The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of Brazil 2005.
Reducing regulatory uncertainty will imrpove the investment climate
The current level of investment, particularly in infrastructure, is insufficient to sustain robust growth over the medium term. On the one hand, there is limited room in the budget to boost public capital spending at the current juncture. On the other, private investment is discouraged by a scarcity of credit, high intermediation costs, and regulatory uncertainty in several sectors. Macroeconomic volatility also weighs heavily on private investment. This is despite the fact that Brazil appears to offer a reasonably investor-friendly environment for business, based on OECD work on the restrictiveness of product market regulations and legislation on foreign direct investment (FDI). In this respect, policies that promote investment and reduce firms’ costs of doing business more generally would also contribute to tackling informality. Enhancing the investment climate will therefore be critical to improving the economy’s growth performance and resilience.
The rationalization of current public expenditure would free budgetary resources which could be channelled to finance higher, externality-rich public investment. At the same time, the reduction in indebtedness, as discussed above, should help reduce the crowding out of private investment. New legislation on public-private partnerships (PPPs), which have hitherto been confined predominantly to leasing operations and concessions, will complement the current legal framework for public procurement, thereby militating to encourage private investment, particularly in infrastructure. Public-private partnerships will need to be encouraged in a fiscally-sound manner, adequately balancing risks between the government and its private-sector partners. There appears to be widespread recognition that fiscal consolidation should not be undermined and that the federal government should set standards for the states and municipalities in this area. An important policy objective is therefore to standardize requirements for the accounting and reporting of PPP operations, as well as the dissemination of information to markets and society at large, together with the risk assessment of individual projects. Draft legislation envisages a leading role for the Treasury in this area. In this regard, the Fiscal Targets Annex of the Budget Guidelines Law (LDO), which each level of government is required to submit to their legislatures, could be the main vehicle for the dissemination of information on PPPs in budget documentation.
Brazil’s regulatory framework for network industries (i.e., electricity, oil and gas, water and sanitation) will need to clearly define the role of government in these sectors. Regulatory uncertainty weighs on private investment and therefore needs to be reduced, particularly in network industries. The overall approach to regulatory reform in the electricity sector, based on arms-length operations and public auctions, is well thought out but the risk of regulatory failure should not be underestimated, given the enhanced role of government in long-term planning. But, again, implementation will be the ultimate test of reform in this area. In natural gas, the dominance of Petrobras, the national oil company, throughout the industry has often been perceived as an obstacle to its development. Private investment in water and sanitation, which is much needed in light of relatively low connection rates to sewerage, is constrained by a lack of clarity over the assignment of regulatory powers across different levels of government. The share of wastewater that is treated is also low, with a detrimental impact on the environment.
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