Brazilian States and Municipalities to Receive R$500 Billion Over Fifteen Years

RIO DE JANEIRO, BRAZIL – The new federal pact may lead to the transfer of approximately R$500 billion (US$125 billion) over fifteen years. The estimate was released by the Minister of Economy, Paulo Guedes, who met on Tuesday, August 20th, with Senate leaders for four hours to address the issue.

Guedes left the meeting without speaking to the press, but the Special Treasury Secretary, Waldery Rodrigues, granted a press conference to explain that the government will support six measures that make up the package.

Although Senate president Davi Alcolumbre said that the federal pact revision would consist of four proposed amendments to the Constitution (PEC) and two bills, Rodrigues said the government will attempt to persuade Congress to unify all proposals into a single PEC and a single bill, authored by the Senate, to be submitted by the beginning of next week.

Proposals

The first measure comprising the federal pact revision is the sharing of resources from the transfer of rights with compensation (auctioning of surplus oil produced in the pre-salt layer) with states and municipalities. From the R$73 billion expected to remain with the Union, the federal government intends to transfer R$21 billion — R$10.5 billion to states and R$10.5 billion to municipalities.

The economic team intends to transfer another R$4 billion from the transfer of rights to the states, totaling R$25 billion, should governors agree to forego legal actions demanding compensation from the Kandir Law (which exemped exports from state taxes for primary and semi-finished products) and the payment of Financial Aid for Export Promotion (FEX) at the end of each year. Both changes depend on the PEC.

Named the Federal Reinforcement Plan (PFF), the third measure comprises the eight-year reversal of the proportion of royalties and special interests in oil belonging to the federal government and local governments. Currently, the federal government retains seventy percent of the Pre-Salt Social Fund. The states and municipalities get thirty percent.

The proposal, also dependent on the PEC, aims to reverse the proportion, to seventy percent for local governments and thirty percent for the federal government by 2028, and will extend the sharing to all oil fields and not only to the pre-salt. According to Rodrigues, state governments and municipalities would benefit by R$6 billion to R$32 billion per year through the change, which also depends on the PEC.

Under consideration in the Chamber as a bill, the fourth measure consists of the Fiscal Balance Plan (PEF), which provides assistance to states undergoing cash flow shortages in exchange for local fiscal adjustment measures. Through the plan, the Treasury intends to provide guarantees to C-rated states on the fiscal strength scale (the second-worst category) so that these administrations may borrow from public and private banks and address issues such as defaults to suppliers. The package provides for the contribution of R$10 billion in guarantees per year over the next four years, totaling R$40 billion.

The fifth measure is the preparation of the new Fund for Maintenance and Development of Basic Education (FUNDEB), which will replace the current fund that ends in 2020. According to Rodrigues, the economic team intends to maintain the transfer of R$13.3 billion of the budget per year, but the new FUNDEB would be supplemented by the reallocation of R$6.5 billion per year of funds from the North, Northeast, and Center-West to finance education projects in these regions.

The sixth measure also impacts the constitutional funds and provides for the disbursement of R$1.5 billion to R$1.6 billion per year from these funds for investment in infrastructure projects and industrial production support. Changes in FUNDEB and constitutional funds are also dependent on the PEC.

Terms

The Special Secretary reported that the federal government intends to enforce terms for all transfers in order to encourage efficient spending, preventing states and municipalities from using the resources to fund salary increases. According to him, the economic team believes that the federal pact will ease the re-inclusion of states and municipalities in the social welfare reform.

Rodrigues added that the economic team intends to reconsider the bills deferring the payment of cash release orders by the states and allowing the securitization (conversion and sale in the market) of part of state governments’ active debt, as the costs may be higher than initial estimates.