Risk Management in Colombia: Contingent liabilities Ministry of Finance and Public Credit Republic of Colombia
Introduction to contingent liabilities management in Colombia It is a fundamental component of the principles of fiscal discipline, addressing debt sustainability, reduction of fiscal risk and transparency in the administration of public resources. • The CL management process starts with Act 448 of 1998: ➢ regulated the budget management of contingent liabilities ➢ established the General Directorate of Public Credit of the Ministry of Finance as responsible for the approval of valuations . In 2003 Law 819 established that CL of central and sub-national • governments had to be included in the Medium Term Fiscal Framework – MFMP, presented annually to Economic Commissions of Congress
Contingent Liabilities • Guarantees for infrastructure projects developed under Public-Private Partnership schemes. Explicit: • Public Credit Operations • Litigation or Claims against the Nation. • Callable Capital. Implicit: • Natural Disasters Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 3 3
Explicit Contingent Liabilities PPP’s Public Credit Claims against Infrastructure Callable Capital. Operations the Nation projects • Evaluates the • Estimates the • Estimates the • Possible contributions possible fiscal commitments fiscal impact of the contingent that costs of capitalization risk coverage government generated by of multilateral agencies with negative rulings organisms. agreed on for infrastructure state on legal contracts, in guarantees disputes must make to against the order to establish the the Nation. contributions to Contingency Fund. the Contingency Fund. Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 4 4
Contingent Value Contingent value with INCORA Contingent value without INCORA Cases of Illegal Ponzi Schemes US$ 19.16 (6% of GDP) INCORA US$ 188.46 (55% of GDP) Other Legal Disputes US$ 29.96 (9% of Total Contingent US$ 245.52 Total Contingent US$ 49.12 GDP) Other Legal Disputes US$ 49.12 (14% of Public Callable Capital PPP´s Credit GDP) US$ 6.37 (2% of US$1.01 Ops. US$ GDP) Callable Capital PPP´s PCO´s 0.58 US$ 6.37 US$1.01 US$ 0.58 *Billions Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 5 5
Explicit Contingent Liabilities PPP’s Public Credit Claims against Infrastructure Callable Capital. Operations the Nation projects • Evaluates the • Estimates the • Estimates the • Possible contributions possible fiscal commitments fiscal impact of the contingent that costs of capitalization risk coverage government generated by of multilateral agencies with negative rulings organisms. agreed on for infrastructure state on legal contracts, in warranties disputes have to do to against the order to establish the the Nation. contributions to Contingency Fund. the Contingency Fund. Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 6 6
Contingent liabilities of projects developed under PPP’s scheme Background • The state encouraged private participation in infrastructure, by offering some guarantees to concessionaires. 90’s • The guarantees to concessionaires were not registered under the fiscal accounting. Fiscal problem • Debt issuance was the funding mechanism to pay for these obligations. Fiscal volatility Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 7 7
Law Establishes measures for the management of contingent liabilities. Law 448 of 1998 Creates the Contingencies Fund. Regulates Law 448 of 1998. Decree 423 of 2001 Empowers the MHCP to establish methodologies and approve. Establishes budgeting standards for accountability and fiscal transparency. Law 819 of 2003 Obliged to submit a statement of contingent liabilities that may affect the financial position of the Nation CONPES 3107 Established the guidelines of Contractual Risk Policy of the State of projects developed under PPP’s scheme and 3133 Establishes the legal framework for Public Private Partnerships. Law 1508 of The PPP's must be governed in contingent liabilities issues by Law 448 2012 of 1998. Regulates Law 1508 of 2012. Decree 1467 of 2012 Empowers the MHCP to approve the valuations of contingent liabilities.
Contingent liabilities of projects developed under PPP’s scheme Institutional process MHCP (MoF ) Sector Nat. Planning Dept . • Evaluates the financial terms in order to establish if they are • Structures • Reviews and convenient for technical, legal advises on the Nation technical features and financial aspects of project. of the project. • Approves the valuation of contingent liabilities. Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 9 9
Contingent liabilities of projects developed under PPP’s scheme Evolution of risk allocation • The government is responsible tor all the risks that the contracts derive. 1 st • Compensation for the risk is provided by establishing a higher value for the design process, larger amounts of public works contracted, minimum traffic and toll fees . Generation • Introduces the concept of expected income. • Income support (for the coverage of debt service), exchange rate 2 nd support, or geological risk. Generation • It achieves the transfer of risk to the concessionaires. • The dealer assumes the risk of land management and environmental licenses. 3 rd Generation • Continues with the concept of expected income. Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 10 10
Contingent liabilities of projects developed under PPP’s scheme Assessment process • It verifies that the project has met the basic provisions in the Contextualization planning stage, including the recognition and allocation of risks in the minutes of the contract. • Identifies possible causes and effects of risk factors and Risk Identification determines which party (dealer or nation) is better able to anticipate and handle each type of risk. • Qualitative assessment and risk mitigation strategies through Evaluation contractual transfer. • Estimation of the probability of occurrence on each of the Valuation identified risks and their potential impact on project results. Management • Decision making on the optimal risk management strategy. Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 11 11
Explicit Contingent Liabilities PPP’s Legal Disputes Public Credit Infrastructure against the Callable Capital. Operations projects Nation • Evaluates the • Estimates the • Estimates the • Possible contributions possible fiscal commitments fiscal impact of the contingent that costs of capitalization risk coverage government generated by of multilateral agencies with negative rulings organisms. agreed on for infrastructure state warranty on legal contracts, in have to do to disputes the against the order to establish the Contingency Nation. contributions to Fund. the Contingency Fund. Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 12 12
Claims against the Nation Introduction • Uncertain fiscal expenditures may derive from negative rulings that depend on future conditions. • Each government agency under an allegation has to include in their annual budget the potential impact of a negative ruling. • Monitoring and forecasting the results of litigations is key to transparency and fiscal responsibility. • The developed methodology is a tool to for decision making on budget policy and management in the legal defense of state agencies . Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 13 13
Claims against the Nation Establishes measures for the management of contingent liabilities.. Law 448 of Create the Contingencies Fund. 1998 Law 812 of 2003 Strengthening policy of the unique legal defense of the nation. Obliged to submit a statement of contingent liabilities that may affect the Law 819 of financial position of the Nation 2003 Policies to strengthen the legal defense of the nation CONPES 3250 And valuation of contingent liabilities. Code of Administrative Jurisdiction Law 1437 of 2011 Entities should make contributions to the Contingency Fund Decree 4085 of Create the National Legal Defense 2011 Provides tools to MHCP for the valuation of contingent liabilities
Claims against the Nation Background 1. Since 2000 there is a growing trend of 500 payment for judgments and settlements 450 of the Nation. Issuance of debt 400 Payments 350 2. This growth is the result of the 300 USD million increased number of claims and their 250 value 200 150 3. Additionally, there are weaknesses in 100 the legal defense of the State, 50 especially those from the national 0 defense sector Source: Consolidation Group General Directorate of National Budget-MHCP * Court in April 2010 Ministry of Finance and Public Credit - Republic of Colombia 27/02/2018 15 15
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