Salvador da Bahia was the colonial capital of Brazil in the 16^th century, and although it lost its capital status of the country by the second half of the 18^th century, it has remained as “the Brazilian capital of happiness,” thanks to the joyous spirit of its people and its renowned street carnival.

Over the past 10 years, the citizens of the northeastern state of Bahia have had additional reason to be happy: theirs has been one of the country’s fastest-growing states. But the state’s finances were in disarray: Debt service consumed around 12% of the state’s net cash flow, making it hard to access capital markets, bound by a federal framework that caps a State’s debt service at 13%. Crossing that threshold meant that Bahia couldn’t apply for credit needed for public investment.

In 2008, Bahia began an ambitious program with three objectives: improving economic stability, boosting revenue collection, and expanding public investment. State authorities asked the IDB for help in developing a program to increase revenue so that it could invest in healthcare and education, two key sectors where investment had lagged in the previous two decades. Just one example: Salvador da Bahia, the state capital and Brazil’s third largest metropolis, had not built a new hospital or invested seriously in existing public hospitals in over 20 years.

Working with the state’s Treasury, the IDB helped to craft a program focused on improving Bahia’s tax collection and its public spending practices. On the collection side, Bahia introduced an electronic tax invoicing for 125 of the state’s largest taxpayers, who accounted for more than 30% of the tax base. The state also found new ways to tackle the evasion of sales taxes and motor vehicle taxes.

On the spending side, Bahia established an investment fund to centralize all public expenditures, with a single budget. Next, it set up an electronic procurement system for most purchases of goods and services.

The program began paying off almost immediately. In 2011 Bahia had R$12 billion (US$ 3.7 billion) in yearly revenue. By 2013 revenue had reached R$15.1 billion (US$ 4.7 billion), surpassing a goal they had set for 2015.

Public expenditures management also improved significantly. In 2010 Bahia established an open bidding system through e-procurement. The state began with a base line of R$596 million (US$ 187 million) being procured through electronic bidding, with a goal of reducing those costs to R$474 (US$ 149) million by the end of 2014. They exceeded that goal, reducing costs to R$464 million (US$ 146 million).

Increased revenue and savings are essential if public investment is to increase.  By strengthening those two areas, Bahia was able to a make big difference in the lives of its citizens. Case in point:  in 2010 officials inaugurated the Hospital do Subúrbio, a state-of-the-art healthcare facility and the first public hospital to be built in the Bahian capital in two decades. The hospital serves 11 poor neighborhoods accounting for 25% of the city’s population.

Bahia managed to build the hospital under a Public-Private Partnership (PPP) model, thanks to the state’s improved finances following implementation of the taxation and spending reforms. The new hospital is an example of transparency and proper management: all of the equipment and medical and administrative services were open to bidding through the Brazilian Stock exchange (BOVESPA), which netted savings of R$8.3 million (US$ 2.6 million).

In just five years, the hospital has conducted 1.8 million procedures, and plans are already in the works to upgrade facilities and equipment at a cost of almost R$22 million (US$ 6.9 million).

This success led to additional reforms: State officials knew that they were spending too much on electricity, so they began monitoring the use and cost of energy across multiple agencies. By the end of the audit, they were able to reduce the number of power supply contracts from 298 to 35, saving as much as R$1 million (US$ 313,000) a year.

By making the right fiscal reforms, Bahia was able to go from investing R$845 million (US$ 265 million) in 2008 to R$1.3 billion (US$ 408 million) in 2010. Today, Bahia is not only the Brazilian “capital of happiness”; it is also the capital of good fiscal policy of Brazil.

Gustavo Garcia has been the Principal Technical Lead Fiscal Economist and Coordinator of the Fiscal Sector at the Fiscal Municipal Management Division at the Inter-American Development Bank since 2009. He holds a Master Degree and Ph.D. studies in Economics from Boston University and author of several publications on macroeconomics, public finances and fiscal policy in Latin America.

Photo of hospital courtesy of the Government of Bahia, Brazil