Are the fiscal gains from public-private partnerships in Minas Gerais contributing to economic growth?

Responsible researcher: Eduarda Miller de Figueiredo

Article title: PUBLIC PRIVATE PARTNERSHIP – PPP: AN ALTERNATIVE SOURCE OF ECONOMIC GROWTH IN THE STATE OF MINAS GERAIS?

Article authors: Ricardo da Costa Nunes and Selene Peres Nunes

Location of intervention: Minas Gerais, Brazil

Sample Size: Public Debt 1996-2016

Sector: Finance

Type of intervention: Effects of Public-Private Partnerships

Variable of main interest: Debt to GDP

Assessment method: Others

Policy Problem

Public-private partnerships (PPPs) aim to exclude public financing restrictions for the carrying out of infrastructure works by the private sector, thus boosting economic growth (Pasin and Borges, 2003). Furthermore, this partnership is expected to improve efficiency in the management of public projects, as occurred in other countries, such as England, Ireland, Portugal, Spain and South Africa. This alternative contractual form, which allows partnership between the public sector and private, where the enterprise remains public, subject to state regulation, but government bodies act to prevent the abuse of entrepreneurs' monopoly power.

The Public Choice School Theory argues that growing personnel expenses and the increase in public debt are due to corporatist demands that are met by politicians who wish to continue in political life. Furthermore, it is also diagnosed that the more the State intervenes in the economy, allowing the increase in public debt, the greater the need to replace public activity with private activity.

Assuming the hypothesis that growth from the adoption of PPPs depends on the economic policy of the federative entity being oriented towards economic growth, the authors analyze the role that PPPs can have in financing economic growth in Minas Gerais.

Assessment Context

In 2015, Minas Gerais had the second highest state revenue in the country, according to the National Public Sector Balance Sheet (BSPN). However, in the period 2014-2016, current revenues remained practically constant in nominal terms, that is, when considering inflation, it can be observed that there was a real drop. A possible explanation for the reduction in revenue collection would be the exchange of favors between politicians and interest groups, which aims to obtain support from these groups so that government officials can be re-elected (Silva, 2018).

The increase in personnel expenses in the period under analysis also demonstrates how serious the State is. Even if there is a defense of including inactive people and pensioners in the calculation of personal defense, it must be recognized that social security is the main problem of public finances. In Minas Gerais, the deficit reached R$14.8 billion in 2016 and the tendency is to increase, given that today's active people will be tomorrow's inactive people, and today's inactive people will be tomorrow's pensioners, demonstrating that the possibility of imbalance in the future which is the most worrying.

The fiscal situation in Minas Gerais is considered very fragile, where even if the economy returns to growth, pensions, personnel expenses, non-compliance with the debt limit and high financial obligations are worrying. Given the lack of State resources to finance works that would influence economic growth, public-private partnerships were sought to fill this gap and promote economic growth.

Policy Details

The authors state that the origin of the concession refers to the crisis of the intervening State. In other words, there is a high public debt that makes financing new investments more expensive, there is a requirement for balanced public finances, the need for a primary surplus to reduce public debt and the few budgetary resources, leading to the linking of revenue to expenditure on education, health and social security. This means that government inefficiency finds PPPs an alternative way to finance the necessary infrastructure.

PPPs are less subject to control and seek to maximize their profits, in accordance with private logic. In this way, contracted companies are more efficient and more productive, compared to public companies, according to Friedman and Friedman (1977). This occurs because managers of public enterprises often operate for political reasons, pursuing their own objectives or those of those who appointed them to that position (Shapiro and Willig, 1990). To combat this type of behavior, the rules that deal with PPPs must be well designed, providing security to the private entrepreneur (Wald, 2005). Therefore, notices must contemplate varied economic situations and adequate result controls.

Within all factors of a fiscal nature, the main motivation for adopting PPPs is the expectation of managerial and financial capacity of the private sector that increases the efficiency of activities. However, it is highlighted that possible fiscal gains from public-private partnerships may disappear in the event of an increase in spending in other public areas. Therefore, the State must have fiscal discipline throughout public administration, ensuring fiscal responsibility, in addition to enabling reliable and necessary transparency of public account data, allowing society to monitor the financial situation and public spending.

However, there will be no satisfactory results in terms of increased revenue and efficiency with PPPs as long as the Government of MG continues to run primary deficits resulting from personnel expenses.

Assessment Method

The lack of resources in the State of Minas Gerais was a decisive element for the implementation of PPPs, in which the best allocation of resources was not sought, but rather additional revenue to finance public expenses that grew over time.

In view of the above, the authors use exploratory bibliographical research to verify whether personnel expenses compromised the growth of the economy. To this end, the article describes the behavior of MG's debt in the period 1996-2016, with data on consolidated debt and ICMS revenue, debt service and personnel expenses, collected from the National Treasury and IBGE websites.

To carry out the econometric calculations, ordinary least squares estimators (OLS) were used, which presented efficient and reliable results after submitting evidentiary tests.

Results

The results found allow us to affirm that personnel expenses explain the dependent variable, debt to GDP. However, debt service did not impact the debt, making it possible to state that interest payments were not responsible for the increase in public debt.

The increase in debt was explained by successive increases in personnel expenses, which includes disbursements for active and inactive employees. In other words, a relationship of around 30% was found between the increase in personnel expenses and the increase in public debt in the State of Minas Gerais.

These results are in line with the Theory of the School of Public Choices, since, for the authors who developed the theory, corporatist demands and the election of politicians who spend go together, resulting in an increase in personnel expenses and a growth in debt.

MG's fiscal issue is not an easy one to resolve, given the above in relation to the expansion of spending on social security, personnel expenses and financial obligations. Furthermore, the State also does not follow strict fiscal discipline. Therefore, it is evident that State expenses are not aimed at economic growth, but only to carry out expenses for the interests of pressure groups.

Finally, the authors note that the analysis of the accounts of the State of Minas Gerais demonstrates that the growth in personnel expenses and public debt removes the fiscal gain from public-private partnerships and other fiscal slack. In view of this, the implementation of PPPs only generated cash for the State to continue with the spending expansion policy.

Public Policy Lessons

Public-private partnerships have the important objective of circumventing government budget restrictions in order to invest in the infrastructure necessary for economic growth. However, there are no satisfactory results in this contractual form when governments continue to increase personnel expenses.

Reference

DA COSTA NUNES, Ricardo; NUNES, Selene Peres Peres. THE PUBLIC PRIVATE PARTNERSHIP–PPP: An alternative source of economic growth in the state of Minas Gerais?. Journal of Administration Studies and Research , v. 4, no. 1, p. 70-92, 2020.