorous appraisal/approval/selection for large projects in legislation. - Central guidelines to standardize appraisal processes for all capital investment. - Enhance predictability of funding for major capital projects: - Strengthen capital budgets, prioritize major projects within annual commitment ceilings, revise regulations to allow multi-year appropriations in special cases. - Enhance project management capacities and accountability: - Government decree to assign responsibilities and accountability to specific project managers. - Comprehensive guidelines and training for project management across government. - Modernize public procurement: - Update procurement framework (RDC) to remove barriers to foreign participation, enhance competition, and better balance price and quality. - Medium-term priorities: PPPs/concessions strategic framework, regulatory agency independence, maintenance planning and budgeting. ### Summary assessment (selected institutional scores and reform priorities) - Planning (examples): - Fiscal rules: Institutional Strength: Medium; Effectiveness: Low; Reform priority: High. - National & sectoral planning: Institutional Strength: High; Effectiveness: Low; Reform priority: High. - Central-local coordination: Institutional Strength: Medium; Effectiveness: Low; Reform priority: High. - PPPs: Institutional Strength: Low; Effectiveness: Medium; Reform priority: Medium. - Company regulation: Institutional Strength: High; Effectiveness: Low; Reform priority: Medium. - Allocation: - Multi-year budgeting: Institutional Strength: Medium; Effectiveness: Low; Reform priority: High. - Budget comprehensiveness: Institutional Strength: High; Effectiveness: High; Reform priority: Low. - Project appraisal: Institutional Strength: Low; Effectiveness: Low; Reform priority: High. - Project selection: Institutional Strength: Low; Effectiveness: Low; Reform priority: High. - Implementation: - Protection of investment: Institutional Strength: Low; Effectiveness: Low; Reform priority: Medium. - Availability of funding: Institutional Strength: Medium; Effectiveness: Low; Reform priority: High. - Project management: Institutional Strength: Low; Effectiveness: Low; Reform priority: High. - Assets accounting: Institutional Strength: Medium; Effectiveness: Medium; Reform priority: Low. ### Action plan — selected high-priority outputs, timing, and responsible agencies - Recommendation 1: Increase budget flexibility and develop medium-term frameworks - Late 2017 / 2018: Review mandatory and indexation practices and implement measures. Responsible: CC / SOF / STN. - Late 2017 / 2018: Establish Ministerial and technical fiscal committees; Publish fiscal strategy statement; Adopt internal debt target; Release fiscal strategy statement with the PLDO 2019. Responsible: SOF / STN / Committees. - 2019: Move to a formal debt target and include it in the fiscal strategy statement. Responsible: SOF / STN / Committees. - MTBF: Late 2017 / 2018 through 2019–2020 steps to expand coverage and publish forward estimates. Responsible: SOF / STN / spending ministries / Committees. - Recommendation 2: Strengthen strategic prioritization and project portfolio - Late 2017 / 2018: Prepare national investment strategy consistent with MTFF; Spending ministries to develop sector strategies. Responsible: CC / MOF / MPDG / spending ministries. - Late 2017 / 2018: Rationalize current projects; Create prioritized portfolio of major projects. Responsible: MPDG / STN. - Recommendation 3: Improve federal–subnational coordination - Late 2017 / 2018: Pilot program-based transfers in one or two states; Consolidate convênio arrangements. 2019–2020: Extend program-based approach. Responsible: MPDG / STN / spending ministries / subnational governments. - Late 2017 / 2018: Require congressional amendments have an assessment of coherence with sectoral needs. Responsible: CC / MPDG / spending ministries / Congress. - Recommendation 4: Standardize project preparation, appraisal and selection - Late 2017 / 2018: Introduce formalized rigorous process for project preparation and standardized VfM analyses; publish methodological guidelines; provide training; establish central cadre of specialists. Responsible: MPDG / MOF / Ministries. - 2019–2020: Continue enforcement. - Recommendation 5: Enhance funding predictability - Late 2017 / 2018: Prioritize major capital projects within annual and in-year ceilings; adopt regulations for multi-year appropriations and carry-forward with limits. Responsible: MPDG / MOF. - Recommendation 6: Enhance project management capacities and accountability - Late 2017 / 2018: Prepare government decree to assign accountability; require project implementation plans prior to budget funding; conduct training. Responsible: MPDG / STN. - 2019–2020: Consider ex post audits with TCU; Include ex post audits in CGU work program. Responsible: CC / Congress. - Recommendation 7: Modernize procurement - Late 2017 / 2018: Independent review of RDC; publish annual procurement plan. Responsible: MPDG. - 2019–2020: Central oversight of RDC outcomes; publish regular reports; establish independent complaints/dispute resolution body. Responsible: MPDG. ### Trends and quantitative highlights in public investment (exact figures preserved) - General government investment: between 1 and 3 percent of GDP over the past 25 years. - High point in 1992: 3.1 percent of GDP. - Low point in 2003: 1.1 percent of GDP. - Long-term average in mid-late 2000s: 2 percent of GDP. - IMF projection: general government investment expected to be cut by one-third in 2017 relative to its 2014 level. - Average general government investment over 25 years: 2.1 percent of GDP. - Share of general government investment in total investment: about 10 percent over the period. - Private investment in Brazil: 16 ½ percent of GDP. - Emerging economies private investment average: 17 percent of GDP. - Public capital stock: Brazil’s public capital stock per GDP in 2015 was 35 percent of GDP (see Executive summary); public capital stock declined by close to a quarter between early 2000s and early 2010s. ### Composition of federal-funded capital spending (2015) — exact shares - Federal-funded capital spending includes direct capital expenditure, transfers to subnational governments, and capital injections to SOEs. - Breakdown by function (federal-funded capital spending, 2015): - Economic infrastructure: 21.8% - Social: 29.5% - Defense: 12.4% - Other: 36.4% ### Public sector investment execution (average 2012–2016) — exact shares - Shares of public sector investment executed by institutional actor (average 2012–2016): - Federal government: 18% - Subnational governments (states and municipalities): 44% - State-owned enterprises (SOEs): 38% - Federal government funded 17% of subnational investment through capital transfers over 2012-2016. - SOEs received capital injections amounting to about 4% of their investment over the same period. - SOE capital investment over 2012-2016: about 1.6% of GDP and 38% of public sector investment. ### PPPs / concessions — stock and trends (exact figures) - By 2014: - Current capital stock from PPP/concession projects exceeded 10 percent of GDP, more than three times the average of other BRICS. - Annual PPP investments were almost equivalent to total general government investment. - Rise in PPP capital stock especially between 1999 and 2003 and more recently related to the Olympics. ### Access, quality and efficiency indicators (exact metrics) - Road network paved (WDI, 2010): 13% of total road network paved in Brazil (2010); India 53%; China 61%. - PIE-X (hybrid indicator 0 to 1): - Brazil’s PIE-X: 0.61 - LAC average PIE-X: 0.71 - EME average PIE-X: 0.73 - Brazil’s efficiency gap: 39% (distance to 1). - EME gap: 27% - LAC gap: 29% - Corruption perception (2016 Transparency International): - Brazil rank: 79th out of 176 countries. - Brazil’s score: 40 (2016); LAC average: 41; global average: 43. - Ten years earlier Brazil ranked 70th. ### Project appraisal, selection and pipeline issues - Project appraisal: - Institutional Strength: Low; Effectiveness: Low; Reform priority: High. - No standardized appraisal guidelines or requirement for financial/economic analysis; cost estimates rely on norms and under-estimation occurs. - Recommendation: proportional appraisal complexity by project size; central reviews or independent checks to guard against optimism bias. - Project selection: - Institutional Strength: Low; Effectiveness: Low; Reform priority: High. - No standardized criteria or common gatekeeping process for pipeline inclusion. - PAC pipeline expanded to many projects; PAC project execution rate 2007-2015: 37 percent (T C U 138 Opinion). - Constitutional amendment No.86 (2015): 1.2% of net current revenue set aside yearly for individual congressional amendments (approx. 8 billion R$ in 2015); LDO set aside 0.8% for group amendments; approximately 10,000 amendments are proposed every year. - RAP (Restos a Pagar) unpaid expenditures: some 2.4 percent of GDP at the beginning of 2017. - MPDG drafting decree to set standardized criteria for project preparation and selection; draft PFM law proposes a “project bank”. ### Selection, congressional influence and protection of investment (exact figures and processes) - Selection responsibilities: spending ministries select projects for PAC pipeline; MPDG receives proposals; CGPAC selects major PAC projects. - PPI Council composition includes the President and multiple Ministers and Presidents of BNDES, Caixa and Banco do Brasil. - LOA funding selection emphasizes project completion level and political priorities. - Table 5 (clearance of prior commitments under PAC in 2016) (values preserved in source): - Budget 2016: Total 30.729; Cities 8.219; Transport 8.139; Defense 4.604 - Payments for budget 2016: Total 20.123; Cities 7.380; Transport 4.091; Defense 3.382 - Prior commitments: Total 48.928; Cities 13.219; Transport 11.607; Defense 3.382 - Payments prior commitments: Total 21.920; Cities 4.3983; Transport 7.169; Defense 3.166 - Total PAC expenditure: Total 42.042; Cities 11.762; Transport 11.261; Defense 6.548 ### Predictability, cash management and sequestration (exact figures) - Table 6 — Impact of Budget Sequestration and Cash Rationing on PAC in the 2017 Budget (accumulated annual limits, million Real) - Decree dates: January 17 / March 30 / April 28 / May 30 / July 28 - Annual budget commitment ceiling: 37.192 / 26.655 / 26.655 / 26.655 / 19.686 - Annual budget payment ceiling: 37.192 / 25.155 / 25.155 / 24.855 / 17.723 - Recommendation: prioritize major capital projects within protected annual commitment ceilings to reduce sequestration-induced unpredictability. ### Project implementation performance — cost overruns and delays (exact table figures) - Table 7 — Cost Overruns and Implementation Delays for Major Projects (IMF staff estimates) - Ministry of Cities: Number of major projects 10; Average project delay (months) 81; Average cost overrun 59 % - Ministry of Education: Number of major projects 4; Average project delay (months) 21; Average cost overrun 12 % - Ministry of Energy: Number of major projects 30; Average project delay (months) 16; Average cost overrun 79 % - Ministry Science, Technology, Innovation and Communication: Number of major projects 4; Average project delay (months) 27; Average cost overrun 109 % - Ministry of Transport: Number of major projects 8; Average project delay (months) 51; Average cost overrun 81 % - Total: Number of major projects 56; Average project delay (months) 39; Average cost overrun 64 % - World Bank estimate: between 2001 and 2015 the federal government and SOEs executed less than 30 percent of planned investment expenses. - NGO Contas Abertas (2007–2015, 60,000 undertakings): 37% finished, 34% delayed, remaining not started. - Causes: weak appraisal, changing specifications, contract amendments without formal amendment, weak quality control, fragmentation of funding and project components. ### Accounting, monitoring and reforms (exact timetables and systems) - Non-financial assets are accounted and consolidated by the Treasury; major accounting reform to introduce IPSAS with 19 implementation steps. - Timetable for asset recognition/measurement: - Movable and immovable property: Federation 2017; States 2019; Municipalities above 50,000 2020; Municipalities below 50,000 2021. - Infrastructure assets: Federation 2019; States 2022; Municipalities above 50,000 2023; Municipalities below 50,000 2024. - Information systems: - SGPAC (MPDG centralized database) — status and physical progress; not fully integrated and not publicly available. - SISPAC — aggregated PAC records; integrated with SIAFI in 2016; used for commitments management. - SIOP — online portal providing public access to SIAFI data. - SIAFI — Integrated System for Financial Administration for budget execution and accounting. - Improvement opportunities: better project cost histories, annual cost profiles, integration with implementing agencies’ project management systems, public reporting enhancements. ### Procurement assessment and priorities (exact findings) - Procurement (RDC) Institutional Strength: Medium; Effectiveness: Low; Reform Priority: High. - Legal framework: Constitution and RDC law ensure competitive processes; information published online. - Weaknesses: - No published procurement plan; ComprasNet not used for regular analysis of RDC outcomes. - Barriers for foreign firms: local registration, unit price registration, taxation on capital imports; foreign bidders often need local joint ventures. - Lava Jato investigations revealed widespread corruption and bid-rigging. - Procurement focus on lowest price may undermine quality and lifecycle outcomes. - Reform priorities: independent review of RDC, balance price vs quality, publish procurement plans and outcome reports, establish independent complaints/dispute resolution mechanism. ### Maintenance (exact assessment and recommendations) - Institutional Strength: Low; Effectiveness: Low; Reform Priority: Medium. - Maintenance spending not systematically identified in planning, annual budgets or execution; data gaps hinder measurement. - Suggested actions: - Assign a maintenance spending marker in budgeting and accounting systems. - Link maintenance funding to life-cycle costing and MTBF. - Standardize procedures for assessing maintenance needs over rolling 3–5-year horizons. ### PPPs/concessions framework — transparency and fiscal risks - Laws governing PPPs/concessions: PPPs Law No. 11709 (2005); Concessions Law No. 8987 (1995). - Gaps: - No published national strategy for PPPs/concessions; no standard selection criteria; contingent liabilities not consolidated. - Fiscal constraint: federal government payments for PPPs other than concessions limited to 1% of net current revenue (Article 22 of the PPP law); no similar limit on concessions. - Annex on fiscal risks in LDO includes qualitative PPP/concession risk section for the first time. - International three-step decision approach recommended: (1) economic/social viability; (2) funding modality decision via VfM analysis; (3) gateway process with MOF/MPDG review and veto rights. - Recommended institutional elements: alignment with national investment priorities, VfM prior to modality choice, consolidated disclosure of fiscal risks, strong gatekeeping by MOF/MPDG. - PPI/SPPI (Investment Partnership Program) established 2016 in Presidency to centralize major concession selection; a dozen major concession projects reported signed by SPPI but strategy and pre-selection criteria not published. ### Annex I — PIMA institutional strength scores (exact values) - Indicator scores (Low = 1, Medium = 2, High = 3): - 1.a 2; 1.b 1; 1.c 2 - 2.a 3; 2.b 3; 2.c 2 - 3.a 3; 3.b 1; 3.c 1 - 4.a 1; 4.b 1; 4.c 1 - 5.a 3; 5.b 2; 5.c 3 - 6.a 3; 6.b 1; 6.c 2 - 7.a 3; 7.b 3; 7.c 2 - 8.a 2; 8.b 2; 8.c 3 - 9.a 1; 9.b 1; 9.c 1 - 10.a 1; 10.b 1; 10.c 2 - 11.a 1; 11.b 2; 11.c 1 - 12.a 2; 12.b 1; 12.c 2 - 13.a 2; 13.b 2; 13.c 1 - 14.a 1; 14.b 2; 14.c 1 - 15.a 2; 15.b 2; 15.c 3 - New proposed institutions (scores): - 16.a 2; 16.b 2; 16.c 1 - 17.a 2; 17.b 2; 17.c 1 - 18.a 2; 18.b 1; 18.c 1 ### Annex V — Proposed standardized project preparation and selection process (major vs non-major) - Overarching recommendation: adopt standardized, rigorous approach with threshold test for major/complex/high-risk projects. - Common project phases: NEEDS ANALYSIS; PRE-SCREENING; PREPARATION; EVALUATION AND SELECTION; CHOICE OF MODALITY; FINAL COST AND RISK ANALYSIS; COMMITMENT OF BUDGET FUNDING; EXECUTION; MONITORING; REVIEW. - Centrally-coordinated major projects: central body provides dedicated funding/staff for project fiche, full life-cycle costing, central appraisal, independent review, selection by high-level committee, VfM for modality, MTBF-aligned funding commitments, active monitoring and ex post review. - Regular/non-major projects: managed by spending ministry with standardized templates, life-cycle costing, proportionate appraisal, selection within ministry ceilings, monitoring and occasional independent review for higher-risk cases. *Source: IMF mission PIMA report (mission: August 9-23, 2017) — cr18249-brazilta (excerpts from Preface, Executive Summary, Chapter IV, Annexes and supporting tables).* ### PREFACE ___________________________________________________________________________________________________ 5 ### PREFACE ### Mission and Participants - A mission from the IMF’s Fiscal Affairs Department (FAD) visited Brasilia, Brazil during the period August 9-23, 2017 to conduct a Public Investment Management Assessment (PIMA). - The mission was led by Teresa Curristine and comprised Fabien Gonguet (both FAD), Mary Betley, Matt Crooke and Eivind Tandberg (all FAD experts). - World Bank and IADB participation: Andrés Munoz Miranda (IADB), Frederico Rabello and Lorena Viñuela (both WB). - Fabian Bornhorst (IMF Resident Representative) also participated. - The mission was hosted by Mr. Felipe Bardella (Coordinator-General, Cesef) and Mr. Marcelo Pioto (Coordinator, Coapi) and their teams. ### Meetings, Workshops and Stakeholders Consulted - Meetings with: Ms. Ana Paula Vescovi, Secretary of the National Treasury, Ministry of Finance (MOF); Mr. Hailton Madueira, Secretary of Infrastructure Development, Ministry of Planning, Development and Management (MPDG); Treasury Secretary, Deputy Secretary, Mr. Otávio Ladeira de Medeiros, Undersecretary for Fiscal Planning Mr. Pedro Jucá and teams. - MPDG participants included: Mr. Bruno Leal, Ms. Viviane Vecchi Mendes, Mr. Manoel Filho, Ms. Joana Soledade, Mr. Guilherme Bianco (all SDI), Mr. Paulo Isobe (SEPLAN), Mr. Paulo Fattori (SEST), Mr. Fábio Pontes (SOF), Ms. Cynthia de Toledo Losso (SEGES). - Meetings with officials from Casa Civil (the Presidency), Federal Court of Accounts (TCU), CGU, sector ministries and agencies (Mines and Energy; Transport and Civil Aviation; Health; Cities; Science, Technology, Innovation and Communications), BNDES, Caixa Economica Federal, the Brazilian Association of Road Concessionaires (ABCR), and a number of State-Owned Enterprises (SOEs). - The mission held two workshops: one presenting the PIMA methodology and a second discussing preliminary scores and findings. ### Objective and Scope - Objective: conduct a Public Investment Management Assessment (PIMA) of Brazil’s public investment management institutions and practices. - The assessment used the IMF’s Public Investment Management Assessment framework (PIMA). - The mission presented results and discussed reforms and implementation with authorities and stakeholders. ### Key Findings from the Executive Summary - Country context: - Brazil is the largest country in Latin America with a varied geography and a population of over 200 million spread across 26 diverse states. - Significant infrastructure gap persists and continues to hamper growth potential. - Historical public investment and 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). - Public capital stock in 2015 was only 35 percent of GDP compared with an average of 92 for EME and 87 for LAC. - Fiscal context and constraints: - Recent economic recession and large drop in revenues have increased debt above the EME average. - Budget rigidities and rising mandatory spending reduce fiscal space for capital spending. - Efficiency gap: - The efficiency gap between Brazil and the most efficient countries with comparable levels of public capital stock per capita is 39 percent. - Comparative gaps: EME average 27 percent; LAC average 29 percent. - PIMA institutional assessment: - The majority of Brazil’s public investment institutions are of medium strength on paper (institutional strength). - Implementation is variable and effectiveness is weak in many areas. - Stronger areas relative to EME and LAC: national planning, budget comprehensiveness, company regulations, monitoring of assets. - Weaker areas: allocation and implementation phases—especially project appraisal and selection, protection of investments, funding availability, and project management. - Common causes of weak project outcomes: lack of high-level guidance on priorities; poor coordination across levels of government; no central guidelines on project appraisal and selection; lack of capacity at subnational level and among some spending ministries; poor project management; uncertain funding; cost overruns, delays and poor-quality infrastructure. - Fragmentation of PIM system reflects multiple actors and financing modalities: federal government, subnational governments, state-owned enterprises (SOEs), public banks, concessionaires and extra-budgetary funds. - A strong legalistic approach prioritizes compliance over efficiency and outcomes, exacerbating lack of strategic direction and prioritization. - Ongoing reform initiatives: - 2016 program to better coordinate and centralize concessions to promote private investment. - MPDG developing central project selection guidelines. - Casa Civil working on a long term national investment plan. - Legal reform to improve SOE governance. - Draft laws on improving governance of regulatory agencies and updating the public financial management (PFM) system, including proposals for a national investment project pipeline. - Recommendations and action planning: - The report provides ten main recommendations to strengthen PIM and improve its effectiveness and presents an action plan for implementing these recommendations over the short and medium term. - Identified institutional themes and action areas (as presented in the assessment figure): - 1. Fiscal Rules - 2. National & Sectoral Planning - 3. Central-Local Coordination - 4. Management of PPPs - 5. Company Regulation - 6. Multiyear Budgeting - 7. Budget Comprehensiveness - 8. Budget Unity - 9. Project Appraisal - 10. Project Selection - 11. Protection of Investment - 12. Availability of Funding - 13. Transparency of Execution - 14. Project Management - 15. Monitoring of Assets *Source: IMF mission PIMA report (mission: August 9-23, 2017) — PREFACE and EXECUTIVE SUMMARY.* ### Chapter IV provides a detailed discussion on each recommendation. The high-priority ### cr18249-brazilta - Chapter IV provides a detailed discussion on each recommendation. The high-priority ### High-priority recommendations (overview) - 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. - 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: improving the strategic framework for PPPs and concessions, improving the independence of regulatory agencies, and developing systematic approaches for maintenance planning, budgeting and execution. ### Summary assessment (selected institutional strengths, effectiveness, and reform priority) - A. Planning - 1 Fiscal rules - Institutional Strength: Medium. Fiscal policy is guided by the FRL EC95 and the Golden Rule but there is no public debt anchor. - Effectiveness: Low. Due to collapse of revenues, debt has increased and cuts were applied to investment to comply with primary targets. - Reform priority: High - 2 National and sectoral planning - Institutional Strength: High. A large number of national and sectoral strategies coexist with information on costs and a focus on outputs. - Effectiveness: Low. Weak prioritization, unrealistic costing and congressional amendments have undermined the potential for planning. - Reform priority: High - 3 Central-local coordination - Institutional Strength: Medium. The federal government oversees local borrowing operations and capital transfers, but federal and local investment are largely not coordinated. - Effectiveness: Low. Capital transfers are fragmented and federal government has a large role in planning projects that could be devolved to local governments. - Reform priority: High - 4 Public-private partnerships - Institutional Strength: Low. There is a legal framework for PPPs and concessions, but no published strategy nor standard criteria for selection and no recording of contingent liabilities. - Effectiveness: Medium. Recent reforms have centralized the selection of major concessions to help remove bottlenecks in the project cycle. - Reform priority: Medium - 5 Regulation of infrastructure companies - Institutional Strength: High. The legal framework is intended to promote competition and there are economic regulators in most infrastructure markets. - Effectiveness: Low. There are barriers to effective market access. Regulatory agencies are both regulators and contract managers and could be more independent. - Reform priority: Medium - B. Allocation - 6 Multi-year budgeting - Institutional Strength: Medium. Projections over the four-year period of the PPA are set out by ministry and program, but there are no multi-year budget ceilings on capital expenditure. - Effectiveness: Low. PPA’s four-year projections are not broken down by year and they are not updated. There are no full life cycle costs. - Reform priority: High - 7 Budget comprehensiveness - Institutional Strength: High. The information on capital investment is comprehensive in the LOA. - Effectiveness: High. Comprehensiveness could be improved by including more information on concessions with LOA. - Reform priority: Low - 8 Budget unity - Institutional Strength: Medium. Capital and recurrent budgets are prepared by a single ministry and presented in a single document but not by program. - Effectiveness: Medium. There is no process by which the budget can systematically incorporate the future recurrent costs associated with investment projects. - Reform priority: Medium - 9 Project appraisal - Institutional Strength: Low. There are no standardized guidelines for project appraisal in place and no requirement for financial/economic analysis. - Effectiveness: Low. Project proposals are not systematically subject to financial feasibility or economic analyses. - Reform priority: High - 10 Project selection - Institutional Strength: Low. There are no standardized criteria or a common process for project selection. - Effectiveness: Low. There is not an effective gatekeeping process for inclusion of projects in the budget. - Reform priority: High - C. Implementation - 11 Protection of investment - Institutional Strength: Low. Formal rules provide little protection of capital spending during budget implementation. - Effectiveness: Low. Actual budget practices do not provide predictability of capital budget funding. - Reform priority: Medium - 12 Availability of funding - Institutional Strength: Medium. Cash forecasts are prepared regularly and donor funding is well integrated into cash management. - Effectiveness: Low. Sequestration and cash rationing are applied regularly and hinder efficient capital project implementation. - Reform priority: High - 13 Transparency of execution - Institutional Strength: Medium. PAC projects are subject to monitoring but the transparency of capital budget execution is variable. - Effectiveness: Low. There is no systematic ex post audit, and weak procurement practices further reduce the effectiveness of capital budget execution. - Reform priority: Medium - 14 Project management - Institutional Strength: Low. There are no standardized approaches to management of major capital projects. - Effectiveness: Low. Major capital projects have generally had significant cost overruns and delays. - Reform priority: High - 15 Assets accounting - Institutional Strength: Medium. Non-financial assets are accounted for and reported in financial statements. - Effectiveness: Medium. New regulations on accounting reform have been produced to support enhanced scope and consistency of accounting. - Reform priority: Low ### Action plan — selected outputs, timing, and responsible agencies (HIGH-PRIORITY RECOMMENDATIONS) - Recommendation 1: Building on existing initiatives, increase flexibility in the budget and develop medium-term frameworks - Review of current budget rigidities - Late 2017 / 2018: Commence review of mandatory and indexation practices and implement measures. - Responsible: CC / SOF / STN - Fiscal strategy and fully-fledged medium-term fiscal framework (MTFF) - Late 2017 / 2018: Establish Ministerial and technical fiscal committees. Publish fiscal strategy statement. Adopt an internal debt target. Release the fiscal strategy statement with the PLDO 2019. - 2019: Move to a formal debt target, and include it in the fiscal strategy statement. - Responsible: SOF / STN / Committees - Medium-term budget framework (MTBF) - Late 2017 / 2018: Technical Committee to lead development of MTBF. SOF to lead work with major ministries. Have baseline estimates ready before 2019 budget process. - 2019–2020: Expand coverage to all ministries. Publish forward estimates; use updated baselines in budget ceilings. - Responsible: SOF / STN / spending ministries / Committees - Recommendation 2: Strengthen strategic prioritization of public investment and develop a prioritized portfolio (bank) of high-quality projects - High-level investment strategy to guide sector ministries in developing sector-level strategies - Late 2017 / 2018: Prepare national strategy for investment consistent with MTFF. Spending ministries to develop sector strategies in line with national strategy. - Responsible: CC / MOF / MPDG / spending ministries - Portfolio of prioritized, major projects consistent with MTFF - Late 2017 / 2018: Rationalize current projects to focus only on major public investments. Create a prioritized portfolio of high-quality major projects. Maintain targeted project portfolio consistent with MTFF / MTBF. - Responsible: MPDG / STN - Framework guiding other public investment - See recommendations 6 and 8. Spending ministries to rationalize internal investment portfolios. Maintain quality project portfolios consistent with MTFF / MTBF. - Responsible: MPDG / STN / spending ministries - Recommendation 3: Improve coordination between federal and subnational governments in investment planning and review funding mechanisms - Improved planning and budgeting mechanisms - Late 2017 / 2018: Pilot program-based transfers in one or two states. Consolidate convênio arrangements for single project funding. - 2019–2020: Extend program-based approach and introduce risk-based selection / monitoring. - Responsible: MPDG / STN / spending ministries / subnational governments - Better coherence between congressional amendments and investment planning - Late 2017 / 2018: Require congressional amendments have an assessment of coherence with sectoral needs. Limit congressional amendments on investment to existing programs or initiatives. - Responsible: CC / MPDG / spending ministries / Congress - Recommendation 4: Strengthen and standardize procedures for project preparation, appraisal and selection - Strengthened gatekeeping role for inclusion of projects in the budget - Late 2017 / 2018: Introduce/enforce formalized, rigorous process for project preparation and selection. Introduce/enforce standardized procedures for VfM analyses. - 2019–2020: Continue enforcement. - Responsible: MPDG / MOF / Ministries - Methodological guidelines developed on appraisal and costing - Late 2017 / 2018: Prepare detailed guidelines on costing, project appraisals, and VfM techniques. Provide training and establish a central cadre of specialists to support ministries. Publish the results of major project appraisals. - Responsible: MPDG / MOF / Ministries - Recommendation 5: Enhance the predictability of funding for major capital projects - Credible annual commitment ceilings for major capital projects - Late 2017 / 2018: Prioritize major capital projects within annual and in-year ceilings. - Responsible: MPDG / MOF - Multi-year appropriations and carry-forward of budget authority - Late 2017 / 2018: Adopt regulations to allow multi-year appropriations in special cases and carry-forward with limits. - Responsible: MPDG / MOF - Recommendation 6: Enhance project management capacities and accountability - Clearly-defined project management framework - Late 2017 / 2018: Prepare government decree to assign accountability. Develop guidelines. Provide centralized resources. Require project implementation plans prior to budget funding. - Responsible: MPDG / STN - Systematic preparation and publication of ex post reviews and evaluations - 2019–2020: Consider consulting with TCU to assess their interest in conducting ex post audits of capital projects. Include ex post audits in CGU work program. - Responsible: CC / Congress - Well-trained project management staff at all government levels - Late 2017 / 2018 onwards: Conduct training programs. - Responsible: MPDG - Recommendation 7: Modernize public procurement - Review the RDC Procurement Framework - Late 2017 / 2018: Conduct independent review of RDC. Set targets for improving RDC outcomes. Publish annual procurement plan. - Responsible: MPDG - Monitoring of RDC outcomes - 2019–2020: Establish central oversight to ensure quality and consistency of RDC processes and documents. Publish regular reports on and analysis of the outcomes of RDC processes. Conduct ex post reviews of RDC procurement processes. - Responsible: MPDG - Complaints handling and dispute resolution - 2019–2020: Establish an independent complaints and dispute resolution body. - Responsible: MPDG ### Medium-priority recommendations (selected) - Recommendation 8: Improve the strategic framework for PPPs and concessions and strengthen analysis - Publish a national strategy on PPPs and concessions. Ensure unsolicited bids are consistent within the strategy and subject to competitive auction. - Ensure VfM analysis is conducted at a central level. Ensure centralized oversight of all new projects. - Develop a database of federal concessions and PPPs. Publish a list of the largest federal concessions and PPPs. Extend the list to subnational PPPs and concessions. - Responsible agencies: CC / SPPI / MOF / STN - Recommendation 9: Improve the clarity of roles and independence of regulatory agencies - Adopt draft law after review to ensure consistency with OECD regulatory independence guidelines. - Adopt new guidelines on the budget of regulatory agencies. Explore new self-funding possibilities (fees). - Responsible agencies: MOF; CC / MPDG / MOF / Spending ministries - Recommendation 10: Develop systematic approaches to maintenance planning, budgeting and execution - Link maintenance to life-cycle costing of projects. Evaluate current / capital maintenance needs over the medium term. Integrate maintenance spending within MTBF. - Assign a ‘marker’ for maintenance spending within the budgeting and accounting systems. - Responsible: MPDG (Seplan, SOF); STN; spending ministries ### Trends in public investment in Brazil (key findings) - General patterns - General government investment in Brazil has represented between 1 and 3 percent of GDP over the past 25 years. - On average, general government investment has been three times higher in EME and 2.5 times higher in LAC and more than four times higher in other BRICS countries (Figure 2). - Historical trajectory - Rebounded after the early 1990s recession to reach a high point in 1992, at 3.1 percent of GDP. - Reached a low point in 2003 (1.1 percent of GDP). - Climbed back to a long-term average of 2 percent of GDP during the mid to late 2000s. - According to IMF projections, general government investment is expected to be cut by one-third in 2017 relative to its 2014 level. - Share in total investment and private investment context - General government investment has been on average 2.1 percent of GDP over the past 25 years, or about 10 percent of Brazil’s total investment over the period. - Private investment levels in Brazil are 16 ½ percent of GDP, slightly lower than the average for emerging economies at 17 percent of GDP. - Brazil has relatively higher incidence of concession/PPP investments and a large share of investments undertaken by state-owned enterprises. - Public capital stock - Brazil’s public capital stock as a share of GDP has been on average less than half of comparable country groups (other BRICS, EME, LAC). - The public capital stock declined by close to a quarter between the early 2000s and the early 2010s. - In 2015, Brazilian public capital stock per capita is similar to Argentina and Chile, but significantly lower than other BRICS, Mexico, Uruguay, and Malaysia. - Constraints on investment - The combination of revenue shocks, high debt and significant budget rigidities have impeded Brazil’s ability to increase general government investment. - Public debt has increased significantly over the last few years (Figure 7). - The recession’s impact on revenues and difficulties in implementing major saving initiatives limited fiscal space and demanded sizeable spending cuts; investment has particularly suffered. - Brazil exhibits record-high levels of current spending and among the lowest levels of capital expenditure in the region (Figure 8). - Budget rigidities arise from mandatory spending items, revenue earmarking and indexation; reforms are necessary in the context of the expenditure rule established in late 2016. - Quantitative highlights (exact figures and metrics preserved) - General government investment: between 1 and 3 percent of GDP over the past 25 years. - High point in 1992: 3.1 percent of GDP. - Low point in 2003: 1.1 percent of GDP. - Long-term average in mid-late 2000s: 2 percent of GDP. - IMF projection: general government investment expected to be cut by one-third in 2017 relative to its 2014 level. - Average general government investment over 25 years: 2.1 percent of GDP. - Share of general government investment in total investment: about 10 percent over the period. - Private investment in Brazil: 16 ½ percent of GDP. - Emerging economies private investment average: 17 percent of GDP. *Source: cr18249-brazilta - Chapter IV provides a detailed discussion on each recommendation. The high-priority* ### 6. In 2015, 22% of capital spending funded by the federal government focused on ### cr18249-brazilta - 6. In 2015, 22% of capital spending funded by the federal government focused on ### Composition of federal-funded capital spending (2015) - Federal-funded capital spending includes direct capital expenditure, transfers to subnational governments for capital spending, and capital injections to state-owned enterprises (SOEs). - Breakdown by function (federal-funded capital spending, 2015): - Economic infrastructure: 21.8% - Social: 29.5% - Defense: 12.4% - Other: 36.4% - Note on comparability: - Economic infrastructure in Brazil represents a relatively small share of total capital spending compared to EME countries. - The importance of direct SOE investment and growing use of concessions (especially in energy and transportation) could partly account for the smaller federal share allocated to economic infrastructure. ### Public sector investment execution (average 2012–2016) - Public sector investment comprises general government investment plus SOE investment. - Shares of public sector investment executed by institutional actor (average over 2012-2016): - Federal government: 18% - Subnational governments (states and municipalities): 44% - State-owned enterprises (SOEs): 38% - Role of federal government funding: - The federal government funded 17% of subnational investment through capital transfers over 2012-2016. - SOEs received capital injections amounting to about 4% of their investment over the same period. - SOE capital investment: - Over 2012-2016, SOE capital investment accounted for about 1.6% of GDP and 38% of public sector investment. - The largest SOE investors were Petrobras and Eletrobras. ### Public-Private Partnerships (PPPs) / concessions - Brazil’s recourse to PPPs/concessions has significantly increased since the early 2000s, yielding a larger stock of projects than EME and LAC. - By 2014: - Current capital stock from PPP/concession projects exceeded 10 percent of GDP, more than three times the average of other BRICS. - Annual PPP investments were almost equivalent to total general government investment. - Trend drivers: - Rise in PPP capital stock especially between 1999 and 2003 and more recently related to the Olympics. - Terminology: - In this report, "public-private partnership" includes concessions in which users pay for the service and projects for which the government pays; in Brazil the term is usually used more narrowly. ### Access and quality of infrastructure; efficiency of public investment - Access and quality: - Brazil performs well on access to basic infrastructure relative to the regional average, with mixed results versus other BRICS or EME. - Brazil fares better than EME and other BRICS averages in public education infrastructure but lower in public health infrastructure. - Differences between urban/wealthier and rural/poorer regions are not captured by aggregate indicators. - Road network specifics (WDI, 2010): - Only 13% of the total road network was paved in 2010 in Brazil, compared with 53% in India and 61% in China. - Electricity network: - Efficiency of the power network is below the average for other BRICS. - Perceived infrastructure quality: - Infrastructure quality in Brazil is perceived as significantly lower than EME and LAC averages. - Perception has deteriorated since the beginning of the decade; the gap relative to other BRICS, EME and LAC has been widening. - Investment efficiency (PIE-X): - PIE-X is a hybrid indicator (0 to 1) combining physical and survey-based quality indicators. - Brazil’s PIE-X: 0.61 - LAC average PIE-X: 0.71 - EME average PIE-X: 0.73 - Brazil’s efficiency gap: 39% (distance to 1), meaning 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 EME (27%) and LAC (29%). - Other performance measures: - Volatility of investment: Brazil’s volatility has remained limited, much lower than Mexico, on par with Argentina or Malaysia, but higher than China or the United States. - Churn (volatility of sectoral allocation of investment) has been significantly above the EME average. - Corruption perception (2016 Transparency International): - Brazil ranks 79th out of 176 countries. - Brazil’s score: 40 (2016); LAC average: 41; global average: 43. - Ten years earlier Brazil ranked 70th, indicating a worsening in perception. ### Public Investment Management (PIM) institutions — overview and fiscal framing - Assessment approach: - Fifteen PIM institutions evaluated across three PIM phases: planning, allocation, implementation. - Two dimensions assessed per institution: institutional strength and effectiveness. - Institutional fragmentation: - Brazil’s PIM system features a large number of players for financing, executing, and controlling public investment (federal government, subnational governments, SOEs, public banks, concessionaires, extra-budgetary funds), producing vertical and horizontal fragmentation and lack of uniform practices. - Fiscal framework and rules (Institutional Strength — Medium; Effectiveness — Low; Reform Priority — High): - Key laws: - 2000 Fiscal Responsibility Law (FRL). - Constitutional Amendment No.95 (EC95), December 2016 — established a new expenditure rule freezing real primary spending at its 2016 level for the next twenty years. - Fiscal policy guided by a quantitative target for the primary balance of the non-financial public sector; target set in the Budget Guidelines Law (LDO) for the budget year and two forward years. - Scope: - Both the FRL target and the expenditure rule include capital expenditure; there is no specific permanent provision aimed at protecting capital spending. - Golden rule on credit operations: - Credit operations cannot exceed projected capital spending (article 167 of the Constitution and art 12 of the FRL). - Exceptions include supplementary or special credits (e.g., natural disasters). - Debt and guarantees: - Article 30 of the FRL mandates the President propose debt limits for federal, state, and municipal governments; Article 31 establishes an automatic adjustment mechanism to bring excessive debt within limits within three years. - The Senate has set debt limits for states and municipalities but has not set a limit for the federal government in practice. - Senate Resolution No. 48 (2007) caps the stock of guarantees by the federal government at 60% of net current revenue. - The TCU (Tribunal de Contas da União) has a constitutional mandate to assess compliance with fiscal rules including EC95. - Fiscal developments and impacts on investment (general government, percent of GDP) - Table 3: Fiscal Developments in Brazil 2013 – 2017 (general government, percent of GDP) - Revenue: 2013: 34.5; 2014: 32.5; 2015: 28.0; 2016: 30.2; 2017: 29.4 - Expenditure: 2013: 37.4; 2014: 37.8; 2015: 38.3; 2016: 39.3; 2017: 38.6 - incl. capital expenditure: 2013: 2.2; 2014: 2.3; 2015: 1.8; 2016: 1.7; 2017: 1.6 - Primary balance: 2013: 1.7; 2014: -0.6; 2015: -1.9; 2016: -2.5; 2017: -2.5 - Gross debt (NFPS): 2013: 60.2; 2014: 62.3; 2015: 72.5; 2016: 78.3; 2017: 83.4 - Real GDP growth: 2013: 3.0; 2014: 0.5; 2015: -3.8; 2016: -3.6; 2017: 0.7 - Source: World Economic Outlook (October 2017). NFPS refers to non-financial public sector. 2017 data is IMF estimates. - Consequences: - Recession, falling revenues, and rising mandatory spending led to a ramp-up in debt and severe cuts in investment. - General government investment cut by more than 25% since 2013. - The fiscal framework has been short-term oriented and struggled to contain the debt ramp-up; the golden rule has been complied with to date. ### Policy recommendations and priorities - Medium-term frameworks and budget rigidity: - Reducing budget rigidity and establishing medium-term frameworks is important to allocate fiscal space to investment and should be a high priority. - Social security reform is a key structural reform to curb current expenditure growth and free fiscal space in the medium term, but will not be sufficient alone to ensure compliance with the expenditure rule. - Recommend a wide review of mandatory expenditure, indexation mechanisms, and tax expenditures to identify reform opportunities. - Develop a medium-term fiscal strategy and medium-term fiscal and budget frameworks to provide forward-looking decision-making and support allocation of fiscal space to investments. - Rule design: - International experience suggests medium-term expenditure rules are more effective when combined with a debt anchor, especially where expenditure rules do not cover all public spending (as in Brazil). *Source: IMF staff estimates and analysis, based on official data (excerpts from the specified chapter).* ### 2. National and Sectoral Planning (Institutional Strength — High, Effectiveness — Low, Reform ### 2. National and Sectoral Planning (Institutional Strength — High, Effectiveness — Low, Reform Priority — High) ### Main findings on national and sectoral planning - 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. 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 in most programs 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 Plurianual (PPA): - Is a four-year plan for all public policies rather than a pure public investment strategy. - Provides aggregate planned capital expenditure per program and detailed information on the costs and execution of major investment projects, as well as some associated output targets and realizations. - Its use in decision-making is limited because it is too detailed and does not rely on a realistic macro-fiscal scenario or clear costing guidelines. - Sectoral planning documents exist for energy, transport and logistics, health, education, and sanitation; they provide detailed views of investment needs but aggregate costs are usually not clearly communicated. - Timeframes often exceed the PPA or PAC: National Energy Plan covers 25 years; National Plan for Basic Sanitation covers 20 years. - Specific agencies outside spending ministries have produced sophisticated instruments (Empresa de Pesquisa Energética, EPE; Empresa de Planejamento e Logistica, EPL). - The Ten-Year Plan for Energy Expansion (PDE) provides projections for the next 10 years; the National Plan for Logistical Integration (PNLI) provides projections for the next 20 years. - The 10-year National Plan for Education and the 4-year National Health Plan contain elements on social infrastructure needs. - Most sectoral planning documents are mostly output-oriented, with a few exceptions (sanitation, education). ### Problems undermining effectiveness - Weak prioritization, unrealistic costing and multiple congressional amendments have undermined the effectiveness of planning strategies. - The PAC, originally targeting major economic infrastructure projects, has become clogged by thousands of small-scale projects; project selection and screening were not technically driven and projects seldom underwent substantive economic evaluation. - Project execution rate for PAC projects between 2007-2015 was only 37 percent (T C U 138 Opinion). - For PAC: - In its first phase (2007-2010), US$ 150 billion was allocated. - In its second phase (2011-2014), commitments totaled US$ 500 billion. - Initially provided greater oversight and prioritization, but over time more sectors were added and implementation became more decentralized; in the second phase, more than two-thirds of projects were executed by subnational governments. - Due to the recession, the third phase (2015-2018) scope was gradually reduced; initially funding for PAC projects in the 2017 budget decreased from R$ 37bn to R$ 19bn. - The PPA is too detailed and lacks realistic macro-fiscal scenario and clear costing guidelines. - Parliamentary amendments may fund capital projects outside existing strategies or plans, deepening the gap between planned and actual investment for ministries with large local-level portfolios. ### Recent improvements and remaining needs - The Casa Civil has defined a set of “priority projects” of national interest (including seven infrastructure projects or initiatives, the PPI, and the Broadband Development Program) and provides support, guidance and close monitoring. - A committee comprising the Presidency, the MPDG and the MOF has prioritized PAC projects close to completion for funding under current fiscal constraints. - There is still a need for a clear national investment strategy to stabilize priorities over time; this would outline medium- and long-term priorities aligned with sectoral instruments. - The “long-term strategic development plan” being considered in a draft law on the general governance of the Union could set long-term goals and targets and serve as an anchor for a prioritized and affordable pipeline of major projects relying on realistic costing and transparent selection processes. *Source: Mission staff (extracted sections 22–25 and Box 2)* ### 3. Central-Local Coordination (Institutional Strength: Medium, Effectiveness: Low, Reform Priority: High) ### Main findings on federal–subnational interactions - The federal government oversees subnational borrowing operations and many capital transfers, but local investment is largely not coordinated with federal priorities. - Legal borrowing limits (Senate resolution) and rules: - Net debt to net current revenue ratios capped for states (200%) and municipalities (120%). - Credit operations cannot exceed capital spending according to the Golden Rule. - To borrow, subnationals require formal authorization from the MOF. - Federal support and transfers: - On average over the last five years, federal 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: Capital transfers from the federal government to subnational governments - Capital transfers (bn R$): 2012 20.7; 2013 15.2; 2014 17.5; 2015 13.9; 2016 18.8 - Share in subnational investment: 2012 20%; 2013 14%; 2014 15%; 2015 15%; 2016 22% - Share in investment funded by the federal government: 2012 40%; 2013 24%; 2014 23%; 2015 26%; 2016 29% - 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. ### Problems in coordination and execution - Coordination suffers from fragmentation of transfers, low local capacity and federal micro-management. - Discretionary capital transfers most often take the shape of convênios (grant agreements on a project-by-project basis), usually monitored end-to-end by Caixa Economica Federal (CEF). - Multiple convênios can be concluded for a single investment project. - Convênios can result from congressional amendments and can impede investment plans set by spending ministries. - The fragmented system is difficult for spending ministries to manage; they may end up supporting portfolios of thousands of small-sized projects. - Subnational governments may lack sufficient capacity to prepare and execute projects; project preparation, appraisal, selection and management are often weak at the subnational level. - Example of workload at line ministry: the Ministry of Health has over 38,000 projects. - Attempts at more devolved models in the past failed due to weak project management capacity at subnational level. ### Recommendations and reform priorities - Finding a better balance between federal oversight and fiscal devolution is a high priority: - Ministries should avoid involvement with individual micro-level projects and focus on programs or initiatives, with devolution of allocation of resources to the local level. - Recognize heterogeneity in subnational capacity; some subnational governments (especially urban and wealthier areas) may be better prepared for greater devolution. - Adopt a risk-based approach to devolution. - Gradual adoption of program-based grants could avoid the need for central government involvement in capital project execution and monitoring. - Successful adoption requires significant capacity building at the local level. *Source: Mission staff (sections 26–29, Box 3 and Table 4)* ### 4. Public-Private Partnerships (Institutional Strength — Low, Effectiveness — Medium, Reform Priority — Medium) ### Institutional framework and gaps - The term public-private partnership (PPP) is used in this report to include concessions (users pay for the service) as well as projects for which the government pays; in Brazil the term is usually used more narrowly. - PPPs and concessions are governed by separate laws: PPPs: Law No. 11709 (2005); Concessions: Law No. 8987 (1995). - 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. - There is no published strategic document on concessions that would indicate the government’s medium-term plans, priority sectors, or projected outputs and outcomes. - There is no list of standard criteria for entering into concession arrangements. - Contingent liabilities associated with federal concession projects are not limited and are not analyzed or reported in a consolidated way. - Fiscal constraint in law for PPPs other than concessions: - 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. ### Project appraisal, transparency and coordination - Value-for-money analysis is not systematic across sectors; there is neither a standard published methodology nor a dedicated unit for such analysis. - There is transparency on individual concession projects (contracts usually publicly available on regulatory agencies’ websites), but no consolidated view of existing and planned concession projects in Brazil. ### Recent reforms and effectiveness - Recent reforms have centralized selection of major concessions and improved effectiveness of the project cycle: - The PPI (Investment Partnership Program) was established in 2016 under the Office of the Presidency; several PIL projects were rolled into PPI. - The placement of the PPI secretariat (SPPI) within the Presidency is intended to reinforce coordination and centralize capacity for PPPs and concession project preparation. - PPI is among the “priority projects” Casa Civil oversees; it coordinates actors in project preparation and appraisal, helps expedite tender preparation and environmental licensing. - PPI/SPPI has become an identified source of information for investors and has been relatively effective in delivering new projects; according to the SPPI, a dozen major concession infrastructure projects have been signed. - After Board meetings, the SPPI publishes updated lists of “qualified” projects. - Remaining weaknesses: - Strategy and criteria for pre-selection of projects within the PPI scope have not been published. - Many concessions, including unsolicited bids, still fall outside the scope covered by the PPI initiative. *Source: Mission staff (sections 30–32)* *Source: cr18249-brazilta - 2. National and Sectoral Planning (Institutional Strength — High, Effectiveness — Low, Reform Priority — High)* ### 33. The publication of a strategy for PPPs and concessions and the consolidation of ### 33. The publication of a strategy for PPPs and concessions and the consolidation of ### Transparency and fiscal risks of PPPs and concessions - The annex on fiscal risks attached to the LDO for the first time contains a section on risks associated with PPPs and concessions; the section is largely qualitative, especially on concessions. - A listing of the current portfolio of concessions at the federal level, and other types of PPPs at the subnational level, could reinforce transparency on risks. - Concessions may not involve explicit contingent liabilities but can lead to implicit contingent liabilities (and significant revenue losses), potentially requiring the government to step in if a private concessionaire fails and to provide the service temporarily or permanently. - Current practices for PPP/concession are discussed in Annex 4 and compared with good international practices. ### Regulation of infrastructure companies (Institutional Strength — High, Effectiveness — Low, Reform Priority — Medium) - Market structure and SOE role: - Most markets for economic infrastructure in Brazil are competitive, with domestic and foreign competition. - The private sector has a significant share in railways, ports and most toll roads (concessions run by the private sector); telecom operators have been private since privatization in the late 1990s. - SOEs are very important players, especially Petrobras and Eletrobras (94% of total planned SOE investment for 2017). - Oversight and reporting: - Investment budgets of all 133 federal non-dependent SOEs are sent to the government for review; 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 financial performance and execution of investment. - Market concentration and regulators: - Several markets remain concentrated around large SOEs or large private firms (e.g., four Brazilian companies hold 80% of the sanitation market share). - Independent federal regulators include ANEEL (electricity), ANTT (highway), and ANATEL (telecom). - Conflicts and resourcing: - In energy and transportation, agencies act both as regulators and as authorities handling tendering/contracting of concessions, which may lead to conflicts of interest and sudden regulatory changes. - Regulatory agencies have suffered delays in nomination processes for board members and from budget sequestration, potentially hindering mandates. - Recommendations: - Clarify roles and strengthen independence of regulatory agencies (medium priority). - Protect agency budgets to keep resources as stable as possible (in line with OECD guidance). - Separate regulation and contract management functions to avoid conflicts of interest. - Note: A draft law approved by Senate in 2016 proposes limits on duration of vacancies and a revised appointment process (appointments remain decided by the President but narrowed to options prepared by the Board based on professional criteria). ### Allocating investments to the right sectors and projects — Multi-Year Budgeting (Institutional Strength — Medium, Effectiveness — Low, Reform Priority — High) - Current PPA and budgeting: - The 2016-2019 PPA comprises detailed programs, projects and activities for each spending ministry. - Projections of total capital costs (Annex III) and four-year expenditure projections (Annex II) are included for each program; 2016 projections linked to LOA for 2016. - Budgeting is annual; expenditure ceilings provided only for the coming budget year. - Full life-cycle costs (including operating costs and maintenance) for major projects are currently not published in the PPA or annual budget; LDO 2018 foresees inclusion of life-cycle costs in complementary information to LOA 2018. - An annual monitoring report on PPA implementation is prepared and sent to Congress; the 2016 report included original four-year PPA projections, original and revised LOA 2016 current and capital allocations, and amount actually spent in 2016. - Weaknesses: - The PPA is not framed within a realistic macro-fiscal scenario and does not actively guide the budget process; it is too detailed and project costs lack clear costing guidelines. - Four-year cost projections are not broken down by year and are not all updated. - The monitoring report covers only projects with expenditures during 2016 and does not provide updated projections for 2017-2019. - No mechanism (e.g., project codes) links measures in the budget to those in the PPA. - Projects in the PPA may have expected lifetimes of up to 20 years; focusing on a four-year segment leads to un-prioritised projects and thinly spread resources. - Recommendation (high priority): - Introduce a rolling medium-term budget framework and establish indicative medium-term budget ceilings within a realistic medium-term fiscal framework to increase predictability and incorporate future recurrent costs and life-cycle project costs. - Implementation will require significant capacity building across government and with Congress; Brazil has many components of medium-term frameworks in place and IMF guidance provides step-by-step approaches. ### Budget comprehensiveness (Institutional Strength — High, Effectiveness — High, Reform Priority — Low) - Extra-budgetary execution: - 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 spending ministries, transfers to sub-national governments, extra-budgetary funds, SOEs (budgetary dependent and non-dependent) and external financing. - LOA shows expenditures by 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). - Enhancements suggested (low priority): - Provide additional information on capital expenditures financed through non-budgetary sources: listing with associated balances for all extra-budgetary funds; summarized financial information on all PPPs/concessions and SOEs in an annex to the LOA. - Provide a quantitative analysis of PPPs/concessions and associated fiscal risks, including implicit contingent liabilities, in the relevant annex to the LDO (see institution 4). ### Budget unity (Institutional Strength — Medium, Effectiveness — Medium, Reform Priority — Medium) - Integration and presentation: - Budgets for capital and current expenditures are prepared by a single ministry and presented in a single document; MPDG manages the integrated budget process. - Budget preparation at ministry level done by a planning and budgeting unit. - Expenditures for current and capital by ministry are shown in Volumes III, IV and V of the LOA; all budget tables include details by spending ministry and distinguish between capital and current spending consistent with international standards; expenditures are presented by ministry but not by program. - Inclusion of project-related costs: - Project-related current (capitalised) costs are included in the LOA under GND 3. - Ongoing operational and maintenance costs associated with capital projects are calculated for some projects but not systematically; project fiches used by some ministries for new projects do not require these costs. - These costs are not systematically used in budget preparation and are not included in LOA, PAC or PPA. - Recommendation: - A budget process enabling incorporation of future recurrent costs (through medium-term budgeting with indicative ceilings) would improve investment efficiency and ensure provision for operation and maintenance; absent this, projects risk extended completion times or poor utilization. ### Project appraisal (Institutional Strength — Low, Effectiveness — Low, Reform Priority — High) - Current practice: - Project appraisals are not systematically undertaken or published. - No centralized procedures require ministries to appraise projects financially or economically as part of preparation. - No documentation of standard methodologies for cost-benefit or value-for-money analyses to guide funding modality decisions (e.g., budgetary resources versus PPPs/concessions). - No central agency provides appraisal support; some ministries undertake analyses but not systematically. - Cost estimates are prepared using norms based on unit costs, but under-estimation of project costs suggests norms are ineffective. - Analytical depth: - Predominant analyses are technical engineering design and legal compliance for potential PPI projects. - Some ministries and SOEs prepare options analyses and risk assessments, particularly for projects involving private participation, but cost-benefit analysis is uncommon. - No value-for-money analyses compare funding modalities to determine the best option for government. - Recommendation (high priority): - Focus on preparing good quality projects: establish procedures and methodologies for costing and appraising project proposals, with appraisal complexity proportional to project size. - Provide detailed guidelines and capacity building for central and ministry staff. - Consider centralized appraisals by a central institution or independent reviews of appraisals to check assumptions and guard against optimism bias. - Box 4: Common appraisal techniques (illustrative list from source): - Net Present Value (NPV) Method. - Internal Rate of Return (IRR) Method. - Benefit-Cost Ratio. ### Project selection (Institutional Strength — Low, Effectiveness — Low, Reform Priority — High) - Current situation: - No standardized criteria for selecting projects for ministry pipelines or for MPDG selection for inclusion in the annual budget. - The PAC maintains a pipeline of approved major investment projects for the annual budget. - Each spending ministry uses its own selection criteria for pipeline approval; criteria are neither detailed nor published and quality/comprehensiveness vary across ministries. - For some ministries with sector strategies, selection criteria include alignment with strategic and national priorities, degree of project complexity and project management risk, and costs relative to likely resource availability. *IMF country report excerpt (chapter/section).* ### 50. The process for selecting projects to be put forward for inclusion in the PAC pipeline ### 50. The process for selecting projects to be put forward for inclusion in the PAC pipeline ### Selection responsibilities and institutional actors - Spending ministries are responsible for selecting projects to be put forward for inclusion in the PAC pipeline and for putting forward projects for budget financing (non-PAC). - 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) on the basis of project details provided by spending ministries and joint discussions. - CGPAC comprises senior management from MPDG (Secretariat of PAC, Federal Budget Secretariat and Secretariat of Planning and Strategic Investments), Casa Civil of the Presidency (Monitoring Section), and Ministry of Finance (National Treasury Secretariat and Secretariat for Economic Monitoring). ### Current selection practice and constraints - PAC II expanded extensively the number of projects included in the pipeline, creating a long wish list of projects; 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. - PAC is now subject to sequestration. ### Selection of PPI and other concession projects - The selection of potential PPI projects is taken by the Council of PPI on the basis of potential for attracting private sector interest. - The PPI Council comprises: The President of the Republic, the Minister Chief of General Secretariat, the Minister Chief of Staff of the President, the Minister of Finance, the Minister of Planning, Development and Management, Minister of Mining and Energy, Minister of Transportation, Ports and Civil Aviation, Minister of Environment, President of BNDES, President of Caixa Econômica Federal, and President of Banco do Brasil. - 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. ### Influence of Congress and congressional amendments - There is no single, effective gate-keeper 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. - Projects selected by Congress are not necessarily taken from the pipeline of ready-prepared and approved projects. - Constitutional amendment No.86 (2015) mandates that 1.2% of the net current revenue of the Union shall be put aside every year for individual congressional amendments made to the budget bill – approximately 8 billion R$ in 2015. - The LDO has also put aside 0.8% of net current revenue for group amendments. - Approximately 10,000 amendments are proposed every year. - Congressional amendments often introduce new small-sized investment projects and modify planned allocations; amendments are not screened for coherence with national investment strategies and often rely on loose preparation and weak appraisal. - Examples of Congressional amendment impact: amendments reached more than 60% of the appropriations proposed by the Ministry of Cities in 2015. - Execution of most amendments relies on convênios monitored by spending ministries; release of funds for amendments may be used by the Executive as leverage for legislative support. ### Identified deficiencies in project selection - The efficiency of project selection is undermined by the lack of a single and effective gate-keeper. - Project selection is fragmented across MPDG, PPI Council, and Congress. - There is no systematic central review of major project appraisals prior to budget inclusion. - Selection for LOA funding emphasizes project completion level and political priorities rather than standardized appraisal against strategic priorities. ### Reforms underway and recommended selection improvements - 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. - Requiring project appraisals and standard selection criteria, including specifically measuring projects against government’s strategic priorities, is expected to: - improve the quality of prepared projects; - identify early projects that are not feasible; and - reduce potential waste of resources. - The proposed draft revised PFM law includes a proposal 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. ### Protection of investment and budget execution issues - Formal rules provide little protection of capital spending during budget implementation; annual appropriations for project outlays and budget documents provide no information on total project costs, neither capital costs nor lifecycle costs. - 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 (RAP—Restos a Pagar). - RAP types: - “Unprocessed” commitments: funds reserved in SIAFI but accrued expenditure has not taken place. - “Processed” commitments: goods and services received and legal obligation to make payments. - Processed RAP are cancelled (Prescrição) after 5 years of existence; unprocessed RAP are cancelled earlier, on June 30th of the second year of existence. - RAPs are not formally considered carryovers and there are no limits to RAPs; unpaid expenditures amounted to some 2.4 percent of GDP at the beginning of 2017. - The LDO 2018 requires that the costs of the projects, considering the life cycle, will be included in the complementary information to LOA 2018. - A Presidential decree issued at the beginning of each year distributes budget appropriations among spending ministries, specifies commitment and payment ceilings for each month and indicates the stock of RAPs. - In 2015 and 2016 the MOF made additional funds available for payment of RAP commitments carried forward from previous years; more commonly they prioritize the payments of processed RAPs from the current year’s budget without additional funds. ### Predictability of capital budget funding and PAC execution in 2016 - The PPA and the PAC include data on total costs of most major projects, but these are not updated in line with the budget and estimates are often outdated. - Spending ministries’ ability to commit funds for future years allows some carry forward, but decisions regarding additional funding for prior commitments above what was appropriated 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 prior PAC commitments. - Table 5. Clearance of Prior Commitments Under PAC in 2016 (values in the source): - Budget 2016: Total 30.729; - Cities 8.219; - Transport 8.139; - Defense 4.604 - Payments for budget 2016: Total 20.123; - Cities 7.380; - Transport 4.091; - Defense 3.382 - Prior commitments: Total 48.928; - Cities 13.219; - Transport 11.607; - Defense 3.382 - Payments prior commitments: Total 21.920; - Cities 4.3983; - Transport 7.169; - Defense 3.166 - Total PAC expenditure: Total 42.042; - Cities 11.762; - Transport 11.261; - Defense 6.548 ### Recommendations to improve protection and predictability - Improvements in protection of investment during budget execution should be a high priority; options 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. - One possible solution to sequestration-induced unpredictability: 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 was the case for all PAC projects; current proposal would focus on a narrower set of priority projects which are near completion. ### Budget cash management, sequestration, and impacts on implementation - Cash forecasts are prepared regularly; donor funding is well integrated into cash management but donor funds are not always included in the TSA. - 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. - Budget sequestration and cash rationing are applied regularly and hinder efficient capital project implementation; limits on commitments and cash payments have been reduced regularly during the year to remain within the primary target or because of adjustments to that target. - Table 6. Impact of Budget Sequestration and Cash Rationing on PAC in the 2017 Budget (accumulated annual limits, million Real): - Decree January 17 / March 30 / April 28 / May 30 / July 28 - Annual budget commitment ceiling: 37.192 / 26.655 / 26.655 / 26.655 / 19.686 - Annual budget payment ceiling: 37.192 / 25.155 / 25.155 / 24.855 / 17.723 - Source: Presidential decrees 8.961, 9.018, 9.040, 9.062 and 9.113. - Budget sequestration is one of the major causes of recent capital budget under-performance; prioritizing major capital projects within protected ceilings is suggested. ### Monitoring, procurement and audit - PAC projects are subject to central monitoring of financial and physical execution by the MPDG using SISPAC and SGPAC; project updates are received from line ministries twice a year; sectoral meetings review 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. - International tendering is very rare, though PPI encourages it; international companies can participate in national tenders. - Central monitoring covers financial and physical execution, but focus appears to be on financial performance at a program level; SGPAC (physical monitoring application) was deployed in 2016 and is still not fully operational. - Both the CGU (internal auditor) and TCU (external auditor) audit the effectiveness of government programs and publish separate reports for each program. - There is no standard requirement or mechanism for ex post audit of major capital projects; neither CGU nor TCU systematically carry out ex post audits. - Near-term priority: establish mechanisms for systematic ex post audit of capital projects; medium-term priorities: more proactive project monitoring and extended use of international tendering. ### Project implementation management weaknesses and process - There are no standardized approaches to the management of major capital projects. - No requirement that project implementation plans are prepared prior to PAC project approval or prior to allocation of budget funding. - Most major projects are implemented by agencies, SOEs or subnational governments; ministries monitor implementation but do not appoint senior responsible officers for each major project. - In implementing agencies, responsibilities are generally allocated to organizational units or teams; appointing fully accountable project managers is not common practice. - Ministries provide semi-annual reports on PAC project implementation to the MPDG; these reports identify needs for adjustments in project cost estimates. - Proposals for adjustments are reviewed by the PAC technical committee and approved by the management committee; 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. *Source: cr18249-brazilta - 50. The process for selecting projects to be put forward for inclusion in the PAC pipeline* ### 65. Major capital projects have generally had very significant cost overruns and delays. ### 65. Major capital projects have generally had very significant cost overruns and delays. ### Findings on cost overruns and delays - Major capital projects exhibit very significant cost overruns and delays, as illustrated in Table 7. - World Bank studies 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 across implementing ministries and agencies. ### Key statistics (from Table 7 and related sources) - Table 7 — Cost Overruns and Implementation Delays for Major Projects (Source: IMF, staff estimates) - Ministry of Cities: Number of major projects 10; Average project delay (months) 81; Average cost overrun 59 % - Ministry of Education: Number of major projects 4; Average project delay (months) 21; Average cost overrun 12 % - Ministry of Energy: Number of major projects 30; Average project delay (months) 16; Average cost overrun 79 % - Ministry Science, Technology, Innovation and Communication: Number of major projects 4; Average project delay (months) 27; Average cost overrun 109 % - Ministry of Transport: Number of major projects 8; Average project delay (months) 51; Average cost overrun 81 % - Total: Number of major projects 56; Average project delay (months) 39; Average cost overrun 64 % - World Bank estimate: between 2001 and 2015 the federal government and SOEs executed less than 30 percent of planned investment expenses. - NGO Contas Abertas (for 60,000 undertakings between 2007 and 2015): 37% were finished, 34% were delayed, and the remaining have yet to be started. - The Ministry of Health monitors more than 38.000 projects, mainly at the sub-national government level. - Note: Average project delays are un-weighted. Average cost overrun is weighted using final project costs. ### Causes of overruns and delays - Weak planning and unrealistic costing at appraisal. - During implementation, project specifications are changed, making projects more expensive. - Contract amendments may be signed without formal amendment of the project. - Quality control from contracting agencies is often lacking. - Extensive fragmentation of project structures and funding arrangements; ministries divide projects’ work into several components with different funding sources. - Simplified procurement and environmental licensing procedures for PAC projects did not materially reduce implementation problems, likely because of original planning and appraisal shortcomings. ### Budget execution and implementation performance - PAC projects were exempted from budget sequestration and cash rationing associated with achievement of the primary budgetary surplus target until 2015. - PAC projects were also subject to simplified procurement and environmental licensing procedures, but exemptions did not significantly improve implementation outcomes. - The weak execution rate for PAC overall cannot be attributed to sequestration, since PAC was exempt prior to 2015. ### Institutional responses and good practices - National highways administration (DNIT) established an office for project management in 2016 and is developing a framework for consolidated management of investment projects over their lifecycle. - Federal savings bank Caixa requires project implementation plans to be prepared before funds are disbursed and applies stringent mechanisms for project implementation. - The report stresses that effective project management is currently not a key focus for implementing ministries and agencies and should be a high priority and strengthened considerably. - The failure to assign clear responsibilities and accountability for project implementation is highlighted as a major shortcoming. ### Good international practices for project management (Box 8 summary) - Provide guidance and training for project managers. - Project Start-Up: gain business commitment; clearly define outputs and critical success factors; ensure adequate staffing and an unambiguous business case. - Project Delivery: break projects into stages; review and report at stage ends; use stage plans to control day-to-day management; determine number of stages by complexity and context. - Project Closure: close projects in a controlled manner; document what went well and what did not; produce end project and 'lessons learned' reports; document 'unfinished business'. - Review: plan and carry out post implementation review (weeks/months/years after closure as appropriate) to assess whether benefits in the business case were achieved. ### Accounting and monitoring reforms - Non-financial assets are accounted for and reported in financial statements; accounting is done by each ministry and consolidated by the Treasury. - Detailed accounting practices are largely determined by each ministry; the same applies to sub-national governments, which provide annual financial statements to the Treasury but no detailed accounting data. - The government is implementing a major accounting reform to introduce several different international public sector accounting standards (IPSAS), applying to state and local governments as well as the federal government. - The implementation plan includes 19 implementation steps; steps 7–9 are particularly important for monitoring of assets and 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. - Timetable for introduction of new accounting standards (Recognition, measurement and disclosure): - 7. movable and immovable property: Federation 2017; States 2019; Municipalities above 50,000 2020; Municipalities below 50,000 2021 - 8. infrastructure assets: Federation 2019; States 2022; Municipalities above 50,000 2023; Municipalities below 50,000 2024 - The mission emphasizes the importance of the ongoing accounting reforms and has no additional recommendations in this area. *Source: IMF staff analysis (excerpt from cr18249-brazilta).* ### 9. Recognition, measurement and ### 9. Recognition, measurement and disclosure of assets of cultural heritage ### IV. REFORM PRIORITIES AND RECOMMENDATIONS — Overview - Chapter makes recommendations to address weaknesses under each pillar and cross-cutting issues, and to improve the strength and effectiveness of PIM institutions. - Recommendations are grouped by reform priority: High-Priority and Medium-Priority. ### High-Priority Recommendations - Recommendation 1: Building on existing initiatives, increase flexibility in the budget and develop medium-term frameworks. - Issue: Public debt rising, fiscal space shrunk; earmarked revenue, fast-growing mandatory spending programs and generous indexation practices have constrained the budget; current fiscal framework remains short-term oriented despite elements of a medium-term framework. - 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. - Note: This recommendation and implementation actions have already been presented to the authorities in another IMF report (IMF, Curristine and al., Supporting Implementation of the Expenditure Rule Through PFM Reforms, 2017). - Recommendation 2: Strengthen strategic prioritization of public investment and develop a prioritized portfolio (bank) of high quality projects. - Issue: Lack of high-level guidance on priorities, confused accountabilities, absence of an effective national strategic infrastructure plan; current pipeline (PAC) not effective. - Recommendation: Develop a broad high-level national investment strategy to guide sector planning, outline national priorities and identify key sectors. - Implementation measures: - Short-term measures: - Prepare a national strategy for investment which focuses 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 strengthened procedures for project preparation and appraisal (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; thousands of small-sized projects not clearly prioritized; subnational governments lack capacity; congressional amendments may hinder implementation. - Recommendation: Balance federal oversight and devolution by building PIM capacity at local level and reducing 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 and could be paid as a block reimbursement to a state, or could transit via the State Participation Fund. - 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: No effective gatekeeping for project inclusion in the budget; selection without economic/financial feasibility or strategic alignment; lack of staged approval and appraisal processes. - Recommendations: Formalize and document procedures for a strengthened public investment project cycle and develop standard guidelines; require analyses above thresholds before funding modality decisions. - 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, including a formal yes/no decision step with justification and sign-off for project selection. - Introduce a standardized process of project appraisal (with varying levels of complexity based on thresholds) for all capital investment. Require major projects be subject to detailed cost-benefit/financial feasibility analyses and meet 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 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 is highly unpredictable; no mechanism for multi-year appropriations; high uncertainty undermines planning and execution; execution rates for capital investments are low. - Recommendation: Enhance realism of capital budgets and predictability of funding for major capital projects. - 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: No standardized framework for management and implementation of major projects; project execution effectiveness is very low; poor accountability; no ex post evaluation mechanisms. - Recommendation: Create a clear and consistent framework for management of public investment projects, hold managers accountable, develop guidelines and training, and create mechanisms for learning from past performance. - 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: Significant barriers for foreign firms in public works bidding; focus on lowest price may conflict with quality and lifecycle costing; need to improve the differentiated procurement framework (RDC). - Recommendation: Update procurement framework for major projects to remove barriers to foreign participation, enhance competition, and balance price and quality. - Implementation measures: - Short-term measures: - Conduct an independent ‘first-principles’ review of the RDC to assess its performance and options for improvement along two 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. - 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. ### Medium-Priority Recommendations - Recommendation 8: Improve the strategic framework for PPPs and concessions and strengthen analysis. - Issue: SPPI centralization has helped but many concessions fall outside SPPI scope; unsolicited bids common; no consolidated vision of concessions/PPPs; limited communication on fiscal risks. - Recommendation: Reinforce prioritization and transparency in PPPs and concessions by clarifying national strategy, reinforcing disclosure and management of fiscal risks, and further centralizing selection. - Implementation Measures: - Short-term measures: - Publish a national strategy for PPPs and concessions, detailing criteria for appraisal and selection and providing project/sector prioritization. - 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 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 sustainability and fiscal risks in appraisal phase, for federal and subnational projects. - Extend the published list to subnational PPPs and concessions, with evaluation of revenue flows, assets and liabilities and 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 also manage tenders and concession contracting — potential conflicts of interest; funding volatility and political interference in board appointments. - Recommendation: Strengthen financial and managerial independence of regulatory agencies and separate regulatory functions from concession contract management. - Implementation measures: - Short-term measures: - Review and adopt the current draft law on 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. - 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: No systematic cross-government approach to assessing maintenance needs; difficulty gauging execution of maintenance budgets; links to need for multi-year public investment approach and life-cycle costing. - Recommendation: Develop systematic approaches to maintenance planning, budgeting and execution. - Implementation measures: - Short-term measures: - Ensure future maintenance spending is captured in 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. *Source: Annex to Portaria STN Nr. 548; PLANO DE IMPLANTAÇÃO DOS PROCEDIMENTOS CONTÁBEIS PATRIMONIAIS; IV. REFORM PRIORITIES AND RECOMMENDATIONS (excerpts as provided).* ### Annex I. PIMA Detailed Scores for Institutional Strength in Brazil ### Annex I. PIMA Detailed Scores for Institutional Strength in Brazil ### I–III. PIMA Institutional Strength Scores (Planning, Allocating, Implementing) - Presentation uses color coding with scores: Low = 1, Medium = 2, High = 3. - Institutional Strength scores (by indicator): - 1.a 2 - 1.b 1 - 1.c 2 - 2.a 3 - 2.b 3 - 2.c 2 - 3.a 3 - 3.b 1 - 3.c 1 - 4.a 1 - 4.b 1 - 4.c 1 - 5.a 3 - 5.b 2 - 5.c 3 - 6.a 3 - 6.b 1 - 6.c 2 - 7.a 3 - 7.b 3 - 7.c 2 - 8.a 2 - 8.b 2 - 8.c 3 - 9.a 1 - 9.b 1 - 9.c 1 - 10.a 1 - 10.b 1 - 10.c 2 - 11.a 1 - 11.b 2 - 11.c 1 - 12.a 2 - 12.b 1 - 12.c 2 - 13.a 2 - 13.b 2 - 13.c 1 - 14.a 1 - 14.b 2 - 14.c 1 - 15.a 2 - 15.b 2 - 15.c 3 - New institutions proposed for PIMA framework (Institutional Strength): - 16.a 2 - 16.b 2 - 16.c 1 - 17.a 2 - 17.b 2 - 17.c 1 - 18.a 2 - 18.b 1 - 18.c 1 ### 16.a Legal Framework — Assessment, Findings, and Reform Priorities - Institutional Strength — Medium; Effectiveness — Low; Reform Priority — High. - Scope of assessment: Constitution, legislation, regulations, decrees, orders and decisions by the supreme audit authority, and other standards and guidelines (including planning and budget guidance, and accounting and audit standards). - Key findings: - The legal framework for public investment in Brazil is complex and fragmented. - Landmark initiatives (new Public Finance Law proposing a National Investment Plan and Project Bank, and adoption of multi-year frameworks) could create momentum for reform. - Complementary efforts needed to introduce consistent, guidelines-based approaches across public investment management. - Degree of devolution in federal-state-local financing arrangements affects fragmentation and should be considered. - Main gaps identified (Table 9 summary): - Fiscal strategy and medium-term frameworks: - There is no overarching fiscal strategy that guides fiscal policy in the medium to long term. - A debt anchor would serve as a multi-year constraint and complement the expenditure rule. - A MTFF would promote better top-down strategic guidance; a MTBF would ensure stronger alignment between planning, budgeting and execution for public investment within rolling, multi-year constraints. - National Investment Strategy: - A National Investment Strategy would outline national priorities; institutional arrangements need to support a prioritized portfolio of high-quality, fully-costed projects implementable with public support or private financing based on value for money analysis. - PPP/Concessions strategy: - No overarching strategy guiding use of PPPs, concessions and unsolicited bids; framework should be updated to align with national priorities, apply explicit criteria, and require VFM analysis prior to choice of modality. - Economic regulation: - Potential conflicts of interest given regulators' roles in preparing PPP bidding documents and monitoring PPP contracts; financial independence of economic regulators should be assured. - Project preparation, appraisal and selection: - Need for standardized approaches for preparation, appraisal and selection of major projects. - Costing guidelines need updating to ensure full life-cycle costing. - Management of other public investment by spending Ministries should follow standardized practices. - Investment protection: - Budget process needs to enhance realism of capital budgets and reduce fragmentation of funding sources. - Priority should be given to funding for major projects within annual ceilings to improve execution prospects. - Multi-year appropriations and carry-forwards should be used in special cases. - Project management and ex post review: - Requirement to develop project management approach with project plans and individual project manager accountability for each major project. - Requires training, capacity development, and formal guidelines. - Procurement: - Procurement framework for major projects, while sound on paper, does not appear to be delivering strong international competition. - Modernizing framework and increasing transparency around opportunities and outcomes would help. - Maintenance funding: - No systematic approach to assessing maintenance needs at planning or budget stage; monitoring of maintenance spending and execution not well supported by accounting framework. - Should be addressed in parallel with medium-term budgeting and full life-cycle costing requirements. ### 16.b Information Systems — Assessment, Findings, and Reform Priorities - Institutional Strength — Medium; Effectiveness — Low; Reform Priority — Low. - Major information systems considered: - SGPAC: - Centralized database maintained by the MPDG collating basic information on each project and investment (both PAC and non-PAC) for which central government provides financial support. - Tracks status and physical progress but often relies on manual updates from implementing agencies, leading to timing lags and possible incomplete information. - Project costs appear updated but there is no annual profile of costs, limiting usefulness as an input to the budget process. - Not yet fully integrated with implementing agencies’ project management systems; plans exist to increase integration. - Not publicly available. - SISPAC: - Additional MPDG system maintaining aggregated records for PAC projects and initiatives. - Draws inputs from SGPAC but less detailed. - Integrated with SIAFI in 2016, allowing latest information on financial execution of PAC projects to be accessed. - Now primary vehicle for commitments management for PAC projects. - Available only to registered users in the Brazilian Government; used to produce regular public reports on PAC and supports portfolio-based monitoring. - SIOP: - Integrated System for Planning and Budget — online portal providing public access to the SAIFI database. - Allows access to detailed information on budget allocations, commitments, liquidation and payments. - Brazil’s single-year budget system (not accrual-based) makes it difficult to assess extent to which financial execution data reflects reality on the ground. - SIAFI: - Integrated System for Financial Administration — budget execution and general accounting system permitting decentralized management of receipts and payments under National Treasury supervision. - Key improvement opportunities: - Improve quality of information on project costs, including retaining a history of cost estimates and project timeframe. - Systematically adopt project management tools in implementing agencies to enhance effectiveness. ### 16.c Institutional Capacity — Assessment, Findings, and Reform Priorities - Institutional Strength — Low; Effectiveness — Low; Reform Priority — Medium. - Key findings: - Significant capacity gaps contribute to weaknesses in institutional strength and effectiveness of PIM. - Strong capacity exists within MOF and MPDG; capacity across spending ministries is variable; most significant gaps at sub-national level. - Complexity of legal frameworks and lack of systematic PIM approaches exacerbate capacity shortfalls. - Specialized partners (EPL, EPE, Caixa, BNDES) and audit bodies are compensating in some areas and raising standards. - Primary areas for future focus: 1. Project preparation, assessment and selection. 2. Costing and budgeting processes for major projects. 3. Project management, execution and ex post review. - Recommended capacity-building actions: - Make a central pool of funding available to improve quality of major project proposals at preparation stage. - Establish guidelines for appropriate methodologies and techniques; adopt standardized practices and procedures across the project cycle. - Undertake more thorough project appraisals for large, complex projects and where specialist knowledge or innovative financing is needed. - Engage external experts/consultants for technical support, quality assurance and ex post evaluation. - Create professional qualifications and training modules to develop a cadre of PIM professionals and undertake sub-national training. - Ensure audit bodies have mandate and resources to conduct ex post performance audits of major projects and infrastructure funding programs to produce lessons learned. ### 17. Procurement — Assessment, Findings, and Reform Priorities - Institutional Strength — Medium; Effectiveness — Low; Reform Priority — High. - Scope assessed: processes applying to major public works; RDC is most applicable framework for major projects (airports, PAC actions, Universal Health System investments, prisons, public security, urban mobility, logistics projects, science/technology/innovation). - Legal context: - Procurement process for major capital projects is open and transparent de jure. - Competitive processes ensured by Constitution (Item XXI, Article 37) and RDC Law (Section II). - Major projects tendered in open competitive process with information published through online systems and the official government gazette. - RDC Law sets timeframes for resolution of complaints; General Administrative law requires decisions within 15 days. - Weaknesses and barriers: - Government does not publish a procurement plan. - Central procurement database ComprasNet is complete and good quality but not used to produce regular reports or analysis on RDC outcomes. - Work underway to improve public access to RDC outcomes information. - Procurement complaints are handled first by tendering authority with recourse to TCU or general courts; no specialized complaints/dispute resolution body exists. - Significant barriers for foreign firms: local registration requirements, detailed and binding unit price registration requirements, taxation arrangements on capital imports; foreign bidders typically need locally-led joint ventures. - Lava Jato investigation revealed widespread corruption and bid-rigging practices, calling into question competitive outcomes and value for money. - Observations on competition and value: - Figure 23 analysis of top 50 RDC projects for roads by value in 2015 and 2016 shows number of bidders usually less than 10. - Procurement focus on lowest price may undermine project quality and useful life; emphasizes importance of full life-cycle cost assessments. - Reform priorities: - Ensure convergence with modern, international procurement practices. - Reconsider balance between price and quality in awarding contracts. - Increase diversity and number of bids for major project tenders and frequency of contracts awarded to foreign construction firms. - Address cultural dimensions of procurement reforms to rebuild trust and deliver transparency and good process. ### 18. Maintenance — Assessment, Findings, and Reform Priorities - Institutional Strength — Low; Effectiveness — Low; Reform Priority — Medium. - Key findings: - No systematic, cross-government approach to assessing maintenance needs, with national highways program an exception (specific capital budget for maintenance included within PAC). - Maintenance spending for economic and social infrastructure is not systematically identified in planning, annual budgets or financial execution. - Ministries receive funding within current budget allocations available for maintenance, but this is not differentiated within ‘other current expenses’ in financial reporting and budget papers, complicating monitoring and assessment of future needs. - Data and execution issues: - Difficult to gauge execution of specific maintenance budgets due to data gaps. - Mission reviewed central government spending on road maintenance using liquidated payments reported on SIOP because reliable data on processed RAPs were not available. - Figure 24 illustrates actual spending on road maintenance fell from its peak in 2014; execution had been very low but improved significantly in recent years (perhaps due to budgets becoming more realistic). - In 2016, spending on road maintenance was relatively more protected than overall Ministry of Transport budget regarding discretionary savings measures. - Suggested actions: - Assign a marker to relevant spending in budget and accounting systems to aid monitoring and reporting. - Link adequate maintenance funding to multi-year approaches and greater protection of investment budget. - Require full life-cycle costing of major projects and standardized procedures and practices for other public investment to support maintenance funding and execution. *Source: IMF Mission (Annex I and Annex II content provided in the PDF chapter).* ### Annex III. Fiscal Devolution - Block Grants and Formula-Based ### Annex III. Fiscal Devolution - Block Grants and Formula-Based Transfers ### Australia — Federal financial relations and transfers - Around 45 per cent of the spending undertaken by state governments is supported by financial transfers from the central government. - Public investment at the state level is around two and a half times that at the central level. - Central government financial assistance to states: - 55 per cent is general in nature (can be spent by states in line with their priorities). - 45 per cent is for specific purposes; the vast majority of specific-purpose assistance relate to health, education and transport. Other areas include skills and workforce development, community services and affordable housing. - Health: - State governments are responsible for public hospitals, including associated capital works and construction. - Local health authorities run hospitals in line with state government budget allocations and service agreements negotiated with state health departments. - The central government makes block-based and activity-based payments to states to contribute to the running costs of hospitals, based on the value of services and range of activities provided in the hospital. - Education: - In primary and secondary education, the majority of funding is provided by state governments. - The central government provides supplementary funding through channels such as the Capital Grants Program for Non-Government Schools, which is a block grant program with payments made directly to state governments. Detailed administration is a matter between the state government, block grant authorities and the school. - Roads: - A range of road funding programs are managed by the (central) Department of Infrastructure and Regional Development. - Major road projects of national significance are subject to detailed assessments and project-by-project funding arrangements under a National Partnership Agreement. - For local roads, funding to local councils is distributed according to a formula based on population and road length set by the Local Government Grants Commissions in each state. This funding for local roads is untied. ### Canada — Main transfer programs and characteristics - Four main transfer programs: the Canada Health Transfer (CHT), the Canada Social Transfer (CST) and the Equalization and Territorial Formula Financing (TFF). - CHT: - The CHT is the largest transfer to provinces and territories. - Provides long-term predictable funding for health care. - Supports principles of the Canada Health Act: universality; comprehensiveness; portability and accessibility. - CHT transfer payments are made on an equal per capita basis. - CST: - The CST is a federal block transfer in support of post-secondary education, social assistance and social services, and early learning and childcare. - CST is calculated on an equal per capita basis. - Equalization and TFF: - Provide unconditional transfers to provinces and territories. - Equalization enables less prosperous provincial governments to provide public services comparable to other provinces at reasonably comparable levels of taxation. - TFF provides territorial governments with funding to support public services, recognizing the higher cost of providing programs and services in the North. ### India — Tax devolution and Centrally Sponsored Schemes (CSS) - Fiscal devolution occurs through two channels: - Tax devolution (the proportion of central taxes to be shared is determined by recommendations of the independent Finance Commission). - Specific purpose grants delivered through centrally sponsored schemes (CSS). - Prior to 2014-15, CSS funds were routed through two channels—the Consolidated Funds of the States and directly to state implementing agencies. - In 2014-15, direct transfers to state implementing agencies were discontinued; all transfers to states including for the CSS were routed through the Consolidated Funds of the States. - There are presently 28 CSS, designed as programs where implementation and delivery are the responsibility of state and local governments. The center’s role typically relates to assessing each state’s eligibility for payments. --- ### Annex IV. PPP and Concessions Framework in Brazil Relative to International Standards ### Key assessment and identified gaps - No overarching strategy guiding the use of PPPs, concessions and unsolicited bids in Brazil despite legislation and directives. - Mission’s assessment underlined: - Lack of standard criteria for entering into concessions arrangements. - Failure to systematically evaluate and report on the explicit and/or contingent liabilities associated with concessions contracts. - Proposal focus (recommendation 8): strengthen institutional framework around PPPs and concessions. ### Desired institutional elements (summary) - Strong alignment with national investment priorities and compatibility with a prioritized national portfolio of major investment projects. - Decisions on project selection based on explicit criteria so only sufficiently well-developed and high-quality projects are selected. - Value for Money analysis undertaken prior to choosing project modality for all projects. - Fiscal affordability considered and analysis of associated risks, which are properly disclosed and managed. - Strong ‘gatekeeping’ powers granted to the MOF and the MPDG to ensure alignment with broader fiscal priorities and budget processes. ### International three-step decision-making approach (effective PPP regulation) - Step 1: Government decides whether a project is worthwhile economically and socially; typical tool is cost-benefit analysis; decision embedded in overall strategic investment planning; explicit criteria guide selection. - Step 2: Government determines whether project should be traditional procurement or PPP; apply Value for Money (VfM) analyses. - Step 3: If PPP chosen, follow a “gateway process”; MOF or MPDG evaluates VfM and fiscal affordability in line with the MTBF and budget at each stage; MOF or MPDG should have veto or suspension rights for projects not meeting criteria. - Establishment of a PPP unit (or public investment unit) in the MOF or MPDG to control steps two and three; public investment units with broader mandates may also control step one. ### Departures from international practice in Brazil (findings) - No overarching national investment strategy and associated process for developing a prioritized portfolio of major projects. PPPs, concessions and unsolicited bids need to be nested within an overall public investment strategy. A National Investment Strategy should encompass all ultimate modalities of investment and could include a detailed PPP and Concessions Strategy. - No set of principles or criteria to guide the selection of public investment projects for addition to a national priority portfolio; explicit criteria and detailed/objective cost-benefit analysis are missing. - Choice of modality needs to be based on VfM analysis. Current practice: - Concessions process appears to pre-empt VfM, with major/priority projects being developed within a centrally-coordinated concessions portfolio due to lack of fiscal space. - Numerous concessions projects are advanced on parallel tracks. - Recommendation: publish a standard VfM methodology, perform analysis by a dedicated unit, and maintain and publish a comprehensive list of all concession projects. - Fiscal implications and risks need careful evaluation and management: - Fiscal risks from concessions/PPPs can include: (i) additional public spending to address unexpected viability gaps; (ii) shortfalls in concessions payments to government versus assumptions; (iii) direct and indirect financial exposures through public sector loans to affected projects (whether or not explicit guarantees are in place). - Risks should be evaluated, managed and disclosed on a project-by-project and consolidated basis. - In Brazil, consolidation of data could fall under the responsibility of the Fiscal Risks Division at the National Treasury. - Strong gatekeeping is not assured under current arrangements: - Need appropriate involvement across project development stages. - Decisions about PPPs and Concessions should be linked to medium-term and annual budget decision-making processes, currently the responsibility of the National Treasury and the Federal Budget Office. --- ### Annex V. Proposed Project Preparation and Selection Process for Brazil – Major and Non-Major Projects ### Overarching recommendation - Adopt a standardized and rigorous approach for project preparation and selection for major and non-major projects. - First step: determine whether the proposed project is above or below the threshold and/or is particularly complex or high risk. - If YES: project goes through a more rigorous centrally coordinated process. - If NO: project managed by the spending ministry as part of its planning/budgeting process but still subject to rigorous appraisal and evaluation. - Project phases are the same for both types: NEEDS ANALYSIS, PRE-SCREENING, PREPARATION, EVALUATION AND SELECTION, CHOICE OF MODALITY, FINAL COST AND RISK ANALYSIS, COMMITMENT OF BUDGET FUNDING, EXECUTION, MONITORING, REVIEW. - At each step there is a decision point — only projects that pass the current step move on. ### Centrally-coordinated major projects — Process steps and roles - Initiated by the spending agency; review and selection managed by a central body with final decisions involving a Cabinet-level body. - Steps: 1. Needs analysis: Spending ministry undertakes needs analysis; outcome = set of project ideas; may align with sector strategy. 2. Pre-screening: Spending ministry pre-screens against strategic policy objectives; apply criteria and rank by alignment. 3. Project preparation: Central body with dedicated funding/staff partners with spending ministry to develop detailed project proposal using standardized template (e.g., a project fiche); prepare life-cycle cost estimates and calculate ongoing operating and maintenance costs. 4. Project appraisal: Central expertise undertakes appraisal covering financial and economic feasibility, including cost-benefit analysis and cost-effectiveness analysis; includes options analyses (environmental, demand, socio-economic, technical engineering, legal/regulatory), risk assessment and sensitivity analysis. 5. Independent review of appraisal: Central body reviews appraisal and assesses realism of cost projections to identify potential optimism bias. 6. Selection of project: Central high-level body (e.g., major projects committee) reviews and decides whether to select the project for the major projects portfolio based on clear selection criteria. 7. Choice of funding modality: Technical staff undertake a specific VfM analysis to determine funding modality (budgetary funds or PPP/concessions). 8. Commitment of funds in budget: Central body (Cabinet-level committee) determines which projects to fund over the medium-term, ideally through the MTBF. 9. Project implementation, monitoring and review: Active project monitoring and reviews during budget implementation, assessment of impact, and ex post review to learn and disseminate lessons. ### Regular public investment / Non-major projects — Process steps and roles - Managed by the spending agency as part of the medium-term budget process; steps 1-2 undertaken by the spending ministry. - Steps: 1. Needs analysis: Spending ministry identifies gaps; outcome = set of project ideas. 2. Pre-screening: Spending ministry pre-screens against strategic policy objectives; only aligned projects proceed. 3. Project preparation: Spending ministry develops detailed proposal using standardized template and prepares life-cycle cost estimates; if projected costs are not in line with expected medium-term resources, the proposal may be stopped. 4. Project appraisal: Spending agency carries out at minimum a basic analysis of financial and economic feasibility, possibly with appraisal specialists; extent of analyses depends on project size. 5. Independent review of appraisal: Not normally carried out unless project has particular risk factors (may be done if desired). 6. Selection of project: Spending ministry reviews analyses and decides whether to select the project based on clear selection criteria. 7. Choice of funding modality: As projects are more likely publicly funded, this step is not normally required. 8. Commitment of funds in budget: Spending ministry determines its budget proposal within its ceiling and which projects to fund over the medium-term, ideally through the MTBF. 9. Project implementation, monitoring and review: Active monitoring and reviews during budget implementation, assessment of impact, and ex post review for learning and dissemination. *Source: cr18249-brazilta - Annex III. Fiscal Devolution - Block Grants and Formula-Based Transfers (IMF mission materials contained in the provided content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18249-brazilta.pdf_