Managing Contingent Liabilities. â« Which role for debt managers? â« OECD 2005 Report: Advances in Risk Management of Government Debt. â« New OECD Task ...
FINANCING LONG-TERM INVESTMENT: CONTINGENT LIABILITIES AND THE ROLE OF DEBT MANAGERS P R O F. D R . H A N S J . B L O M M E S T E I N OECD
4th International Conference on Economics October 18-20, 2014 Antalya, TURKEY
OUTLINE Traditional ways in Financing Long-term Investments and what role for DMOs? Non-traditional ways of financing LT-investments and what role for DMOs? Managing Contingent Liabilities Which role for debt managers? OECD 2005 Report: Advances in Risk Management of Government Debt New OECD Task Force on Contingent Liabilities and Debt Management Follow-up to 2005 report: New OECD Report on Contingent Liabilities and Public Debt Management
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ROLE OF DEBT MANAGERS IN FINANCING LONG-TERM PROJECTS
Traditional ways of financing long-term investments
Bond issuance for projects Using loans from International Financial Institutions
Debt Management Offices (DMOs) are biggest players in debt markets. Technical guidance to other governmental institutions, SOEs and local administrations based on the financial expertise of DMOs
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NON-TRADITONAL WAYS FOR FINANCING LTPROJECTS
State guarantees related to projects implemented by SMEs, SOEs, local administrations and private companies • Credit/Loan guarantees • Public-Private-Partnerships (PPPs)
In many respects similar to conventional government debt instruments …….
…..Even though not recorded as conventional debt (doing so would result in direct role for debt managers)
Less agreement on how to manage CLs
New risk mitigation mechanisms
State guarantees remain important
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CONTINGENT LIABILITIES – I (1) OECD (2005) Report: Advances in Risk Management of Government Debt Leading practices on EXPLICIT CONTINGENT LIABILITIES in debt management Mainly credit guarantees: Issuance (including pricing) Management (governance ) Risk management perspective
On-lending versus credit guarantees
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CONTINGENT LIABILITIES – I (2) Credit or Loan Guarantees A contract through which the government assumes the credit risk for a loan extended by someone else
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CONTINGENT LIABILITIES – I (3) Valuation Expected value vs. Market Value Guarantee Pricing Methods oImplicit Pricing Model oOption Model oSimulation Model Fees Determined according to market value Transparency Unbiased and systematic valuation Accurate reporting of measured values
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CREDIT GUARANTEES VS. ON-LENDING (1) Credit Guarantee: A contract through which the government assumes the credit risk for a loan extended by someone else On-lending: Government extend the loan directly
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CREDIT GUARANTEES VS. ON-LENDING (2) Credit risk exposure is the same for both forms of financing 3 parties vs. 2 parties
In contrast to direct lending, guarantees are not reflected in the debt stock But, after default, debt position of the government is the same in both cases (importance of using net debt concept) Comparison with the other conventional budgetary resources is hard if guarantees are used Guaranteed debt more costly Trading more difficult than government bonds (liquidity risk premium)
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CREDIT GUARANTEES VS. ON-LENDING (3) Behavioural implications of guarantees are fairly complex Lender has no incentive to monitor effectively Government should use partial guarantee mechanism for risk sharing EU State Aid Rules: guarantee ratio < 80%
Contracts are relatively costly to write for guarantees Cost for government
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GUARANTEES VERSUS ON-LENDING (4) Benefits Allows government to share credit risk Administrative benefits Outsourcing some services such as evaluation and distribution Niche products Smaller borrowings Instruments tailored to specific needs borrowers
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GUARANTEES VERSUS ON-LENDING (5) Drawbacks Higher funding cost: Liquidity problem Contract cost (more complex contracts are needed to control incentives) Higher financial risk: Behaviour (adequate monitoring very important) Illiquid Non-transparent and complex Inadequate reporting ; off-balance sheet
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CONCLUSIONS ON CREDIT GUARANTEES Unless managed with appropriate procedures, credit guarantees can blow a big hole in public finances Transparency Unbiased and systematic valuation Accurate reporting of measured values Fee Should reflect the cost of the credit guarantee
Proper budget process/ proper debt concept So that comparison can be made with other government expenditures and on-lending
Maintain market competitiveness (avoid hidden state aid)
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CONTINGENT LIABILITIES – II (1) PPPs (not covered by the 2005 OECD Report ; limited to credit guarantees) PPPs: one or more public authorities engage with one or more private companies to finance, design, construct and operate a structure (e.g. a road or bridge)
Transparency is key A robust PPP framework with rules and procedures that provide space for bond financing is a key requirement for project bonds
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CONTINGENT LIABILITIES – II (2 ) Drawbacks PPPs: Complexity Risk of termination of contracts Benefits PPPs: Attractive for government balance sheet (risk sharing with private sector) Know-how and technology transfer from private sector Helping local private sector to grow faster and become globally competitive companies Support foreign direct investment Increase the efficiency of public services
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CONTINGENT LIABILITIES – II (3) PPPs and debt managers Debt manager’s perspective may cover: Monitoring Coordination and communication with relevant government entities Technical assistance in assessing financial feasibility oBankable projects oValue for money
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THE 22ND OECD GLOBAL FORUM IN 2013 Key question: is there a need to revise/update OECD leading practices for guarantees? Extension and update due to the policy changes during the global financial crisis Suggestions received during the Forum: Need for a broader perspective on explicit contingent liabilities; for example by including PPPs Assess use of implicit Contingent Liabilities New OECD study (circulation of a new survey among debt managers)
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NEW OECD SURVEY: THE ROLE OF DEBT MANAGERS IN CONTINGENT LIABILITY MANAGEMENT (1) by the OECD First in-depth survey (circulated in October 2013) on contingent liabilities circulated among OECD member countries
Information on leading practices of OECD countries (and two nonOECD jursdictions) in managing: Explicit Contingent Liabilities Implicit Contingent Liabilities In addition, assess post-crisis policy changes and practices Results will serve as input for a New OECD Report focused on broad range of guarantees
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NEW OECD SURVEY: THE ROLE OF DEBT MANAGERS IN CONTINGENT LIABILITY MANAGEMENT (2) 30 OECD countries out of 34 replied to the survey Preliminary Results: 19 DMOs out of 30 have different roles in managing contingent liabilities Those 19 countries were asked more specific questions on different kinds of: Explicit contingent liabilities Implicit contingent liabilities
Also technical questions covering legal and institutional framework, methodology, etc. regarding: Credit Guarantees PPPs Implicit Contingent Liabilities ( such as bank failures)
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FOLLOWING STEPS: REPORT BY TASK FORCE OF THE OECD WPDM Task Force on “Contingent Liabilities and Public Debt Management” Chair: Taskin Temiz (Turkish Treasury) with analytical support by Hakan Bingol (Turkish Treasury and OECD) and Hans J. Blommestein (OECD) Sweden Denmark Mexico Iceland Brazil South Africa
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FIRST DRAFT OF NEW OECD REPORT: DECEMBER 2014
Different types of contingent liabilities with different roles for debt managers across jurisdictions Policy conclusions and leading practices based on Survey results Detailed country cases based on survey results
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FINAL REMARKS (1) Conclusions based on the preliminary results of the recent OECD study: Guarantees to finance investment projects became more important after the financial crisis Responsibilities of DMOs in different countries may vary partly due to differences in organizational structure of DMOs Leading or good practices will be reported taking into account these differences
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FINAL REMARKS (2) Credit guarantees are commonly used instruments among OECD countries, especially for SMEs and banking sector More than half of DMOs monitor closely credit guarantees Based on infrastructure needs, use of PPPs as an alternative way of financing may differ among countries After the crisis, transparency of contingent liabilities became more important
