c


 

’
 
  
     
   


„

  
   

© 

Ô What is on-lending?
Ô Why do government¶s on-lend?
Ô Types of risks involved in on-lending
Ô How does on-lending differ from guarantees?
Ô Sound practices
Ô Fees for on-lending?

2
 
 

Ô Rifferent terms are used: On-lending, Re-

lending, Lending

Ô Typically covers the situation where the central

government borrows in the market (domestically
or externally), and on-lend the funds to a public
or private entity
± Or on-lending from central government budget
without earmarking, e.g., student loans

3
 
 c



Ô Supporting the financing of certain entities/projects ±
public or private ± that would have difficulty funding
themselves in the market at acceptable terms
± Using the higher credit rating of the government implies lower
cost for the borrower
± Allows the central government to support specific activities
Ô Way of controlling/monitoring the financial activities
of the borrowers
± For example, to centralize external and domestic borrowing
Ô Generation of externality benefits
± Issue additional domestic debt to support market development

4

 





Ô —arket risk
± Loan terms may be passed on to the borrower
without ensuring that the entity has the capacity to
manage the risk, e.g, FX risk
Ô Credit risk
± The risk that the lender ± the central government ±
will not be fully repaid
Ô Weakening of the borrowers¶ corporate
governance given the absence of market
discipline
± —oral hazard
5
 
 c

On-lending Guarantees
‡ Government issues debt ± and ‡ Government guarantees
acquire an asset repayment
± Increases gross debt of government ± No effect on gross debt of government
± Net debt unchanged ± Net debt unchanged
‡ Credit risk ‡ Credit risk
± If default, government writes down ± If guarantee is called, government
asset takes over the liability
‡ Transparent ‡ Often not transparent
± Both assets and liabilities accounted ± Guarantee not recorded
and reported

While in practice often treated differently in budgets and in debt

reports, the objectives and economic implications of on-lending and
guarantees are similar, i.e., on-lent debt is comparable to a
6
contingent liability from a risk perspective
 u c
 
 
 
Ô Guidelines for the end-borrower regarding portfolio
exposure
Ô Risk based fee
Ô Only on-lend in local currency
Ô Only lend at shorter maturities than original loan
Ô Limits for total size of on-lent portfolio
Ô Contingency fund
± For example based on (risk-based) fees
Ô Transparency
± —ake clear that providing on-lending and guarantees is not free
‡ Standardized set of rules for access to on-lending and guarantees
‡ Standardized risk-related methodology for calculating fees
± Reporting on total government debt, including on-lent loans and
guarantees, i.e., both gross and net debt to ensure changes in debt
7
to GR can be properly explained
’  c

   
 
Ô Sound practice would call for a fee that reflects the
risk that the government is taking
± The fee should be equal to the expected loss
Ô Alternative ways of charging a fee
± A fixed up-front or annual fee
± Charging a higher interest rate compared to the
underlying loans
Ô Fees can be collected in a fund and invested, or
can be a part of the general budget
± How to deal with the fact that the government will have
net-income on the budget under cash accounting?
8
 ’   


Ô Best practices
± World Bank and I—F: Guidelines for ublic Rebt —anagement
± OECR: Advances in Risk —anagement of Government Rebt

Ô Consider the impact that contingent liabilities have on the

government¶s financial position
Ô —onitor the risk exposure
Ô Consider making budget allowances for expected losses
Ô Ensure reporting on the on-lent portfolio (and guarantees)
Ô An estimate of the expected cost should be included in the
budget, or as notes to the budget or the government
accounts
9
  
 !"#$

Ô United States (on-lending)

± Congressional approval needed
± The expected cost of issuing a loan guarantee or on-lend
is budgeted as a cost at the time of loan disbursement

Ô Sweden (guarantees)
± All guarantees require approval by parliament
± The fee charged shall correspond to the state¶s financial
risk and other costs of commitment
‡ One purpose of the fee is to ensure that the state allocates
resources to meet expected future costs
‡ Fee collected from guarantee recipient, or from the central
government budget
10
 
 !"%$

Ô Turkey (on-lending and guarantees)

± Law covers both on-lending and guarantees
± On-lending only from external financing and to public
entities
± On-lending and guarantees approved by the —inister
± Yearly limit in the budget law on a commitment basis
± There is a risk account appropriation
± Fee is calculated based on expected loss, but cannot
exceed 1% (up-front fee)

11
’

Ô On-lending is conceptually similar to guarantees

Ô Governments provide on-lending to support
specific projects/sectors
Ô Risks related to on-lending should be monitored
and managed
± —ain risk is an unexpected government budget
impact ± related to credit risk
± Guidelines, risk-based fees, contingency funds, etc.
‡ Ideally, the fee should reflect the government¶s risk, and
there should be a budget charge whether a fee is paid or not
± Transparency is key
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ü2007 The International Bank for Reconstruction and Revelopment / The World Bank1818 H Street NW Washington
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