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    Contingent Liability Management

    A Study on India

    Tarun Das Anil Bisen M. R. Nair Raj Kumar

    Commonwealth Secretariat

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    Commonwealth Secretariat

    Marlborough HousePall Mall, London SW1Y 5HXUnited Kingdom

    Commonwealth Secretariat, 2002

    This publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means, electronic or mechanical, including photocopying, recording or otherwiseprovided the source is referenced.

    The views in this document do not necessarily reflect the opinion or policy of theCommonwealth Secretariat.

    The designations employed and the presentation of material in this publication do not implythe expression of any opinion whatsoever on the part of the Commonwealth Secretariatconcerning the legal status of any country, territory or area, or of its authorities, or concerningthe delimitation of its frontiers or boundaries.

    Designed by KC Gan designsCover illustration by Diane AllardPrinted by CMP (uk) Limited

    Published by the Commonwealth SecretariatISBN: 0-85092-709-0

    Copies of this publication may be obtained from:The Publications ManagerInformation and Public Affairs DivisionCommonwealth SecretariatPall Mall, London SW1Y 5HXUnited Kingdom

    Tel: +44 (0)20 7747 6342Fax: +44 (0)20 7839 9081Email: [email protected]commonwealth.intWebsites: http://www.thecommonwealth.org

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    Contents

    Acknowledgements 1

    Foreword

    1. Introduction 5

    Background 5

    The scope and structure of the report 6

    2. Definitional and Conceptual Issues 9

    The fiscal risk matrix 9

    External sector contingent liabilities 9

    Contingent liabilities in the emerging economy context 12

    Public contingent liabilities in private infrastructure projects 14

    Independent Power Projects (IPP) and government guarantees 17A framework for monitoring contingent liabilities 20

    The valuation of contingent liabilities 22

    3. Country Experiences when Dealing with Contingent Liabilities 25

    The key findings of country practices with regard to contingent 25

    liability management

    Issues relating to the definition of contingent liabilities 25

    The legal regime 26

    Accounting 26

    Recording, monitoring and management 274. Contingent Liabilities Relating to the Government of Indias 29

    Guarantees on External Debt

    The classification and magnitude of contingent liabilities 29

    The magnitude of government guarantees on external debt 29

    External debt guarantees by economic sector 31

    Projected debt service payments on government-guaranteed external debt 32

    Government policy towards guarantees 33

    The impact of government guarantees: some empirical evidence 36

    The risk of default on government-guaranteed external debt 36

    Contingent liabilities due to the exchange risk guarantee 36

    5. Contingent Liabilities Relating to Infrastructure Investment 39

    Infrastructure investment in India 39

    The government of Indias counter-guarantees for Independent 40

    Power Projects

    BOT projects on roads in India 46

    Contingent liabilities for telecommunications 51

    Contingent liabilities for ports 51

    Overall recommendations 52

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    6. Contingent Liabilities Relating to Banking, Financial Institutions 55

    and the Corporate Sectors of India

    The banking system 55

    Financial institutions 58

    The corporate sector 59

    7. Concluding Observations and Recommendations 61

    Exisiting contingent liabilities 62

    New contingent liabilities 63

    List of Boxes

    Box 2.1: The fiscal risk matrix 10

    Box 2.2: Examples of external contingent liabilities 11

    Box 2.3: The financial stability forum: The report of the working group 13

    on capital flow aspects relating to contingent liabilities and

    government risk management (selected recommendations)

    Box 2.4: Build Own Transfer (BOT) and Build Own Operate (BOO) 15schemes

    Box 2.5: The international experience of Independent Power Projects (IPPs) 18

    Box 4.1: Guarantees by state governments 35

    Box 5.1: Terms and conditions for the provision of counter-guarantees 43

    by the central government to the independent power producers

    Box 5.2: The status of eight fast track IPPs approved for GOI 44

    counter-guarantees

    Box 5.3: BOT projects on roads 50

    Box 5.4: Managing contingent liabilities: World Bank recommendations 52

    Box 5.5: Managing contingent liabilities in infrastructure 54Box 6.1: Contingent liabilities of the EXIM Bank of India 58

    List of Tables

    Table 4.1: Central government guarantees on external debt 30

    Table 4.2: Government guarantees to PSUs and private entities by 32

    economic sector

    Table 4.3: Projected debt service payments on existing government 32

    guaranteed borrowings

    Table 4.4: FCNR(A) deposits and losses due to exchange guarantees 38

    since 1991-1992

    Table 5.1: Sectoral shares in GDP and gross domestic investment 39

    (percentage) in 1998

    Table 5.2: The financial performance of the state power sector 42

    (rupees billion)

    Appendices

    Appendix I: An Accounting Framework for Contingent Liabilities: 65

    Country Practices

    Appendix II.: The Special Data Dissemination Standard and the Data 77

    Template on International Reserves/Foreign Currency Liquidity

    References 83

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    Contingent Liability Management A Study on India 1

    Acknowledgements

    This report has been put together by a team comprising Dr Tarun Das, Economic Adviser;

    Mr Anil Bisen, Director, from the Ministry of Finance; Mr M. R. Nair, Adviser, from the

    Reserve Bank of India; and Dr Raj Kumar, Special Economic Adviser, from the

    Commonwealth Secretariat, London. The views contained in the report are the personal

    views of the members and not necessarily those of the institutions they represent.

    The team wishes to place on record its appreciation for the contributions of Sarvashri B.

    N. Anatha Swamy, Somnath Chatterjee, Sitikantha Pattanaik, Muneesh Kapur and A.

    Karunagaran of the Reserve Bank of India; Mr Arindam Roy and Mr Krishan Kumar

    of the Ministry of Finance, Government of India; and Mr Dev Useree of theCommonwealth Secretariat.

    The team is grateful to Ms Catherine Gondwe of the Commonwealth Secretariat for her

    services in putting the various contributions into an integrated document.

    The team appreciates the comments received during a presentation in Washington of the

    draft report in November 2000 and wishes to acknowledge in particular the input provided

    by Hana Polackova Brixi, Sergei Shatalov, Fred Jensen, A. Mody and Malvina Pollock.

    The report has benefited from funds from the Institutional Development Facility of the

    World Bank for India, and ackowledgement must be made to the Commonwealth Fund forTechnical Co-operation, the operational arm of the Commonwealth Secretariat.

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    2 Contingent Liability Management A Study on India

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    Contingent Liability Management A Study on India 3

    Foreword

    The sharp increase in the contingent liabilities of many developing countries in recent

    years and its possible implications has prompted a rethink in the way governments

    quantify their fiscal burdens. The increase in contingent liabilities is primarily attributed to

    the transformation of the role of the state from a supplier of certain services to a facilitator,

    where the state extends a guarantee to the private sector for providing such services.

    Contingent liabilities of the government have also increased due to liberalization of the

    capital account by many countries as well as the move towards greater integration of

    international financial markets.

    Recognizing the significant rise in the contingent liabilities-both external and implicit- ofmany countries and concerns on potential risks this may entail, the Commonwealth

    Secretariat has been placing greater emphasis on the need for monitoring such exposures.

    As part of its programme of advisory services on debt and development resource

    management, the Debt Management Services Department of the Special Advisory

    Services Division (DMS-SASD)* has been encouraging governments in explicitly taking

    into account their contingent liabilities while gauging the risks associated with countries

    debt portfolios.

    The publication of this report on contingent liability management is topical and timely

    indeed. While highlighting the basic conceptual issues on the subject matter it looks atsome of the issues related to the identification, monitoring and valuation of external sector

    contingent liabilities of India. It also attempts to define a framework that can be used for

    measuring these liabilities.

    The report is being disseminated to a wider audience