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Managing Debt: Lessons Learned
Bogotá, Colombia
Managing Debt: Lessons Learnedand Emerging Issues
Finance Secretary
June 2011
Outline
1. Institutional framework
2. Financing sources - Alternative schemes
3. Financing sources - Traditional schemes
4. Fiscal sustainability
Annex
Conclusions
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Institutional framework
COLOMBIAN POLITICAL AND ADMINISTRATIVE DIVISION
National
Sets development policies and objectives; provides technicalsupport to local governments; sets the regulatory framework forNational
Government
Departments (32)
pp g ; g ythe provision of education, health and other social services.Provides public goods such as defense, justice, national roads .
Advise, support and monitor municipalities in theexecution of social spending and planning.Complements national and municipal spending ineducation, health, roads, water and sewerage
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Municipalities (1102)Education, health, public utilities, localroads, public transport (cities), culture,etc.
Institutional framework
MUNICIPAL SOURCES OF REVENUES AND ITS ALLOCATION
•Education and health coverage•Water and sewerage
•General purpose expenditure
Intergovernmental transfers(SGP).
•General purpose expenditure
Other investment and infrastructure needs, current
expenditure, debt service
Investment
Own revenue sources.
Subnational debt and otherfi i h i
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Investment
Investment in public transportinfrastructure and water and
sewerage
financing mechanisms.
National governmentco-financing.
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Agreement to provide a specific infrastructure asset or service in
PUBLIC PRIVATE PARTNERSHIPS (PPP) - CONCESSIONS
Financing sources –Alternative schemes
Public sector Private sector
exchange of payments based on the service actually delivered.
$
Source of repayment of investment:- User charges (fares, tolls, etc)- Public budget payments if the project is not self-financed
CONTINGENT LIABILITIES
$
5
Why do governments choose PPPs?
PUBLIC PRIVATE PARTNERSHIPS (PPP) - CONCESSIONS
Financing sources –Alternative schemes
• Insufficient public funds to meet the demand for infrastructure.
• New sources of finance.
• A desire to improve the quality of a specific service.
• Transfer of certain risks to the private sector.
• Better value for public
Examples in Bogota:• Public transportation systems (Transmilenio, SITP).• Urban highways.• Landfill.• Garbage collection.• Parking lots.• Schools’ management.
Better value for public investments in infrastructure by the use of private sector skills.
• Introduction of innovation/ technology.
Source: Worldbank. Large project finance
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FUTURE BUDGET COMMITMENTS
Special budget authorization to commit expenditures beyond a fiscalyear It allows financing of long term projects (i e Infrastructure)
Financing sources –Alternative schemes
year. It allows financing of long term projects (i.e. Infrastructure).
Legal Factors:
This type of authorization to commit future budgets cannot go beyondthe current government period (Exception: strategic projects).
Subnational Entities: The authorization to commit future budgets in thelast year of government period, is forbidden (Law 819, 2003).
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Controversy:
Subnational entities:
INFRASTRUCTURE
Financing sources –Alternative schemes
Future budget commitmentsis a kind of public debt.
• Most of them had approvedfuture budget commitmentswith no revenue to support it.
• The commitments should beconsistent with the mediumconsistent with the mediumterm fiscal framework.
Future budget commitments
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INFRASTRUCTURE
SECURITIZATION
G l Fi i l St t
Financing sources –Alternative schemes
Future budget commitments
Special budget authorization to commitexpenditures beyond a fiscal year.• To whom approve Expenditure.
General Financial Structure
BeneficiarySpecialpurposevehicle
Securities Investors
• To the beneficiary Revenue.
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NationalGovernment
SubnationalGovernment
Civil Works Companies
- Contractors
AgentsConventions: Financial figure
Securities
INFRASTRUCTURE
SECURITIZATION
S ifi Fi i l St t
Future Budget Commitments
Special budget authorization to commitexpenditures beyond a fiscal year.
• To whom approve Expenditure.T th b fi i R
Financing sources –Alternative schemes
TransmilenioSpecial purpose
vehicleSecurities
Transfer of FutureBudget Commitments
2
Specific Financial Structure• To the beneficiary Revenue.
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Nation DistrictCivil Works Companies
(Contractors)
InvestorsPayment1 3Future Budget
CommitmentsFuture BudgetCommitments
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Central Governmentguarantee
Bonds Central Government cannot guarantee internal debt
Financing sources –Traditional schemes
Internal Debt
External Debt
Commercial Bank
Bonds
Commercial Bank
not guarantee internal debtof sub-nationals and theirdecentralized entities, norprivate entities. (Decree2681, 1993).
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Multilateral and Bilateral (i.e. government-to-
government)
Guarantees Trust, Notes
Financing sources –Traditional schemes
LowCosts
Long Maturities
Collateralrequired
Central GovernmentAuthorization (+)
TechnicalAssistance
Hedging Operationsoffered by the Bank
GradeRating
Required*
Bonds
ForeignCommercialBanking
Local CommercialBanking
Multilateral and Bilateral Banking
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(+) For loans that obtain central government guarantee, subnational entities must do the paymentto the State Entities Contingence Fund.
* This grade is related to the market requirement (it does nor have relation to the obligationestablished by the Law 819, 2003).
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State Entities Contingency Fund: was established by Decree3800, 2005.
•Variables taken into account:
Financing sources –Traditional schemes
•Variables taken into account: Funding cost (include the territorial entities
ratings).Credit performance (default). Liquidity level of the counter-guarantee.
•Periodicity: Annual
Sovereign Guarantee in Credit Operations:
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gBogotá suscribed loanoperations without sovereign guarantee of US$150.0 millions:
• CAF US$105.0 millions.• IFC US$45.0 millions.
ml1
Financing sources –Traditional schemes
BOGOTA’S CASE: guarantees
Bogotá has guaranteed financial loans of descentralized entities, asfollows:
DecentralizedEntity
Guarantee Loan
EAAB Guarantee Letter Sanitation sector: JICA Bank Loan -Infrastructure.
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IDU Guarantee Trust Transport sector: Securitization.
Transmilenio Guarantee Note Transport sector: Commercial Bank Loan – Transmilenio Phase III.
Slide 13
ml1 La palabra contragarantía está de esa forma (counterguarantee) en el Prospecto de Emisión del Bono Externo (Offering Memorandum). No obstante, consideramos que también se puede colocar con guion intermedio (counter-guarantee).mlparra, 6/2/2011
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• Colombia has made big improvements in the regulatory
Financing sources in the context of fiscal sustainability
Colombia has made big improvements in the regulatoryframework to increase fiscal discipline in order tocontrol debt levels of subnational governments and tomitigate the associated risks (contingent liabilities).
• This has also done in order to avoid incur in backingfrom the central goverment to the subnationals and
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gconsequently.
• Preserve the macroeconomic stability.
• 1968 – 1993: Legal framework that guaranteed income for
BACKGROUND
Fiscal sustainability
subnational governments, without controlling the use ofthese resources.
• The Constitution of 1991 deepened the decentralizationprocess and increased the amount of transfers from theNational Government to local governments.
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• These transfers were used as a guarantee of paymentand increased the supply of credit to subnationalgovernments.
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Subnational governments’ debt (% GDP)
2.5
3.0The result was an explosivetrend in spending and debtlevels.
Fiscal sustainability
BACKGROUND
250
300%
Current expenditure / current revenue (1999)
0.5
1.0
1.5
2.0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
% G
DP
In many cases, currentexpenditure was greater than
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0
50
100
150
200
E 1 2 3 4 5 6Categoria
Departamentos
Municipios
Source: CGR
Subnational governments’ categories are defined by population and current revenues, where a lower number indicates higherpopulation and revenues. Bogotá belongs tocategory E (special), amongst other cities.
current revenue.
• In response to the rapid increase in subnationalgovernments´ debt, the National Government
Fiscal sustainability
INSTITUTIONAL FRAMEWORK
gestablished a series of regulations to:
– Control subnational governments’ debt
– Increase transparency and fiscal discipline
– Restructure current liabilities
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• Additionally, subnational revenue sources werestrengthened (e.g. increase in gasoline surcharge, tax onvehicles was levied).
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Subnational debt control and fiscal sustainability
Law 358/1997 • Defines sustainability indicators and limits:
INSTITUTIONAL FRAMEWORK
Fiscal sustainability
Law 358/1997 Defines sustainability indicators and limits: Interest payments/ operational savings < 40% Debt/ current revenues < 80%
• Debt only for investment expenditure (“golden rule”).• Ministry of Finance must approve indebtness of subnational
governments that are above limits.• Subnational governments can use transfers as a guarantee
for credits only if these credits finance the same type of spending as transfers.
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Law 550/1999 • Defines mechanisms to restructure current liabilities. 13 departments and around 80 municipalities benefited
from this law.
Subnational debt control and fiscal sustainability
Law 617/2000 • Sets limits to current expenditure (as % of non-earmarkedcurrent revenues – 50%)
INSTITUTIONAL FRAMEWORK
Fiscal sustainability
current revenues 50%).• National government can guarantee subnational debt with
Colombian financial institutions only to finance fiscal adjustment programs of local governments with no repaymentcapacity, specifically to pay for the severance payments and compensations required to carry out the adjustment program.
Law 819/2003 • Requires the elaboration of the Medium Term Fiscal Framework and the definition of primary balance targets.
• Future budget commitments can be authorized only in the
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Future budget commitments can be authorized, only in thecase of strategic projects (e.g. infrastructure, energy, telecommunications).
• Requires the valuation of contingent liabilities.• Subnational governments must obtain risk ratings to contract
new debt.• Reinforces indebtness controls set in Law 358.
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• Fiscal scenario for the next 10 years.
• Must include sustainability analysis
MEDIUM TERM FISCAL FRAMEWORK (MTFF):
Fiscal sustainability
• Must include sustainability analysis.
• Primary balance targets have to be, on average, greater or equal tothe primary balance that guarantees debt sustainability.
•pb: primary balance•r: interest rate•g: GDP growth•d: debt
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Bogotá has met the primary balance targets set in the MTFF. The target is a primaryprimarysurplus surplus of 0,08% of GDP in 2011 and primary surpluses of 0,02% of GDP, onaverage, for 2011-2021, which guarantees fiscal sustainability in the medium term.
FISCAL AND PRIMARY BALANCE - CENTRAL ADMINISTRATION (%GDP)
Fiscal sustainability
0.08%
0.05% 0.05% 0.06%0.05% 0.05% 0.05% 0.05%
0.05%
0.10%
-0.24%
-0.04%
-0.21%
-0.18%-0.19%
-0.09% -0.08% -0.08% -0.08% -0.08% -0.07% -0.07%-0.12%-0.11%
-0.06% -0.07%
-0.25%
-0.20%
-0.15%
-0.10%
-0.05%
0.00%
% G
DP
TOTAL BALANCE (% GDP)
PRIMARY BALANCE (%GDP)
Source: SDH, Dirección de Estadísticas y Estudios Fiscales
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-0.30%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
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• Designs and leads the execution of fiscal stabilizationprograms with subnational governments.
• Assesses the financial situation of subnationalgovernments.
Ministry of Finance
Directorate of Fiscal
Fiscal sustainabilityINSTITUTIONAL FRAMEWORK
• Monitors the sustainability indicators set in the laws (e.g.debt/ current revenues, interest payments/ operationalsavings).
• Provides technical assistance to subnationalgovernments.
Directorate of Fiscal Support (DAF)
Fiscal performance indicator and ranking.
Components:
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National PlanningDepartment (DNP)
Components:• Subnational governments capacity to finance currentexpenditure with own revenue sources.• Degree of dependence from transfers and royalties.• Fiscal effort: Tax revenues/total revenues• Saving capacity: Current saving/current revenues• Weight of investment in total expenditure• Debt/current revenues
RESULTS OF THE REFORM: Subnational governments’ debt (% national GDP)
3 0
Fiscal sustainability
0.5
1.0
1.5
2.0
2.5
3.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
% G
DP
Law 819
Law 617
Law 358
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199
199
199
199
199
199
199
199
199
199
200
200
200
200
200
200
200
200
200
200
Source: Contraloría General de la República
•Debt started to decrease in 2001 and has mantained that trend in the last decade.•Additionally, current expenditure decreased from 24% of total expenditure in 2000 to 16% in 2009.
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Annex: Bogotá
DISTRICT OF BOGOTÁPoor persons (%) according to UBN. Bogotá's Localities 2007.
• Bogotá is the capital city of Colombia and it isstrategically located in the geographic centre ofthe American continent; in the eastern Andesmountain range and 1 hour away from both the
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mountain range and 1 hour away from both theAtlantic and Pacific Oceans.
• The district is governed by a Mayor, a District Council, local administrative boards and other local authorities
• Bogotá is divided into 20 counties that together comprise the District.
DISTRICT OF BOGOTÁ
2010 • Population 7.363.782 (16,2% Colombian
population*).
Annex: Bogotá
• 2010 GDP USD67.4 millions (23,6% Colombian GDP) GDP per cápita USD8.955 (Colombia USD6.142)
• Unemployment rate 11,2% (Dec 10 – Feb11 quarter)
• Commerce is largest sector of employmentgeneration.
• Full water and sewerage coverage (100%).El t d Ed ti G
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• Elementary and Education: Gross coveragerate 99,1%.
• Social security coverage rate 86,8%• Internet suscribers: 900.000
* According to the data from the 2005 Census. Source: DANE-SDP.