Regulations are required
to set out the explicit roles of the MOF, Central Bank, Office
of the Government/Cabinet, Audit Office, Ministry of Planning
and other agencies involved in loan operations at all stages of
the loan cycle. They should set out in a transparent manner the
responsibilities for:
Regulations and procedures are also required
for the issue and management of guarantees and on-lending
Governments and public
sector agencies guarantee loans taken by State enterprises and
in exceptional circumstances by private sector firms for public
policy reasons. These are issued to assist the borrower to obtain
more concessional terms than would otherwise be possible.
When a guarantee is issued,
the guarantor takes on an obligation to pay some or all the principal
amount of the debt and accrued interest in the event of a default
and the underlying debt and related rights of recourse against
the debtor. The guarantor has a receivable from the debtor, that
is, the guarantee premium or fee, with possibly some collateral
pledged by the debtor.
Government guarantees required
by joint enterprises between private firms and State entities
should be limited to the share of the State entity in the enterprise.
The government could provide a guarantee for the whole loan, although
this is not the usual practice. Problems have arisen in the case
of guarantees issued for borrowings by State enterprises that
were subsequently privatized. The nature of these guarantees should
be clarified when the enterprises are privatized.
The issue of guarantees
for borrowings allows the government to achieve a range of policy
objectives, such as reviving ailing sectors of the economy and
export promotion. Guarantees have many advantages. These are that
a guarantee:
Is a more attractive option
fiscally than the government obtaining a loan to finance a project
and on-lending the proceeds, thereby avoiding a build-up of government
debt. This is more important in the case of larger borrowing requirements.
Improves the flexibility
of the borrowing options as the loan could be tailored to reflect
the borrower's needs regarding the maturity and terms of repayment.
Offers spin-off benefits,
particularly with large-scale projects by bringing the borrowers
into direct contact with the lenders, providing direct and quick
access to new financing arrangements and market instruments.
An effective guarantee
policy requires a thorough assessment of projects and programmes
for which guarantees are requested and the rejection of all those
that are judged to be non-viable. This should be undertaken by
the ministry of finance-in collaboration with the supervising
Ministry-prior to issuing the guarantee by reviewing the appraisal
prepared by the lender to evaluate the prospects of the beneficiary,
generating adequate income to repay the loan. The government should
consider the alternative of borrowing and on-lending the funds
by comparing the costs and risks of issuing a guarantee with those
of on-lending before a decision is made.
Three agreements have to
be negotiated when government guarantees are issued. They are
the loan agreement between the lender and the borrower, the guarantee
agreement between the lender and the government, and the agreement
between the government and the borrower setting out the conditions
under which the guarantee is issued.
Governments should manage
each guarantee actively as soon as it is issued and undertake
regular risk analyses when the underlying market conditions hange,
as the levels of risks vary from one project to another. There
should be regular consultations between the borrower and guarantor
in the case of large guarantees. The former should inform the
latter of an impending default and provide all the relevant financial
information before notification from the lender. The lender would
call the guarantee in the event of a payment default and notify
the guarantor.
The total amount of government guarantees
issued each year should be within a ceiling set by the debt policy
committee and approved by the Minister of inance. The ministry
of finance should have the responsibility of issuing guarantees
for domestic and external borrowings of the public sector after
obtaining the approval of the Minister of Finance. The processing
of documents and other formalities required for issuing and managing
guarantees and maintaining full records should become the responsibility
of the ministry of finance or DMO (if one has been set up).
Agencies receiving government guarantees
should pay the ministry of finance a guarantee fee up front into
a special fund. This should cover the administrative cost of processing
and monitoring the guarantee and the risk of default of the loan.
The government should make an annual appropriation in the budget
of a given percentage of government guarantees outstanding as
loan loss provisions. The fund-made up of guarantee fees and loan
loss provisions-should be used only to make debt service payments
on guaranteed loans that are in default. Surpluses in the special
fund should be invested in short-term instruments at the discretion
of the government and the proceeds used for budget support. Supplementary
provision should be sought from general revenue in the event of
a shortfall of funds to make debt service payments on loans in
default.
Public sector borrowers
outside the government often seek the assistance of the government
when direct borrowing for projects and programmes is difficult
or not possible. The government could borrow from foreign or domestic
sources and on-lend the funds to the agency requiring them.
Direct borrowing with a government guarantee
is sometimes preferred by the government as it does not increase
the level of its debt. There are cost advantages to the borrower
in both methods. It is easier, however, for the government to
monitor loan utilization in the case of on-lending, though the
level of government debt outstanding would increase.
The legal basis for the on-lending operations
of the government should be included in a public debt management
law (or other legislation on public sector borrowing). The procedures
that need to be followed for the approval of government on-lending
and monitoring of performance should be described in the supporting
regulations. The principal basis for the decision to on-lend
funds is that the completed project or programme would generate
adequate revenue to make debt service payments without a government
subsidy. This may be modified in the case of social and some
physical infrastructure, environmental protection and other
projects assigned national priority.
The ministry of finance should set out
the terms and conditions for on-lending in a subsidiary agreement
negotiated with the institutions channelling on-lent funds.
They should reflect all the conditions for on-lending that are
imposed on the government by the lender. The repayment period
normally stipulated for on-lending depends on the repayment
capacity of the project as determined in the feasibility study.
In principle, the repayment period should not exceed that in
the agreement between the government and the lender. When the
government borrows under commercial conditions and on-lends
to an intermediary institution for making sub-loans, the applicable
rate of interest should be the interest and fees payable to
the lender by the government plus an annual domestic on-lending
fee. A preferential rate of interest may be charged for projects
such as those in the social sector, those that protect the environment
and for reconstruction following natural disasters. For reasons
of transparency the subsidies implicit in the preferential rates
should be estimated and provided explicitly in the budget. The
risks arising from exchange rate fluctuations should be borne
by the ultimate borrower.
The institutions through which government
loans are on-lent should take full responsibility for the management
of the loans that are extended by them and provide periodic
reports on the implementation of the projects and programmes
financed to the ministry of finance. Each borrower should be
required to submit reports on implementation to the on-lending
agency. These reports and data collected through supervision
of the loans by the relevant on-lending agency would provide
the basis for the periodic reports it submits to the ministry
of finance.
Debt service payments are made by borrowers
to the on-lending agency, which transfers them to the ministry
of finance. In the event of default, the on-lending agencies
should take the measures necessary to recover the funds from
the borrower based on the agreement signed and the current laws
of the country. Persistent defaulters should be reported to
the government through the debt policy committee for guidance
on future requests for on-lent funds from this agency.
Governments should have the authority
to borrow granted to them in the Constitution or legislation.
The law should enable this authority to be delegated to a government
agency subject to prior legislative authorization or within
ceilings set in annual appropriation acts. Governments are required
to meet their repayment obligations and provide assurances to
lenders regarding the borrowing process and their rights. The
legislation should also assign the responsibility for public
debt management to a single agency while the regulatory framework
should describe the procedures for public sector borrowings
and their management. The organizational structure set in place
should enable borrowings to be undertaken in the most effective
manner based on the legislative and regulatory framework that
is established.
