|After years of economic mismanagement, the budget of Minas Gerais reached a deficit of R$2.3 billion (about $1 billion) in 2003. Public investment dropped from average of R$5 billion/year (2003 prices) in 1995–98 to R$1.5 billion by 2003. The net consolidated debt of the state amounted to 238.87 percent of the net current revenue in 2003. Because of its indebtedness, the state could not count on financial support from the federal government to contract credit operations (this was prohibited by law). Faced with extremely adverse fiscal conditions, the newly elected state government initiated a set of bold adjustment measures, the so-called choque de gestão (management shock), in January 2003. This management shock can be divided into two stages: fiscal balance and fiscal quality.
First Phase (2003-06)
The first set of measures concentrated on traditional policies: regaining fiscal sustainability through increasing revenue and rationalizing expenditures; reorganizing the state government's macro structure (administrative reform); integrating planning and management instruments; and establishing a new human resources policy—for example, creating a ceiling for remuneration.
The innovative feature was the creation of the Strategic Resource and Action Management. GERAES, as it was known, was the operational framework that guided the allocation of resources to structural projects. In 2005, the government defined and agreed on performance goals for all 31 of the state's structural projects. These data were entered in the central project monitoring system for regular monitoring of their performance, which enabled the government to limit wasteful expenditures. The combination of the traditional policies with the impact of GERAES turned the fiscal situation around. Starting in 2004, the state has had four consecutive years of fiscal surplus, after one entire decade of fiscal deficit.
Second Phase (2007-to date)
Taking advantage of the improvement in public accounts, the Second Phase was launched in 2007, under the label of Results-Oriented State. This meant that fiscal balance would be a prerequisite for government action, and government performance would be measured by improving outcomes; that is, it had to be results-oriented. To move toward achieving this goal, the governor of Minas Gerais asked for the Bank's support. The Bank responded with a two-tranche DPL of $170 million, which was fully disbursed in May 2007. This DPL had three pillars—fiscal stabilization, public sector reform, and private sector development. All three pillars had a well-defined action matrix and impact indicators. It helped the government to formulate its actions so that it would be results-oriented.
To continue with his program, in July 2008, the governor of Minas Gerais asked the Bank for a loan of $1 billion (the entire borrowing capacity of to the state in its agreement with the federal treasury).
Sources: Government of Minas Gerais; IEG mission materials and interviews.