INTOSAI Working Group on Public Debt Vilnius, Lithuania 9-10 June 2011

1. INTOSAI Working Group on Public DebtVilnius, Lithuania9-10 June 2011 Report on the investigation results Contingent Debt (exposure draft) ACCOUNTING CHAMBER OF UKRAINE

2. Contingent Debt:WGPD Research Activities ACCOUNTING CHAMBER OF UKRAINE • Main results and conclusions of investigation on this subject were reflected in the Guidances: • on the Reporting of Public Debt in 2000 • Public Debt Management and Fiscal Vulnerability: Potential Roles for SAIs and Fiscal Exposures: Implications for Debt Management and the Role for SAIs in 2003. • the UK SAI conducted the survey in 2004-2006 • in July 2008 Accounting Chamber of Ukraine (ACU) was appointed as responsible for conducting the investigation

3. Investigation development: Aims ACCOUNTING CHAMBER OF UKRAINE • to identify the running status of contingent debt management in INTOSAI member states and approaches to conducting the audits on this subject • to find out peculiarities existing in different countries • to summarize the experience of INTOSAI member states of contingent debt management, more attention was paid to a number of problems these countries faced

4. Investigation development: principals ACCOUNTING CHAMBER OF UKRAINE 3 main principles: • consistency, based on considering analysis of guidelines and the documents of the INTOSAI, IMF, the WB • continuity, including changes that have taken place in managing the contingent debt since the previous investigation (UK SAI) • novel approach, including the innovations in this problem, based on the current challenges. Some scientific articles on the subject were analyzed. Also there were used the outcomes of audit on the status of contingent debt in Ukraine, conducted in 2008

5. Investigation development: Report structure ACCOUNTING CHAMBER OF UKRAINE 1. State of contingent debt problem development 2. World financial and economic challenges and contingent debt 3. Value of contingent liabilities in Ukraine 4. Theoretical generalization of contingent debt 4.1. Obligations and contingent liabilities measurement 4.2. Types of contingent liabilities 4.3. Contingent debt components 4.4. Financial risks 4.5. Measurement of debt 4.6. Reporting and disclosure of contingent liability information 4.7. Contingent liabilities management 4.8. Role of the Supreme Audit Institutions 5. Results of survey on contingent debt conducted among INTOSAI members 6. Conclusions and recommendations Annex 1: Contingent debt questionnaire; Annex 2: Peculiarities of contingent debt management in different INTOSAI member states

6. Investigation development: Contingent Debt Questionnaire ACCOUNTING CHAMBER OF UKRAINE • was presented and approved by the WGPD at the meeting in Kyiv in 2009 • contained 15 questions and covered following main sections: • legal definition of “contingent debt” in national legislation and its classification; • accounting and reporting of contingent debt, availability of special financial reserves; • management system of contingent debt, including availability of strategy on the contingent debt management and special agency responsible for monitoring contingent debt; • role of SAIs, their power to audit the contingent debt; • availability of information on the contingent debt and audit results to the public.

7. Investigation development: Contingent Debt Questionnaire (cont.) ACCOUNTING CHAMBER OF UKRAINE • was circulated among 176 INTOSAI member states; • the responses only from 26 countries were received by the end of 2009; • 14 responses were received after our second request; • additional responses from 5 members were received after WGPD meeting (Mexico, June 2010); • as a result, there were available responses from 45 SAIs (a quarter of total number of INTOSAI members).

8. Investigation development : Contingent Debt Questionnaire (cont.) ACCOUNTING CHAMBER OF UKRAINE • EUROSAI members - 23 responses (Portugal, Switzerland, Sweden, Austria, Germany, Netherlands, Belgium, the Czech Republic, Slovakia, Latvia, Lithuania, Estonia, Russia, Bulgaria, Romania, Albania, Turkey, Malta, Denmark, Cyprus, Moldova, Norway, Italy) • the USA and Canada • OLASEFS – 6 (Colombia, Chile, Brazil, Panama, Mexico, Argentina) • ARABOSAI – 2 (Yemen, Bahrain) • ASOSAI – 2 (Japan, Kyrgyzstan) • AFROSAI – 7 (Morocco, Uganda, Swaziland, Madagascar, Rwanda, Zambia) • CAROSAI – 3 (Suriname, Santa Lucia , Trinidad and Tobago) • PASAI – 0

9. Investigation development : Contingent Debt Questionnaire (cont.) ACCOUNTING CHAMBER OF UKRAINE • answers only of 37 SAIs contained some information on the status and classification of contingent debt used by these countries. • the issues of classifications, managing, reporting, monitoring contingent debt are arranged to a certain extent in a few countries such as USA, Canada, Turkey, Germany, Bulgaria, Japan • the Court of Audit of Belgium, Swiss Federal Audit Office, the Office of Auditor General of the Republic of Panama did not fill out the questionnaire because of lack of the contingent debt information.

10. Investigation development : Conclusions & Recommendations ACCOUNTING CHAMBER OF UKRAINE • The problem of public debt is important for all INTOSAI member states. • Big differences exist among INTOSAI members concerning definition of terminology, classification, methodology of contingent debt measurement and information disclosure about it in state financial report. • The principles of dividing contingent debt into direct and indirect are relatively agreed. • The issue of definition and classification of contingent debt is not commonly regulated by law. • The contingent debt is mainly represented by loans received under government guarantees. • Recommendation 1. for conducting more qualified contingent debt audits (including public debt audits) we recommend SAI to complete relevant guideline by contingent debt classification adapted to country features taking into account international experience.

11. Investigation development : Conclusions & Recommendations (cont.) ACCOUNTING CHAMBER OF UKRAINE • Contingent debt is often connected with high risk decision-making by separate governmental bodies because likelihood of their materialization increases with the timely allocation of funds to cover such liabilities (e.g. government guarantees). • Potential loans may be explicit and implicit (those that are implied); they may exist right now or depend on future events. • Recommendation 2. Given this range, it is reasonable to consider financial risks within the framework of explicit (formal) obligations under the law and implicit (those implied) obligations, that are included in the current political or social expectations.

12. Investigation development : Conclusions & Recommendations (cont.) ACCOUNTING CHAMBER OF UKRAINE • One of the important factors of the origin or spread of economic crises is inefficient structure of debt in terms of significant unsecured by reserves contingent liabilities. • Only a quarter of SAIs notified about the existence of the reserve funds in case contingent debt transforms into direct public debt. • Recommendation 3. SAI should draw government attention to the necessity of providing the reserve funds in case of transformation of contingent debt into direct public debt. After estimating possible finance risks, SAI can recommend government to set a limit of a reserve amount (for example, percentage of amount providing guarantees).

13. Investigation development : Conclusions & Recommendations (cont.) ACCOUNTING CHAMBER OF UKRAINE • The possibility of contingent debt measuring is one of the important elements of public debt security of the state. • SAI plays an important role in evaluation of contingent debt amount because it accumulates the data about contingent debt and can make a forecast concerning critical situations. SAI provides full information to the public concerning contingent debt. • Half of respondents informed about public accessibility of contingent debt information (e.g. through official websites of the Ministry of Finance, the annual government reports, annual bulletins on thepublicdebt, specializedpublications). • Recommendation 4.SAI should monitor the level of risk in connection with possible assumption of direct contingent debt for government and public informing about risks related to such debt.

14. Investigation development : Conclusions & Recommendations (cont.) ACCOUNTING CHAMBER OF UKRAINE • If there are contingent liabilities, information about their cost and risk features should be disclosed in public statements as much as possible. • For each element of the debt the amount of any future payments can be fixed, variable (according to formula set in advance), or uncertain. • SAI should decide about the content of public debt report and its components. • More than half respondents informed about the lack of special forms of accounting contingent debt. • Recommendation 5. It is reasonable for SAI to determine the list of contingent liabilities, which should be reported by government for the future recommendations on the development of the documents on contingent debt (special reporting, official information etc.). At the same time SAI needs to summarize and display the nature and amount of each major contingent liability or contingent liabilities type.

15. Investigation development : Conclusions & Recommendations (cont.) ACCOUNTING CHAMBER OF UKRAINE • World financial crisis essentially stirred the economics of different countries and raised the problem of transformation of contingent debt into direct debt. • In our opinion there is a need to create the protection system against crisis situations: at first - consider the potential risks secondly - provide effective monitoring, thirdly - remove the risky methods of debt management. • One of the effective ways to control the level of contingent debt is centralization of all data about it (the amount of contingent debt, monitoring, and assessment methodology) by one institution (could it be the part of the Ministry of Finance or an independent body).

16. Investigation development : Conclusions & Recommendations (cont.) ACCOUNTING CHAMBER OF UKRAINE • Recommendation 6. Resulting from fact that there is no consolidated position among SAIs about the definition of contingent debt, reporting about it and audit procedures accordingly, it is worth to continue the discussion of these matters within the INTOSAI Working Group activity with the aim to gradually find the understanding of this problem. Taking into account that the problem of transformation of contingent debt into direct public debt arises during the financial and economic crisis we consider it is reasonable to applythe results of this survey in conducting investigation started by USA SAI on “Influence of financial crisis on public debt”.