Brazil's Sao Paulo Stumbles, Cutting Back on State Projects

FOR years, bustling industrial Sao Paulo - Brazil's richest state - has been known as the nation's locomotive. But this year, the engine is sputtering.

After years of mismanagement and alleged corruption, Sao Paulo owes its creditors $50 billion. With high interest payments on its debt and salaries for 1.1 million public employees, state officials have little to spare for the most basic services, including gas for police cars.

''The nation's richest state is in the gutter,'' said a recent article in the Rio de Janeiro daily O Globo.

This precarious financial situation for the state with its 32 million inhabitants has caused Gov. Mario Covas this year to stop 1,300 public projects, lay off 35,000 public employees, and cut funds from housing, education, and health programs. Consider the following:

* A doctor at the Sao Paulo city hospital Regional de Ferraz de Vasconcelos - a state facility attending to 25,000 people a month with only 299 beds - told reporters that 200 people died there in the last two years from ''structural flaws'' such as a lack of equipment.

* Public school teachers for the state's 6.7 million students have gone on strike for months on end to raise their monthly incomes to the current wage of $210.

* Work on three new subway stations has come to a halt, even as some 4.3 million motorists must cope with horrific traffic jams in the capital city.

The deterioration has hit hard in a state where the number of families living in absolute poverty jumped from 450,000 to 640,000 between 1990 and 1994, according to the state planning agency. ''If Sao Paulo doesn't put the breaks on its rapid descent into poverty,'' said an editorial in the Rio daily Jornal do Brasil, ''it will find itself on the road to becoming a Mexico City, a symbol of a nation in ruin.''

To be sure, Sao Paulo is still home to Latin America's largest industrial complex and its annual per-capita income of $5,000 is more than twice the region's average. The state accounts for 45 percent of Brazil's industrial production, 35 percent of its exports, and pays 52 percent of its federal taxes.

Sao Paulo's financial woes began during Brazil's economic crisis of the 1980s when many states ran up huge debts and then used state banks to bail them out. Currently, the Sao Paulo government owes $13 billion to Banespa, the state-owned bank.

Many political observers place the blame for Sao Paulo's travails on its two past governors: Orestes Quercia (1987-91) and Luiz Antonio Fleury (1991-94). ''There is no doubt that the last two administrations ran state finances into a hole,'' says Gilbert Donahue, economic adviser for the United States Consulate.

Critics say Mr. Quercia and Mr. Fleury used Banespa to finance preelection public-works projects and give loans to companies headed by friends that no private bank would ever make. ''It was as if it were a personal fund from which one could get millions, make deals, and forget to pay the bill,'' said Veja, the nation's leading news magazine.

Quercia, who ran an unsuccessful bid for president last year, blames such criticism on his political enemies who he says want to ''confuse public opinion.''

In an interview with the Monitor at his spacious Sao Paulo home, Fleury also denies any wrongdoing. ''The problem isn't patronage or poor management, but high interest rates on the state debt,'' he claims. ''It's a perverse system, which the current governor must also face.''

Governor Covas, who took office in January, has watched the state's debt grow by $1 billion a month because of interest rates as high as 60 percent a year. Covas, a close political ally of President Fernando Henrique Cardoso, says his aim is to reduce state spending by 30 percent.

Restraint couldn't come too soon for businessmen who worry that the state's financial problems will scare off foreign investors. ''When US investors see the figures on market potential, they are attracted to Sao Paulo,'' Mr. Donahue says. ''But when they come here and see the reality, they are put off or forced to grin and bear it.''

Sao Paulo businessmen are also worried that other states are winning what the press here calls ''the fiscal war'' by offering potential new investors hefty tax breaks.

A big blow to state pride occurred in July when Volkswagen - which had been planning to build a $250 million bus and truck plant in Sao Paulo - chose to construct its factory in the small Rio de Janeiro state city of Resende.

Covas, who is struggling to correct the situation, recently launched the state Agency for Development and Competition to woo back foreign investors. Emerson Kapaz, the state secretary for economic development, says foreign investors still find Sao Paulo an attractive investment and points to recent agreements with Wal-Mart, Procter & Gamble, and General Motors.

Moreover, Covas has agreed to privatize 70 percent of Banespa's stock while allowing federal managers to fire 1,390 of the bank's political appointees. He also recently announced that his government would sell 492 state properties, including the domestic airport, worth $3 billion.

His government is also investigating the most dubious loans made by Banespa. A judge recently froze the assets of 20 individuals, including former Governor Fleury, as their investigation continues.