Contingent Liability- Country Experiences By Tarun Das

Management of Contingent LiabilitiesCross Country Experiences Tarun Das Economic Adviser, MOF, India and Consultant, World Bank

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Overview 1. 2.

Concepts and definitions Fiscal Risk Matrix for Philippines government 3. Extent of CLs for Philippines government 4. Cross Country Experiences (e) Transparency in recording & reporting (b) Accountability and Legal system (c) Policy Framework (d) System of Risk Management 5. International best practices 2

1. Concepts and Definitions of Contingent liabilities (CLs) SNA 1993: CLs are defined as Contractual financial arrangements that give rise to conditional requirements to make payments either in cash or in kind. Two main types- explicit and implicit. Explicit contingent liabilities: Legal and Contractual Commitment. Implicit contingent liabilities:No contractual obligation, but expected by society. 3

2. Fiscal Risk Matrix for the Philippines Liabilities

Direct (obligation in any event Contingent (obligation if a particular event occurs)

Explicit Govt. liability by law or contact

•Sovereign debt •Expenditures approved in the Budget •Future legally-binding expenditures (pensions and provident funds)

Implicit •Future cost overruns or recurrent costs of public A moral obligation of investment projects the govt. due to public or interest group pressures

•Govt. guarantees for GOCC loans •Govt. guarantees given to the operators of the BOT projects •Umbrella guarantees for loans given to the priority sectors •Guarantees on benefits of the social security system • Bail out of failed banks •Possible default of the central bank •Support to public enterprises for covering losses or assuming nonguaranteed obligations

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Philippines GovernmentExplicit Contingent liabilities •-Direct guarantees on obligations of GOCCs •Guarantees on currency risks of GFIs' foreign loans •Guarantees on various types of risks (such as market, currency, regulatory, political) in BOT contracts •Umbrella guarantees for various types of loans (agriculture, micro enterprises, housing) •Deposit insurance (P100k per account) •Guarantees on benefits (unfunded liabilities) of the social security system •Future health care financing 5 •Tax credit certificates

Philippines GovernmentImplicit Contingent liabilities •Bank failure (beyond state insurance) •Possible default of the central bank •Possible need to further recapitalize government banks or financial institutes •Cleanup of the liabilities of privatised entities before or after privatisation • Support to enterprises (covering losses 6 & assuming non-guaranteed obligations

3. Contingent Liabilities of Philippines Govt.

Type of contingent

Amount

Share in

As % of

As % of

liability Guarantees on loans

P billions

total (%)

GDP

public debt

491 455

15.5 14.3 1.3 57.7 11.1 100

BOT Projects Guarantee institutions SSS & GSIS Deposit insurance Total

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1,828 352 3,166

14.8 13.7 1.2 55 10.6 95.2

17.2 16 1.4 64.2 12.4 111.3

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Guarantees of the NG of Philippines Type of Guarantee Domestic debt Guaranteed Assumed External debt Guaranteed Assumed Total Guarantee Memo Item NG Debt Domestic External

Levels (Pbln) 15.3 15.1 0.2 476.1 458.7 17.4 491.4 2844.0 1239.4 1604.6

% share in contingent 3.1 3.1 0.0 96.9 93.3 3.5 100.0 Share in Debt 100.0 43.6 56.4

% of GDP

% of total

0.5 0.5 0.0 14.3 13.8 0.5 14.8

NG debt 0.5 0.5 0.0 16.7 16.1 0.6 17.3

85.6 37.3 48.3

100.0 43.6 56.4

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4. Management of Contingent LiabilitiesCross Country Experiences India,Australia, Canada,Columbia, Czech Republic, Hungary,New Zealand, Philippines, UK, USA

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(a) Transparency in recording and reporting

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(i) Types of liabilities reported

- Guarantees by most countries - Indemnities and uncalled capital by Australia, New Zealand -All explicit contingent liabilities by Canada,

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(ii) Authority for Approval and Issue of government guarantees - MOF/ DOF/ Treasury in most countries -Respective Ministries/ Departments in the United Kingdom 12

(iii) Centralised Unit for monitoring of government guarantees - MOF/ DOF/ Treasury in most countries -Public Debt Office in Columbia, Hungary and New Zealand 13

(iv) Are there automatic guarantees? - India: Small savings, PF and Insurance - Australia: Certain items under legislation - Canada : Crown corporations on insurance - Hungary: Reinsurance of priority lending - Philippines: Some GOCCs under charter - UK: Items of national security - USA and New Zealand: Not in general 14

(v) Contingent liabilities not monitored - Liabilities due to Pension, Provident and Insurance - Due to lack of proper methodology and requisite information 15

(vi) Are all monitored liabilities reported to public? - Yes, by all countries. - Contingent liabilities related to national security and commercial confidentiality are not reported by the government of UK

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(vii) Does there exist ready up-todate data for other CLs? - Yes, in Australia, Canada, Hungary, New

Zealand, U.K. and U,S,A, - No, for India, Columbia, Czechoslovakia, Philippines

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(b) Accountability and Legal system

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(i) Legal Requirements to report contingent liabilities -India: Proposed Fiscal Responsibility and

Budget Management Act under article 292 - Australia: Charter of Budget Honesty Act (BHA) 1998 - Canada: Financial Administration Act -Columbia: Law 448 enacted on 21-07-98 -Czech Republic: Law of Budgetary Rules 19

(i) Legal Requirements to report contingent liabilities(completed) -Hungary: Public Finance Act 1992 -New Zealand:Fiscal responsibility Act, Public Finance Act, Local Government Act, - Philippines:Republic Act 4860 for ext..sector - UK: Code of Fiscal stability -USA: Federal Credit Reforms Act 1990 20

(ii) Contingent liabilities regulated

corparation corparation corparation corparation bank: corparation bank: corparation bank: corparation bank: corparation bank: corparation bank: corparation bank: bank: bank: bank:

by law -India: Guarantees, PF, SSI -Australia, Canada, New Zealand: Guarantees,indemnities, uncalled capital Columbia- CLs of state entities Czech Rep- Guarantees, hidden debt Hungary- Guarantees, reinsurance Philippines- Guarantees to GOCCs UK, USA-All material contingent 21 liabilities

(iii) Are there limits on Contingent liabilities? No--India, Australia, Columbia, Czech Republic, Philippines, UK India is trying to legislate an act. Yes-- Canada, New Zealand Hungary- As % of revenue USA-Automatic limits through appropriation 22

(iv) Audit by Independent Auditors -India:Comptroller General of Accounts -Australia: National audit Office Canada, Columbia, Czech Rep: Yes Hungary- State Audit Office New Zealand: Yes, applies GAAP Philippines- Yes by Commission on Audit UK: National Audit Office USA- Federal Financial Accounting 23 Stand.

(c ) Policy Framework

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(i) Does the Annual Budget present a medium term policy framework? No- India, Columbia, Czech Rep Yes- Australia, Canada, Hungary, New Zealand, Philippines, U.K., U.S.A. 25

(ii) Does there exist a designated contingent liability redemption fund? Yes- Australia, Canada, India, Columbia, Hungary, New Zealand, U.K, U.S.A. No- Czech Rep, Philippines. 26

(d) Systems for Risk Management

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(i) Is budgeting done on the basis of accrual accounting? Yes- Australia, Canada, Hungary, New Zealand, U.S.A. No- India, Columbia, Czech Rep, Philippines, U.K. Note: India and Philippines are moving towards accrual accounting. 28

(ii) Is a statement on fiscal risk included in the budget? Yes- Australia, Canada, Columbia, Hungary, New Zealand, U.K., U.S.A. No- India, Czech Rep. and Philippines.

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(iii) Does there exist an independent public debt office (PDO) ? Yes- Australia, Canada, Columbia, Hungary, New Zealand, U.K., U.S.A. No- India, Czech Republic, Philippines. Note: India has decided to set up independent PDO.

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5. Lessons from International Best Practices

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1. Setting up a Centralised Unit for:

-- Identification and measurement of CLs -- Policy formulation for issue of CLs -- Determination of guarantee fees -- Designing of CL instruments -- Monitoring risk exposures 2. To set up a Contingent Liability Redemption Fund 3. Not to provide any automatic guarantee 4. To prescribe limits on guarantee 32

5. Sound risk sharing arrangements among government, operators, insurance companies 6. Promoting sound corporate governance 7. Improve the supervision and regulation of PSEs 8. Sound macro-economic policies 9. To establish and strengthen appropriate legal, regulatory and institutional set-up 10. Set up an independent public debt office 11. Strengthening Capability Building for Contingent liability Management

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6.

Suggested Tasks for Philippines Government for the near term

1. To set up a Middle Office for management of Contingent Liabilities in the DOF with sanction of sufficient budget and recruitment of technical experts, for the following tasks: - Identification, measurement, monitoring and management of CLs - To complete the inventory of all existing CLs - To produce status reports on CLs and present to Congress and for general sissemination - Evaluation and recommendations of future CLs -Designing appropriate guarantee instruments for BOTs -- Reviewing, restructuring of the existing ones for BOTs -- Formulation or review of policies, guidelines and regulations for future contingent liabilities - Determination of risk based guarantee fees -- Evaluation and monitoring of risks for all CLs -To deal with CLs associated with BOT/ PSP projects - To organise training, seminars and 34 workshops on capacity building etc.

2.To prepare a standardized manual for measurement of all CLs and income recognition and provisioning norms for GOCCs, and particularly for NBFCs 3. To make all the GOCCs disclose their CLs in their Annual Report and to have appropriate policies for CL management 4. Require all government departments to submit half yearly reports to the Middle Office in DOF on their CLs and risk mitigation measures 5. To disclose all CLs in Budget documents as memorandum items or to present a separate budget for CLs (as was done in the USA before 1990) 6. To strengthen the corporate governance and risk management capability in all GOCCs 7. Formulate program for Capacity building within 35 government for management of CLs

8. Improve infrastructure and hardware and software for information systems, databases and networks and interface in all organizations dealing with CLs 9. Executive order removing all automatic guarantees on some GOCCs and to put a limit on guarantees 10. Sector Specific Policies: (a) To enhance the contribution rate of SSS to at least 12 per cent in the current year and to the level of GSIS in a phased manner, say in three years (b) To improve compliance rates and qualifying period for pension for the GSIS (c) To strengthen the risk management capability in overall ALM framework in both SSS, GSIS and government banks (d ) To strengthen the mechanism for recovery of nonperforming assets in the banking sector (e) Institute performance contacts and sign MOUs with major GOCCs and GFIs (as being done in India)

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1. Move towards complete Accrual Basis of Accounting 2. Improvement in Audit, introduction of performance audit & disclosure norms for all GOCCs, particularly for SSS, GSIS, RSBS, HGC, Pag-ibig 3. Move towards US System of budgeting and provisioning by combining both direct and contingent liabilities 4. To set up full fledged Public Debt Office 5. Privatization of some of the GOCCs 6. Innovative systems for risk allocation among govt., operators and insurance cos for BOT projects 7. To move towards defined contribution schemes or fully funded programs for SSS and GSIS 8. Continue with sound macroeconomic policies

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THANK YOU

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