R sETURNI TO Cj1i!,LATING CUPY RESTRICTED R wEPORTS DESK -Report No. WH-195a WITHSN T BFREK-JR,'ED TO REPORTS DESK ONE WIEEK L CEg47-fTAL FILES Public Disclosure Authorized This reportwas prepared for use within the Bank and its affiliated organizations. They do not acceptresponsibility for its accuracyor completeness.The report may not be publishednor may it be quotedas representingtheir views. INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVEI (DX 4 'r INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized CURRENT ECONOMIC POSITION AND PROSPECTS OF BRAZIL (in five volumes) Public Disclosure Authorized VOLUME IV Annex 4 - The Federal Sector Investment Program Annex 5 - List of Projects for External Financing Annex 6 - Flows of Funds Tables December 19, 1969 Public Disclosure Authorized Western Hernsiphere Department CURRENCY EQUIVALENTS Currency Unit: Novo Cruzeiro (New Cruzeiro) Average 1968 Exchange Rate: U.S. $1.00 m NCr 3.396 U.S. $1 million - NCr 3,396,000 NCr 1 million - U.S.$294,464 Unless a specific indication to the contrary is given, all cruzeiro values in the report are expressed in average 1968 prices and conversions betreen dollars and cruzeiros were made at the average 1968 exchange rate. Exchange Rates Effective October 3, 1969: Selling Rate: $1.00 = NCr 4.210 Buying Rate: $1.00 = NCr 4.185 . ANNEX4 FISCAL AND MCNETARYPOLICr Prepared by Curt Carnmark and Richard Fletcher 'aS A ANNEX4 THE FEDERALSECTOR INVESTMENT PROGRAM TABLE OF CONTENTS Page No. I. INTRODUCTION ...... 9........................900 @0S000 0 1 A. ProjectedInvestment Levels ......... .................... 1 B. Financingthe Program ............................. , 2 II. THE SECTORAL PROGRAMS ................. 4 A. GeneralComments 4*.e.... 4 B. The Directly ProductiveSectors , , 5 C. Economic Infrastructure ...... ........... 10 D. Social Infrastructure 23 III. CREDIT PROGRAMS ................. 29 A. TheNational Housing Bank 29 B. The National Economic DevelopmentBank.* 31 STATISTICALAPPENDIX 4' -I : ANNEX 4 THE FEDhRAL SECTOR INVESTMENT PROGRAM I. INTRODUCTION A. Projected Investment Levels 1. In its review of the Federal Government's investment program the mission has included the programs of federal enterprises as well as invest- ment through ministries and federal autarkies. In this sense our concept of the federal sector is wider than that used in the Brazilian national accounts. In another respect our concept is narrower, the "Federal Sector Investment Program" which we discuss in detail excludes capital expenditures for admin- istration, for defense, and for some other unidentified purposes. 'IThe mis- sion's objective has been to analyze the investment projections for 1969-71 of the individual agencies and to present our own estimates of feasible and desirable programs for the period 1969-74. 2'. A number of difficulties have been encountered. First, data re- lating to the recent past (1966-68) are inadequate. The Ministry of Finance has recently completed a review of Federal Government investment in 1966 (Balanco dos Investimentos Publicos), but no reliable figures are available for 1967 or 1968. Secondly, for Dractical purposes Brazil is without a me- dium-term program for federal sector investment and its financing. In 1968 the government prepared both a three-year investment budget and a three-year Strategic Development Program (both covering 1968-70). There has been no re- vision of either of these "plans" nor at the time of the mission could the government say to what extent they were fulfilled in 1968. In the absence of a coordinated plan, the agencies' investment program for 1969-71 consists of a consolidation of the ambitions of individual spending agencies. These in- dividual projections have not been subjected to any review by the government to determine what the relative priorities are and how the program as a whole can be kept to a level consistent with the government's resources and the needs of the economy. 1! 3. In preparing the "Mission Projections" for 1969-74 several con- straints were applied. Investments by each agency (or loan disbursements in the cases of the BNDE and BNH credit programs) have been set according to the expected availability of financial resources, the state of prepara- tion of particular projects or Drograms, and the extent to which major programs are already under way as well as the mission's view of the Drior- ity of the activity. In addition the overall size of the investment pro- gram has been kept to a level consistent with the general macroeconomic framework which assumes annual growth rates of 6 percent for GDP and of 9.4 percent for fixed investment during 1969-74. 1/ See Table 4-1 under "Agency projections": This shows a projected in- crease in federal sector investment in 1969 of 60 percent over the 1968 level. Such an expansion would not be possible unless there was a severe contraction in the level of private investment. ANNEX 4 Page 2 B. Financing the Program 4. The macroeconomic framework (which is discussed in detail in "The Main Report") has provided a more stringent limitation on the public sector investment program that has the availability of funds. Detailed projections were made of total capital expenditures of the federal sector and of the available financing for 1969-74. (See "The Main Report", pp. 32 ff.) The estimates indicate that the federal sector as a whole will generate financial resources in excess of its spending needs. Surpluses occur in particular in the Social Security Institute (INPS) and the Coffee Institute (IBC) which taken together will have excess capital resources amounting to over NCr 1.2 billion per year on average throughout 1969-74. The projections provide that these surplus resources will be made available to the private sector as a result of the build-up of cash deposits by the agencies concerned and their use by the monetary authorities to either extend credit to or purchase Treasury Bonds (ORTN's) from the private sector. This process should help to ease the problem of credit in the private sector which is at least partly due to the high tax burden. The situation disclosed by our projections suggests that tax reform aimed at reducing the level of taxation would be desirable in the latter years of the period (see discussion ciffiscal and monetary policies). Financing of Federal Sector CapitalExpenditures (billions of NCr's at 1968 pricesF Discre- Earmarked Enter- External tionary Taxes prise Private Other Borrow- Budget and Funds Savings Sector Domestic ing Total 1968 NCr 1.9 4.9 1.2 0.3 0.3 0.7 9.3 % 20% 53% 13% 4% 3% 7% 100% Total in NCr 11.6 38.0 13.2 7.9 0.9 9.5 81.1 1969-74 % 14% 47% 16% 10% 1% 12%, 100% Change, 1975 NCr 0.3 2.3 1.8 1.7 -0.2 1.1 7.4 from 1968 % 4'e 33% 26% 24% -9 . 3%e 16,l 100% Ratio, 1974 to 1968 1.2 1.5 2.5 5.9 0.3 2.7 Source: Mission estimates and projections. See details in Annex 6. 5. The breakdown between the various sources of finance is shown in the accompanying table. As in 1968, the major source will be the variety of bud- getary and extrabudgetary taxes which are earmarked for particular agencies or activities. These will account for nearly 50 percent of total resources. Dis- bursements of external loans are expected to rise sharply between 1968 and 1974, due in part to the past build-up of a large pipeline of external project ANNEX 4 Page 3 assistance and supplier credits. (In January 1969 undisbursed amounts of ex- isting loans from AID, IDB, IBRD and Eximbank totalled over US$1 billion; the pipeline of supplier credits was over $600 million.) Other sources include transfers from the private sector (mainly repayments to BNDE and BNH), retained earnings of federal enterprises, and discretionary transfers from the Treasury capital budget. A comparison of 1974 and 1968 shows that of the increase in the level of capital expenditures of NCr 7,020 million, 33 percent is financed by earmarked revenues, 16 percent by external borrowing, and 47 percent by enterprise profits and other extra-budgetary domestic resources. A mere 5 percent of the increase is financed by discretionary Treasury budget capital expenditures. 6. Earmarking has long been a major feature of the Brazilian tax system. While the 1967 tax reforms reduced the earmarking of budgetary revenues, there are a large number of extra-budgetary earmarked taxes. It is argued that agen- cies receiving earmarked funds have a high degree of financial autonomy which permits them to plan and carry out investment programs with a minimu= of bureaucratic hindrances. The achievements of Embratel and BNH, which rely to a large extent on earmarked taxes, can be offered as evidence. However, in other cases the assurance of revenues from earmarked taxes is accompanied by relatively poor planning. Here the discipline that a budget review could pro- vide would be helpful. In addition, in the absence of a coordinated invest- ment program, the amount and distribution of earmarked finance acts as the main determinant of the sectoral breakdown of federal investment. Too much earmarking can limit the government's flexibility in varying investment to meet changing sectoral priorities and the requirements of overall fiscal policy. 7. It would appear that this point has been reached in Brazil. The re- sult is that attempts by the government to vary the level of public investment in the short run usually entail large variations in the discretionary capital budget, and the effects are therefore concentrated on the programs of those agencies which rely heavily on this source of funds. In Brazil these are largely the agricultural, regional development and social infrastructure pro- grams carried out by various ministries. It is the mission's impression that this volatility of the discretionary capital budget is an important cause of the inadequate quality of investment planning found in most ministries.