Fast-disbursing Credit Auditing

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Page 1: Fast-disbursing Credit Auditing

Fast-disbursing Credit Auditing

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In Mexico, the contracting and use of resources stemming from

public debt transactions are ruled by the Political Constitution of

the United Mexican States, the General Public Debt Law, the Law

of Revenue, the Federal Law of Budget and Treasury

Responsibility and the Planning Law.

Regulatory Framework

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Federal Government can use four general concepts to contract a

loan on the state’s credit:

• Productive public investment.

• Exchange or refinancing of Federal Treasury obligations.

• Dealing with an emergency declared by the President of Mexico.

• Monetary regulation.

Regulatory Framework

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According to Public Debt Law, Federal Government can perform

credit transactions with:

• International Financing Bodies (IFB).

• National Commercial Bank.

• International Commercial Bank.

• International Monetary Fund and other international financial

cooperation bodies or which group central banks.

Institutions to contract a debt with

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The Congress of the Union authorizes external and internal direct

net indebtedness sums for public financing of Federal Government

and government agencies. These sums are included in the

Revenue Law and its use must be approved in the Expenditures

Budget of the Federation.

Authorization

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For making a loan, it is necessary to:

• Include, in the Expenditure Budget of the Federation, the sums

for financing projects.

• Contract credit for investment projects or productive activities.

• Assess the cost and benefit of investment projects to be

financed.

Requirement

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(Cont.)

• Credits generate sufficient resources for their payment.

• Count on the adequate guarantees.

• That the borrowing bodies have sufficient payment capacity to

timely settle the commitments.

Requirements

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The IFBs offer two basic types of loans:

• Long-term loans for investment projects.

• Fast-disbursing loans for development policies.

Credit Classification (IFB)

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Through auditing, the Superior Audit Office has determined

irregularities in public debt policy and in contracting and use of

resources stemming from fast-disbursing loans for development

policies, contracted with IFBs.

Problems

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Strategies and guidelines of debt policy presented in the National

Financial Program for Development (PRONAFIDE 2008-2012)

propose to use long-term debt in local currency to finance federal

government deficit, which does not fit in with the regulatory

framework for public debt contracting, that rules the use of

resources derived from transactions made on the credit of the

state.

Public policy problems

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(Cont.)

Along the same lines, public policy is not in line with the Political

Constitution of the United Mexican States and with the General

Public Debt Law, because public debt policy envisages that

resources stemming from external financing can be applied in non-

controlled concepts.

Public policy problems

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Three loans contracted with IFB have been audited

systematically in the last Public Accounts (2006, 2007 and 2008).

Revisions made to these credits have shown irregularities in

resources use and contracting because:

Loans problems

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(Cont.)

• They are agreed on already made actions.

• Resources are not earmarked to investment projects or

profitable activities.

• Evidence to verify that the credit genered enough resources

for its payment is not provided.

Loans problems

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(Cont.)

• Evidence to know the credit resources use is not provided.

• Consultig bodies in public credit do not analyze credit

planning, budgeting, practice and monitoring.

• Resources are poured in the Federation Treasury and its final

use is unknown.

Loans problems

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Loans problems

Fast-disbursing loans

contracting is made

over already carried out

actions, what prevents

knowing resources

specific use and does

not allow its proper

auditing.

Agree on tangible

actions to be

performed with loans,

allowing identifying

the resources specific

use for its auditing.

What really happensWhat should be

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Conclusion about loans problems

Credit’s virtue is to bring a future good to present, what cannot be

determined for fast-disbursing loans, because the resources use

and the expected outcome of their application are unknown.

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Conclusion about loans problems

(Cont.)

The Superior Audit Office of Mexico considers that the Ministry of

Finance and Public Credit does not comply with normative

regulations relating to operation of consulting bodies on public debt

and the application of resources stemming from loans.

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Conclusion about loans problems

(Cont.)

Likewise, terms agreed on contracts do not define the schedule of

meetings to exchange points of view on the achievements reached

during the program execution neither for writing reports about its

implementation.

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Conclusion about loans problems

(Cont.)

Evidence of credits being allocated to investment projects or

productive activities was not obtained, studies to corroborate that

credits will generate enough resources for its payment were not

carried out; and, there was no evidence about resources being

allocated to development policies.

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Proposal for a Public Debt Sustainability Audit

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Auditing public debt sustainability in Mexico

As a result of the audit carried out by the Superior Audit Office

about the resulting debt of fast-disbursing loans, a discrepancy

between public policy and applicable legislation was found,

therefore, an audit on public debt sustainability in Mexico was

programmed.

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The General Public Debt Law states that the Federal Executive and

its dependencies will be able to contract financing only through the

Ministry of Finance and Public Credit.

The decentralized sector and the development bank will be able to

contract external financing only with previous authorization of the

Ministry of Finance and Public Credit.

Regulatory Framework

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The Political Constitution of the United Mexican States allows the

federal states and municipalities to contract obligations or loans as

long as they are not either contracting them with other nations

government, with societies or foreign private citizens, or paying with

a foreign currency or outside the national territory.

Regulatory framework

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(Cont.)

Credits should be used in public and productive investments,

according to bases established by local legislative bodies for

specifical purposes and no higher than the amount yearly set in their

respective budgets.

Regulatory framework

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According to the General Public Debt Law, the Ministry of Finance

and Public Credit is in charge of granting the Federal Government

guarantee to the credit transactions carried out with international

bodies of which Mexico is a member, or with public or private,

national or foreign entities.

Federal Government endorsement and guarantee

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According to the Fiscal Coordination Law, federal participations

corresponding to federal entities or municipalities could be used to

guarantee obligations in case of non compliance or serve as a

means of payment of those obligations contracted with the

Federation, credit institutions operating in national territory or with

physical or moral Mexican nationals.

Federal Government endorsement and guarantee

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Executing entities of resources stemming from public credit are:

• Federal Executive and its dependencies.

• Federal District Government.

• Decentralized public bodies.

• Companies with a majority government ownership.

Executors

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(Cont.)

• Institutions rendering public banking and credit services

(development bank).

• National auxiliary credit organizations.

• National insurance and security institutions.

• Trusts in which the trustee is the Federal Government.

Executors

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Objective

Assessing the Ministry of Finance and Public Credit performance in

terms of efficacy, effectiveness and economy in its transactions

regarding evolution and sustainability of financial and non-financial

liabilities constituting public debt and the public federal sector

federated entities and autonomous bodies contingencies.

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Scope

The public and contingent debt balance as of December 31, 2009,

from public federal sector, public-state sector and autonomous

bodies.

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Procedures

It will be proved that the financial program from the public sector

corresponding to the 2009 fiscal year, under which the public

debt was managed, including the provision of foreign currency

required for external debt management, was created.

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Procedures

The monitoring mechanisms implemented by the Ministry of

Finance and Public Credit allowing to check the capacity of

payment of the entities that contract financing, performance of

approved financing programs, the adequate financial structure of

accredited entities and management resources stemming from

financing, will be reviewed.

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Procedures

It will be reviewed that the destination of the contracted credits

observe the lines stated by the Federation Revenue Law for the

2009 fiscal year.

The balance integration, registry, interest rates, maturities and

changes in the last five years of the gross domestic debt will be

revised.

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Procedures

The total of the state and municipal endorsed public debt, its

integration and registry, interest rates, maturities and its changes

in the last five years will be revised.

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Procedures

The total of federal public sector laboral liabilities; that of the

state public sector, in accordance with the information offered by

the Ministry of Finances and Public Credit and that of the

autonomous bodies, its integration and registry, its changes in

the last five years, its accounting and the actuarial studies will be

revised.

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Procedures

The total of the public sector endorsed obligations, its integration

and registry, and its changes in the last five years will be revised.

The total of the 1995 financial crisis debt, its integration and

registry, and its changes in the last five years will be revised.

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Procedures

The total of the State Oil Company debt, its integration and

registry, and its changes in the last five years will be revised.

The total of the State Electricity Company debt, its integration

and registry, and its changes in the last five years will be revised.

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Public Debt problems

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From the previous analysis about public debt, we can observe that

the local indebtedness grew and divested in the exterior, and finally

a considerable part of these resources became available instead of

being allocated to material investments, the very same year in

which the biggest economic recession has happened in the country

since the 1930’s.

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Public Debt problems

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On the other hand, we can observe that the use of debt to fund the

deficit of the Federal Government is preferably used, when is

supposed to be allocated to the execution of projects, activities and

enterprises that support economic and social development plans,

that generate revenue for their payment, that are used for the

improvement of the structure or for effects of monetary regulation, as

established in the regulatory framework.

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Public Debt problems

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Finally, to evaluate the public debt sustainability, involves knowing

not only the federal sector total amounts, that are included in the

annual public account, but it is also important to know what is the

contingent debt, the endorsement granted to the states and

entities, what is the labor liabilities value and, most of all, to

assess the risk and consequences in which the country is to face

its obligations in relation to the financial cost and its repayment.