Risk Management in Colombia: Contingent liabilities

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Risk Management in Colombia: Contingent liabilities. Ministry of Finance and Public Credit Republic of Colombia. Introduction to contingent liabilities management in Colombia. - PowerPoint PPT Presentation

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Risk Management in Colombia: Contingent liabilities

Ministry of Finance and Public CreditRepublic of ColombiaIntroduction to contingent liabilities management in ColombiaIt is a fundamental component of the principles of fiscal discipline, addressing debt sustainability, reduction of fiscal risk and transparency in the administration of public resources.

The CL management process starts with Act 448 of 1998:regulated the budget management of contingent liabilities established the General Directorate of Public Credit of the Ministry of Finance as responsible for the approval of valuations.

In 2003 Law 819 established that CL of central and sub-national governments had to be included in the Medium Term Fiscal Framework MFMP, presented annually to Economic Commissions of Congress30/10/20123Ministry of Finance and Public Credit - Republic of ColombiaContingent Liabilities330/10/20125Ministry of Finance and Public Credit - Republic of ColombiaContingent ValueContingent value with INCORAContingent value without INCORA

Total Contingent US$ 245.52Total Contingent US$ 49.12Other Legal Disputes US$ 29.96 (9% of GDP)Cases of Illegal Ponzi Schemes US$ 19.16 (6% of GDP)Public Credit Ops. US$ 0.58Callable Capital US$ 6.37 (2% of GDP)PPPs US$1.01PCOs US$ 0.58Other Legal Disputes US$ 49.12 (14% of GDP)INCORA US$ 188.46 (55% of GDP)Callable Capital US$ 6.37PPPs US$1.015*Billions30/10/20126Ministry of Finance and Public Credit - Republic of ColombiaExplicit Contingent Liabilities630/10/20127Ministry of Finance and Public Credit - Republic of ColombiaContingent liabilities of projects developed under PPPs schemeBackground7LawLaw 448 of 1998Decree 423 of 2001Law 819 of 2003CONPES 3107 and 3133Decree 1467 of 2012Law 1508 of 201230/10/20129Ministry of Finance and Public Credit - Republic of ColombiaContingent liabilities of projects developed under PPPs schemeInstitutional process930/10/201210Ministry of Finance and Public Credit - Republic of ColombiaContingent liabilities of projects developed under PPPs schemeEvolution of risk allocation1030/10/201211Ministry of Finance and Public Credit - Republic of ColombiaContingent liabilities of projects developed under PPPs schemeAssessment process1130/10/201212Ministry of Finance and Public Credit - Republic of ColombiaExplicit Contingent Liabilities1230/10/201213Ministry of Finance and Public Credit - Republic of ColombiaClaims against the NationUncertain fiscal expenditures may derive from negative rulings that depend on future conditions. Each government agency under an allegation has to include in their annual budget the potential impact of a negative ruling.Monitoring and forecasting the results of litigations is key to transparency and fiscal responsibility.The developed methodology is a tool to for decision making on budget policy and management in the legal defense of state agencies.Introduction13Claims against the NationLaw 448 of 1998Law 812 of 2003Law 819 of 2003Law 1437 of 2011Decree 4085 of 2011CONPES 325030/10/201215Ministry of Finance and Public Credit - Republic of ColombiaClaims against the NationBackgroundSince 2000 there is a growing trend of payment for judgments and settlements of the Nation.

This growth is the result of the increased number of claims and their value

Additionally, there are weaknesses in the legal defense of the State, especially those from the national defense sectorSource: Consolidation Group General Directorate of National Budget-MHCP* Court in April 20101530/10/201216Ministry of Finance and Public Credit - Republic of ColombiaClaims against the NationBackgroundThe sector with the highest level of participation in claim payments made with resources from the national Budget is defense, with 62.24%.Source: Consolidation Group General Directorate of National Budget-MHCP* Court in April 20101630/10/201217Ministry of Finance and Public Credit - Republic of ColombiaClaims against the NationRisk Management1730/10/201218Ministry of Finance and Public Credit - Republic of ColombiaClaims against the NationMethodology and assessment of contingent liability for litigation activityElements of the contingent liabilities on litigation activity 1830/10/201219Ministry of Finance and Public Credit - Republic of ColombiaClaims against the NationRepresentation of the probabilistic treeFinal judgmentSecondInstanceExtraordinary remedyFavorableFavorableFFFUnfavorableUnfavorableUUUWithout appeal II | Favorable IWA II | F IWA III | U II | F IWA III | F II | U IWA III | U II | U IWithout appeal I | Unfavorable IWA I | U IUWA III | F II | F I

FFavorableUnfavorableFirstInstance1930/10/201220Ministry of Finance and Public Credit - Republic of ColombiaClaims against the NationAssessment of contingent liability for litigation activity.2012-2022 without INCORA*PretensionsContingentEntityBillons%Billions% Financing Superintendence of Colombia 28.4834.44%20.0140.74% General Attorney 7.549.12%3.557.22% Ministry of National Defense 5.356.47%3.436.98% Consejo Superior de la Judicatura 3.514.24%2.254.57% Autonomous Regional Corporation of Cundinamarca - Car 2.953.57%1.974.00% National Police 3.804.60%1.493.04% Ministry of Transportation 2.022.45%1.212.47% Ministry of Mining and Energy 2.432.93%1.212.46% Ministry of Finance and Public Credit 1.742.10%1.142.33% Ministry of Agriculture and Rural Development 1.982.39%1.002.04% Subtotal 59.8072.31%43.4788.51% Total 82.70100.00%49.12100.00%2030/10/201221Ministry of Finance and Public Credit - Republic of ColombiaClaims against the NationChallengesIt is necessary to have a consolidated database of claims against the State in the short term.It is important to identify possible correlations between the different processes against the state, considering that court rulings in similar processes may give way to same or similar verdicts.It is necessary to create policies, guidelines and valuation methodologies for conciliations.In order to avoid fiscal volatility, it is mandatory to evaluate the use of the Contingency Fund of State Agencies as a mean of mitigating contingent liabilities arising from litigation activity2130/10/201222Ministry of Finance and Public Credit - Republic of ColombiaExplicit Contingent Liabilities2230/10/201223Ministry of Finance and Public Credit - Republic of ColombiaPublic credit operationsLegal Framework23Artculo 6, Decreto 423 de 200130/10/201224Ministry of Finance and Public Credit - Republic of ColombiaPublic credit operationsRisk management mechanisms2430/10/201225Ministry of Finance and Public Credit - Republic of ColombiaPublic credit operationsThe methodology consists of three components:

Gathering and processing the available information of ratings and sovereign risk.Transition Matrix calculation.Estimation of the 25 years probability curve of solvency (CPS).Methodology and assessment of contingent liability for public credit operations.2530/10/201226Ministry of Finance and Public Credit - Republic of ColombiaPublic credit operationsGeneral outline of the methodologyoperations.have current rating?Assigns the CPS of the appropriate ratingAssigns the CPS of the worst ratingpreliminary primeApplies discounts?Debt serviceLiquidityLiquidity and Debt servicenot applicableFinal primeContributions PlanExposure adjusted for market riskInitial exposureMarket scenariosCEC COP Discount factorsProbabilities of solvencyCDS Colombiatheoretical matrixTransition matrixYesNo2630/10/201227Ministry of Finance and Public Credit - Republic of ColombiaContingent Liabilities27Geographic Conditions

The country has the highest rate of recurrent natural disasters in Latin America, with an average of over 600 reported disasters every year. (1970-2000 US4500 million)In the last 30 years, Colombia has suffered ten major earthquakes, two major volcanic eruptions, five major flooding and annual major landslides. The damage of the Ola Invernal exceed the most damage of the earthquake in the Eje Cafetero (US1590 mill).

Seismic Hazard MapComments28Establishes the National Calamity FundDecree 1547/84Establishes the System for Disaster Prevention and Attention (SNPAD)Law 46/88The National Plan for Prevention and Attention of Disasters (PMPAD) was adopted. It defines 4 strategies:Risk identification and monitoringRisk reductionInstitutional strengtheningSocialization of disaster prevention and careDecree 93 of 1998Establishes the strategy to prevent and attend disasters CONPES 3146 of 2001Legal FrameworkCreate the National Unit for Disaster Risk Management with the function of coordinating the SNPAD.Decree 4147 of 20112929Includes as an objective to reduce fiscal exposurePND 2002 - 2006Includes as an objective to reduce fiscal exposure through transfer risk mechanisms PND 2006 - 2010 Article 220 : MHCP should design a strategy to reduce Natural Disaster fiscal exposure. To do so, the MHCP could use resources from the National Budget to get the mechanisms to cover those events.PND 2010 - 2014Legal FrameworkNational Development Plan (PND)3030Risk management public policies perspectiveNumber in Millions of USD.Institutional, political, normative, financial contextA. Risk identificationD. PreparednessE. Post-disaster reconstructionB. Risk reduction Hazard mapping, risk modeling Social perception, priority settings Territorial and sectorial planning, building codes Risk mitigation works, infrastructure retrofitting Education, creation of a culture prevention Alert and early warning systems Response planning training, equipment logistics, simulations Response systems management Institutional planning, strengthening Recovery, planning reconstruction policies Rehabilitation plans Reserve mechanism, budget planning Risk transfer, insurance, insurance linked securities Budget appropriation, execution in emergencyC. Financial protection3131Financial risk strategyReduceRetainTransfer3232Financing Strategy - ColombiaWithholdingTransfer.Lowe