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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: publications@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