Recte Rempublicam
Recte Rempublicam
GerereGerere
Gerindo a coisa pública corretamente
Management
of the Public Good
Gerindo a coisaProper
pública
corretamente
Proper Management of the Public Good
The Brazilian Federation:
Financing Cities and
Mega Cities
Foro de Capitalidad/Capital Forum
Ciudad de Mexico
July 19th, 2010
Renato Villela
Secretaria de Fazenda
Estado do Rio de Janeiro
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Background
Financing the Cities
Large and Mega Cities Main Services
Other Relevant Issues
Final Remarks
2
Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
• Federative Republic of Brazil (since 1988)
• 26 States + 1 Federal District
• 5,560 Municipalities
• 4,491 in 1990
• 3,991 in 1980
More than 1,500 created after 1988
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Population: 190 million
Urbanization rate: 82%
Annual population growth (2008): 1.01%
GDP (2008): US$ 1,575.9 billion
GDPpc (2008): US$ 8,311
Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Population Percentiles, 2008.
700,000
600,000
500,000
Largest
São Paulo
Smallest
Borá
Population
10,886,518
804
Population
City
400,000
300,000
200,000
100,000
0
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
• In 1988 the Federal Constitution was voted.
• It marked the end of a 20-year dictatorship.
• Restoration of democracy and civil liberties were the main
drive, and decentralization was viewed as a major way to
achieve that.
• The Constitution decentralized – not merely deconcentrated:
– Revenue mobilization (strengthened tax base and
transfers)
– Expenditure functions
• Municipalities were recognized in 1988 as having the same
hierarchy of states in the Brazilian federation
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Background
Financing the Cities
Large and Mega Cities Main Services
Other Relevant Issues
Final Remarks
7
Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Tax Assignment by government tier
Municipal
• on Urban Property
• on Services
• Real estate transfers by
inheritance or legacy
• fees and improvement
charges
State
• “VAT”
• on Motor vehicles
• Real estate transfers
(market operations)
Central
• on Foreign trade
• on Rural property
• on Income (corporate
and personal)
• on Industrial products
• on Financial operations
• Payroll tax (social
security general regimen)
• Social contributions
• Economic contributions
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
2008
Municipal
States
Central
Tax Revenue (US$ billion)
22.4
129.2
138.6
%
7.7
44.6
47.7
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
TAX BURDEN IN BRAZIL
Own tax collection
Available after transfers
Percent of GDP
%
Percent of GDP
%
Total
38.9
100
38.9
100
Central
26.7
69
22.5
58
State
10.1
26
9.8
25
Municipal
2.1
5
6.6
17
Source: Afonso & Araújo (2006)
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Expenditure Assignment
Gov´t tier
Shared (M, S and C)
Function
Local
Source: Afonso & Araujo (2006)
Function
Distribution
Health and social
Total
cultural heritage
preservation;
environment; education
and culture; agriculture
and food distribution;
housing and sanitation;
transportations and
traffic safety; small
business improvement;
and tourism and sports.
Education
23.7%
Health
21.6%
Administration
13.8%
Urban services
12.4%
Pensions
4.6%
Transportation
3.5%
Social assistance
2.9%
Pre-school and primary
education; and
preventive health care
Sanitation
2.6%
Housing
0.8%
Public order
0.8%
Other (incl legislative
and debt)
13.3%
Expenditure assignent
assistance; historic and
Mainly local
Municipal expenditure by Functions
Intra-city public
transportation; and
land use regulation
US$ 39.3
Source: Afonso & Araújo (2006)
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
VERTICAL IMBALANCE
MUNICIPALITIES
Own revenue and loans
Total Expenditure
100%
32%
Tax sharing
Mandatory transfers
68%
Discretionary transfers
Source: Brazilian National Treasury
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
HORIZONTAL IMBALANCE
Population brackets
(thousand inhabitants)
Tax Revenue
US$ per capita
Total Population
in the Bracket
(million inhabitants)
Less than 50
178
61.1
50 to 100
339
20.0
100 to 500
541
39.5
500 to 1,000
654
12.0
1,193
33.3
521
166.5*
More than 1,000
Total
Source: National Treasury and Brazilian Statistics Bureau (IBGE)
* Corresponds to the population of the municipalities for which there was fiscal data.
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Central
States
Three major types:
• Tax sharing
• Based on the Constitution or
the law (mandatory)
• Discretionary
Municipalities
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Tax Sharing: Municipalities get
• 25% of the state VAT [main criteria: economic
activity (3/4), population, area, local tax collection]
• 50% of the state tax on motor vehicles (# of licensed
vehicles in the municipality)
• 50% of the federal tax on rural property (property
localization)
• 70% of the federal tax on financial operations with
gold (amount of gold extracted locally)
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Equalization fund
(22.5% of the federal income tax and of the tax on indl products)

10% of the fund to the state capitals
f(Population + Income per capita -1)

90% to remaining municipalities
Population: 16 brackets with index varying from:
Less than 1,188 inhabitants => 0.6
….
More than 156,216 inhabitants => 4.0
Smaller municipalities get proportionally much more
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Compensation/cooperation purposes
•
•
•
•
•
•
Loss of tax on industrial products due to exports exemption
Loss of VAT due to exports of primary and manufactured
goods
Royalties and other compensations on oil and natural gas
production, hydroelectricity, and mineral resources
25% of the states quota on a federal contribution on fuels
Fund for basic education (better described later)
National Health Fund (better described later)
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Discretionary Transfers
• Depend on political will and agreement between administrations
• Very small (only about 0.2 % of GDP), but increasing very fast
• Project linked: consistent with federal or state policies
• Matching funds (at least 20%, with few exceptions)
• Concentrated on 2 ministries (health and education), but recently the
Ministry of the Cities (Urban Affairs) has become also an important
player. Program for Acceleration of Growth – mostly paying for
investment in sanitation services.
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Background
Financing the Cities
Large and Mega Cities Main Services
Other Relevant Issues
Final Remarks
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
The Health Sector
 The 1988 Federal Constitution ensured universal access to publicly
provided health services.
 Centralized financing (only the federal government), and
decentralized service delivery based on strict rules and government
and social oversight
Public providers (central, state, and municipal)
Private providers
Managing health care centers, hospitals, and clinics
Are reimbursed by the Central government for medication, consultations,
exams, and surgeries and complex treatments
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Municipal service delivery
The Health Sector (cont.)
Municipalities also spend their own resources in health
(12% of taxes and general purpose transfers => health services)
Large and Mega Cities have their own health network, which is only partially
funded by the NHS
Metropolitan problems are dealt with by States and the NHS - coordination
problems
The dynamics of the costs of services are posing an increasing challenge for
local public and state public health networks
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Education
The sector benefits from a earmarking of 25% of own taxes and general
purpose transfers
Fund for Basic Education Development (FUNDEB)
• One fund for each state and corresponding municipalities:
– 20% of the own taxes and transfers of each entity go to the fund
– The resources of the fund are redistributed according to the number
of students enrolled in the respective basic-education public school
system of unit
The idea is to ensure that the public funds earmarked to
basic education (first 9 years, pre-school included) are matched with the
actual supply of the service
In Rio, the municipality covers all public primary education and the State
responds for the high school system
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Water and Sanitation
Before 1988:
• State responsibility
– State enterprises
• collected, treated, and distributed water
• collect, and disposed of the sewage
– Billing according to consumption, allowing for
some subsidy of low consumption levels and some
cross-subsidies for poorer areas
– Municipalities had no influence on the
enterprises´ investment plans
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Water and Sanitation (cont.)
After 1988:
– Companies are still there (some privatized)
– Fierce dispute over the concession powers
– Mid-size cities in rich areas took over the concessions,
and either set-up their own companies or auctioned
the concession to private partners.
– Some new experiments with PPPs.
– Larger cities mostly are still with the state companies,
and many of them have opened their capital.
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Background
Financing the Cities
Large and Mega Cities Main Services
Other Relevant Issues
Final Remarks
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Municipal borrowing
All municipalities are free to borrow and issue bonds,
both domestically and abroad
– except those that signed debt agreements with the Federal
government (183 municipalities, representing around 90% of
municipal debt)
– And provided that the legal debt rules be complied with
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Subnational Debt is constrained by several
mechanisms and ratios
FRL & Senate
Observance of maximum service and debt ratios
to be able to contract new debt
CMN
Rationing of total credit
to the public sector
(excp. for multilaterals)
Prudential limit by
bank (45% of capital)
PAF
Declining Debt Trajectory
Multiyear limit for
new operations
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Budget rigidity (mostly due to earmarking)
Constitution:
•
•
12% for health (NHS not included)
25% for education (FUNDEB included)
Debt agreements: 13% of state/municipal revenues to debt service
(25 states and 183 municipalities)
Personnel and pensions – public servants cannot be fired
Not much money left for other functions, especially investments
Bottom-line: the mayors – especially from Mega Cities have very little space to implement their own policies or
to meet other needs of their constituency
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Background
Financing the Cities
Large and Mega Cities Main Services
Other Relevant Issues
Final Remarks
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
• Municipalities have the same status in the
federation as states: the Central government
deals directly with the municipal government.
• Small, large and Mega cities in Brazil are
bound to the same legal and institutional
framework, but very different problems
• The bulk of the transfers are not attached to
federal or state programs. Which is good,
but…
• High budget rigidity leaves very few resources
available to the discretion of the municipal
authorities
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Rio de Janeiro, o melhor
lugar para trabalhar
Thank you !
Rio de Janeiro, the best
place to work
[email protected]
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Recte Rempublicam Gerere
Gerindo a coisa pública corretamente
Proper Management of the Public Good
Thank you
Teresópolis
Niterói
Campos
Costa Verde
Sefaz/RJ – excelência de serviços
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