Principal investigator: Eduarda Miller de Figueiredo
Article title: Public-Private Partnerships (PPPs): An Alternative Source of Economic Growth in the State of Minas Gerais?
Article authors: Ricardo da Costa Nunes and Selene Peres Nunes
Location of the intervention: Minas Gerais, Brazil
Sample size: Public Debt 1996-2016
Sector: Finances
Type of intervention: Effects of Public-Private Partnerships
Primary variable of interest: Debt as a percentage of GDP
Evaluation method: Others
Policy Problem
Public-private partnerships (PPPs) aim to eliminate restrictions on public funding for infrastructure projects by the private sector, thereby boosting economic growth (Pasin and Borges, 2003). Furthermore, this partnership is expected to improve the efficiency of public project management, as has occurred in other countries such as England, Ireland, Portugal, Spain, and South Africa. This alternative contractual form allows for partnerships between the public and private sectors, where the project remains public and subject to state regulation, but government agencies act to prevent the abuse of monopoly power by private companies.
Public Choice Theory argues that increasing personnel expenses and rising public debt are due to corporatist demands that are met by politicians who wish to remain in political life. Furthermore, it also diagnoses that the more the State intervenes in the economy, allowing public debt to increase, the greater the need to replace public activity with private activity.
Assuming 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 play in financing economic growth in Minas Gerais.
Evaluation 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, a real decrease can be observed. A possible explanation for the reduction in revenue collection would be the exchange of favors between politicians and interest groups, aimed at obtaining the support of these groups so that the rulers are re-elected (Silva, 2018).
The increase in personnel expenses during the period under analysis also demonstrates how serious the state's situation is. Even if there is a defense of including retirees and pensioners in the calculation of personnel costs, it must be recognized that social security is the main problem in public finances. In Minas Gerais, the deficit reached R$ 14,8 billion in 2016 and the trend is for it to increase, since today's active workers will be tomorrow's retirees, and today's retirees will be tomorrow's pensioners, demonstrating that the possibility of future imbalance 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 debt limits, and high financial obligations are worrying. Given the lack of state resources to finance projects that would influence economic growth, public-private partnerships have been sought to fill this gap and promote economic growth.
Policy Details
The authors argue that the origin of the concession model stems from the crisis of the interventionist state. That is, there is a high level of public debt that makes financing new investments more expensive, there is a requirement for balanced public finances, a need for a primary surplus to reduce public debt, and limited budgetary resources, leading to the earmarking of revenue for expenses on education, health, and social security. This causes governmental inefficiency to find in PPPs (Public-Private Partnerships) an alternative route for financing necessary infrastructure.
Public-private partnerships (PPPs) are less subject to control and seek to maximize their profits, following private sector logic. Therefore, contracted companies are more efficient and productive compared to public companies, according to Friedman and Friedman (1977). This occurs because the managers of public projects often operate for political reasons, pursuing their own objectives or those of the people who appointed them to the position (Shapiro and Willig, 1990). To combat this type of behavior, the regulations governing PPPs must be well-defined, providing security to the private entrepreneur (Wald, 2005). Thus, tender documents should consider varied economic situations and adequate performance controls.
Among all fiscal factors, the main motivation for adopting PPPs is the expectation of managerial and financial capacity from the private sector that will increase the efficiency of activities. However, it is highlighted that any fiscal gains from public-private partnerships may disappear if spending increases in other public areas. Therefore, the State must maintain fiscal discipline throughout the public administration, ensuring fiscal responsibility, as well as enabling reliable and necessary transparency of public accounts data, allowing society to monitor the financial situation and public spending.
However, there will be no satisfactory results from increased revenue and efficiency with PPPs as long as the Government of Minas Gerais continues to run primary deficits resulting from personnel expenses.
Assessment Method
The lack of resources in the State of Minas Gerais was a decisive factor in the implementation of PPPs, in which the goal was not the best allocation of resources but rather an additional revenue to finance public expenses that grew over time.
Given the above, the authors use exploratory bibliographic research to verify whether personnel expenses compromised economic growth. To this end, the article describes the behavior of Minas Gerais' debt in the period 1996-2016, with data on consolidated debt and revenue from ICMS (a state sales tax), debt service, and personnel expenses, collected from the National Treasury website and IBGE (Brazilian Institute of Geography and Statistics).
For the econometric calculations, ordinary least squares (OLS) estimators were used, which presented efficient and reliable results after the submission of confirmatory tests.
Results
The results show that personnel expenses explain the dependent variable, debt as a percentage of GDP. However, debt servicing did not impact the debt, allowing us to conclude 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 include disbursements for active and retired employees. In other words, a relationship of approximately 30% was found between the increase in personnel expenses and the increase in the public debt of the State of Minas Gerais.
These results are consistent with the Public Choice Theory, since, according to the authors who developed the theory, corporatist demands and the election of politicians who spend lavishly go hand in hand, leading to increased personnel expenses and debt growth.
The fiscal issue in Minas Gerais is not easy to resolve, given the expansion of spending on social security, personnel expenses, and financial obligations. Furthermore, the state does not adhere to strict fiscal discipline. Therefore, it is evident that state expenditures are not aimed at economic growth, but only at serving 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 negates the fiscal gains from public-private partnerships and other fiscal leeway. In light of this, the implementation of PPPs only generated cash for the State to continue its policy of expanding spending.
Lessons in Public Policy
Public-private partnerships have the important objective of circumventing government budgetary constraints in order to invest in the infrastructure necessary for economic growth. However, this type of contract does not yield satisfactory results when governments continue to increase personnel expenses.
Reference
DA COSTA NUNES, Ricardo; NUNES, Selene Peres Peres. Public-Private Partnerships (PPP): An alternative source of economic growth in the state of Minas Gerais?. Revista Estudos e Pesquisas em Administration, v. 4, n. 1, p. 70-92, 2020.
