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FEATURE STORY

A Fiscal Turnaround in Brazil’s State of Rio Grande do Sul

December 12, 2012


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The people from Rio Grande do Sul currently benefit from better education and public services, thanks to measure that ensure fiscal sustainability.

Eduardo Seidl/Palacio Piratini/Handout

STORY HIGHLIGHTS
  • A tailor-made project enabled the local government to restructure its debt and increase investments.
  • R$271 million is the total savings reaped by the procurement office.
  • With support from IBRD, the state disclosed detailed information on tax expenditures, becoming the most transparent state in Brazil in this regard.

Overview

Drawing upon IBRD financial and technical support, the Brazilian state of Rio Grande do Sul restructured its debt, generating savings of R$379 million up to December 2010. The state also improved its tax administration and expenditure controls.

The state government was able to turn its finances around from a negative operating balance of R$473 million in 2007 to a positive figure of R$1.497 million, and increase investments from 6 percent of net revenues in 2007 to 9 percent in 2010.

Challenge

Brazil’s state of Rio Grande do Sul had a long history of fiscal mismanagement. Excessive expenditures and generosity in granting tax exemptions produced budget deficits over many years until 2006. By the time IBRD began working with the state in 2008, the Rio Grande do Sul fiscal situation was regarded as the worst among Brazilian states.

The state was failing to comply with Brazilian fiscal responsibility legislation, and its troubled fiscal situation had translated into deteriorated public services, and poor economic performance.

Approach

An IBRD loan was designed to support the state government’s effort to turn around the fiscal situation in the state. The project recognized the efforts undertaken by the government, especially with regards to the 2007 emergency fiscal adjustment plan, and it also sponsored more structural measures that guaranteed longer-term fiscal sustainability.

In addition, IBRD used its supervision resources to provide technical assistance to the state, helping the government to achieve the proposed results. Since this was the first debt restructuring operation in Brazil following the Fiscal Responsibility Law and the 1997 state debt bailout, (Federal Initiative) IBRD Treasury support was paramount to the operation.

Its innovative and tailor-made repayment profile was key to smoothing the highly volatile debt repayment profile of the state, and to secure the approval of, and a guarantee, from the federal government.

Results

The Rio Grande do Sul Fiscal Sustainability for Growth Program’s major results are summarized below:

  • The state was able to turn around its fiscal situation and greatly improve its fiscal management, as reflected by the declining debt to net revenue ratio (from 2.48 in 2007 to 2.14 in 2010) and increased primary balance (from R$967 million in 2007 to R$1.583 million in 2010).
  • With support from IBRD, the state disclosed detailed information on tax expenditures, becoming the most transparent state in Brazil in this regard.
  • The government implemented more modern procurement alternatives. The improvement in fiscal management created more resource predictability, allowing for better purchase planning, which in turn reduced uncertainty among suppliers. As a result, the price paid for some items such as livestock vaccination was reduced from R$1.56 per shot to a range between R$0.76 to R$0.86 per shot. The total savings reaped by the procurement office amounted to R$271 million.
  • The loan proceeds also were used to pay back expensive debt contracts, with large payments due in 2008 and 2009, saving R$379 million (1.6 percent of GDP) up to December 2010.

Bank Contribution

IBRD supported the state with a two-tranche development policy loan (DPL) in the amount of US$1.1 billion. The first tranche was disbursed in September 2008 in the amount of US$650 million. The second tranche of US$450 million was disbursed in July 2010.

Partners

The project was financed entirely by IBRD.

Moving Forward

The new government that took office in 2011 benefited from the improved fiscal situation and has reinforced the state’s commitment to fiscal rectitude. Furthermore, in recognition of the state’s solid fiscal performance, the National Treasury Secretariat allowed the state to initiate procedures for contracting new loans for the first time since the debt renegotiation contract was signed in 1998.

Beneficiaries

The people of the state of Rio Grande do Sul as a result of reduced government waste and mismanagement and increased access to better public services.


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