Contingent Liability- Country Experiences by Tarun Das

8/14/2019 Contingent Liability- Country Experiences by Tarun Das

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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

Contingent Liability- Country Experiences by Tarun Das

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