Challenge
Brazil faces many challenges in its intergovernmental finance arrangements, which, if addressed, would help boost the country’s long term growth prospects. Past attempts at reform have failed, because of the multitude of interests at stake. However, recent court rulings on the main intergovernmental transfer from the federal government to the states (FPE), the legislative decision to change the oil royalties sharing scheme, and the court rulings on the illegality of the fiscal war among states, have led to an ongoing discussion of multiple fiscal federalism reforms.
The first challenge was to understand and assess the impact of these reforms in relation to the subnational governments. This knowledge was needed not only from a due diligence aspect of the portfolio, but also to inform future engagements with the subnational governments, the World Bank’s main clients. The second challenge was to communicate the findings of the study to the authorities to inform their decision and raise awareness of their options.
Solution
Under the Brazil Intergovernmental Finance Non-lending Technical Assistance Project, the Bank utilized its knowledge and convening resources to craft a solution. The technical assistance benefited from an early round of consultations with specialists on the theme and experienced peer reviewers to fine tune the proposal. Drawing on these consultations, the Bank team enlisted knowledgeable local experts to elaborate background papers on intergovernmental transfers, oil and mining royalties, and subnational debt. The Bank team then built on the simulations done for each proposed change to produce a table consolidating the changes for each state and for each reform under two different scenarios. Moreover, the spreadsheet set was done in such way that it could be easily updated with new data or scenarios. A summary report included the consolidated tables and an analysis of the estimated impacts as well as background information on the proposed reforms.
Results
The technical assistance successfully achieved its objectives of evaluating recent changes to the intergovernmental fiscal framework and assessing its implications for the subnational governments. Recognizing the high quality of the assessment, the government invited the Bank team to present the results at the State Finance Managers Group (GEFIN) meeting, which brings together all the state finance managers, in the context of the National Council for Fiscal Policy (CONFAZ).
The report’s key messages were:
· If all subnational fiscal reforms took place simultaneously, the top winners would be small, less developed states which produce little or no oil.
· There would potentially be complementarity between reforms regarding ICMS, FPE and royalties. However, even if the reforms happened in all areas at the same time, such "endogenous" compensation would not be enough to be "distributively neutral".
Bank Group Contribution
This project was entirely financed out of the Bank’s Brazil Country Management Unit (CMU) budget at a total cost of US$90,220.
Partners
The Bank team carried out the assessment in intense consultation with Brazil’s Federal and subnational governments and other development partners, including the Inter-American Development Bank, and seasoned experts in fiscal federalism. This successful experience also led to improved cooperation with CONFAZ/GEFIN.
Moving Forward
The final report is serving as an input for the fiscal and debt analysis of upcoming development policy loans (DPLs), because the proposed changes might represent a fiscal risk to the states or, in certain cases, a stable revenue gain. For the cases in which there will be losses, the Bank can help the client mitigate the losses with revenue enhancing and expenditure efficiency measures.
The Bank’s Brazil CMU also asked the team to continue to monitor developments in this area
Beneficiaries
The direct beneficiaries were the Brazilian Federal and subnational governments.