Governance, Audits and Accountability. DeMPA Tool Training Singapore September 21-25, 2009

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1 Governance, Audits and Accountability DeMPA Tool Training Singapore September 21-25, 2009

2 Governance in context of debt management Governance refers to legal and managerial structure that shapes and directs the operations of debt managers Legal apparatus statutory legislation, ministerial decrees etc that define goals, authorities and accountabilities Managerial framework including relating to strategy formulation and implementation, operational procedures, quality assurance practices and reporting 2

3 Parliament/Congress Minister/Cabinet SAI Central Bank Principal DeM Entity

4 Governance and Accountability 1/3rd of total indicators Legal Framework (DPI-1) Managerial Structure (DPI-2) Debt Management Strategy (DPI-3) Evaluation of DeM Operations (DPI-4) Audit (DPI-5) 4

5 Outline Why so much focus on Governance and Accountability? What are the DeMPA requirements? 5

6 Why the focus on Governance and Accountability?

7 Historically, government DeM was limited to borrowing, recording and debt servicing One policy goal to ensure that government financing needs were met, which lead to: Several borrowing units (front offices) Several debt databases No systematic analysis of cost/risk in the debt portfolio (no middle-office function) Narrow scope of the legal framework; limited to borrowing authorization 7

8 In the 90 s, new approach to government DeM The most pressing issue confronting governments is the need to reform the institutional arrangements governing debt policy, so that the technical expertise and experience required to manage the risks of external debt competently and transparently can be applied. Professionalism and accountability can best be achieved when debt management is assigned to an agency that is separate and autonomous from the political process. Cassard and Folkerts-Landau: Sovereign Debt: Managing the Risks (F&D December 1997) 8

9 New Environment Sovereign debt management is the process of establishing and executing a strategy for managing the government s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management goals the government may have set, such as developing and maintaining an efficient market for government securities. World Bank/IMF Guidelines for Public Debt Management (2001) 9

10 Now: New Issues at the Center Policy goals - How to formulate the DeM objectives/ goals? Strategy design - How to achieve these goals? Depolitization and decision making - What to be decided at the political level, and what is best left to professional debt managers? Organizational arrangements - How to set up a consolidated debt management office (DMO)? Regulatory changes - How do these changes affect the legal framework? Accountability - How to evaluate DeM performance? Audits - How do all these changes affect auditing? 10

11 Goals Common DeM objectives: Ensure that government s financing needs are met Minimize the borrowing costs over the medium to long run, consistent with a prudent degree of risk Promote development of the domestic debt market (sometimes a subsidiary goal) OECD: Debt Management and Government Securities Markets in the 21 st Century (2002) 11

12 Strategy Design Now common with a medium-term DeM strategy to guide borrowing decisions, including: Cost/risk trade-offs Shall we borrow short to reduce cost, or long to reduce the interest rate and rollover risks? Shall we borrow in foreign currencies to reduce cost, or in our local currency to reduce the foreign currency exposure? How to promote development of our domestic debt market by the use of DeM activities? 12

13 Depolitization and Decision Making Decisions at the political level: The policy goals The medium-term strategy Supervision and evaluation Decisions by the debt manager: Preparation of a DeM strategy proposal The annual borrowing plans based on the strategy Execution of these plans 13

14 New Organizational Arrangements Increasing demand for the debt management office (DMO) to: drive strategy development, take overall responsibility for government DeM activities, create one debt database, build up a domestic yield curve, and report on the entire government debt Separation/clarity of government DeM from monetary management 14

15 New Regulatory Changes Now policy-based legislation focused on: policy goals, strategy development, accountability, and audits Before: Detailed regulations on single transactions: Borrowing restricted to certain markets and by the use of certain instruments Common with Parliament s approval for all external borrowings 15

16 New Accountability Process Now public evaluation reports to the Parliament/Congress that cover DeM activities, evaluation of outcomes against the stated policy goals, and compliance with the DeM strategy Before: Reports restricted to debt statistics 16

17 New Audits Now more focus on performance/ compliance audits Before: Audit limited to the financial accounts INTOSAI: Guidance for Planning and Conducting an Audit of Internal Controls of Public Debt (2000), the Mexico Accords (2007), and development initiative to train SAIs in developing countries in performance audits of government debt management activities 17

18 What are the DeMPA requirements?

19 DPI-1: Legal Framework Dimensions to Assess The existence, coverage, and content of the legal framework 19

20 DPI-1: Legal Framework Score A : requirements for B are met + Primary legislation includes requirement to develop a DeM strategy + mandatory annual reporting to Parliament that includes evaluation of outcomes against stated objectives Score B: requirements for C are met + Primary legislation includes clear debt management objectives + annual reporting requirement to Parliament on debt management activities and issued loan guarantees + requirement for external audits of DeM activities, policies and operations Score C Clear authorization to borrow and undertake debt-related transactions, and to issue loan guarantees For specified purposes

21 DPI-2 Managerial Structure Dimensions to Assess Managerial structure for central government borrowings and debt-related transactions Managerial structure for preparation and issuance of central government loan guarantees 21

22 DPI-2 Managerial Structure (Dimension 1: debt management) Score A: requirements for B are met + undertaken by a Principal DeM Entity Score B: requirements for C are met + are steered by a formalized DeM strategy + undertaken without undue political influence Score C Borrowings and debt-related transactions are undertaken by a Principal DeM Entity, or by several DeM entities that regularly exchange debt information and closely coordinate activities

23 DPI-2 Managerial Structure (Dimension 2: Loan guarantees) Score A requirements for B are met + Loan guarantees are prepared and issued by Principal DeM Entity Score B requirements for C are met + Loan guarantees prepared & issued by Principal Guarantee Entity that closely coordinates activities with Principal DeM Entity, if any Score C Loan guarantees are prepared and issued by several government entities that closely coordinate respective activities between themselves and with Principal DeM Entity

24 DPI-3: Debt Management Strategy Dimensions to Assess Quality of the debt management strategy document Decision-making process, updating, and publication of the debt management strategy 24

25 DPI-3 Debt Management Strategy Dimension 1: Quality Score A requirements for B are met + target levels for risk indicators are based on costs and risks analysis + identifying vulnerability of debt portfolio to shocks in market rates + analyses, assumptions and limitations are described Score B requirements for C are met + Target for indicators of interest-rate, refinancing, and foreign currency risks Score C Medium-term (3-5 year) strategy; Covers 90 percent of existing & projected central government debt Based on debt management objectives Guidelines for direction of interest-rate, refinancing, foreign currency risks if applicable: Minimum target of grant element in external borrowing, description of measures to support domestic debt market development

26 DPI-3 Debt Management Strategy Dimension 2: Decision making process, updating procedure Score A requirements for B are met + Updated annually, Score B requirements for C are met + If proposal is not accepted, the rationale is presented in the strategy document; + Updated at least every third year Score C Strategy proposal prepared by Principal DeM Entity or jointly DeM entities, Central Bank s views are obtained Approved by the Cabinet/Minister, Made public

27 DPI- 4 Evaluation of DeM Operations Dimensions to Assess Level of disclosure in annual report of government DeM activities, central government debt, evaluation of outcomes against stated objectives, and compliance with debt management strategy 27

28 DPI- 4 Evaluation of DeM Operations Dimension 1 Score A requirements for B are met + evaluation of outcomes against stated objectives, the chosen strategy +Report is made public, Score B requirements for C are met + Annual report contains evaluation on how activities complied with DeM strategy Score C Cabinet /Parliament receive annual report on DeM activities and outstanding central government debt

29 DPI- 5: Audit Dimensions to Assess Frequency of internal and external audit of central government debt management activities, policies, and operations, as well as publication of external audit reports Degree of commitment to address the outcomes from internal and external audits 29

30 DPI- 5: Audit Dimension 1: Frequency of audit Score A requirements for B are met + External audits are conducted every 2-3 years. +External audit reports are made public within 6 months of completion of the audit Score B requirements for C are met + There are frequent external audits (at least every 3 to 5 years) + Annual internal audits Score C External audit of DeM activities, policies, and operations conducted within past 5 years

31 DPI- 5: Audit Dimension 2: Commitment to address audit outcomes Score A requirements for B are met +immediate commitment Score B requirements for C are met + strong commitment Score C There is commitment to address the outcomes

32 Thank you! Abha Prasad Economic Policy and Debt Department, The World Bank 32