Management of

Contingent Liabilities-
Cross Country
Experiences
Tarun Das
Economic Adviser, MOF, India
and Consultant, World Bank

1
 Overview
1. Concepts and definitions
2. 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 •Sovereign debt •Govt. guarantees for GOCC loans
Govt. liability •Expenditures approved in the •Govt. guarantees given to the
by law or Budget operators of the BOT projects
contact •Future legally-binding •Umbrella guarantees for loans given
expenditures (pensions and to the priority sectors
provident funds) •Guarantees on benefits of the social
security system

Implicit •Future cost overruns or • Bail out of failed banks

A moral recurrent costs of public •Possible default of the central bank
obligation of investment projects •Support to public enterprises for
the govt. due covering losses or assuming non-
to public or guaranteed obligations
interest group
pressures

4
 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
5
•Tax credit certificates
 Philippines Government-
Implicit 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
& assuming non-guaranteed obligations 6
 3. Contingent Liabilities of Philippines Govt.

Type of contingent Amount Share in As % of As % of

liability P billions total (%) GDP public debt
Guarantees 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

7
 Guarantees of the NG of Philippines

Type of Levels (Pbln) % share in % of GDP % of total

Guarantee 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 Debt
NG 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

8
 4. Management of
Contingent Liabilities-
Cross Country
Experiences
India,Australia,
Canada,Columbia,
Czech Republic,
Hungary,New
Zealand,
9
Philippines, UK, USA
(a) Transparency in
recording and
reporting

10
(i) Types of liabilities reported

- Guarantees by most
countries
- Indemnities and uncalled
capital by Australia, New
Zealand
-All explicit contingent
liabilities by Canada, 11
(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

16
(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

17
(b) Accountability
and
Legal system

18
(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
corparation
corparation
corparation
corparation
bank:
(ii) Contingent liabilities regulated
corparation
bank:
bank:
by law
corparation
corparation
bank:
corparation
bank:
corparation
bank:
corparation
bank:
bank:
bank:
bank:

-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
liabilities 21
(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
Stand. 23
(c ) Policy
Framework

24
(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

27
(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.
29
(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.
30
 5. Lessons from
International Best
Practices

31
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

33
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 non-
performing assets in the banking sector
(e) Institute performance contacts and sign MOUs with
major GOCCs and GFIs (as being done in India)
36
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 37
THANK YOU

38