Revolutionizing public procurement in Brazil

. Jul 27, 2020
Breaking down Brazil's multiple tax reform proposals Photo: Vladimir Sukhachev/Shutterstock

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This week, we cover the government’s advances to revolutionize public procurement in Brazil. And we break down the tax reform bills on the table.

BREAKING

The Federal Police has launched an operation against Piauí Governor Wellington Dias, of the Workers’ Party. Alongside the state’s former Education Secretary, he is suspected of rigging procurement processes for buses for public school students, in exchange for bribes. These alleged illegalities have been under investigation since 2018.


Turning public bidding into a marketplace

The Economy Ministry is advancing a project that would radically change the way public institutions make purchasing decisions.

Instead of the current bidding process of reserve price auctions — wherein the bidder with the lowest price is awarded the contract — the idea would be to create an <a href="https://brazilian.report/tech/2020/07/24/tech-roundup-brazilian-fintech-wants-save-amazon/">online marketplace</a> on which suppliers would propose their products and services, allowing the government to select companies according to its needs. A similar system is already used in Chile. </p> <ul><li>At first, the change would be applied for cases in which bidding processes are not legally required — i.e. contracts for goods and services valued up to BRL 50,000 a year, or infrastructure services of up to BRL 100,000 a year. But the plan would be to extend this to all contracts in the future.</li></ul> <p><strong>Why it matters.</strong> The Brazilian government is the country&#8217;s biggest buyer — and around 15 to 20 percent of GDP originates in public procurement.</p> <p><strong>Change.</strong> This new marketplace would revolutionize how government procurement happens in Brazil. At its best, it could speed up small contracts and <a href="https://brazilian.report/podcast/2019/11/06/explaining-brazil-blockchain-fix-bureaucracy-ibm/">reduce red tape</a>. Today, government entities inform all registered suppliers of their needs for products and services, and companies adapt themselves to these demands.&nbsp;</p> <ul><li>Purchases such as furniture or computer software are prime examples of goods and services that wouldn&#8217;t have to jump through all the hoops currently in place, according to Renato Fenili, the Deputy Management Secretary at the Economy Ministry.</li></ul> <p><strong>Risks.</strong> The marketplace would make tech vendors expendable, for instance, with the government being able to contract products directly from companies such as Microsoft, Google, or IBM. That could ravage hundreds of companies which currently rely on selling software and providing IT support to public bodies, and potentially create dangerous market concentration in the hands of just a few players.</p> <hr class="wp-block-separator"/> <h2>Breaking down Brazil&#8217;s multiple tax reform proposals</h2> <p>Last week, Economy Minister Paulo Guedes paid a visit to Congress to <a href="https://brazilian.report/power/2020/07/22/brazil-promised-tax-reform-overhaul-more-tweak/">submit his tax reform bill</a>. Mr. Guedes was criticized for taking too long —&nbsp;over 18 months —&nbsp;to propose what ended up as more of a &#8220;tweak&#8221; rather than a true overhaul of one of the most complex tax systems in the world. Moreover, the new proposal is the third in Congress right now —&nbsp;and lawmakers will have the challenge of merging them all in one single coherent reform. Reporter José Roberto Castro has broken down each bill.</p> <p><strong>Why it matters.</strong> Brazil currently has 73 different types of taxes — each one following its own labyrinthine set of rules. This creates an environment in which companies spend too much time and human resources just to comply with the rules.</p> <p><strong>What all bills have in common.</strong> The three tax reform bills propose the merger of multiple taxes into one value-added tax (VAT).</p> <p><strong>Lower house bill.</strong> The reform proposal in the House plans to merge five taxes of multiple levels (one municipal levy, one state, and three federal taxes) into a single VAT. State taxes on goods and services (ICMS) would have one simple rule: they would be charged at their destination — at a rate established by each state. The federal government would collect all tax revenues and manage their distribution. A transition from the current to the new system would take around eight years.</p> <ul><li><strong>Positive change.</strong> Today, ICMS rules are a mess. Each product is taxed differently depending on the place of origin, destination, and even to whom one is selling.&nbsp;</li><li><strong>But … </strong>It is the states&#8217; single most important source of revenue. Convincing governors to surrender control of their money-making levy is a tough sell.</li></ul> <p><strong>Senate bill.</strong> Senators talk of merging nine different taxes into a VAT. The final rate of this new duty would vary according to the product, but it would be the same all over the country — regardless of the origin or destination of goods and services. Taxes would be collected at the destination and distributed to states and cities along the production chain. Part of the revenue would go to a fund aiming at reducing the per capita income gap between cities and states.</p> <p><strong>Guedes&#8217; tax bill.</strong> The Economy Minister proposed combining two social security taxes into a 12-percent VAT, leaving the ICMS — the most problematic of Brazil&#8217;s taxes — untouched. Deemed &#8220;not bold enough&#8221; by congressmen, the upside of this proposal is precisely how conservative it is.&nbsp;</p> <ul><li>By merging only two federal levies and leaving state and city taxes unchanged, Mr. Guedes&#8217; proposal can pass as an ordinary law, requiring just a simple majority of votes in Congress. Meanwhile, the reform plans in the House and Senate call for amending the constitution, a much longer process that requires 60-percent majorities over two-round votes in both congressional chambers.</li><li>But being formally easier to pass doesn&#8217;t mean it is <em>politically </em>easier to pass. Business owners reacted negatively to the bill — especially those in the services sector, which will be worst-affected by the changes. Meanwhile, economists showed concern about the tax burden becoming even heavier than it is now.</li><li>The government promises to reduce corporate taxes and begin taxing dividends. However, no time frame for these proposals was given.&nbsp;</li></ul> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Shares of retail giant Magazine Luiza have soared 67 percent so far this year, so is it still worth investing? For asset management firm Reach Capital, the answer is not quite clear. They say the stock is difficult to price and have reduced their exposure to Magazine Luiza&#8217;s shares. But they do add that the stock has potential to rise even more. “As the company delivers [its quarterly] results, it will be more clear to investors [if it&#8217;s worth a long-term investment].”</p> <p class="has-text-align-center"><strong><em>Natália Scalzaretto</em></strong></p> <hr class="wp-block-separator"/> <h2>The virus is not slowing down in Brazil</h2> <p>Over the past month, Brazil has consistently recorded a daily average of over 40,000 new cases and over 1,000 new deaths. Data journalist Aline Gatto Boueri analyzed the progression of the disease in each of the country&#8217;s 5,570 municipalities over the first three weeks of July. And the data suggests we could see a second coronavirus wave in the Amazon. New cases per 100,000 people have been particularly high in the region —&nbsp;notably in the municipalities of <a href="https://brazilian.report/society/2018/04/19/brazil-population-ibge/">Jacareacanga</a> (460) and Campos de Júlio (504).</p> <iframe title="The coronavirus continues to spread in Brazil" aria-label="map" id="datawrapper-chart-oufQw" src="https://datawrapper.dwcdn.net/oufQw/1/" scrolling="no" frameborder="0" style="width: 0; min-width: 100% !important; border: none;" height="636"></iframe><script type="text/javascript">!function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"])for(var e in a.data["datawrapper-height"]){var t=document.getElementById("datawrapper-chart-"+e)||document.querySelector("iframe[src*='"+e+"']");t&&(t.style.height=a.data["datawrapper-height"][e]+"px")}}))}(); </script> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <ul><li><strong>Politics.</strong> House Speaker Rodrigo Maia made a proposal that could reignite the crisis between Congress and the Bolsonaro government. He wants to limit the participation of military officers in executive positions —&nbsp;forcing them to retire if they join the government. There are at last 2,500 active members of the Armed Forces currently working in the Bolsonaro administration — and over 3,500 military retirees. This <a href="https://brazilian.report/power/2020/05/07/uncertain-role-military-armed-forces-jair-bolsonaro-government/">massive presence of the military</a> in his government is considered to be one of the reasons why Mr. Bolsonaro has managed to avoid more open attacks from the political establishment.</li><li><strong>Economy. </strong>The week will bring new data about the state of the government&#8217;s public accounts and formal employment numbers. Both indicators will provide a picture of the extent of the crisis and how resilient the Brazilian economy can be. In May alone, the federal deficit topped BRL 126 billion (USD 24 billion)&nbsp;—&nbsp;the largest on record. By the end of the year, it could reach at least BRL 800 billion. Moreover, the pandemic kept 19.4 million people from <a href="https://brazilian.report/business/2020/07/23/economics-second-covid-19-wave-brazil/">seeking a job</a> in the first week of July, according to new data from the Brazilian Institute of Geography and Statistics. At that moment, the country had 76.8 million workers out of the labor force.</li><li><strong>Bolsonaro.</strong> Unions representing over 1 million health workers, alongside international entities, have filed a complaint at the International Court of Justice against President Jair Bolsonaro — accusing him of committing &#8220;crimes against humanity,&#8221; due to his <a href="https://brazilian.report/podcast/2020/03/27/explaining-brazil-podcast-public-health-enemy-1/">approach to the coronavirus crisis</a>. They say the president &#8220;adopted negligent and irresponsible actions, which contributed to the number of deaths topping the 80,000 mark.&#8221; The complaint will be analyzed by Gambian lawyer Fatou Bensouda, Prosecutor of the International Criminal Court —&nbsp;and any decision could take months.</li></ul> <hr class="wp-block-separator"/> <h2>In case you missed it</h2> <ul><li><strong>Oil and gas.</strong> After eight years, Brazil&#8217;s <a href="https://brazilian.report/newsletters/brazil-daily/2020/04/22/crashing-oil-prices-affect-petrobras-brazil/">oil and gas giant Petrobras</a> has decided to order three new offshore oil-drilling platforms — one of which will be leased. The cost for each platform is estimated at USD 2 billion. While Brazil&#8217;s naval industry doesn&#8217;t expect to win the bidding war against Asian competitors, they hope to get part of the orders for equipment and services — and in turn help reignite the sector.&nbsp;</li><li><strong>Public bank.</strong> Rubem Novaes announced his resignation as CEO of Banco do Brasil, a state-controlled, publicly-traded bank. In a statement to Brazilian Securities Commission, he cited personal reasons and highlighted the institution&#8217;s need for &#8220;fresh faces.&#8221; But Mr. Novaes had grown frustrated due to not being able to carry out the project to <a href="https://brazilian.report/business/2018/11/09/brazil-privatization-austerity/">fully privatize</a> Banco do Brasil.</li><li><strong>Amazon.</strong> Reporter Natália Scalzaretto spoke with fintech Moss, which was created four months ago with the goal of &#8220;helping save the Amazon.&#8221; It plans to develop a market that remains incipient in the country: carbon credit. <a href="https://brazilian.report/tech/2020/07/24/tech-roundup-brazilian-fintech-wants-save-amazon/">Read more</a>.</li><li><strong>Telecom.</strong> Brazil’s fourth-largest telecom company Oi announced it has entered <a href="https://brazilian.report/newsletters/brazil-daily/2020/07/23/brazil-central-bank-optimism-recovery-telecom-amazon/">exclusive talks with Highline</a> to sell its mobile telephony operations. The bidders — which made a better offer than competitors Vivo, TIM, and Claro — are a telecom infrastructure company owned by Digital Colony, the digital infrastructure investment platform of Colony Capital, Inc.</li><li><strong>Fake news.</strong> The Supreme Court&#8217;s highly controversial anti-fake news investigation continued last week, with many pro-Bolsonaro activists having their Facebook and Twitter accounts blocked. The move followed a ruling by Justice Alexandre de Moraes, who claimed it was necessary in order to &#8220;curb users from spreading hate speech and fueling actions against the democratic order.&#8221; But Justice Moraes is not exactly a neutral umpire in the discussion: fact-checking agency Aos Fatos shows that he is the target of choice of the far-right&#8217;s vitriol, with <a href="https://www.aosfatos.org/noticias/autor-de-bloqueio-nas-redes-moraes-e-o-ministro-do-stf-mais-atacado-por-bolsonaristas-suspensos/?utm_source=aosfatos&amp;utm_campaign=88630717ef-newsletter_created_on_2020-07-24+19%3A54%3A50&amp;utm_medium=email&amp;utm_term=0_b221809dd3-88630717ef-189628221">71 percent of negative posts</a> about the Supreme Court mentioning him. At President Jair Bolsonaro&#8217;s orders, the Solicitor General&#8217;s Office <a href="https://congressoemfoco.uol.com.br/governo/bolsonaro-entra-com-acao-para-recuperar-contas-de-aliados-em-redes/">filed a lawsuit</a> to overturn the decision.

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