New partnerships energise Minas Gerais

The Brazilian state of Minas Gerais is known locally for the easy-going and tranquil disposition of its inhabitants, but behind this peaceful nature is an entrepreneurial spirit unrivalled in any other part of the country

 
 

Minas Gerais is a state of rolling hills and baroque citadels. Translated literally from Portuguese, the name means ‘general mines’, because of the abundance of gold and precious stones found buried under its hills, which have been steadily excavated over the last 400 years. Today, Minas Gerais boasts a different kind of mining, and is the homeland of Vale, the iron ore giant.

The whole region has become a complete hotspot for tourism. The gold rush left behind countless baroque cities, towns and hamlets, scattered around the state; towns like Ouro Preto and Tiradentes are not only picturesque, but teem with Brazilian history. The historic towns of the state are a living memory of Brazil’s colonial heritage, and most of them have at least one opulent baroque church dating back to the 18th century. It is a place of beauty and history, not as well known to the world as the states of Rio de Janeiro
and São Paulo.

After the gold rush subsided in the late 1700s, Minas Gerais developed into a mainly agrarian region. Outside of the capital, Belo Horizonte, it had a poor track record of education and public services. Despite its size and natural wealth, the state was struggling. There was deep debt and little investment. The south east of Brazil, where Minas Gerais is located, is traditionally the wealthiest part of Brazil, but the citizens of Minas were among the most deprived in the region.

But something began stirring deep within the state; a restlessness of unfulfilled promise. Like much of the rest of the country at that time, roads and railways were in a precarious state. It would have taken millions of reais and many years worth of investment to get the region operating at full capacity again. But within a decade Minas Gerais has refurbished the most extensive network of transportation in the country. Today, the state contributes over nine percent of Brazil’s GDP through agriculture and industry, and has developed a world-class service industry and a model public governance system.

Over the past 10 years the state has undergone a remarkable transformation and risen from the quiet, south eastern hills to an industrial powerhouse. Nestled between the agrarian western regions and industrial São Paulo with its huge Santos port, Minas occupies a strategic geographic position in the heart of the country. Until a decade ago, the state was woefully unequipped to deliver on its potential, but thanks to recent developments, this is not the case any more.

The railway complex, with the centre of the city in the background, in Belo Horizonte, the capital of Minas Gerais

State rebirth
It is clear that Minas Gerais is a state of entrepreneurship, but it has risen above even the most generous expectations and completely reinvented itself. One of the factors that fostered this process was made possible by the intelligent design of legislation – passed in 2003 – that allowed and regulated a series of public-private partnerships (PPPs) to be forged within the state. It was the first law of its kind in Brazil and served as a model for other states and eventually for a federal bill.

“The legislation passed in Minas Gerais allowed the state to consolidate its pioneer spirit in terms of modernisation and public management,” says Governor Antônio Augusto Anastasia. “The legislation created the conditions for institutions and transparent rules that could reduce the private risks and increase public gains with the implementation of projects.” Through the institutionalisation of PPPs, the government was able to implement costly projects that lifted the state into modernity. “We knew that to improve economic and social development in the state, it was necessary to expand infrastructure, especially roads and airports, as well as to improve the management of public institutions like hospitals, prisons and other public services,” explains Anastasia.

The first order of service was to clean up the state’s finances in order to make it a more attractive destination for investment and partnerships. Then-governor Aécio Neves, under whom Anastasia was deputy from 2007, devised an intricate ‘Management Shock’ plan designed at jumpstarting the local economy. The plan was aimed at reducing government spending by increasing the efficiency of public services for citizens, specifically developing areas like health, education, security and infrastructure, as well as creating more jobs and increasing income.

In 2003, when the programme was first implemented, the budget deficit for the state was R$2.3bn; since the mid-90s, the state budget had not been balanced. Measures were passed to fix this, including reducing the number of state departments from 21 to 15, a 30 percent cut. The governor and deputy-governor took a pay cut, along with other state secretaries. State-wide audits were set up to enforce greater control over public spending and increase transparency. Public debt was auctioned off, and materials and services were renegotiated. No stone was left unturned in the government’s quest to balance the books. Within the year the state had reached its target of zero deficit, after a decade of being in the red. With healthier finances the government was free to focus on attracting foreign investment to the state. “The first stage of the Management Shock programme enabled us to balance the public chequebook and direct our spending toward the users of public services,” says Anastasia. “The second stage was all about results, in which we directed all the efforts into improving the life of the local citizens.”

Public-private partnerships
A fundamental part of this rapid development has been the numerous PPPs undertaken by the government, which have enabled the government to develop all areas of public service with lower investments. “We identified a significant need for infrastructure development,” says Marcos Siqueira, General Coordinator of the PPP Unit for the state of Minas Gerais, “that opened up a world of opportunities.” Siqueira’s unit was the first organisation in the country set up to research and manage public-private partnerships. Founded in 2003, the unit is charged with executing all operational activities related to the implementation of a PPP. This is a ground-breaking model of operation in Brazil, which ensures that all partnerships run smoothly and profitably for all parties involved. In the last five years the PPP Unit has overseen the equivalent of $2bn in investments flow into the state. It is in charge of everything from planning, researching and pitching partnerships, to monitoring their development and assessing their success. “In the nine years since the inception of the unit we have closely followed all partnerships going on in the state, with the aim of learning from them to make the next projects more efficient,” says Siqueira.

The unit is very attractive for investors, who can rest assured that a professional and specialised team is in charge of the research and design of each individual partnership. “It is important to move in the right direction,” says Siqueira. “We are improving with each process and speeding up the learning curve.” The unit also takes care of producing detailed and long-term business models, as each partnership lasts, on average, 25 years. Siqueira’s team takes care to publish every document in English as well as Portuguese in order to attract foreign investors and submit to international scrutiny; Minas Gerais wants to be a global model.

Though the unit is the central nervous system of all PPPs in Minas Gerais, departmental heads and the governor all meet and agree which projects are worth pursuing in the long run. PPPs involve significant input from the government, not just financial but also in terms of manpower and other resources. But there is no question that the government stands to gain from these partnerships. According to Dorothea Werneck, Secretary of Development for Minas Gerais, PPPs allow the state to increase its efficiency in the management of social and economic infrastructure. “In Minas Gerais, the PPP programme is considered essential to promoting sustainable development, based on principles of good-governance and the best use of public resources,” she says.

The whole process is transparent from start to finish. This is part of the effort to keep investors keen. The unit publishes and regularly updates a comprehensive list of completed, ongoing and planned partnerships, as well as the full details of all accounts and financial transactions undertaken by the government. According to Siqueira, this is pivotal in insuring the smooth running of all partnerships. “We are preoccupied with security and credibility. Transparency is one of our main objectives in order to reduce risk and increase profitability for our private partners,” he says. “All of our projects are listed online until 2020. All information is made public.”

A traditional church in Minas Gerais

Infrastructure partnerships
Minas Gerais remains unique in Brazil in that it uses PPPs to develop the much-needed infrastructure that will attract other investments. The first step was developing the state’s roads. The whole network of highways has been refurbished and enlarged, and a large part of it is being kept by private partners both foreign and domestic.

The first PPP to be implemented in the state was a busy highway segment that connects Belo Horizonte with the state of São Paulo, Brazil’s industrial hub. Through a competitive bidding process, the unit guaranteed the lowest possible annual investment in the upkeep of the road by the government. The private partners enjoy shared maintenance costs and the additional revenues from pre-approved tollbooths. “It is a very profitable endeavour for our private partners,” says Siqueira. “But it would not be appealing if the risks weren’t so low.” Because the PPP Unit and Siqueira carry out such extensive research and conducted their process in the most transparent and credible fashion, there is virtually no risk for the private partner, and the government ensures a predetermined, fixed annual investment in local highways that is much lower than what it was previously spending in upkeep alone. There are many benefits for the local population as well. Even though tollbooths have been introduced, their charges are kept low by the state, and drivers can enjoy safer, better-kept highways.

“Today, Minas Gerais is the third most powerful economy in the country, and the second-largest state in terms of population,” says Werneck. “We stand out because of our advanced infrastructure, which includes the most comprehensive network of highways in the country, and the second-largest rail network.” These developed transport links have allowed the state to finally make the most of its privileged geographic position on the borders of São Paulo and Rio de Janeiro, the biggest consumer centres in Brazil. Minas Gerais has become a massive transport hub for products travelling from all over the country to ports in the neighbouring states.

Siqueira and his team learned a lot from the first highway partnership, and it has helped them streamline the process on subsequent projects. “The unit is very independent,” explains Siqueira. “We take charge of everything, from dialoguing with the market, assessing bids and monitoring the development. We learn with every project and accelerate our learning curve every time.” To him, the PPP Unit is a real draw for prospective investors, who recognise the experience and know-how as assets to a successful deal. Effectively, the unit has been consolidating itself as a think-tank and purveyor of knowledge and guidance for all PPPs, and investors are reassured that there is a whole team dedicated exclusively to their projects.

A win-win game
All partnerships commissioned are subject to a strict auditing process, both from internal auditors and market consultants. This is a further step in ensuring the most risk-free process possible for both the government and the private partners. The local authorities have recently embarked on yet another successful endeavour, this time before the eyes of the world. Belo Horizonte is one of the host cities for the 2014 World Cup, and as such it needed a top-class stadium. The project was commissioned as a PPP, minimising the risks for the local authority, which paid one lump sum towards the building costs of the facility and saved itself R$150m in the process. The private partner not only received solid investment from the government, but has also won managing rights over the venue for 27 years. In a state like Minas Gerais, where football is everyone’s sport of choice, that is indeed a very lucrative deal.

“Our main focus is to be as efficient as possible,” says Siqueira. Indeed, the unit does not simple try to create business opportunities for the state; it also seeks to better the quality of life of its inhabitants. Today, the once embattled citizens of the state enjoy all the benefits of a transparent and efficient government. “In recent years Minas Gerais has been standing out in education in the country. Currently we have the best primary schools. We also have 14 federal universities, five of which are ranked top in the country,” says Werneck. This not only demonstrates the complete revolution in public services the state has undergone, but is also attractive to investors because of the potential of a skilled and competent labour force.

According to Anastasia, the reason why PPPs are so successful in Minas Gerais is because they are intricately tied to the social and economic development of the state. “As early as 2003 we established the aim of transforming Minas Gerais to the best state in the country in which to invest and live,” he says. “This audacious mission could only be accomplished if we developed a strategy to modernise public management and social and economic infrastructure. With PPPs we have managed to introduce the flexibility of private management to public infrastructure, drawing up projects that attract investors and that represent, at the same time, good business to the government.”

Siqueira is emphatic that the whole process is carefully scrutinised and audited to guarantee the highest levels of transparency as well as quality. “We have developed a management system that focuses on risk reduction, solid institutions and stable legislation,” he explains. “It is all about accountability and full disclosure, both to our partners and to the local citizens. But above all our focus is on efficiency. These partnerships are about value for money and investments for the state that will generate the best possible services for the population. We want to do the best by paying the least.” In order to guarantee that both parties are receiving the best deal possible, some of the partnerships are negotiated on a goal and achievement basis; when targets are met efficiently and in a timely manner by the private partners, they receive higher fees from the state. “It’s a win-win game,” says Siqueira.

He cites as an example the case of the Integrated Service Unit (UAI) where citizens can renew or obtain copies of all their documents and certificates. Minas Gerais entered into a PPP to redesign this service, notoriously inefficient all over Brazil. The state pays the private partner per person seen at the UAI centres; the quicker the service is provided, the higher the fee paid. “This is a perfect example of a well designed partnership,” says Siqueira. “We have reduced the cost to the government of providing these services by as much as 30 percent. And there is a powerful incentive for the partners to provide good service.” Now the average waiting time at the UAI centres is less than six minutes, and the citizens who benefit from these improved services are the clear winners.

Dealing with big projects
Siqueira emphasises that it is not simple to design and execute a successful PPP, which is why Minas Gerais is particularly well equipped to handle large-scale projects. Over the past decade the state has developed an intricate network of operations that ensure every partnership runs smoothly and productively. At the helm of the operation is the PPP Unit, but it is supported by a managing committee and presided over by the governor himself, who guarantees that all partnerships have the best interests of the population and the partners at heart.

“Good PPP projects demand a detailed preparation process, time, and effort in their design,” says Anastasia. “Therefore, it is important to be zealous when selecting the projects and proposals that are to be developed, avoiding repeated work and guaranteeing high quality to every proposal opened up to the market.”

This responsible approach to business was recognised by Standard and Poor’s rating agency last July, when it elevated the state to investment grade rating. “We have a support system to the investor that offers all backing needed both by the companies that are already settled and the ones hoping to open branches in the state,” says Werneck. “Another important factor is the public management programme. In the past few years Minas Gerais has been recognised all over the country as a model of excellence in public administration.”

In the process of transforming Minas Gerais into an attractive destination for business and investment, the government also revolutionised public management. Brazil is a country that has a rather telling reputation of corruption and convoluted bureaucracy, but Minas Gerais has been successful in breaking free from this stigma with its simple, effective strategies. The international community has recognised this as well, and consolidated the state as a world apart from the rest of the country.

In 2008 the World Bank announced that the public management system implemented by the Minas Gerais state government was a global model, and awarded the state $976m in loans for investments in education, health, environmental projects, and fiscal projects, to help the state stay on the remarkable course of development it has been on over the past decade. “It is our long-term vision, along with the dedication to satisfying the needs of our population, that makes the public management in Minas Gerais a model for success,” says Anastasias.