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Management of
Contingent Liabilities-Cross CountryExperiences
Tarun Das
Economic Adviser, MOF, India
and Consultant, World Bank
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Overview1. Concepts and definitions
2. Fiscal Risk Matrix for Philippinesgovernment
3. Extent of CLs for Philippinesgovernment
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
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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. Explicitcontingent liabilities: Legal and ContractualCommitment.
Implicit contingent liabilities:No contractualobligation, but expected by society.
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2. Fiscal Risk Matrix for the Philippines
Liabilities Direct (obligation in any event Contingent (obligation if a particular
event occurs)
Explicit
Govt. liabilityby law orcontact
Sovereign debt
Expenditures approved in theBudget
Future legally-bindingexpenditures (pensions andprovident funds)
Govt. guarantees for GOCC loans
Govt. guarantees given to theoperators of the BOT projects
Umbrella guarantees for loans givento the priority sectors
Guarantees on benefits of the socialsecurity system
Implicit
A moral
obligation ofthe govt. dueto public orinterest grouppressures
Future cost overruns orrecurrent costs of public
investment projects
Bail out of failed banks
Possible default of the central bank
Support to public enterprises forcovering losses or assuming non-guaranteed obligations
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Philippines Government-
Explicit 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
Tax credit certificates
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Philippines Government-
Implicit Contingent liabilities
Bank failure (beyond state insurance)
Possible default of the central bankPossible need to further recapitalize
government banks or financial institutes
Cleanup of the liabilities of privatisedentities before or after privatisation
Support to enterprises (covering losses
& assuming non-guaranteed obligations
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3. Contingent Liabilities of Philippines Govt.
Type of contingent Amount Share in As % of As % of
liability P billions total (%) GDP public debtGuarantees on loans 491 15.5 14.8 17.2
BOT Projects 455 14.3 13.7 16
Guarantee institutions 40 1.3 1.2 1.4
SSS & GSIS 1,828 57.7 55 64.2
Deposit insurance 352 11.1 10.6 12.4
Total 3,166 100 95.2 111.3
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Guarantees of the NG of Philippines
Type of Levels (Pbln) % share in % of GDP % of totalGuarantee contingent NG debt
Domestic debt 15.3 3.1 0.5 0.5
Guaranteed 15.1 3.1 0.5 0.5
Assumed 0.2 0.0 0.0 0.0
External debt 476.1 96.9 14.3 16.7
Guaranteed 458.7 93.3 13.8 16.1
Assumed 17.4 3.5 0.5 0.6
Total Guarantee 491.4 100.0 14.8 17.3
Memo Item Share in DebtNG Debt 2844.0 100.0 85.6 100.0
Domestic 1239.4 43.6 37.3 43.6
External 1604.6 56.4 48.3 56.4
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4. Management ofContingent Liabilities-
Cross CountryExperiences
India,Australia,Canada,Columbia,
Czech Republic,
Hungary,NewZealand,
Phili ines, UK, USA
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(a) Transparency in
recording andreporting
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(i) Types of liabilities reported
- Guarantees by mostcountries- Indemnities and uncalled
capital by Australia, NewZealand-All explicit contingent
liabilities by Canada,
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(ii) Authority for Approval andIssue
of government guarantees
- MOF/ DOF/ Treasury in mostcountries-Respective Ministries/
Departments in the UnitedKingdom
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(iii) Centralised Unit for
monitoringof government guarantees
- MOF/ DOF/ Treasury in mostcountries
-Public Debt Office in Columbia,Hungary and New Zealand
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(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
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(v) Contingent liabilities not
monitored
- Liabilities due to Pension,Provident and Insurance- Due to lack of proper
methodology and requisiteinformation
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(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-to-
date 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
andLegal 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
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(i) Legal Requirements to report
contingentliabilities(completed)
-Hungary : Public Finance Act 1992-New Zealand :Fiscal responsibility Act,
Public Finance Act, Local Government Act,
- Ph ilip p ines:Republic Act 4860 for ext..sector- UK : Code of Fiscal stability-USA : Federal Credit Reforms Act 1990
on ngen a es regu a e
ti
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on ngen a es regu a eby law
-India: Guarantees, PF, SSI-Australia,Canada, NewZealand: Guarantees,indemnities,
uncalled capitalColumbia- CLs of state entitiesCzech Rep- Guarantees, hiddendebtHungary- Guarantees, reinsurancePhilippines- Guarantees to GOCCsUK, USA-All material contingent
liabilities
corparation
bank:
corparation
bank:corparation
bank:
corparation
bank:corparation
bank:
corparation
bank:corparation
bank:
corparation
bank:corparation
bank:
corparation
bank:
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(iii) Are there limits on
Contingent liabilities?
No--India, Australia, Columbia,Czech Republic, Philippines, UKIndia is trying to legislate an act.
Yes-- Canada, New ZealandHungary- As % of revenue
USA-Automatic limits throughappropriation
v u y n epen en
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v u y n epen enAuditors-India:Comptroller General of
Accounts-Australia: National audit OfficeCanada, Columbia, Czech Rep:
YesHungary- State Audit OfficeNew Zealand: Yes, applies GAAPPhilippines-Yes by Commission onAuditUK: National Audit OfficeUSA- Federal Financial Accounting
Stand.
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(c ) PolicyFramework
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(i) Does the Annual Budget
present a medium termpolicy framework?
No- India, Columbia, CzechRep
Yes- Australia, Canada,
Hungary, New Zealand,Philippines, U.K., U.S.A.
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(ii) Does there exist adesignated contingentliability redemption fund?
Yes- Australia, Canada, India,Columbia, Hungary, NewZealand, U.K, U.S.A.
No- Czech Rep, Philippines.
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(d) Systems forRisk 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 accrualaccounting.
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(ii) Is a statement onfiscal risk included in the
budget?Yes- Australia, Canada,Columbia, Hungary, NewZealand, U.K., U.S.A.
No- India, Czech Rep. andPhilippines.
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(iii) Does there exist anindependent public debt
office (PDO) ?Yes- Australia, Canada,Columbia, Hungary, NewZealand, U.K., U.S.A.No- India, Czech Republic,
Philippines.Note: India has decided toset up independent PDO.
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5. Lessons fromInternational 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 guarantee4. To prescribe limits on guarantee
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5. Sound risk sharing arrangements among
government, operators, insurance companies6. Promoting sound corporate governance
7. Improve the supervision and regulation of PSEs
8. Sound macro-economic policies9. To establish and strengthen appropriate legal,
regulatory and institutional set-up
10. Set up an independent public debt office
11. Strengthening Capability Building for Contingentliability Management
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.Governmentfor the near term 1. To set up a Middle Office for management of Contingent
Liabilities in the DOFwith sanction of sufficient budget andrecruitment of technical experts, for the following tasks: - Identification, measurement, monitoring andmanagement 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 andregulations 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/ PSPprojects- To organise training, seminars and
workshops on capacity building etc.
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2.To prepare a standardized manual for measurementof all CLs and income recognition and provisioning
norms for GOCCs, and particularly for NBFCs3. To make all the GOCCs disclose their CLs in theirAnnual Report and to have appropriate policies for CLmanagement
4. Require all government departments to submit halfyearly reports to the Middle Office in DOF on their CLsand risk mitigation measures5. To disclose all CLs in Budget documents asmemorandum items or to present a separate budgetfor CLs (as was done in the USA before 1990)6. To strengthen the corporate governance and riskmanagement capability in all GOCCs7. Formulate program for Capacity building within
government for management of CLs
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8. Improve infrastructure and hardware and software forinformation systems, databases and networks and
interface in all organizations dealing with CLs9. Executive order removing all automatic guarantees onsome GOCCs and to put a limit on guarantees10. Sector Specific Policies:(a) To enhance the contribution rate of SSS to at least 12per cent in the current year and to the level of GSIS in aphased manner, say in three years(b) To improve compliance rates and qualifying periodfor pension for the GSIS(c) To strengthen the risk management capability inoverall ALM framework in both SSS, GSIS and government
banks(d ) To strengthen the mechanism for recovery of non-performing assets in the banking sector(e) Institute performance contacts and sign MOUs withmajor GOCCs and GFIs (as being done in India)
.A ti
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.Accounting2. Improvement in Audit, introduction ofperformance audit & disclosure norms for allGOCCs, particularly for SSS, GSIS, RSBS, HGC,Pag-ibig3. Move towards US System of budgeting andprovisioning by combining both direct andcontingent liabilities
4. To set up full fledged Public Debt Office5. Privatization of some of the GOCCs6. Innovative systems for risk allocation amonggovt., operators and insurance cos for BOT
projects7. To move towards defined contributionschemes or fully funded programs for SSS andGSIS8. Continue with sound macroeconomic policies
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THANK YOU