Debt Management Performance Assessment Methodology 2021 Edition Debt Management Performance Assessment Methodology Debt Management Performance Assessment Methodology 2021 Edition © 2021 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This study is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Graphic Designer: Maria Lopez / lopez.ten@gmail.com Contents 1. Introduction 1 2. Assessment Methodology 3 2.1. Scope and Coverage 4 2.2. Debt Management Performance Indicators 4 2.3. Scoring Methodology 5 2.4. DeMPA Report 6 3. Debt Management Performance Indicators 7 3.1. Governance and Strategy Development 8 DPI-1 Legal Framework – Existence, Coverage, and Content of the Legal Framework 10 Managerial Structure DPI-2 18 Debt Management Strategy DPI-3 27 Public Debt Reporting DPI-4 37 Audit DPI-5 46 3.2. Coordination with Macroeconomic Policies 52 DPI-6 Coordination with Fiscal Policy 53 DPI-7 Coordination with Monetary Policy 61 3.3. Borrowing and Related Financing Activities 69 DPI-8 Domestic Borrowing 71 DPI-9 External Borrowing 79 DPI-10 Loan Guarantees, On-Lending, and Derivatives 86 3.4. Cash Flow Forecasting and Cash Balance Management 94 DPI-11 Cash Flow Forecasting and Cash Balance Management 96 3.5. Debt Recording, Payments, and Operational Risk Management 105 DPI-12 Debt Recording, Monitoring, and Payments 107 DPI-13 Data Security and Business Continuity 115 DPI-14 Debt Related Records 122 DPI-15 Debt Management Information Systems (DMIS) 128 4. References 130 Annexes 133 Annex I. The DeMPA Spreadsheet Tool 134 Annex II. DeMPA Debt Performance Indicators (DPIs) 135 Annex III. Mapping of the Revised DeMPA 136 Annex IV. Treatment of Arrears in Finance Statistics 137 Annex V. Guidance on the Country Background Section 137 Boxes Box 1. Guidance for Assessing the Legal Framework 13 Box 2. Debt Monitoring 108 Box 3. Arrears and Related Liabilities 122 Figures Figure 1. DeMPA Indicators (DPIs) 4 Figure 2. Simplified DM Governance Structure 9 Figure 3. The Non-Financial Public Sector and its Main Components 40 Figure 4. Schematic Representation of Budget Execution and Financing 96 Figure 5. Schematic Representation of Cash Management 97 Tables Table 1. Scoring: Legal Framework (DPI 1) 15 Table 2. Scoring: Managerial Structure (DPI 2) 23 Table 3. Scoring: DMS and ABP (DPI 3) 32 Table 4. Scoring: Public Debt Reporting (DPI 4) 42 Table 5. Scoring: Audits (DPI 5) 49 Table 6. Scoring: Coordination with Fiscal Policy (DPI 6) 57 Table 7. Scoring: Coordination with Monetary Policy (DPI 7) 65 Table 8. Scoring: Domestic Borrowing (DPI 8) 74 Table 9. Scoring: External Borrowing (DPI 9) 82 Table 10. Scoring: Loan Guarantees, On-Lending, Derivatives (DPI 10) 90 Table 11. Scoring: Cash Flow Forecasting and Cash Balance Management (DPI 11) 101 Table 12. Scoring: Debt Recording, Payments (DPI 12) 111 Table 13. Scoring: Data Access, Backups, and IT Infrastructure (DPI 13) 118 Table 14. Scoring: Debt Records (DPI 14) 125 Table 15. Scoring: Debt Management Information Systems (DMIS)(DPI 15) 129 1 Introduction Debt Management Performance Assessment Methodology The Debt Management Performance Assessment (DeMPA) is the World Bank’s diagnostic tool for assessing performance using a comprehensive set of indicators that span the full range of government debt management (DM) functions. Launched in 2007, revised in 2015, the indicators have become an internationally recognized standard in the government DM field and can be applied in all developing countries. The DeMPA offers a sound diagnostic framework that allows a country’s DM processes and institutions to be evaluated against sound international practice, identifying core strengths and weaknesses, and thereby helping strengthen capacity and institutions so that countries can manage their government debt effectively and sustainably. It will assist countries that want to undertake debt management reforms, helping to monitor progress with achieving government DM objectives consistent with international sound practice. The DeMPA is modeled on the Public Expenditure and Financial Accountability (PEFA) indicators, however, it uses a more comprehensive set of indicators, spanning the full range of government debt management (DM) functions, to provide a detailed assessment of government DM. The DeMPA methodology consists of two parts: i) a description of the methodology and ii) an evaluation tool that summarizes key questions that should be assessed in the context of a DeMPA evaluation. The main body of the document is organized by Debt Management Performance Indicators (DPI). It contains background information on each indicator and provides references to help understand the rationale for an indicator’s inclusion. The evaluation tool includes the scoring criteria for each indicator. “Guidance tables” help assessors interpret the requirement for scoring purposes. “Supportive documentation” lists the documents and other evidence required for an assessment. Finally, “Indicative questions to ask” provides suggestions for questions that an assessor should raise (the list is not exhaustive and should not be used as a template).1 This revised DeMPA methodology2 replaces an earlier version from 2015. The main changes refer to the inclusion of new performance indicators to better capture: (i) the legal framework for other public bodies (DPI 1); (ii) debt levels beyond the central government (DPI 4); and (iii) coordination with fiscal policy (DPI 6). The requirements for cash flow forecasting and cash management (DPI 11) have been revised and improved; they now describe more clearly the steps that are needed to produce sound estimates and to manage cash surpluses. Requirements related to debt recording, reporting and operational risks were also redesigned (DPI 12-14). Staff and DM Information Systems are now presented as stand-alone indicators since they represent cross-cutting issues that help explain performance levels and have implications across a variety of indicators. The scoring methodology, i.e., additional guidance that allows users to track requirements embedded in each score, has also been upgraded for clarity. The current methodology has different requirements from the previous methodologies and does not allow for full comparability of ratings for certain scores within the assessments. Annex II provides a table that compares current and previous versions of the tool. 1. Section 4 provides a bibliography of key references. 2. The review has been prepared by a team led by Marcello Estevão (Global Director, EMFDR, World Bank) and Doerte Doemeland (Practice Manager, EMFMD, World Bank). The team comprised Andre Proite (TTL), Lilia Razlog,(co-TTL), Çigdem Aslan, Diego Rivetti, Lars Jessen, Léa Hakim, Leandro Secunho, (all EMFMD, MTI, World Bank), Lars Mayland (Head of Banking and Markets at the Danish Central Bank), Phillip Anderson (WB Consultant). Zsolt Bango (EFNLT, FCI, World Bank) has provided comments. It has been peer reviewed by Abha Prasad -Lead Economist (DFCII, World Bank), Teppo Koivisto (Director of Finance at the State Treasury, Finland), Mike Williams (WB consultant), Per-Olof Jönsson (WB consultant) and Moritz Kraemer (Chief Economist- CountryRisk. io). The review has benefited from many conversations with debt managers from OECD, Emerging and Developing Countries. 2 2 Assessment Methodology Debt Management Performance Assessment Methodology 2.1. Scope and Coverage In line with the core mandate of most Debt Management Offices, the DeMPA covers central government (CG) DM activities and closely related functions such as issuing loan guarantees; on-lending: cash flow forecasting: and cash balance management. Some indicators extend to the broader public sector to verify to what extent the CG monitors and coordinates overall public sector borrowing and public debt reporting and this applies to: the legal framework (DPI-1), debt reporting (DPI-4) and coordination with fiscal policy (DPI-6). The DeMPA does not assess debt management of other government entities not guaranteed or on-lent by the central government, as the CG generally does not have the legal or administrative mandate to do so. The Subnational DeMPA and the Fiscal Risk Assessment (FRA) tools offer tailored diagnostic frameworks on debt management capacity, local government institutions, and fiscal risks stemming from SOEs.3 2.2. Debt Management Performance Indicator The aim of the DeMPA indicators is to measure government DM performance and identify elements required for achieving sound DM practices (Figure 1). Each indicator has its own dimensions, also called Debt Performance Indicators (DPI) that are intended to cover CG DM activities, and the overall environment in which they operate. There are 15 indicators, broken down into 34 DPIs with properties that reflect established good practice. Indicator 1, for example, consists of two properties: DPI 1.1 and DPI 1.2. The assessment is incorporated into a Debt Management Performance Assessment Report. The DeMPA does not specify recommendations for reforms or capacity-/institution-building, however, performance indicators do stipulate minimum levels that should be met. Countries need to achieve the minimum level to be able to effectively carry out the assessed debt management function. Consequently, an assessment showing that the DeMPA minimum requirements are not met clearly indicates an area requiring reform, capacity building or both. Figure 1. DeMPA Indicators (DPIs) DPI Title Governance and Strategy Development 1 Legal Framework 2 Managerial Structure 3 Debt Management Strategy 4 Debt Reporting and Evaluation 5 Audit Coordination with Macroeconomic Policies 6 Coordination with Fiscal Policy 7 Coordination with Monetary Policy 3. See https://openknowledge.worldbank.org/handle/10986/25103 and https://www.worldbank.org/en/programs/debt-toolkit/fiscal-risk#fiscalrisk and the WB’s Integrated SOE Framework (iSOEF). 4 Debt Management Performance Assessment Methodology DPI Title Borrowing and Related Financing Activities 8 Domestic Borrowing 9 External Borrowing 10 Loan Guarantees, On-Lending, and Derivatives Cash Flow Forecasting and Cash Balance Management 11 Cash Flow Forecasting and Cash Balance Management Debt Recording and Operational Risk Management 12 Debt Recording and Payments 13 Data Access, Backups, and IT Infrastructure 14 Debt-Related Records 15 The use of DM Information Systems (DMIS) 2.3. Scoring Methodology The scoring methodology breaks down the fourteen indicators4 (e.g., DPI-12) and assesses each dimension (e.g., those labeled as DPI 12.1, 12.2, ...). It assigns a score of A, B, or C, depending on the criteria. If the minimum requirements set out in C are not met, a score of D should be assigned.5 Special attention was given to the C scores, which indicate that the minimum requirements for that DPI have been met. The minimum requirements are considered essential for effective performance under any DPI that is being measured. A score of D indicates that the minimum requirements have not been met, and signals a performance deficiency, requiring priority corrective action. A “D” score can also indicate a situation where there is insufficient information for the assessment (e.g., the authorities could not provide inputs).6 Sound practice for any DPI is awarded an A score. The B score lies between the minimum requirements and sound practice. The requirements are cumulative, that is, A contains B which contains C. DPIs are further broken down into sub-requirements7, all of which need to be satisfied to attain a particular score. In addition to the score, the DeMPA Report needs to clearly identify the requirements that have not been met, this will help improve future debt management practices and will also measure progress over time. The requirements for each dimension are fully specified in the “Assessment and Scoring” table of the relevant DPI. The text in “Rationale and Background” provides context and indicates the significance of each dimension. For each DPI, a table with “Guidance and Definitions” was added to provide clarification on how to determine compliance with some requirements. This should be read in conjunction with the “Assessment and Scoring” tables in the evaluation tool.8 4. Indicator and DPI may be used interchangeably throughout the text. 5. See Annex II for a complete list of the DPIs. 6. Previous DeMPA methodologies used to assign a N/R (Not Rated) for this situation. 7. Denominated sub-DPIs, for example the set (1.1.c1, … , 1.1.c4) denotes that DPI 1.1 has four requirements that need to be met for a C score. 8. Some requirements are evaluated based on the assessment team’s judgment; the team will apply the expertise in the field to capture any national idiosyncrasies and to explain potential deviations from the thresholds. 5 Debt Management Performance Assessment Methodology There are also situations in which a dimension cannot be assessed. This may be because the dimension is not applicable (e.g., there are no derivatives), in which case the term N/A (not applicable) should be assigned.9 All legislation, regulations, or procedures manuals must be followed as they pertain to specific criteria for any score.10 If they are not implemented as required, it will be assumed that the criteria have not been met. The same applies to using a DM strategy to steer daily borrowings and other DM activities: if a strategy document covering the year of the evaluation is in place but does not guide debt operations, the strategy should be considered nonexistent. A new DeMPA Scoring sheet has been introduced to support computation of requirements under each DPI. This tool replicates the criteria to help with the assessment. More information is available in Annex I. Individual scores may be updated remotely if the DeMPA has been applied in the past two years and if the government provides enough evidence to meet requirements. A full-fledged assessment may also take place if requested by the authorities. 2.4. DeMPA Report The objective of the DeMPA Report is to provide an assessment of government DM performance based on indicator-led analysis in a concise and standardized manner. The report is a concise document (30–40 pages) with the following structure and content: • A section with country background information (see Annex V); • An executive summary that provides the performance assessment of each DPI and a comparison to the latest DeMPA results, if applicable. The summary should highlight staffing and the use of Debt Management Information Systems (DMIS) according to DPIs 2.3 and 15.1 respectively; • In the case that the report is a follow-up DeMPA, it will contain a section that briefly summarizes: i) changes in DeMPA scores; ii) reform measures implemented by the government since the last assessment, and iii) reasons for any deterioration in areas that have been assessed; • The main body of the report, which assesses the current performance of government DM on the basis of the DPIs. As noted above, the report is a statement of current government DM performance and does not include recommendations for reforms or action plans. In the case that the assessment team and the government reach different conclusions on the findings of the report, all opinions will be reflected in the report (Executive Summary). 9. N/A is used when an activity is not performed: for example, derivatives are not used, or loan guarantees are not issued. 10. The term “regulation” has a broad meaning in the tool, and reflects the variety in public administration systems. It may include ministerial decisions or practices that have been codified in written form and approved by senior officials. 6 3 Debt Management Performance Indicators Debt Management Performance Assessment Methodology 3.1. Governance and Strategy Development In the context of government DM, the term “governance” refers to the legal and managerial structure that shapes and directs the operations of government debt management (Figure 2). It also includes accountability aspects related to audits and transparency11. The legal structure (statutory legislation, ministerial decrees, and so forth) defines goals, responsibilities, authority, and accountability. It also embodies the management framework, covering issues such as the formulation and implementation of: strategy, operational procedures, quality assurance practices, and reporting responsibilities Parliament, or Congress, typically has the ultimate power to borrow on behalf of the central government as a result of its constitutional power to approve central government tax and spending measures. The first level of delegation of the borrowing power therefore comes from the parliament or congress to the executive branch (for example, to the president, the cabinet or council of ministers, or directly to the minister of finance). In turn, the president or minister of finance will delegate DM responsibilities, including the mandate to borrow, to the principal DM entity (commonly called the DM or Debt Management Office (DMO)). 11. See (Wheeler, 2004). 8 Debt Management Performance Assessment Methodology The principal DMO is the dedicated government entity whose primary responsibility is to execute the DM strategy through borrowing, and other debt-related transactions, such as guarantees, on-lending and derivatives.12 The DMO is typically responsible for undertaking analysis and providing advice to decision makers on potential DM strategies and the cost-risk trade-offs. Approval and implementation of an effective DM strategy (DMS) is central to achieving the government’s debt management objectives, for example, ensuring that the government’s financing needs, and payment obligations are met at the lowest possible cost, consistent with a prudent degree of risk. To help ensure DMS implementation, the DMO prepares an annual borrowing plan (ABP), describing the DM transactions that are needed to meet the gross borrowing requirement, within the parameters of the DMS. Debt managers must be accountable to the legislative and, by extension, to society. This is achieved through transparency around public debt and ensuring that effective audit arrangements are in place. Regular reporting on the level of central government debt and the characteristics thereof is one way to promote transparency, as is comprehensive reporting to the legislature on DM operations and outcomes. The public and investors also have an interest in broader public sector debt, especially if SOEs, local governments and other non-financial public bodies represent significant fiscal liabilities or contingent liabilities for the government. Figure 2. Simplified DM Governance Structure Legislature Minister/Cabinet - Authorization to borrow DM Strategy DM Strategy - Accountability MoF/ - Delegation of Design and Analysis/Consultation CB/ Authority Implementation and Proposal - Reporting and Other Oversight - Setting LT DM objectives Principal DM Entity Source: World Bank Audit bodies periodically examine DM transactions and reporting to evaluate the accuracy of the government’s financial statements; they also check that the DMO has complied with existing regulations. More comprehensive audits evaluate operational performance to assess the effectiveness and efficiency of the DM entity. 12. For more details on the managerial structure, see WB and IMF, 2014 – Revised Guidelines for Public Debt Management. 9 Debt Management Performance Assessment Methodology DPI-1 Legal Framework – Existence, Coverage, and Content of the Legal Framework DPI 1.1. Central Government’s legal framework The rationale is to ensure that the legal framework clearly designates the authority to borrow on behalf of the government (in domestic and foreign markets, including bilateral creditors and International Financial Institutions); to undertake debt-related transactions (such as guarantees, on-lending and derivatives). There is no universally accepted definition of central government debt, various jurisdictions and accounting standards have different definitions, with varied policy implications. It is critical for the legal framework to delineate the scope of public debt explicitly. It has implications for the types of instruments that are governed by the debt management (DM) legal framework. All debt instruments representing central government liabilities should be included in the legal framework. The IMF13 defines total gross debt as all liabilities that require payment of interest and/or principal by the debtor to a creditor at a future date. Some jurisdictions include other forms of government debt in their legal framework: arrears, suppliers’ credit arrangements, and judgment debt (IMF, 2015). Definitions are helpful for developing a conceptual framework and providing practical guidance on compiling debt statistics. The scope of the legal framework governing public debt management may vary and is normally restricted to central government.14 This comprises primary legislation approved by the legislature and secondary or delegated legislation determined by the executive branch. Together, they form the broad legislative architecture within which public debt is contracted and managed. The following is a description of types of legislation and key provisions frequently observed in sound legal frameworks:15 Primary legislation typically covers the following key provisions: a) Authorization to Borrow: • clear authorization from the legislature to the executive branch (the president, cabinet/council of ministers, or minister of finance) to approve borrowing, undertake debt transactions and issue government guarantees (eventually requiring collateral for such guarantees) on behalf of the central government16. • this is typically found in a separate law on public debt management or similar, e.g., the public finance law, or a fiscal responsibility law. b) Borrowing purposes, such as: • budget financing, cash deficits and settlement of arrears; • investment projects financing approved by the legislature; • refinancing and pre-financing outstanding debt; • support government-related entities through on-lending or the issuance of guarantees; • financing called guarantees; • fulfilling requirements by the central bank to implement monetary policy (e.g., draining excess liquidity from the domestic market); and • dealing with the impact of natural disasters, pandemics, etc. 13. Public Sector Debt Statistics (2012). 14. Other government related entities such as SOEs and subnational governments are often regulated by specific pieces of legislation. 15. Examples of Primary Legislation: Laws enacted with approval of parliament or congress/assembly, e.g. the PFM Act; and Secondary Legislation: Executive orders, decrees, ordinances, e.g. the PFM Regulations. The definitions may change depending on the jurisdiction. See IMF (2015). 16. After the legislature delegates borrowing activity to the executive branch, the legislature may ratify some borrowing in accordance with country laws. Some countries have limited the ratification to debt instruments that are governed by international law or treaties (i.e., sovereign bonds, World Bank loans, collateralized instruments). 10 Debt Management Performance Assessment Methodology c) Objectives, such as: • meeting the government’s borrowing requirements on time; • minimizing the medium- to long-term cost, while keeping the risks in the debt portfolio at acceptable levels; and • promoting development of domestic government securities markets. d) Definition of debt instruments: • to provide guidance on the definition and a description of debt instruments used by the government such as securities, loans, collateralized obligations and guarantees (or any other debt form). e) Transparency: • periodic disclosure of debt-related information to the public (e.g., regular reporting on stock, risk indicators, terms and conditions, collateral, fees, etc.); • report DM activities to the legislature (parliament or congress) evaluating outcomes against stated objectives and the DM strategy, see DPI 4. f) Requirement to develop a Debt Management Strategy (DMS): • DM objectives must be translated into an operational rolling medium-term plan that sets out how the government intends to achieve its objectives, see DPI 3. g) Guarantees / on-lending framework • A set of rules (primary or secondary legislation) comprising: (i)sound governance arrangements, where the guarantees are defined, the purpose of the guarantees is described, and the entities or sector to benefit from the guarantees are specified; (ii) institutional setup to evaluate the contingent liabilities from guarantees; (iii) monitoring tools, such as setting limits on guarantees, issuance guidelines; (iv) charging fees; (v) arrangements to pay when necessary – see DPI 10.1 for operations. Including key provisions in the primary legislation gives them prominence and should reduce the risk of ad hoc and frequent changes. These provisions are also guided by constitutional principles and by the desired role of the legislature in central government DM activities and in broader public sector indebtedness. However, some countries use secondary legislation to cover some of the provisions above. The DeMPA methodology considers primary or secondary legislation (content and implementation) for the scoring. Secondary Legislation typically covers: a) Authorization: clear authorization within the executive branch of government to one or more DM entities to borrow and, where applicable, to undertake debt-related transactions (for example, debt exchanges; currency and interest rate swaps) and issue loan guarantees, see DPI 10.1; b) Coordination between the Ministry of Finance (MoF) and the Central Bank on operational aspects concerning government securities issuance, clearing, settlement and information sharing. Some countries use executive decrees, ordinances, memoranda of understanding; c) Coordination within the MoF: establishment of committees to share information on borrowing activities, issuance of guarantees/on-lending, debt sustainability, cash management with relevant entities (e.g., DMO, fiscal area, treasury, SOE oversight). 11 Debt Management Performance Assessment Methodology Administrative Regulation typically covers: a) Rules and procedures: clear, comprehensive rules and procedures for borrowing and repayment authorization and for negotiation cycles, debt management operations (including guarantees and on-lending), and management of proceeds; b) Negotiation guidelines and standardized contractual terms to provide transparency and consistency in the debt portfolio, including the following clauses: narrow definition of indebtedness (external indebtedness), representation and warranties, permitted encumbrances, events of default, pari passu, negative pledge, confidentiality, assignment, and transfers. For a C score,17 the primary or secondary legislation must specify: 1. The authorization to borrow; C 2. The authorization to issue guarantees and to undertake on-lending operations; 3. The definition of debt instruments used by the Central Government; 4. The purpose of borrowing; • Evidence for this should describe the uses of debt instruments or guarantees, e.g., to finance the budget; to refinance the debt; to support credit to SOEs. Accountability to the public and to the legislature are important. For a B score, the primary or secondary B legislation must include: 1. Debt Management (DM) objectives; 2. Requirement to publish debt reports; For the A score, the primary or secondary legislation must include: A 1. The development and publication of a medium-term DMS; 2. A framework to guide the management of guarantees/on-lending operations. The key aspect for DPI 1.1 evaluation is to review the legislation to see whether it meets the above requirements, particularly institutional and implementation aspects. The institutional aspect addresses the existence and coverage of the provisions within the legal framework, whereas implementation refers to enforcement or adherence to the legislation. If legislation pertaining to the requirements of the DeMPA tool was not followed in the past 3 years, the indicator should be read as if the legislation were not in place. 17. The requirements are cumulative, that is, A contains B which contains C. 12 Debt Management Performance Assessment Methodology Box 1. Guidance for Assessing the Legal Framework: I-Check the legal decision-making process for borrowing in domestic and external markets. This may include issuing debt securities (where applicable), concluding common loan agreements and debt-related transactions. Borrowing authorities may be vested in the parliament or congress, the executive council, or the minister of finance. II-Once the approval process has been clarified, and assuming it is followed, check that the documentation for any loan has been accurately signed. An official (or officials) will have received the authority to sign these documents on behalf of the government, usually the minister of finance (or equivalent), either through expressed legal authority or in their capacity as head of the ministry or head of the unit responsible for borrowing and DM activities. A similar process should be followed to check the decision-making process for debt-related transactions and loan guarantees. All relevant laws must be referenced in the DeMPA report. DPI 1.2. Public Sector Entities’ legal framework The scope of public debt, from a legal point of view, should reflect how public institutions relate to the central government. In the context of the DeMPA methodology, the scoring marks whether the legislation requires public entities to report borrowing activities to the central government, which would facilitate coordination across different government levels and monitoring the formation of contingent liabilities of a broad non-financial public sector. Whether broader public sector debt is included in the scope of applying the legal framework will depend on each country’s political and institutional setting. Normally, the Ministry of Finance’s fiscal unit, rather than the DMO, has the institutional responsibility to compile and monitor other entities’ debt activities. In addition to providing for borrowing by the central government, the legal framework should clarify the borrowing mandates and reporting requirements for public sector bodies (IMF, 2015). It should define how borrowing authority is distributed among central and general government and the broader public sector, including state owned enterprises (SOEs). In general, government entities could be divided into (a) Statutory and Parastatal bodies; (b) Local Governments; and (c) SOEs. Statutory bodies and Parastatals are public sector bodies defined by special statute to provide governmental service. They include statutory funds such as social security, deposit insurance schemes, infrastructure funds, and others. In most jurisdictions, these bodies have legal and operational autonomy, given that they are part of the broader public sector. Local Governments are subnational entities (e.g., states, provinces, municipalities) that may be entitled to borrow in some jurisdictions. The authority to borrow may appear in the Constitution, fiscal responsibility laws, fiscal rules’ law, PFM and public debt regulation. SOEs are generally created by special statute or ordinary corporate law, with commercial objectives,18 and tend to have borrowing authority. By design and through their own existence as corporate entities, they normally have the authority to borrow under their constituent legislation and to abide by regular corporate regulation applied to private companies including bankruptcy law and accounting standards. Some jurisdictions confer broad borrowing authority in a consolidated piece of legislation such as the state-owned enterprise act, and limit external borrowing activities.19 18. The government owns whole or partial shares. 19. See IMF, 2015 and World Bank iSOEF (2016). 13 Debt Management Performance Assessment Methodology Broad public sector legal frameworks (e.g., PFM Law and regulations) should require the central government to monitor borrowing activities within the non-financial public sector, to determine its exposure to those types of contingent liabilities. For a C score, the primary or secondary legislation must: C 1. Require Non-Financial Public Sector (NFPS) bodies20 to inform the Central Government of their borrowing activities (see guidance); For a B score, the primary or secondary legislation must: B 1. Require the Central Government to report the debt of NFPS bodies (together with their guarantees); • NFPS entities may provide guarantees to their own subsidiaries21. For an A score, the primary or secondary legislation must: A 1. Describe the role of the Central Government when giving NFPS bodies authorization to borrow (and to issue guarantees). 20. Statutory Bodies/Parastatals, Local Governments, and SOEs 21. Guarantees provided by the CG are covered in DPI 1.1. 14 Debt Management Performance Assessment Methodology Table 1. Scoring: Legal Framework (DPI 1) Score Requirements by DPI 1.1. Central Government’ legal framework: The primary or secondary legislation must specify: 1. The authorization to borrow; 2. The authorization to issue guarantees and undertake on-lending operations; C 3. The definition of debt instruments used by the Central Government; 4. The purpose of borrowing. 1.2. Public Sector Entities’ legal framework: 1. Require Non-Financial Public Sector (NFPS) bodies to inform the Central Government of their borrowing activities (see guidance). 1.1. Central Government’ legal framework: The primary or secondary legislation must include: 1. DM objectives; 2. Requirement to publish debt reports; B The minimum requirement for • To provide accountability to the public and to the legislature. score C is met. In addition 1.2. Public Sector Entities’ Legal Framework: The primary or secondary legislation must: 1. Require the Central Government to report the debt of NFPS bodies (together with their guarantees); 1.1. Central Government’ legal framework: The primary or secondary legislation must require: 1. The development and publication of a medium-term DMS; A 2. A framework to guide the management of guarantees/on-lending operations. The minimum requirement for score B is met. In addition 1.2. Public Sector Entities’ legal framework: The primary or secondary legislation must: 1. Describe the role of the Central Government when giving NFPS bodies authorization to borrow (and to issue guarantees). 1.1. The minimum requirement for score C is not met. D 1.2. The minimum requirement for score C is not met. 15 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 1) Guidance notes when determining compliance with the requirements Guarantees/on-lending framework: A set of rules and procedures (primary or secondary legislation) comprising: (i)sound governance arrangements, including the legal framework and institutional setup, where the guarantees are defined, the purpose of the guarantees/on-lending is described, and the entities or sector to benefit from the guarantees/on-lending are specified; (ii) 1.1 A institutional and technical setup to evaluate the contingent liabilities from guarantees/on-lending; (iii) tools to manage and monitor the CLs, such as setting limits on guarantees, deciding on new guarantees by means of guidelines; (iv) charging guarantees/on-lending fees/spreads; (v) making proper arrangements to pay when necessary. Report DM operations, issuance of guarantees, on-lent funds and debt evolution on a yearly 1.1 B basis at least. See DPI-4. 1.2 B NFPS entities may provide guarantees to their own subsidiary entities. The legal framework is defined as those provisions contained in the primary and secondary legislation, and in applicable administrative regulation. If the country’s legal framework contains 1.1 C more requirements than listed in the DeMPA methodology, the additional provisions will not affect the scores. For the purpose of reporting, aggregate figures on stock and currency are acceptable, e.g., 1.2 C domestic and foreign-currency denominated. Supporting documentation • A copy of all primary and secondary legislation, these should be available on government web sites, e.g., SOEs, Ministry of Finance, DMO, or Central Bank. • Typically, the PFM and the Debt Management Law/Regulations are the most important pieces of legislation. • A copy of all administrative and other agreements that guide operations and procedures. 16 Debt Management Performance Assessment Methodology Indicative questions to ask • Is there clear authorization in the primary/secondary legislation to approve borrowings and loan guarantees on behalf of the central government? Has this authorization been assigned to the president, the cabinet/ council of ministers, or the minister of finance? • If so, which legislation sections or clauses are relevant? • Who signs the loan and other documents related to a particular transaction? • Which legislation provides for this authorization, and what are the relevant sections or clauses? • Is there clear authorization in the legislation to undertake debt-related transactions and to issue loan guarantees/on-lending on behalf of the central government? • If so, which legislation sections or clauses are relevant? • Which sections or clauses in the legislation cover specified borrowing purposes; DM objectives; the requirement to develop a medium-term DMS; and annual mandatory reporting covering DM activities and, where applicable, issued loan guarantees? • Has there been any instance in the past few years in which the laws have not been followed? If so, what were the instances, why were the laws not followed, and what were the consequences? • Does the legislation include the definition of debt instruments? • Does the legislation require NFPS bodies to inform their borrowing activities to the CG? • Does the legislation require the CG to report on Subnational Governments and SOEs? • Does the CG have any role in giving NFPS bodies the authorization to borrow? 17 Debt Management Performance Assessment Methodology DPI-2 Managerial Structure DPI 2.1. The managerial structure for central government borrowing and debt-related transactions The rationale is to ensure that the managerial structure for borrowing and debt- related transactions22 is effective and, at higher scoring levels, that it includes clear divisions at: • the political level, i.e., between the parliament/congress, the president, the cabinet or council of ministers, and the minister of finance. The minister of finance sets the overall central government DM objectives and decides on the level of risk that the government is willing to tolerate through the approved medium-term DMS; and • the execution level, which includes the entities responsible for implementing policy decisions and the DM strategy; this requires efficient organization at the execution level of DM policies within the government. Effective Organizational Structure The most effective organizational structure is a single DM entity (DMO) responsible for all central government borrowing. Even so, the DeMPA tool at the C and B levels does not require a principal DM entity to be established or a DMO to be in charge of the DM activities at the execution level. If the government has multiple DM entities, however, they need to share information regularly and coordinate their DM activities through formal channels. To facilitate coordination, one of these entities can be selected to take the lead, or a coordination committee can be set up to share information at regular meetings. Coordination is essential to avoid over-borrowing and ensuring that the DMS is implemented. The B score requires that coordination between DM entities is formalized by some form of regulation, e.g., decrees, ministerial orders, or legislation. For the highest level, there is a requirement to have a DMO that is responsible for undertaking all borrowing and debt- related transactions. With this structure, some DM activities may be conducted by other entities acting as “agents” for the DMO. (For example, the central bank may undertake government securities auctions in the domestic market; or a savings directorate may issue government savings certificates for the domestic retail sector.) In these cases, the rights and obligations of the parties needs to be clarified, typically in a formalized agency agreement and/or in secondary legislation. Undue Political Interference The advantage of a clear division between the political and execution levels is that major decisions about the overall volume of indebtedness and the acceptable risks in the debt portfolio are assigned to political decision makers while allowing technical professionals to seek an efficient outcome within given parameters. This separation helps diminish the risk of fiscal or budgetary policy dominance over prudent debt management, for example, by lowering the debt interest cost in times of budgetary constraint at the expense of higher risk in the debt portfolio.23 22. Debt-related transactions create direct or indirect liabilities to the government. They include non-marketable and marketable operations such as issuances, swaps to change the risk profile of the debt portfolio, and debt buybacks of outstanding securities. 23. Although it is an important topic, political interference is not directly scored. The assessment team may describe this if it is a factor negatively affecting the decision making in the DMO. 18 Debt Management Performance Assessment Methodology The minimum requirements are therefore: For a C score: 1. There is coordination between DM entities that undertake borrowing transactions. C This can be evidenced by at least one of the following: • Minutes of committee meetings where all DM entities are represented; • Memoranda or reports on planning and implementation of borrowing circulated among all DM entities; • Reporting structure for all DM entities to the same Principal Secretary, or similar position. For a B score: B 1. There must be formal mechanisms to facilitate coordination between DM entities that undertake borrowing transactions. • The formalization could be evidenced by an agency agreement or any applicable regulation clarifying the rights and obligations of the parties. A For the A score : 1. Borrowing must be undertaken by a single DMO. DPI 2.2. The managerial structure for preparation and issuance of central government loan guarantees and on-lending operations Effective organizational structure The rationale is to ensure an effective organizational structure for preparing and issuing central government loan guarantees and on-lending. Loan guarantees extended to third parties are based on contracts, i.e., explicit contingent liabilities typically issued in financial support to a certain beneficiary or project. In the DeMPA tool, “loan guarantees” do not include export credit guarantees or other contingent liabilities (explicit or implicit). On-lending is outright debt between the government and the primary creditor. The terms and conditions of the on-lent credit are transferred to a final beneficiary and may differ from those of the original debt instrument. As such, on-lending operations have many similarities with guarantees and there is an opportunity to coordinate with respect to issuance, processing and monitoring. Guarantees/on-lending are issued/undertaken at the government’s discretion, often decided at the political level. However, as with debt transactions, overall responsibility for their preparation and issuance should rest with one entity only, a principal entity responsible for: 19 Debt Management Performance Assessment Methodology • independently assessing and pricing credit risk; • mitigating the financial effects of a default or trigger event24; • monitoring the risk during the term of the loan guarantee/on-lending; • coordinating guarantee beneficiaries’ borrowing with central government borrowing; and • recording and reporting guarantees/on-lending. In some cases, responsibilities for guarantees/on-lending are integrated into the DMO; in other cases, a principal guarantee entity may be appointed. It is important to note that the skills and tools required for evaluating and managing risks related to guarantees/on-lending may differ from those required for managing direct debt. As is the case for DM, a single guarantee/on-lending entity is not required at C and B levels. Where there are multiple government entities, information needs to be exchanged regularly, and activities closely coordinated. Formal mechanisms, such as meetings, official reports and memoranda are in place and must be used for these purposes. Coordinating issuance of guarantees Coordination between the timing of borrowing with guarantees and central government borrowing is important. If central government and the guaranteed beneficiary enter the same market as a result of poor communication, it could lead to more-expensive loans for both and create an impression of disorganization within their market operations. Government- guaranteed debt tends to have higher financing costs than government debt because of lower liquidity and/or lengthy legal processes that sometimes accompany the calling-in of guarantees. In turn, investors may require higher yields if they perceive the sovereign may have to assume the debt of a guarantee’s beneficiary. This structure allows for certain loan guarantees to be issued by other entities as agents for the principal guarantee entity, for example, this could be a designated guarantee entity that can issue individual loan guarantees to support farmers under a certain guarantee scheme. Parties’ rights and obligations need to be clarified in a formalized agency agreement or in secondary legislation for this to happen. The requirement for the C score is: 1. Loan guarantees/on-lending are prepared and undertaken by one or more government entities that regularly exchange information and coordinate their respective activities, both between C themselves and with the DM entity/entities. • This could be evidenced by minutes of committee meetings or memoranda, or reports circulated among all entities on planning and issuance of guarantees/on-lending agreements, or an organizational structure where all DM entities report to the same Principal Secretary, or similar position. An additional requirement is introduced at the B level: B 1. There are formal coordinating mechanisms in place to guide the issuance and monitoring of guarantees and on-lent credits. • Specific regulation creating and defining the roles of coordinating committees and the exchange of information is typical evidence of formal coordination. 24. For example, by charging fees or recovery mechanisms. 20 Debt Management Performance Assessment Methodology For the highest score A: A 1. There is a principal entity responsible for preparing and undertaking loan guarantees/ on-lending. DPI 2.3. Staff and HR issues Staff size and capacity critically affects debt management performance. Although staffing and HR issues are related to the managerial structure, they are normally scored after the assessment team covers the DPIs. The assessment must briefly describe general issues regarding staff and is based on the interactions between the DeMPA team and officials. Specifically, the report must address several issues related to human resources: Number of Staff – Views on the adequacy of staffing, taking into account the complexity of the portfolio, operations, and the prevailing IT structure. The assessment team should indicate: (a) the number of people per unit/sub-unit; (b) justification for adequacy of the staff size. Recruitment – Describe how staff is recruited, (e.g., is there a competitive selection process in place, are there political appointments at the operational level); if vacant positions are timely filled; if compensation schemes exist to promote staff retention. The assessment should include information on training and career plans; and any mechanisms in place to promote an ethical civil service. Civil servants who are recruited or promoted through political or personal connections are often associated with weak governance or achieve poor performance results25. Formal “merit” procedures curb politicization and nepotism: public sector jobs need to be publicly advertised; there needs to be an assessment system to thoroughly evaluate candidates’ suitability using written examinations and personal interviews. Turnover – The assessment team should provide numerical indicators on average length of employment in the unit and should evaluate whether turnover constrains core DM activities such as: (a) Recording and Payment preparation; (b) Reporting; (c) Preparation of a DMS; (d) Analysis of terms and conditions of debt instruments; (e) Guarantees’ management (if applicable). Possible causes and remedies for turnover issues may be presented if applicable.26 Training – The assessment must indicate the need for capacity building in specific areas that could improve DM activities. The DPIs should be used to signal the need for training where applicable. Countries tend to request training in all five core DM areas27. The team may indicate if other training is needed, even something like the use of spreadsheets or basic finance. Qualitative information can be used for scoring this indicator. Nonetheless, the assessment team should seek numerical evidence to support all scoring. 25. https://blogs.worldbank.org/governance/getting-basics-right-how-manage-civil-servants-developing-countries 26. For example, adequate compensation generally helps retain more motivated civil servants and prevent large scale turnover of high performers. 27. Governance and DM strategy, policy coordination, debt issuances, negotiating loans, market development, guarantees management, cash flow forecasting/ cash balance management and debt recording and operational risk management 21 Debt Management Performance Assessment Methodology For the C score the criteria are: C 1. 2. 3. The size of the staff is considered adequate; Competitive selection is used for recruitment; Turnover does not hinder core DM activities; 4. The staff is trained to perform core DM activities. For the B score, the requirements are: B 1. There are career plans and job descriptions; 2. There are codes of conduct and conflict of interest terms for staff to follow. A For the A score: 1. Existing compensation schemes encourage staff retention. 22 Debt Management Performance Assessment Methodology Table 2. Scoring: Managerial Structure (DPI 2) Score Requirements by DPI 2.1. CG Borrowing and Debt-related Transactions: 1. There is coordination between DM entities that undertake borrowing transactions. This can be evidenced by at least one of the following: • Minutes of committee meetings where all DM entities are represented; • Memoranda or reports on planning and implementation of borrowing circulated among all DM entities; • Reporting structure for all DM entities to the same Principal Secretary, or similar position. C 2.2. Issuing CG Loan Guarantees/On-lending: 1. Loan guarantees/on-lending are prepared and undertaken by one or more government entities that regularly exchange information and closely coordinate their respective activities, both between themselves and with the DM entity/entities. This could be evidenced by: • Minutes of committee meetings or memoranda, or reports circulated among all entities on planning and issuance of guarantees/on-lending agreements, or an organizational structure where all DM entities report to the same Principal Secretary, or similar position; 2.3. Staff and HR issues: 1. The size of the staff is considered adequate; 2. Competitive selection is used for recruitment; 3. Turnover does not hinder core DM activities; 4. The staff is trained to perform core DM activities. 2.1. CG Borrowing and Debt-related Transactions: 1. There must be formal mechanisms to facilitate coordination between DM entities that undertake borrowing transactions. • The formalization could be evidenced by an agency agreement or any applicable regulation clarifying the rights and obligations of the parties. B 2.2. Issuing CG loan Guarantees/On-lending: The minimum requirement for 1. There are formal coordinating mechanisms in place to guide the issuance and monitoring score C is met. of guarantees and on-lent credits. • Specific regulation creating and defining the roles of coordinating committees and the exchange of information is typical evidence of formal coordination. 2.3. Staff and HR issues: 1. There are career plans and job descriptions; 2. There are codes of conduct and conflict of interest terms for staff to follow. 23 Debt Management Performance Assessment Methodology Score Requirements by DPI 2.1. CG Borrowing and Debt-related Transactions: 1. Borrowing must be undertaken by a single DMO. • If any DM activities are conducted by other entities as agents for the DMO, the roles and obligations of the parties should be specified in a formalized agency agreement or in A secondary legislation. The minimum requirement for score B is met. 2.2. Issuing CG loan Guarantees/On-lending: 1. There is a principal entity responsible for preparing and undertaking loan guarantees/ on-lending. 2.3. Staff and HR issues: 1. Existing compensation schemes encourage staff retention. 2.1. The minimum requirement for score C is not met. D 2.2. The minimum requirement for score C is not met. 2.3 The minimum requirement for score C is not met. 24 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 2) Guidance notes when determining compliance with the requirements If the CB is formally in charge of conducting the operational work, following the decisions taken 2.1 A by the DMO, the DMO can be considered the single DM entity. “Preparing” means compiling the information required to issue the guarantee. For example: 2.2 A terms and conditions of the debt; credit risk analysis; compliance with the guarantee framework; authorizations required. The formalization could be evidenced by an agency agreement, the existence of a debt committee 2.1 B or any applicable regulation clarifying the rights and obligations of the parties. Further evidence of formalization includes regulation defining the roles of coordinating committees 2.2 B that meet regularly to exchange information on incoming guarantees/on-lending transactions. Information that typically needs to be shared among the entities: (a) price and risk; (b) actions to mitigate the financial effects of a default; (c) monitoring the risk throughout the life of the 2.2 C guarantee; (d) coordinating borrowing of the beneficiary and Central Government; (e) recording and reporting. If no guarantees have been issued in the last five years, the dimension should be rated N/A, even 2.2 C if there is a legislative and regulatory framework in place. Supporting documentation • An organizational chart of the MoF covering all entities involved in DM; secondary legislation setting out the roles of entities involved in DM; preparation and issuance of loan guarantees and their respective roles and responsibilities • Minutes etc. as specified in the scoring table for DPI 2. • A copy of the agency agreement between the DMO and the central bank or other agents • A copy of the documented and approved guarantee framework or government policy • Number of staff in the team, Turnover ratio in the past years, recruitment mechanisms, training program, career plans, job descriptions, code of conduct. 25 Debt Management Performance Assessment Methodology Indicative questions to ask • Which entities are involved in DM activities? What are their respective roles and responsibilities? • What is the process, and who is responsible, for negotiating and contracting new loans (concessional, multilateral, bilateral, commercial, domestic, etc.)? • What role does the legislature, the cabinet or council of ministers, and the minister of finance play in any new borrowing? This is important particularly with regard to authorization to borrow; the contract negotiation period; and the transacting process. • If there are two or more DM entities, what information is exchanged between them? How frequently is this information exchanged? Do the entities closely coordinate their respective activities and what mechanism is used for this coordination? • Is there a documented and approved policy/framework document that is used for deciding whether guarantees are to be granted and processes to be followed? • Who is responsible for preparing and issuing loan guarantees? How are these loan guarantees prepared? • If there are two or more guarantee entities, what information is exchanged between them? How frequently is this information exchanged? Do the entities regularly coordinate their respective activities to avoid inconsistencies in approach (for example, thresholds for credit risk)? What mechanisms are used for coordination purposes? • In the context of guaranteed borrowings by the beneficiary of loan guarantees, is there coordination with central government borrowing, and if so, how? • Is the staff size adequate and well trained? Is turnover a factor hindering performance? What are the recruitment mechanisms? • Is the staff bound to code of conduct/ conflict of interest? Does the existing compensation schemes favor staff’s retention? 26 Debt Management Performance Assessment Methodology DPI-3 Debt Management Strategy DPI 3.1. The quality of the DM strategy document The rationale is to ensure that the government has prepared and approved a Debt Management Strategy (DMS) based on the longer-term DM objectives and set it within the context of the government’s macroeconomic assumptions and its budget framework. The DMS is a medium-term plan to be used by the government to achieve the desired composition of its debt portfolio. The plan needs to capture government preferences regarding cost-risk trade-offs. It operationalizes the DM objectives and has a strong focus on managing the risk exposure embedded in the debt portfolio, specifically, potential variations in the cost of debt and its impact on the budget. In particular, a DM strategy identifies how cost and risk characteristics vary with changes in the composition of the debt portfolio. Designing a DMS is separate from debt sustainability analysis (DSA), although the information from each is complementary and provides essential information to debt managers, see DPI 6. A DMS must cover all central government existing debt and projected borrowing28, including debt raised by the central bank for fiscal purposes, with a minimum horizon of three years. Although the strategy is specified for the medium term, it needs to reflect the current debt situation and up-to-date assumptions about fiscal, macro, and market variables. It needs to be reviewed annually, and if the existing strategy is viewed as appropriate, the rationale for its continuation should be stated. This is a requirement for a C score. In addition to being based on cost-risk analysis, the DMS needs to be consistent with the macroeconomic framework and the level of development of the domestic debt market -see Medium-Term Debt Strategy (MTDS) Guidance Note29. The content of the strategy, type, and target levels for risk exposure indicators will vary from country to country, depending on: the stage of economic development; funding sources and available instruments; and the breadth and depth of the domestic debt market. Some fundamental elements remain universal and the DM strategy document, at the C level, needs to include the following: Content of the DMS I. Description of the market risks being managed (currency, interest rate, and refinancing (or rollover) risks) and historical context for the debt portfolio; II. Description of the future environment for DM, including: fiscal and debt projections; assumptions about interest and exchange rates; and constraints on financing choices, including those relating to market development and monetary policy implementation30; III. Description of the analysis undertaken to support the chosen DM strategy, clarifying assumptions used and any limitations in the analysis; IV. Evaluation of the previous strategy’s implementation; V. The chosen strategy and its rationale. 28. It is acceptable if the debt coverage is the GG or the PS provided the strategy can be implemented. 29. http://pubdocs.worldbank.org/en/671771552946461937/MTDS-Guidance-Note.pdfS 30. Although not all projections need to be published, e.g., FX and interest rates. 27 Debt Management Performance Assessment Methodology Specifically, the following indicators are commonly observed in DMS documents: • Total cost under different scenarios, particularly the sensitivity to changes in interest rates and exchange rates; • Maturity profile of the debt under different scenarios; • Strategic benchmarks such as: • ratio of foreign currency debt to domestic debt; • currency composition of foreign currency debt; • minimum average time to maturity of the debt; maximum share of debt that can fall due during one and two budget years; • maximum ratio of short-term (up to one-year remaining maturity) to long-term debt; • maximum ratio of floating rate to fixed rate debt; and minimum average time to interest rate refixing. For countries that have limited access to market-based debt instruments and rely mainly on external official concessional finance, all of these risk-based parameters may not be equally relevant. In such cases, the most relevant parameters for containing the risks to the debt portfolio will be currency composition, interest rate composition, and amount of debt that must be refinanced over a particular period. The requirements for a C score can be summarized: 1. The time horizon for the DMS is at least three years, and should be updated and published annually31; 2. The DMS document must include; a. The scope for DM b. The composition of existing debt, the risks being managed and an assessment of the previous strategy’s implementation; C c. Fiscal and debt projections; assumptions about interest and exchange rates; and constraints on financing choices32; d. Brief description of the analysis undertaken and rationale for the chosen DMS; e. The DMS, expressed at least as guidelines for the preferred direction, over the horizon period, of specific indicators for interest rate, refinancing, and foreign currency risks; f. Description of how DM objectives will be achieved (e.g., measures aimed at supporting domestic debt market development). The DM strategy should specify targets and ranges for key risk indicators in the portfolio and the financing program over the projected horizon. As an interim step, at the C level, it will be enough to express the strategy in the form of guidelines to indicate the direction in which certain key indicators are expected to evolve (for example, a statement that “the amount of local currency debt maturing within 12 months shall be reduced”). 31. Once the DMS is first published, it needs to be updated annually. 32. Note that the estimates on fiscal interest and FX-rates don’t need to be individually published for computing the scores. 28 Debt Management Performance Assessment Methodology For a B score, the requirements are: 1. The DMS is based on quantitative analysis of costs and risks that describes the evolution of B debt service flows and borrowing alternatives under the expected values of future interest and exchange rates. A range of possible values for these variables is also provided; 2. The DMS includes realistic quantitative targets or ranges for indicators of: interest rate, refinancing, and foreign currency risks. For the highest score A: 1. The DMS has specified risk exposure targets for the end of the borrowing horizon; the vulnerability A of the debt portfolio to shocks in market rates will also need to be identified. The execution of DM activities must be steered by the DMS. If it is clear that a DMS is not being followed, the DMS is treated as non-existing (e.g., a rating of D for DPI 3.1). Unexplained deviations in the strategy, for instance, the use of debt instruments that were not considered in the DMS, may indicate that the strategy is not being followed.33 DPI 3.2. The decision-making process and publication of the DM strategy The DMS is a decision on the government’s preferred cost-risk trade-off and therefore should be approved by the cabinet, council of ministers, or minister of finance. Some countries have set up specialized advisory boards to comment on the draft DMS before it is approved. The proposed DMS must be prepared by DMO (or DM entities together), in order to ensure that it is grounded in the actual financing choices available and prepared by those with the relevant professional experience. The central bank must be asked for input and comments to the DMS to ensure that there is no conflict with monetary policy implementation. Transparency regarding the government’s DMS is important, as it provides assurance to citizens that the costs and risks from central government debt are being effectively managed. It also sends a signal to investors about how the government intends to finance itself over the medium term. The requirements for the C score are: 1. The DMS is prepared by the DMO or by coordinating entities; 2. The views of the central bank are obtained; C 3. The strategy is formally approved by cabinet, council of ministers, or minister/vice-minister of finance34; 4. The DMS is published on the official website(s). The annual DMS review should be undertaken as part of the budget process, as this is the main reference for the government’s financing needs and other parameters assumed in the DM strategy, such as projected exchange rates and interest rates. To help secure a robust decision-making process for the DMS over time, the main steps can be specified in regulation. 33. To illustrate, a Eurobond issued without being considered in the DMS may provide a hint that the DMS is not being followed. 34. The assessment may consider other competent authority more senior than the proponents of the DMS. 29 Debt Management Performance Assessment Methodology In order to progress to the B score, there needs to evidence that: B 1. The DMS is well integrated with the budget document and in the medium-term expenditure or budget framework; For the highest score A: A 1. There is a regulation that specifies the content and quality of the strategy document, which includes the elements listed at the 3.1 C level. • This is to help ensure that the quality of the DMS is maintained over time. DPI 3.3. Annual Borrowing Plan (ABP) The rationale is to ensure that an ABP is in place each year, to meet the government’s financing requirement, and in keeping with the DM strategy and the budget. An ABP is typically prepared by the front office of the DMO35. In the context of the DeMPA scoring, the ABP must be a standalone publication describing at least how the gross financing requirement is expected to be met by financing alternatives available to government. High quality ABPs provide more details and granularity on how the government plans to implement the financing program, conveying specific messages to the investor’s community, and revealing preferred currencies and tenors when issuing securities in the market.36 Similar to the DMS, the ABP could include ranges to accommodate large variations in the scenario. The ABP needs to express the gross funding needs, specifying the projected split between domestic and external wholesale debt instruments. The external component of the ABP needs to specify the estimated financing (volumes) from each source (e.g., international bond issuance, official loans). As external project financing is disbursed over a number of years, the forecast disbursements for the current year need to be be included. Similarly, domestic financing should estimate the volumes raised through securities and loans. Retail markets must be included if they are representative (that is, if retail debt’s share is greater than 5 percent of total debt). The ABP should be published because it adds transparency to DM and enhances communication with investors. It can be revised during implementation, reflecting budget updates and financing conditions. In sum, for the C level, the ABP must observe the following: 1. Content: (this may be expressed as ranges) C a. Forecasted gross borrowing volume, split between foreign and domestic sources; • If domestic retail debt share is 5 percent or more of total debt, the forecast is split between wholesale and retail domestic borrowing; 35. Some countries share the responsibilities within the DMO. 36. See, for example, World Bank (2015) “Issuance Plan for Government Securities: Guidance Note”, Finance and Markets Global Practice. 30 Debt Management Performance Assessment Methodology b. Forecasted split between the main types of external financing (e.g., international bond issuance, loans); c. Forecasted split between the main types of domestic financing (e.g., commercial loans and securities, such as T-Bills, or T-bonds. 2. Reflect updated budget reviews, when applicable37 3. Be published on an official website (s). For a B score the ABP is required to: 1. Include detailed analysis of how it will support implementation of the DMS. • Specifically, there needs to be cost and risk indicators for the portfolio at the start of the year and estimates of those indicators at the end of the year that conform to the target ranges in B the DMS; • The securities tenors are disclosed. Advanced practice regularly monitors the implementation of the ABP throughout the year and reviews the performance against the original plan. The review is for internal purposes in the first instance, but a revised version of the ABP explaining deviations from the original plan may be made publicly available if appropriate (e.g., if borrowing requirements and targets change significantly according to the updated fiscal information and market conditions). For the highest score A: A 1. The plan (ABP) is reviewed (internally) at least quarterly to take account of changes in borrowing requirements, domestic and external market conditions, and disbursement profiles. • When applicable the revised ABP is made public and deviations from the DMS are explained. 37. This applies in cases where the budget revision has been made public. Publication of the updated ABP is desired. 31 Debt Management Performance Assessment Methodology Table 3. Scoring: DMS and ABP (DPI 3) Score Requirements by DPI 3.1. Content: There is a medium-term DMS covering all existing and projected central government debt, including borrowing from the central bank, based on the DM objectives. 1. The time horizon for the DMS is at least three-years and should be updated and published annually; 2. The DMS document must include: a. The scope for DM b. The composition of existing debt and the risks being managed and an assessment of the previous strategy’s implementation; c. Fiscal and debt projections; assumptions about interest and exchange rates; and constraints on financing choices; d. Brief description of the analysis undertaken and rationale for the chosen DMS; e. The DMS, expressed at least as guidelines for the preferred direction, over the horizon period, of specific indicators for interest rate, refinancing, and foreign currency risks; f. Description of how DM objectives will be achieved (e.g., measures aimed at supporting C domestic debt market development). 3.2. Decision Making and Publication: The requirements for the C Score are: 1. The DMS is prepared by the DMO or by coordinating entities; 2. The views of the central bank are obtained; 3. The strategy is formally approved by the cabinet, council of ministers, or minister/vice- minister of finance; • The assessment may consider other competent authority more senior than the proponents of the DMS; 4. The DMS is published on the official website(s); 3.3. ABP: For the C level, the ABP must observe the following: 1. Content: (this may be expressed as ranges) a. Forecasted gross borrowing volume, split between foreign and domestic sources; • If domestic retail debt share is 5 percent or more of total debt, the forecast is split between wholesale and retail domestic borrowing; 32 Debt Management Performance Assessment Methodology Score Requirements by DPI b. Forecasted split between the main types of external financing (e.g., international bond issuance, loans); c. Forecasted split between the main types of domestic financing (e.g. commercial loans and securities, such as T-Bills, or T-bonds. 2. Reflect updated budget reviews- when applicable; 3. Be published on an official website (s). 3.1. Content: 1. The DMS is based on quantitative analysis of costs and risks that describes the evolution of debt service flows and borrowing alternatives under the expected values of future interest and exchange rates. A range of possible values for these variables is also provided. 2. The DMS includes realistic target ranges for indicators of the interest rate, refinancing, and foreign currency risks. 3.2. Decision Making and Publication: 1. The DMS is well integrated in the budget document and the medium-term expenditure or B budget framework. The requirements for score C are met 3.3. ABP: For a B score the ABP is required to: 1. Include detailed analysis of how it will support the implementation of the DMS. • Specifically, there needs to be cost and risk indicators for the portfolio at the start of the year and estimates of those indicators at the end of the year that conform to the target ranges in the DMS; • The securities tenors are disclosed. 3.1. Content: 1. The DMS has specified risk exposure targets for the end of the horizon; the vulnerability of the debt portfolio to shocks in market rates will also need to be identified. A The requirements 3.2 - Decision Making and Publication: for score B are met 1. There is a regulation that specifies the content and quality of the strategy document, which include the elements listed at the 3.1 C level. • This is to help ensure that the quality of the DMS is maintained over time. 33 Debt Management Performance Assessment Methodology Score Requirements by DPI 3.3. ABP: 1. The plan (ABP) is reviewed (internally) at least quarterly to take account of changes in borrowing requirements, domestic and external market conditions, and disbursement profiles. • When applicable the revised ABP is made public and deviations from the DMS are explained. 3.1. The minimum requirement for score C is not met. D 3.2. The minimum requirement for score C is not met. 3.3. The minimum requirement for score C is not met. 34 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 2) Guidance notes when determining compliance with the requirements 3.1 C and DM activities must be steered by the DMS/ABP respectively in practice, in order to score a C. 3.3 C Countries with significant financial assets should take these into account when conducting 3.1 C the cost and risk analysis, in keeping with the time horizon for holding such assets and the government’s ability to use them to hedge the risks of the gross debt portfolio. It is acceptable if the debt coverage is the GG or the PS provided the strategy can be implemented. 3.1 C Note that not all financial estimates need to be published (see sub-DPI 3.1.c2.d) The analysis needs to provide debt cost outcomes given the expected future interest and 3.1 B exchange rates, as well as a range of possible values for these variables. 3.2 A and Primary or Secondary Legislation 3.2 B Evidence of integration in the budget process would be cross-referencing in the DMS to the 3.2 B budget document and medium-term fiscal framework, and vice versa. There may also be minutes of committees or working groups with DM and fiscal/budget officials. Central bank consultation: there needs to be evidence that this occurred, e.g., minutes of meetings, exchange of letters/emails. The views may include liquidity conditions, monetary 3.2 C policy objectives and instruments; projections of interest and exchange rates; concerns about the impact of DM activities on the exchange rates and interest rates; views about DM and domestic instruments. The analysis needs to demonstrate that the estimated cost and risk indicators for the portfolio at 3.3 B the end of the year conform to the target ranges in the DM strategy. 35 Debt Management Performance Assessment Methodology Supporting documentation • Copies of the most recent DMS and ABP • Monitoring reports of DMS implementation • The defined process for strategy formulation and approval Indicative questions to ask • Has the government written and approved a medium-term DM strategy? • How was the strategy produced? • Which DM entities or people were responsible for producing the strategy, and what were their respective roles? • Are there regulations or laws that mandate the content of the DM strategy? What is the process for preparing and approving it? • Who authorized or approved the strategy? Was it made public on an official website? • How was the analysis undertaken, who was responsible for setting economic and budget parameters, and who was responsible for debt forecasts? Has the central bank been consulted in formulating the strategy? Is it consistent with monetary policy implementation? • Does the strategy cover the items required to meet the minimum requirements? • Has the DM strategy been followed in practice? • Has the government prepared an annual borrowing plan? • Does the ABP include the minimum requirements? • Has it been made public on an official website? • If applicable, has it been updated after budget updates? 36 Debt Management Performance Assessment Methodology DPI-4 Public Debt Reporting DPI 4.1. Central Government (CG) debt report - Content and timeliness The rationale is to ensure that the central government periodically publishes a CG debt report on the official website(s). A debt report (or equivalent to a statistical bulletin) covering domestic and external central government debt, loan guarantees, and debt-related operations is essential for ensuring transparency of the debt portfolio and of outstanding loan guarantees. In the DeMPA methodology, the scores increase with higher frequency and granularity of the information published in the report. The report could be in the form of either regular Ministry of Finance or Central Bank publications or as statistical tables produced by a bureau of statistics or DMO. The bulletin should be published at least annually on the website (for example: DMO/MoF) and provide information on central government debt stocks; flows; ratios and other cost-risk indicators. Note that for DPI 4.1 the published set of statistics and indicators qualifies for the content of the report/bulletin38. For the C level, the requirements are the following: 1. The CG debt report must include the following indicators (or equivalent): a. Stock: Composition of the debt: • Fixed, floating, FX-linked, Inflation-linked, other; • Denominated in local currency, USD, EUR, other; • Creditors: Commercial (loans vs securities), official bilateral, multilateral, residency, other. b. Flows: maturity profile39 C • Total debt maturity by year • Share of debt maturing in the next 12 months. c. Cost measures: • Implied interest rate: Interest payments/stock at the end of the previous period or other cost measures. d. Guarantees: Outstanding guaranteed debt by currency. 2. Annual publication on the official website with a maximum lag of six months. 38. This contrasts to DPI 4.2 where the report is required to have an analytical content at a minimum. 39. Some countries breakdown the maturity profile by principal and interest. 37 Debt Management Performance Assessment Methodology For the B level, the debt report/bulletin must: B 1. Include the following risk measures: a. ATR (Average time to Refixing) b. ATM (Average Time to Maturity) • Any similar indicators to capture the debt structure are acceptable. 2. Include historical series of the main stock and flow indicators; • e.g., total volume, composition, share of debt maturing in the coming 12 months; 3. It must be published at least semi-annually with a maximum lag of three months For score A : A 1. The debt report must be published quarterly with a maximum data lag of two months. • The same set of indicators for the C and B level apply except for guarantees, which can be reported semi-annually. DPI 4.2. Reporting to the legislature The rationale is to ensure that the government is accountable for its DM operations to the legislature and to the country’s citizens. This approach promotes transparency in DM operations and good governance through greater accountability. In addition to providing full information about public debt outstanding, accountability is strengthened by submitting a detailed annual report to the legislature with an evaluation of the DM operations, including borrowing, liability management operations such as debt exchanges, loan guarantees extended, and on-lending made. The rationale for this is to ensure that DM operations have been carried out in accordance with objectives and legal requirements that have been set by the legislature and with the DMS that was approved by the executive. The report should include enough information to enable the legislature to evaluate how successful the DM operations, including new borrowings and debt-related transactions, have been in meeting the DM objectives. The report can be either prepared by the principal DMO or coordinated between the DM entities. If there are no explicit objectives or strategy, it is possible to meet the threshold of a C score by producing an annual report that provides a thorough account of DM operations during the period, together with the rationale for those operations. The rationale could include how DM operations contributed to the achievement of budget and fiscal objectives and policies. It also would be expected to include references to the management of risks (outlined in DPI 4.1), cost-effectiveness, and the judgments made in trading off cost against risk. In addition to the cost-risk analysis, the rationale for the operations may consider consistency with the macroeconomic program and with the level of domestic market development. 38 Debt Management Performance Assessment Methodology For the C score: 1. The DMO must publish on MoF website an annual report providing minimal information of outstanding central government debt and DM operations. C • Debt operations should be described together with the risk characteristics of the debt portfolio. For higher scores, the report should include information on the chosen DMS, as well as an assessment of compliance and an explanation of potential deviations. For the B score: B 1. The annual report describes actual performance compared to the approved DMS.40 • There is explicit evolution of targets and indicators included in the DMS. For the A score: A 1. A standalone annual report must contain assessments of the outcomes against the chosen DMS and rationale behind it. • The report brings a fuller discussion of the deviations from the targets and implications for the future. DPI 4.3. Public debt report – Government coverage The rationale is to ensure that non-financial public sector debt is systematically captured, and that reports are published on a single, easily accessible government website. Accurate and comprehensive data on public sector debt are a cornerstone of sound borrowing and lending practices. The debt of public sector entities is a contingent liability of central government: it is an explicit contingent liability for debt guaranteed by government, and an indirect contingent liability in other cases. Debt managers need this information to make informed borrowing decisions, which has implications on debt sustainability and macroeconomic stability. The DMO typically focuses on reporting the debt instruments that it manages41 but does not have the mandate or the means to include other central government liabilities or to report public sector debt. This requires a higher degree of coordination and regulatory oversight to capture all relevant liabilities in the banking system42. Therefore, debt reports broadening the public sector coverage are often published by the central bank, another MoF unit or the bureau of statistics. The reason why this indicator is included in DeMPA is that the DMOs, who are familiar with debt and DM information system management, may provide the expertise to collect and compile debt statistics. Debt transparency needs to be strengthened to help countries create a more complete picture of their debt. Incomplete debt coverage may lead to the underestimation of debt levels, posing significant risk to sustainability analysis. 40. For scores of C and B, the annual report may be part of another document (for example, a report on budget execution or notes to financial statements), if it fully addresses the areas identified in this description. 41. See DPI 4.1. 42. In addition to the liabilities, assets deposited in the banking system are used to calculate the Net PS Debt. 39 Debt Management Performance Assessment Methodology Creditors, donors, analysts, and rating agencies need this information to make accurate assessments of sovereign financing needs and creditworthiness, and to appropriately price debt instruments. The public also needs this information to hold the government accountable for its fiscal management, and to enable citizens to participate more actively in governance, potentially reducing corruption. The IMF Public Sector Debt Statistics Guide (PSDSG)43 defines public sector debt and steers the measurement, compilation of comparable data, and presentation of public sector debt statistics. Non-Financial Public Sector Debt is defined by (see Figure 3): i. Non-Financial Public Companies (State Owned Enterprises -SOE) ii. General Government, which is the aggregation of the: a. Central Government; b. Subnational Governments (States and Counties/Municipalities) In the DeMPA methodology the debt types typically considered are: i. Debt Securities; ii. Loans; iii. Arrears; For the purpose of scoring, the list above differs from the statistical definition presented in the PSDS, which would also consider, Special Drawing Rights (SDR); Currency and Deposits; and Other Accounts Payable. Figure 3. The Non-Financial Public Sector and Its Main Components Public Sector General Public Government Corporations Central Local Non-Financial Government Government SOEs Source: IMF PSDS – A guide for compilers and users For this indicator, it is satisfactory if, for each government level, the debt report includes a) The outstanding total debt; b) The breakdown into external and domestic currency. For all scores, the periodicity required is to publish the reports on an annual basis with a maximum time lag of six months. The reports do not necessarily need to be published by the DMO. The DeMPA assessment focuses on the content and timeliness only. 43. “Public Sector Debt Statistics: Guide for Compilers and Users – 2013” http://tffs.org/PSDStoc.htm and Joint Bank - Fund Note on Public Sector Debt Definitions and Reporting in Low-Income Developing Countries 40 Debt Management Performance Assessment Methodology For the C score: C 1. A report covering central government debt is published on the official website. • If applicable, CG debt should include the stock of fiscal arrears and debt instruments. • The periodicity required is to publish the reports on an annual basis with a maximum time lag of six months. For the B score: B 1. A report covering all outstanding general government debt is published on the official website. • If applicable, the debt stock is broken-down into domestic and external currency. • The periodicity required is to publish the reports on an annual basis with a maximum time lag of six months. For the A score: 1. A debt report covering all outstanding non-financial public sector debt is published on the A official website. • If applicable, the debt stock is broken-down into domestic and external currency. • The periodicity required is to publish the reports on an annual basis with a maximum time lag of six months. 41 Debt Management Performance Assessment Methodology Table 4. Scoring: Public Debt Reporting (DPI 4) Score Requirements by DPI 4.1. Content and Timeliness (CG): 1. The CG debt report must include the following indicators (or equivalent): a. Stock: Composition of the debt: • Fixed, floating, FX-linked, Inflation-linked, other; • Denominated in local currency, USD, EUR, other; • Creditors: Commercial (loans vs securities), official bilateral, multilateral; residency, other. b. Flows: maturity profile • Total debt maturity by year • Share of debt maturing in the next 12 months. c. Cost measures: • Implied interest rate: Interest payments/stock at the end of the previous period or C other cost measures. d. Guarantees: Outstanding guaranteed debt by currency 2. Annual publication on the official website with a maximum lag of six months. 4.2. Reporting to the legislature 1. The DMO must publish on MoF website an annual report providing minimal information of outstanding central government debt and DM operations. • Debt operations should be described together with the risk characteristics of the debt portfolio. 4.3. Government Coverage: 1. A report covering central government debt is published on the official website. • If applicable, CG debt should include the stock of fiscal arrears and debt instruments. • The periodicity required is to publish the reports on an annual basis with a time lag of six months. 42 Debt Management Performance Assessment Methodology Score Requirements by DPI 4.1. Content and Timeliness (CG): The CG debt report/bulleting must: 1. Include the following risk measures: a. ATR (Average time to Refixing) b. ATM (Average Time to Maturity) • Any similar indicators to capture debt structure are acceptable. 2. Include historical series of the main stock and flow indicators; • e.g., total volume, composition, share of debt maturing in the coming 12 months; B The minimum requirement for score C is met. 3. It must be published at least semi-annually with a maximum lag of three months In addition: 4.2. Reporting to the legislature: 1. The annual report describes actual performance compared to the approved DMS. • There is explicit evolution of targets and indicators included in the DMS. 4.3. Government Coverage: 1. A report covering all outstanding General Government debt is published on the official website. • If applicable, the debt stock is broken-down into domestic and external currency; • The periodicity required is to publish the reports on an annual basis with a maximum time lag of six months. 4.1. Content and Timeliness (CG): 1. The debt report must be published quarterly with a maximum data lag of 2 months. • The same set of indicators for the C and B level apply except for guarantees, which can be reported semi-annually. A The minimum requirement for score B is met. 4.2. Reporting to the legislature: In addition 1. A standalone annual report must contain assessments of the outcomes against the chosen DMS and the rationale behind it. • The report brings a fuller discussion of the deviations from the targets and implications for the future. 43 Debt Management Performance Assessment Methodology Score Requirements by DPI 4.3. Government Coverage: 1. A debt report covering all outstanding non-financial Public Sector debt is published in the official website. • If applicable, the debt stock is broken-down into domestic and external currency; • The periodicity required is to publish the reports on an annual basis with a maximum time lag of six months. 4.1. The minimum requirement for score C is not met. D 4.2. The minimum requirement for score C is not met. 4.3. The minimum requirement for score C is not met. Guidance and Definitions (DPI 4) Guidance notes when determining compliance with the requirements 4.3 The coverage also includes public guaranteed debt for these levels. A, B, C For scores of C and B, the annual report may be part of another document (for example, a report 4.2 C, B on budget execution or notes on financial statements), provided that it fully addresses the areas identified in this description. The distinguishing characteristics of 4.2 compared to 4.1 at the C level are: (a) the report contains a “thorough account” of DM operations and the rationale for them (even if there is no ABP or DMS); (b) the report is published or submitted to the legislature (either stand alone or as a section 4.2 C of a wider report). It would therefore be possible to score a C for 4.1, but not for 4.2. 4.1 and 4.2 cover only central government debt and debt that has been guaranteed by central 4.3 C government. Public sector debt may include entities that are not guaranteed by central government. 44 Debt Management Performance Assessment Methodology Supporting documentation • A copy of the most recent publication of the stocks and flows of the external and domestic debt of the central government • A copy of the most recent debt statistical bulletin or its equivalent, outlining the debt coverage (CG, GG, PS) • Copies of the annual evaluation reports • Copies of other reports (for example, the budgetary implementation report), which include details of DM activities Indicative questions to ask • Does the debt statistical bulletin or equivalent include: • information on central government debt stocks (by creditor, residency classification, instrument, currency, interest rate basis, and residual maturity); • debt flows (principal and interest payments); • debt ratios and/or indicators; and • basic risk measures of the debt portfolio? • Is an annual report on DM activities submitted to the legislature, and is the report detailed enough to form the basis for an evaluation of borrowing and other DM activities? • Does this report contain: (a) an evaluation of how the DM activities have complied with the DMS; (b) the DMS and rationale behind it; and (c) an assessment of outcomes in the context of the stated DMS? • What other debt reports are produced by the government or central bank? Are they publicly available? If so, how and in what format? • What is the time period or lag of the debt reporting period? • Are there reports for General Government and Public Sector debt (including guarantees)? 45 Debt Management Performance Assessment Methodology DPI-5 Audit DPI 5.1. Frequency and comprehensiveness of external audits (Financial, Compliance, Performance) and their public disclosure DM activities, policies, and operations are subject to scrutiny by the national audit bodies. Public disclosure of audit reports improves transparency and accountability, by strengthening incentives to act on audit findings. To assess requirements under this DPI, meetings should be held with representatives of both the supreme audit institution (SAI), this is typically the Auditor General, and the internal audit function covering government DM activities and control systems, this is normally the internal audit function of the Ministry of Finance or general accounting/ controller office. Accountability for government DM is strengthened by introducing regular audits of DM activities in relation to: a) reliability and integrity of financial and operational information; b) effectiveness and efficiency of DM operations, including compliance with the stated DM objectives and strategy; c) effectiveness of the internal control system; and d) compliance with laws and regulations. Standards of external audit practice should be consistent with international standards, such as those set by the International Organization of Supreme Audit Institutions (INTOSAI). Transparency and the accountability framework for DM can also be strengthened by public disclosure of external audits of DM operations. Financial audits seek to assess the risk of material misstatement of public debt information disclosed in financial reports, whether due to error or fraud. Compliance audits identify the direct and materially significant provisions of laws and regulations, and then perform tests to determine whether DM has complied with the legal and regulatory provisions. Performance audits are required for higher levels. They are designed to examine the effectiveness and efficiency of the DM operations. The effectiveness aspect involves checking the achievement of the stated objectives and the actual impact of activities compared with their intended impact. It also includes an examination of existing controls and management of operational risks. The efficiency aspect looks at the use of resources44, it examines information systems as well as performance measures and monitoring arrangements. In performance audits, the auditors identify materially important areas of DM that can be examined, and then select specific areas where the audit is likely to add significant value in promoting effectiveness, efficiency, and economy. Audits of the control system involve assessing whether it is properly designed to: • provide reasonable assurance for the government to undertake debt transactions and to achieve its DM objectives, and • prevent fraud within the organization. Internal control systems that prevent fraud or errors may involve organizing a DM unit based on segregation of duties, having sound information technology (IT) security, and having a risk control and compliance unit that frequently monitors adherence to these internal rules. 44. Resources used to perform DM activities. 46 Debt Management Performance Assessment Methodology Sound practice in this area suggests that the transparency of DM operations is enhanced when the results of external audits are made available to the public. The minimum requirements for the C score are: C 1. An external financial audit of DM transactions is undertaken annually45; 2. An external compliance audit of DM transactions has been undertaken within the past two years; 3. Audit reports are publicly available within six months of completion. For the score B: 1. There must be external performance audits of DM operational effectiveness within the past three years. This is typically evidenced by: B • performance audits that broadly aim to check the achievement of the stated objectives and the actual impact of activities compared with their intended impact for important aspects of the operations; • an examination of control systems and management of operational risks for important aspects of the operations. A For a score A, the requirement is: 1. The external performance audits are published within six months of completion of the audit. DPI 5.2. Degree of commitment to address audit outcomes The rationale is to ensure that the relevant government decision makers are committed to addressing the audit outcomes. The goal of external auditing is to promote accountability in debt contracting and management. Mechanisms should ensure the adoption of corrective measures to address issues highlighted in audit reports and the appropriate responses from decision makers, to ensure that the findings from audits are addressed.46 At a minimum (C score): C 1. The DMO or other entity is required to produce an action plan to address external audits. For higher levels the action plan must specify the corrections accepted and a clear timeline to execute audit findings. 45. The number of transactions may be significant for active DMOs. It is acceptable if audits cover the most important transactions. 46. In Low Income Countries, external auditors are typically more active than internal auditors. However, if the assessment team understands that the internal audit body is the relevant unit providing recommendation and these have been addressed by the government, the score should reflect this. 47 Debt Management Performance Assessment Methodology For the B score the requirement is: B 1. The action plan (from the DMO or MoF) must specify the corrections and the timeframe to address audit findings. Example of evidence: • certain actions need to be implemented, normally prioritized items, as agreed by both parties. A For the A score: 1. All actions need to have been implemented within the agreed timeline, as defined in the plan. 48 Debt Management Performance Assessment Methodology Table 5. Scoring: Audits (DPI 5) Score Requirements by DPI 5.1. Frequency, comprehensiveness and disclosure of audits (Financial, Compliance, Performance): 1. An external financial audit of DM transactions is undertaken annually; 2. An external compliance audit of DM transactions has been undertaken within the past two years; C 3. Audit reports are publicly available within six months of completion. 5.2. Degree of commitment to address audit outcomes: 1. The DMO or other entity is required to produce an action plan to address external audits. 5.1. Frequency, comprehensiveness and disclosure of audits (Financial, Compliance, Performance): 1. There must be external performance audits of DM operational effectiveness within the past three years. This is typically evidenced by: • performance audits that broadly aim to check the achievement of the stated objectives and the actual impact of activities compared with their intended impact for important B aspects of the operations; The minimum requirement for • an examination of control systems and management of operational risks for important score C is met. In addition: aspects of the operations. 5.2. Degree of commitment to address audit outcomes: 1. The action plan (from the DMO or MoF) must specify the corrections and the timeframe to address audit findings. Example of evidence: • certain actions need to be implemented, normally prioritized items, as agreed by both parties. 5.1. Frequency and timeliness of audits (Financial, Compliance, Performance): A 1. The external performance audits are published within six months of completion of the audit. The requirements for score B are met. In addition: 5.2. Degree of commitment to address the outcomes from the audits: 1. All actions need to have been implemented within the agreed timeline, as defined in the plan. 5.1. The minimum requirement for score C is not met. D 5.2. The minimum requirement for score C is not met. 49 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 5) Guidance notes when determining compliance with the requirements Control System: established policies and procedures designed to show that engagements are performed in accordance with professional standards and applicable legal and regulatory 5.1 B requirements. Such policies and procedures shall include: (i) guidance to improve the quality and consistency of performance; (b) supervision responsibilities; (c) review responsibilities. The objective is to prevent the DM entity from responding only to relatively easy or less relevant 5.2 B findings of the auditor. External audit body - Entity outside of the executive branch, e.g., the audit body linked to the Legislative branch or a private company. 5.1 C Internal Audit body: Entity within the Executive branch, e.g., audit/compliance unit within the MoF or audit controller body. The number of transactions may be significant for active DMOs. It is acceptable if audits cover 5.1 C the most important transactions. An action plan is a roadmap to effectively close non-conformances. It brings details such as: (i) determination of root causes; (ii) description of the proposed corrective and preventive actions 5.2 C listed within the plan; (iii) application of preventive action to avoid future recurrence of the problem; (iv) the date the action is expected to be completed; (v) current status of the action items. In Low Income Countries, external auditors are typically more active than internal auditors. However, if the assessment team understands that the internal audit body is the relevant unit 5.2 C providing recommendation and these have been addressed by the government, the score should reflect this. Supporting documentation • A copy of audit legislation, which may be available on the government or SAI website • A copy of any financial, compliance, and performance audits of DM activities undertaken within the past five years • A copy of any follow-up response to a performance audit, particularly any response that notes the reaction and commitment to address the audit findings 50 Debt Management Performance Assessment Methodology Indicative questions to ask • Have any external financial audits been undertaken? If so, when, what was the process, what were the findings, and how have they been addressed? Have these been publicly disclosed, and if yes, where? • Have any external compliance audits been undertaken? If so, when, what was the process, what were the findings, and how have they been addressed? Have these been publicly disclosed, and if yes, where? • Have any external performance audits been undertaken? If so, when, what was the process, what were the findings, and how have they been addressed? Have these been publicly disclosed, and if yes, where? • What audits are undertaken, how frequently? • Have any audits been conducted on the effectiveness of the internal control system for debt management operations? If so, when, what was the process, what were the findings, and how have they been addressed? What is the government’s commitment to addressing audit findings in the area of DM? 51 Debt Management Performance Assessment Methodology 3.2. Coordination with Macroeconomic Policies In the broad policy framework, it is important for DMs to be carried out in coordination with fiscal and monetary policy. Coordination is necessary for formulating DM objectives and strategy within the context of the government’s fiscal and monetary policy framework. The debt managers, fiscal policy advisers, and monetary policy authority should share an understanding of the objectives of government DM as well as fiscal and monetary policies; particularly given that the three areas have different objectives and use different instruments to meet these objectives. This is critical to ensure the integrity and accountability of the institutions responsible for each policy area. Fiscal Policy design and implementation is a key component affecting debt size and trajectory. In addition to the analysis of other economic sectors, fiscal policy is useful for gauging whether the level and terms of current and expected future borrowing may lead to future debt servicing difficulties (medium- and long-term). Strategic planning for debt management typically uses primary balance estimates to forecast domestic and external debt service. DM composition and structure affect debt costs and risks, potentially impacting the level of primary balance needed to stabilize the debt. DM objectives and guidelines also impact the interest rate term structure and the level of liquidity in the system, through issuances and redemptions of securities. Monetary policy objectives, instruments and constraints directly affect the levels of exchange rates and short-term interest rates that can be transferred to the entire yield curve, with potential implications on the cost of funding. Investors may react differently depending on their preferences, which could prompt specific reactions from debt managers.47 47. As an example of policy tension, the central bank may prefer that the government issue inflation-indexed bonds or borrow in foreign currency to bolster the credibility of monetary policy. The debt manager may believe that the market for such inflation-indexed debt has not been fully developed and that foreign currency debt introduces greater risk into the government’s balance sheet. 52 Debt Management Performance Assessment Methodology Because of policy interdependencies, it is important to understand how policy instruments operate, how they can reinforce one another, and how policy tensions can arise. Clarity in the roles and objectives for government DM and monetary policy can minimize potential conflicts, while transparency about roles and instruments is important for market participants to reduce the risk of misinterpreting policy signals and implementation. In order to support the efficient implementation of each policy, institutions need to share information with each other, including the DMS, government forecast cash flows, macroeconomic assumptions, analysis of debt sustainability, and monetary policy stance. DPI-6 Coordination with Fiscal Policy DPI 6.1. Provision of debt service forecasts: The rationale is to ensure that fiscal policy makers have sufficiently reliable and timely forecasts on debt service for the yearly budget preparation process. The DMO (or the relevant DM entities) is responsible for providing debt service forecasts. During the assessment, the meeting with the budget department (or equivalent) should check the timeliness and reliability of the debt service forecasts, and whether sensitivity and scenario tests were used. In order to achieve score C, the forecasts must: 1. Cover all existing central government debt48; 2. Be based on the macroeconomic assumptions used for the budget • for example, for interest rates and exchange rates; 3. Be based on the cash flow estimates used by the DMO for preparing the debt management strategy (DMS). C • If there is no DMS, the budget number (debt service) may be compared to the debt payment estimates (for principal and interest) provided by the DMO. If there is no DMS, the budget number (debt service) may be compared to the debt payment estimates (for principal and interest) provided by the DMO. Deviations are accepted if they are well explained and justified, e.g., in the event of unexpected shocks. In countries with more advanced fiscal policy-making and budget preparation, the authorities may insert variations in the estimates based on the assessment of fiscal risks. The objective is to understand how budget outcomes may differ from the baseline forecasts, for example by changing the assumptions on exchange and interest rates. Accordingly, for a B score, in addition to a baseline forecast for principal and interest payments: B 1. The fiscal authorities must be provided with a sensitivity analysis of debt service forecasts to factor in changes in interest and exchange rates. 48. Debt service forecast should be consistent with the fiscal accounts. CG debt includes any guarantees that have been called and that are being serviced by central government. Some countries may consider other official levels in the budget, e.g., GG or PS. 53 Debt Management Performance Assessment Methodology For the highest score A: A 1. The authorities must also be provided with a scenario analysis that tests the impact on the debt servicing costs of a severe shock or worst-case scenario. • For example, this could be a prolonged and severe economic downturn, a major exogenous shock, or a scenario that reflects the country’s main vulnerabilities. DPI 6.2. Monitoring Fiscal Risks in the NFPS This indicator measures the extent to which fiscal risks, stemming from certain contingent liabilities, are reported to the central government. Policy makers need this information to make appropriate borrowing decisions, and to safeguard debt sustainability and macroeconomic stability. These contingent liabilities can arise from adverse macroeconomic outturns, weak financial positions of subnational governments (SNG) or non-financial public corporations (SOEs), and from the central government’s (CG) own programs and activities, including extra-budgetary units. They can also arise from other implicit risks such as market failure, natural disasters and pandemics. The central government should have the authority and institutional capacity to monitor borrowing activities from the NFPS (Non-Financial Public Sector) in accordance with the regulatory framework. It should also establish a specific unit responsible for monitoring borrowing activities of public issuers, mainly SOE and SNG. Explicit and implicit contingent liabilities from other sources within the NPFS (such as public private partnerships- PPPs) also need to be monitored and shared with the CG. The CG would then be able to monitor and analyze the characteristics and risks of those liabilities. Such analysis, (e.g., a fiscal risk statement) should be shared with the DMO to incorporate and understand the rise of contingent liabilities in their strategy and to plan for the future. A fiscal risk statement needs to include the risks from SOEs and PPP projects as well as any arrears the government may have accumulated. There should also be a discussion on the past and future impact of macroeconomic shocks as the largest source of risk to the economy. As time goes on and experience with the fiscal risk statement grows, it may include other relevant risks like natural disasters or the financial system. Coverage of the fiscal risk statement and the depth of information reported may also increase. At the highest level the CG (e.g., fiscal unit) should conduct at least a qualitative evaluation of the financial health of the public entities, without necessarily quantifying the likelihood of the risks. The criteria for the qualitative evaluation include the following: • Listing the large NFPS entities that could expose the country to fiscal risks (e.g., SOEs fully owned by the CG, list of PPP projects); • Overview of the financial statements of the large NFPS entities (e.g., large SOEs, PPP projects of a significant size) through the evolution of the nominal figures (and the main financial ratios) of the last 2-3 years; • Overview of the debt (guaranteed and non-guaranteed) of the largest NFPS entities. 54 Debt Management Performance Assessment Methodology The assessment would identify the directional data path (e.g., increasing or decreasing debt stock, worsening financial ratios) to provide information on entities’ past performance. This assessment does not need to include forward-looking analysis, but its inclusion would be helpful. For the C score, the requirements are: C 1. The CG (e.g., Fiscal area or other entity) regularly collects information (audited or unaudited) about the largest public entities (e.g., SOEs/SNGs whose debt accounts for 75% of total SOE/ SNG debt). Higher scores require the elaboration of fiscal risk statements and detailed reporting of key indicators. B The criteria for the B score are: 1. The CG has published a Fiscal Risk Statement for the NFPS in the past three years. The criteria for the A score is: A 1. The CG annually publishes a Fiscal Risk Statement for the NFPS; 2. The CG publishes financial ratios of the main SOEs to quantitively assess their performance. DPI 6.3. Availability of key macro and fiscal variables and DSA The rationale is to ensure that key macroeconomic variables are available and that debt sustainability analyses (DSAs) are undertaken and shared with the DMO. The DMO requires this information to plan for borrowing. The projections of the key fiscal variables and the DSA are typically the responsibility of the fiscal authority, using debt service information from the DMO and broader fiscal risks. The government level covered by the DSA will depend on the availability of data. Typically, the DSA will consider at least the CG (and guaranteed) debt, but it would be better if it would also cover higher levels such as the GG and the NFPS. Key observed macro variables and forecasts of real, monetary, external, and fiscal variables are needed to allow the sustainability of the fiscal position to be assessed, as well as to assess its sensitivity to changes in the economic environment.49 The key fiscal variables include: (a) total central government expenses, revenues, and debt level; (b) the medium-term plan (three or more years) for total expenses and revenues (c) debt levels from SOEs and Sub-National governments for DSAs considering NFPS and GG levels. 49. The assumption regarding key macro variables should be coordinated between the budget forecasting process and debt servicing forecasts (in particular with foreign exchange and inflation rates if there is foreign currency or inflation-indexed debt). 55 Debt Management Performance Assessment Methodology Debt sustainability analysis (DSA) provides the debt manager with critical information on the government’s tolerance for risk, so that this can be incorporated into the DMS. The extent of debt-related risk that a government is willing to take may vary over time, depending on the size of its debt portfolio and its vulnerability to economic and financial shocks. In general, the larger the debt portfolio and the greater the vulnerability to shocks, the larger the potential risk of loss from a financial crisis or other adverse developments. A DSA is undertaken to assess the long-term (at least 5–10 years) sustainability of the future debt path. To assess this, a DSA begins with a baseline for public and publicly guaranteed debt based on the assumptions underlying the macroeconomic framework. It then tests these baseline assumptions and analyzes how various risks would affect the public debt trajectory.50 In sum, the requirements for a C score are: 1. Key macro and fiscal variables estimates, as defined above, are shared with the DMO annually; 2. An analysis of the sustainability of public and publicly guaranteed debt for the NFPS (DSA), as defined above, has been undertaken within the last three years and shared with the DMO; • Depending on the country and the data availability the General (GG) or Central Government (CG) debt may be the relevant coverage for the DSA; C 3. The DSA is updated when sizable new borrowing is programmed; • In the context of Low Income Countries, evidence of sizable new borrowing may be, for example, Eurobond issuance or a loan that is beyond the concessional financing limits; 4. The DSA is published. More frequent DSAs enhance the ability of the DMO to revise the DMS, as the analysis incorporates recent developments. B Accordingly, the requirement for a B score is: 1. The DSAs are undertaken at least once every two years. A For the A score: 1. The DSAs must be undertaken annually. 50. A separate analysis is conducted to assess the sustainability of total external debt, which involves the evaluation of foreign exchange flows to meet the total external debt service obligations in a timely manner. 56 Debt Management Performance Assessment Methodology Table 6. Scoring: Coordination with Fiscal Policy (DPI 6) Score Requirements by DPI 6.1. Provision of debt service forecasts: In order to achieve score C the forecasts must: 1. Cover all existing central government debt; 2. Be based on the macroeconomic assumptions used for the budget • For example, for interest rates and exchange rates; 3. Be based on the cash flow estimates used by the DMO for preparing the debt strategy (DMS). • If there is no DMS, the budget number (debt service) may be compared to the debt payment estimates (for principal and interest) provided by the DMO. • Deviations are accepted if they are well explained and justified, e.g., in the event of unexpected shocks. 6.2. Monitoring Fiscal Risks in the NFPS: 1. The CG (e.g., Fiscal area or other entity) regularly collects information (audited or unaudited) C about the largest public entities (e.g., SOEs/SNGs whose debt accounts for 75% of total SOE/SNG debt). 6.3. Availability of key macro and fiscal variables and DSA: 1. Key macro and fiscal variable estimates, as defined above, are shared with the DMO annually; 2. An analysis of the sustainability of public and publicly guaranteed debt for the NFPS (DSA) has been undertaken within the last three years and shared with the DMO; • Depending on the country and the data availability General (GG) or Central Government (CG) debt may be the relevant coverage for the DSA; 3. The DSA is updated when sizable new borrowing is programmed; • In the context of Low Income Countries, evidence of sizable new borrowing may be, for example, Eurobond insurance or a loan that is beyond the concessional financing limits; 4. The DSA is published. 57 Debt Management Performance Assessment Methodology Score Requirements by DPI 6.1. Provision of debt service forecasts: In addition to a baseline forecast for principal and interest payments: 1. The fiscal authorities must be provided with a sensitivity analysis of debt service forecasts B to factor in changes in interest and exchange rates. The minimum requirement for score C is met. 6.2. Monitoring Fiscal Risks in the NFPS: In addition: 1. The CG has published a Fiscal Risk Statement for the NFPS in the past 3 years. 6.3. Availability of key macro and fiscal variables and DSA: 1. The DSAs are undertaken at least once every two years. 6.1. Provision of debt service forecasts: 1. The authorities must also be provided with a scenario analysis that tests the impact on the debt servicing costs of a severe shock or worst-case scenario. 6.2. Monitoring Fiscal Risks in the NFPS: A 1. The CG annually publishes a Fiscal Risk Statement for the NFPS; 2. The CG publishes financial ratios of the main SOEs to quantitively assess their performance. 6.3. Availability of key macro and fiscal variables and DSA: 1. The DSAs must be undertaken annually. 6.1. The minimum requirement for score C is not met. D 6.2. The minimum requirement for score C is not met. 6.3. The minimum requirement for score C is not met. 58 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 6) Guidance notes when determining compliance with the requirements Examples of scenario analysis could be the impact of a prolonged and severe economic downturn, 6.1 A a major exogenous shock, or a scenario that reflects the country’s main vulnerabilities. The criteria for the qualitative evaluation include the following: (i) Listing the large NFPS entities that could expose the country to fiscal risks (e.g., SOEs completely owned by the CG, list of PPP projects); (ii) Overview of the financial statements of the large NFPS entities (e.g., large SOEs, 6.2 A PPP projects of a significant size) through the evolution of the nominal figures - and the main financial ratios (e.g., DEBT/EBITDA; EQUITY/DEBT) - of the last 2 years; (iii) Overview of the debt (guaranteed and non-guaranteed) of the (largest) NFPS entities. Examples of sensitivity analyses could be the impact of a 10 percent depreciation of the local 6.1 B currency or a two percentage point increase in interest rates. When assessing “reasonable reliability”, a table contrasting debt service forecasts and outturns 6.1 C should be provided. In the event of unexpected shocks, larger deviations can be accepted but should be duly justified. Depending on the country other indicators such as the General or Central Government Debt may 6.3 C be the relevant indicator for sustainability analysis. Key macro variables are actual outcomes and forecasts of real, monetary, and external variables. The assumption regarding key macro variables should be coordinated between the budget 6.3 C forecasting process and debt servicing forecasts (in particular with foreign exchange and inflation rates if there is foreign currency or inflation-indexed debt). Key fiscal variables include: (a) the medium-term fiscal policy objectives and strategy; (b) total central government expenses, revenues, and debt level; and (c) the medium-term plan (three 6.3 C or more years) for total expenses and revenues. The objective is to assess the fiscal path over the years. The DSA has a scope of 10–25 years, and includes a baseline trajectory for the NPSD based on the 6.3 C assumptions underlying the macroeconomic framework. It also analyzes how the materialization of various risks would affect the public debt trajectory. For Low Income Countries, an external bond issuance or a loan that is beyond the concessional 6.3 C financing limits. 59 Debt Management Performance Assessment Methodology Supporting documentation • A copy of information shared between the DMO and the fiscal policy or budget authorities • A copy of the most recent document detailing key fiscal variables (actual out- comes and forecasts), such as central government revenues, expenditures, primary balance, and central government direct and guaranteed debt and the analysis of debt sustainability that was shared with the debt management entities. Indicative questions to ask • Who is responsible for preparing forecasts of CG debt and debt service? What assumptions are used in preparing these forecasts, and who is responsible for setting the assumptions? Do the forecasts include sensitivity analyses of the baseline to interest and exchange rate changes? • What information on debt and other issues is shared between the DMO and the fiscal or budget authorities? How frequently is this information shared? • Does the government regularly prepare and update a document detailing key fiscal variables, actual outcomes and forecasts, (for example, revenues, expenditures, primary balance, and debt), does it undertake a DSA? Is this document or analysis published and widely distributed? Are these documents shared with the DMO? If so, how are they used by the DMO? • Does the CG obtain information about the debt and financial position of SOEs and SNG? • Does the CG prepare a fiscal risk statement? • Does the CG assess the performance of SOEs? • When was the DSA last undertaken? Did it cover domestic or external debt or both? What entities or staff members were involved in undertaking the DSA, and what were their respective roles and responsibilities? How was the output used? • Did the result of the DSA inform fiscal or budgetary and debt policies? 60 Debt Management Performance Assessment Methodology DPI-7 Coordination with Monetary Policy DPI 7.1. Separation between monetary policy and DM operations The rationale is to ensure the clarity of separation between monetary policy operations and DM transactions. Clarity and transparency regarding the objectives and accountabilities of monetary policy operations and DM transactions are important to ensure the integrity and accountability of each institution. This will help build credibility which is key for effective policy implementation and will help keep government financing costs low. Clarity and separation are particularly important when the central bank acts as an agent for the DMO in issuing government securities; the potential for misperceptions of clear separation of policies increases in this case.51 The central bank may use its own instruments to implement monetary policy, for example withdrawing/injecting liquidity from/into the system and affecting interest rate levels. In this case, separation of monetary policy and debt management is assessed by the clarity and transparency of the decision-making process for issuance of securities and by how transactions are initiated and communicated to the market. The minimum requirements (for the C score) are: 1. Separation of CB and DM policy instruments for monetary policy implementation. • This separation can be clearly evidenced when countries use different policy instruments, such as repurchase agreements for monetary policy and government securities for fiscal policy. • In the case that the same instrument is used, for example, T-bills issued for both fiscal and C • monetary policy purposes, the proceeds of the monetary policy T-bills should be sterilized, and the amounts clearly separated in the reporting and accounting. Separation requires that the decisions on the domestic issuance volume, pricing, tenor and calendar are made by the DMO. 2. Independent decision making. • Adequate policy separation: DM decisions are not perceived as influenced by insider information on interest-rate decisions at the CB, and the CB must aim to avoid perceptions of conflicts of interest in market operations. While for the C level it is acceptable to meet the minimum requirement based on a proven track record in respect to the decision-making process, this is not the case for the B level, where the institutional arrangement must be written down. 51. However, in the case of a crisis, an even higher degree of coordination and information sharing between the DM and CB is needed to ensure effective overall policy measures. 61 Debt Management Performance Assessment Methodology For score B: B 1. There needs to be a formal agency agreement between the DM and the CB to ensure a clear division of tasks and responsibilities. A The highest score A requires that: 1. The agreement between the DM and the CB is made public. During the assessment, it is important to meet with officials from the CB and to understand their perspectives on the level and effectiveness of coordination. The assessors should also meet with market participants to ascertain if they are informed as to whether the transactions in the domestic market have been made to meet monetary policy objectives or for DM purposes and if market participants perceive the separation to be adequate. In cases when there is no active monetary policy, e.g., due to currency board arrangements, the dimension should be rated N/A whether the central bank conducts DM operations or not. DPI 7.2. Coordination with the CB through regular information sharing on current and future debt transactions and central government cash flows The rationale is to ensure the coordination of DM with monetary policy implementation through information sharing on current and future cash flows on domestic and external debt/current and future, and on remaining government revenues and expenditures. To facilitate monetary policy implementation, the central government should regularly inform the CB about its current and expected debt transactions and remaining cash flows52. Other units with treasury functions within the MoF may also contribute to information sharing. Because of the size of these flows, the CB needs the information to assess the impact on the money supply and liquidity in the financial system. Examples of information exchanged between the DMO and the CB must be secured for the assessment; the frequency or regularity of this information sharing also needs to be made known. One example of information sharing is how the DMO informs the central bank about the central government’s current and future cash flows. As the information is critical for the planning of open market operations it is important that the information provided by the DMO on current and future debt transactions and cash flows is sufficiently detailed, of adequate quality and that it is delivered and updated in a timely fashion. For this indicator, the content assessed is the same for all levels. However, the frequency is verified by the criteria below. 52. Reflecting remaining revenues and expenditures. 62 Debt Management Performance Assessment Methodology C For the C score: 1. The information is shared on a monthly basis. B For the B score: 1. The information is shared on a weekly basis. A The highest score A requires that: 1. The information is shared on a daily basis. DPI 7.3. Limits of direct access to CB funding The rationale is to limit monetary financing of government deficits through the central government’s direct borrowing from the CB. In order to support the CB to achieve its monetary policy objectives, the central government should avoid direct borrowing from the central bank unless under exceptional circumstances53 and in all other cases should be legally restricted in both amount and tenor. Monetary financing of government deficits imposes undesirable constraints on monetary policy operations by increasing the money supply. Legislation should therefore be in place to safeguard the CB against opportunistic political pressure. In addition, if substantial amounts are borrowed from the central bank, less will be borrowed in the domestic market by issuance of government securities, which will have a detrimental effect on the domestic debt market development. Limits on government access to credit from the CB, defined in terms of outstanding debt or new borrowing, must be adhered to in order to qualify for a C score:54 1. Access to financing from the CB has a ceiling limit imposed by the legislation; C • Most countries establish a limit of up to 20% of government revenues 2. Access to financing from the CB has a maximum tenor imposed by legislation; • CB financing is not a continuous funding source for the government; • Most countries limit the tenor to up to 180 days55. 53. These circumstances relate to financial emergencies triggered by episodes of financial distress, market panics, and liquidity squeeze, among others. 54. Special bonds issued by governments for conversion of short-term central bank borrowing into medium- or long-term liabilities should be included in the calculation of legal limits. However, central bank purchases of government securities in the secondary market for monetary policy purposes should not be included in the calculation of such limits. 55. According to IMF (2012), most countries limit the amount to up to 20% of Government Revenues and limit the tenors to up to 180 days, though it varies across regions. 63 Debt Management Performance Assessment Methodology For the C level, there is no specific threshold for the ceiling or tenor. Nonetheless the legal limits have to be binding and CB lending cannot be continuously provided for the central government. For higher levels, there must be a formal ceiling for the tenors. B For the B score: 1. Access to financing from the CB has a maximum of three months. A For the A score: 1. Access to financing from the CB has a maximum of two weeks. 64 Debt Management Performance Assessment Methodology Table 7. Scoring: Coordination with Monetary Policy (DPI 7) Score Requirements by DPI 7.1. Separation between Monetary Policy and DM operations 1. Separation of CB and DM policy instruments for monetary policy implementation. • This separation can be clearly evidenced when countries use different policy instruments, such as repurchase agreements for monetary policy and government securities for fiscal policy; • In the case that the same instrument is used, for example, T-bills issued for both fiscal and monetary policy purposes, the proceeds of the monetary policy T-bills should be sterilized, and the amounts clearly separated in the reporting and accounting; • Separation requires that the decisions on the domestic issuance volume, pricing, tenor and calendar are made by the DMO. 2. Independent Decision Making: • Adequate policy separation: DM decisions are not perceived as influenced by insider information on interest-rate decisions at the CB, and the CB must aim to avoid perceptions of conflicts of interest in market operations. C 7.2. Coordination with the CB through regular information sharing on current and future debt transactions and the central government’s cash flows: 1. The information is shared on a monthly basis: • Current and future cash flows on domestic and external debt/current and future debt transactions; • Remaining government revenues and expenditures. 7.3. Limits to direct access of CB funding: 1. Access to financing from the CB has a ceiling limit imposed by the legislation; • Most countries establish a limit of up to 20% of government revenues. 2. Access to financing from the CB has a maximum tenor imposed by legislation; • CB financing is not a continuous funding source for the government • Most countries limit the tenor to up to 180 days. 65 Debt Management Performance Assessment Methodology Score Requirements by DPI 7.1. Separation between Monetary Policy and DM transactions: 1. There needs to be a formal agency agreement between the DM and the CB to ensure a clear division of tasks and responsibilities. B The minimum 7.2. Coordination with the CB through regular information sharing on current and future requirement for debt transactions and the central government’s cash flows: score C is met. In addition: 1. The information is shared on a weekly basis. 7.3. Limits to direct access of CB funding: 1. By formal regulation, access to financing from the CB has a maximum of three months. 7.1. Separation between Monetary Policy and DM transactions: 1. The agreement between the DM and the CB is made public. A 7.2. Coordination with the CB through regular information sharing on current and future The minimum requirement for debt transactions and the central government’s cash flows: score C is met. In addition: 1. The information is shared on a daily basis. 7.3. Limits to direct access of CB funding: 1. By formal regulation, access to financing from the CB has a maximum of two weeks. 7.1. The minimum requirement for score C is not met. D 7.2. The minimum requirement for score C is not met. 7.3. The minimum requirement for score C is not met. 66 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 7) Guidance notes when determining compliance with the requirements Access to financing from the CB is, by law, prohibited or limited to emergency situations in which 7.3 A other funding operations are not viable, and, when used, the tenor is limited to two weeks. This could be done either by MoU- Memorandum of Understanding or SLA- Service 7.1 B Level Agreements. If the CB does not undertake borrowing in the name of the CG, or has different policy instruments 7.1 C from the DM, this indicates that there is separation of monetary policy and DM transactions. If it uses T-bills there should be a public statement showing the purposes of this borrowing. The institutional component needs to be present in the legal and operational framework allowing 7.1 C both CB and MoF to issue securities to the public. The CB needs to forecast changes in the TSA balance. Examples of information sharing from 7.2 C the DMO include: current and future cash flows on domestic and external debt/current and future debt transactions. Although there is no maximum ceiling or tenor, the limits cannot be too loose and must be binding. 7.3 C According to IMF (2012), most countries in the world limit the amount to up to 20% of Government Revenues and limit the tenors to up to 180 days, although it varies by country. Supporting documentation • A copy of information shared between the DMO (or DM entities) and the CB • A copy of the CB Act to check the government’s access to CB resources • A copy of the agency agreement between the government and the CB to ascertain the CB’s role as agent acting on behalf of the government 67 Debt Management Performance Assessment Methodology Indicative questions to ask • What information is shared between the DMO and the CB? How frequently is this information exchanged? Is there a formal mechanism in place for sharing information? • Is the relationship between the central government and the CB clearly detailed in an agency agreement or agreements? Is this an officially approved agreement? Are the responsibilities of the CB as a government DM agent publicly disclosed? Has this been obeyed in the past? Does the CB hold government DM transactions separate from transactions for monetary policy purposes? If so, how does the CB do this, and what instruments does it use? What are the de facto and de jure positions? • Who is responsible for preparing cash flow forecasts? How frequently are these forecasts prepared, and what time period do they cover? • Does the government have an overdraft or a ways and means (W&M) facility with the CB? If so, • is there a ceiling imposed by legislation, and what is that ceiling? • does the legislation impose a tenor on the duration of this facility, and what is that tenor? • has the government used the facility, and if so, how often, for what amounts, and for what tenors? • when does the facility have to be reduced to a zero balance? • What happens at the end of the financial year – is it repaid or is it securitized? 68 Debt Management Performance Assessment Methodology 3.3. Borrowing and Related Financing Activities The government’s DMS and ABP are implemented by the DMO through borrowing and related financing activities -including Liability Management Operations (LMO)- in the market or from official, commercial, multilateral lenders. To perform this role effectively, the debt management unit needs people who understand and the range of potential sources available to the borrower, the operational and regulatory constraints that exist for these sources, and clear information regarding these issues. It also needs people who understand the instruments that are used by these sources and how they operate, this can vary significantly depending on whether they are marketable or not. DM therefore needs people with financial, operational and legal expertise. The latter because lawyers have the technical skills to understand the regulatory frameworks that are applicable to all potential sources of funds and to understand the documentation used in debt transactions with these potential sources. This legal information is usually advised by a third party and is useful to the DMO because it helps them determine the suitability of each instrument for its particular purpose; the information with negotiating and drafting approaches in specific transactions. Borrowing activities can be categorized as domestic borrowing; external borrowing; loan guarantees, on-lending, and derivatives. 69 Debt Management Performance Assessment Methodology Domestic borrowing focuses on the placement of securities in the local market and is significant beyond just financing the government. The market for government securities is often the starting point for broader capital market development and provides a pricing reference for other issuers. This highlights the need for the government to use market-based instruments and mechanisms in its domestic borrowing, as well as to provide transparency in its operations. To support an efficient market, participants should be provided with: advance notice of the government’s issuance volume plans; prompt notification of the results of operations (e.g., auctions); terms and conditions of instruments; rules and procedures for securities issuance; and the opportunity to consult with the DMO. External borrowing may be from official sources (multilateral or bilateral) or from international capital markets (which include securities and loans). In both cases, operations need to be carefully planned and have systematic processes in place to ensure the best outcomes for the government. This includes careful analysis of the terms and conditions offered by potential creditors. External borrowing is subject to laws in foreign jurisdictions, and governments should ensure that they protect their own position to the greatest degree possible. Loan guarantees represent an explicit contingent liability to government. Consequently, the process of granting them should comply with existing regulation and be based on a clear decision-making framework. The government needs a formal policy in place that provides a framework for issuing guarantees, including governance arrangements; requests to undertake credit risk assessments prior to issuing the guarantees, and monitoring this risk throughout the life of the guarantee. In more advanced settings, the government charges (risk-based) fees for granting them. Similar to loan guarantees, on-lent credit requires careful analysis from the central government as they are exposed to credit risk associated with the beneficiaries, who may be directly or indirectly servicing the original debt. The policy framework and operational processes should therefore be similar to that for guarantees. Some governments use derivatives as hedging instruments to reduce debt costs, or to transform the risk characteristics of the debt portfolio. Using derivatives entails market, credit, and significant operational risks, so a clear risk management framework and operational procedures need to be in place. A dedicated unit will be needed to monitor risk and to manage counterparty credit risk throughout the life of the transaction. 70 Debt Management Performance Assessment Methodology DPI-8 Domestic Borrowing DPI 8.1. The publication of a borrowing calendar for wholesale securities and publication of issuance results The rationale is to ensure that domestic securities’ issuance by the central government is conducted in a transparent and predictable manner. Governments can reduce their long-term domestic borrowing costs by being transparent and predictable in their securities issuance operations.56 By publishing borrowing plans in advance and acting consistently when issuing new securities, investors are able to plan their investments and bid with confidence in auctions. One element of transparency is publication of an Annual Borrowing Plan, see DPI 3.3. Transparency is improved if the government prepares the market for the issuance of wholesale instruments by publishing a borrowing calendar in advance (excluding T-bills issued for monetary policy purposes). To remain credible, the government needs to issue securities in accordance with the calendar, other than in extreme circumstances and accompanied by an explanation.57 At a minimum, the calendar should specify issue dates and instruments for the following month, be published at least one week ahead of the start of that month, and it should be followed. Transparency and fairness are also developed if the results of issuance are publicly disclosed to all market participants at the same time – as soon as possible to the close of the auction. The yield at which securities are issued provides important information about the supply and demand for government paper; it sets the reference for interest rates at the relevant maturities. In markets with little secondary market activity, such information has even more significance. The requirements for a C score are: 1. The government prepares a calendar for domestic wholesale securities issuance that: a. specifies the issue dates and instruments for the following month; b. is published at least one day before the start of that month; C c. is followed, other than in rare circumstance (see guidance), and any deviations are explained. 2. The results of issuance of domestic wholesale securities are published on the official website e.g., MoF or its agent (see guidance). Transparency is enhanced by providing full information on the indicative volumes of securities to be issued, as well as by lengthening the time covered by the online calendar. As short a time as possible between the close of an auction and announcing results is helpful for bidders as they will not know their position during this time.58 56. World Bank and IMF (2014) “Guidelines for Public Debt Management”, World Bank and IMF (2001) “Developing Government Bond Markets – A Handbook”; and World Bank and IMF (2020) “Guidance Note for Developing Government Local Currency Bond Markets”. 57. Deviation from the calendar could be a result of market turmoil or sudden operational challenges, such that there is insufficient demand or that clearing yields would be significantly out of line with the secondary market. Rules of thumb would be that market participants generally support the changes, and the government is not forced to incur excessive costs. 58. This creates a risk they are unable to manage and may cause them to bid less aggressively. 71 Debt Management Performance Assessment Methodology For a B score, the additional requirements are: 1. The issuance calendar specifies the indicative volumes of securities to be issued; B • For T-Bills used for cash management it is enough if only the dates and maturities are published. 2. The results of the securities issuance are published on the day of issuance to all participants at the same time. A For an A score: 1. The borrowing calendar for wholesale securities covers at least three months. DPI 8.2. Domestic market operations and clarity in rules and procedures The rationale is to ensure that CG domestic borrowing activities are transparent and conducted using market-based instruments and mechanisms. Written procedures should be prepared for all domestic borrowing operations and made public. The terms and conditions of the instruments issued should be made public and there will be regular interaction with the market participants. Domestic capital markets are important for securing stable funding sources for public and private sectors. In addition, well-developed domestic markets enhance the efficiency and stability of financial intermediation; provide a broader range of assets; and facilitate better risk management. These benefits will come about only if the government uses market-based instruments and mechanisms, and this is a requirement for a C score. A market-based mechanism involves competition among securities buyers, including securities where the interest rate is set based on a market-based rate (for example the policy or overnight rate). Auctions are the most common competitive mechanism by which the government receives bids, the price of the securities is determined by a multiple- price or a uniform-price basis. Syndication is common and the price is determined by negotiation with a group of investors, based on the demand for the security offered. Tap sales and private placements are also used unless priced far off the secondary market.59 A key test is that the authorities do not control or set the interest rates on government debt instruments, and that they are formed freely in the market. Excessive use of discretion to scale back or cancel auctions, or evidence that the clearing price/yield stays the same in auctions over time, may indicate that the process is not genuinely market-driven. The most common market-based instruments are bonds, notes, and bills. Borrowing through direct bank credits may also be market-based, if conducted through open procurement or other mechanisms that ensure a market interest rate on the credit. Debt issued to retail investors should be at market-based rates.60 To clearly understand the instruments in which they are investing, market participants should have easy access to the instruments’ terms and conditions. These include a description of the instrument, its form, calculation of settlement 59. For a full discussion of market-based issuance mechanisms, see World Bank and IMF (2001) “Developing Government Bond Markets – A Handbook”. 60. There are cases where the government issues retail instruments to achieve social protection objectives by offering higher yields on these instruments compared to wholesale instruments. However, the savings placed with these instruments are often not those of the most vulnerable sectors of the community but instead of those sufficiently prosperous to maintain substantial deposits. 72 Debt Management Performance Assessment Methodology prices (and yield rates), computation of interest payments and accrued interest, day count conventions, and eligible investors. The terms and conditions may be in a prospectus or an information memorandum. Investors also need information on how to purchase securities, this is provided in formal guidelines, often called an issuance guide.61 The guide should include all steps in the issuance process, for example, outlining who is eligible to bid62, announcement of the auction, bidding time period (opening time and closing time), processing of bids, approval of auction cut-off interest rate, announcement to successful bidders and the market, and settlement of the auction. In many countries there is a system of Primary Dealers (PDs). These are selected institutions that provide services to the government by distributing securities, they may also serve the secondary market. If PDs are used, the incentives, obligations, and eligibility criteria for becoming a dealer, must be well defined and disclosed. The requirements for a C score are: 1. The government uses market-based instruments and mechanisms to borrow in the domestic market, as defined above63; 2. The terms and conditions of all instruments are specified and available on official websites; 3. An issuance guide - for all types of domestic borrowing (e.g., auctions, syndication, taps, and C retail) is available on official websites64; 4. The staff responsible for domestic borrowing is able to articulate the steps required to borrow; 5. If a PD system exists, the incentives, obligations and eligibility criteria must be disclosed. An efficient and well-functioning domestic securities market is supported by dialogue with market participants on direction of the borrowing program as well as by measures to further develop the market. It helps the authorities understand the dynamics of market demand and the nature of any impediments to market functioning. Accordingly, market consultation is introduced at the higher scores. The additional requirements for a B score are: B 1. The DMO meets regularly with market participants (at least annually) to exchange views on borrowing plans and the domestic market; 2. There are internal procedures manuals reflecting up-to-date operational practices. • Procedures manuals should be approved by senior management. The highest score A requires there to be: A 1. An ongoing dialogue with market participants (regular conference calls or other high frequency contact); • There are at least two formal meetings per year with major market participants (inviting all PDs, if applicable). 61. Also known as operating procedures. In some cases this guidance may be included in an information memorandum or prospectus. Sometimes it will be in the regulations. 62. Directly or indirectly via intermediaries, e.g., Primary Dealers. 63. Note that staff responsible for executing transactions must be authorized to perform this role- see DPI 1.1. 64. Terms and conditions and the issuance guide need to be honored in practice. 73 Debt Management Performance Assessment Methodology Table 8. Scoring: Domestic Borrowing (DPI 8) Score Requirements by DPI 8.1. The publication of a borrowing calendar and issuance results: 1. The government prepares a calendar for domestic wholesale securities issuance that: a. specifies the issue dates and instruments for the following month; b. is published at least one day before the start of that month; c. is followed, other than in rare circumstance (see guidance), and any deviations are explained. 2. The results of issuance of domestic wholesale securities are published on the official website e.g., MoF or its agent (see guidance). C 8.2. Domestic market operations and clarity in rules and procedures: 1. The government uses market-based instruments and mechanisms to borrow in the domestic market; 2. The terms and conditions of all instruments are specified and available on official websites; 3. An issuance guide - for all types of domestic borrowing (e.g., auctions, syndication, taps, and retail) is available on official websites; 4. The staff responsible for domestic borrowing is able to articulate the steps required to borrow; 5. If a PD system exists, the incentives, obligations and eligibility criteria must be disclosed. 8.1. The publication of a borrowing calendar and issuance results: 1. The issuance calendar specifies the indicative volumes of securities to be issued; • For T-Bills used for cash management it is enough if only the dates and maturities are published. B 2. The results of securities issuance are published on the day of issuance to all participants at The minimum requirement for the same time. score C is met. In addition: 8.2. Domestic market operations and clarity in rules and procedures: 1. The DMO meets regularly with market participants (at least annually) to exchange views on borrowing plans and the domestic market; 2. There are internal procedures manuals reflecting up-to-date operational practices; • Procedures manuals should be approved by senior management. 74 Debt Management Performance Assessment Methodology Score Requirements by DPI 8.1. The publication of a borrowing calendar and issuance results: 1. The borrowing calendar for wholesale securities covers at least three months. A 8.2. Domestic market operations and clarity in rules and procedures: The minimum requirement for 1. An ongoing dialogue with market participants (regular conference calls or other high score B is met. In addition: frequency contact); • There are at least two formal meetings per year with major market participants (inviting all PDs, if applicable). DPI 8.1. The minimum requirement for score C is not met. D DPI 8.2. The minimum requirement for score C is not met. 75 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 8) Guidance notes when determining compliance with the requirements The indicative volumes can be expressed in various ways, e.g., a specific volume, a target range, 8.1 B a maximum, or a minimum. In the context of DeMPA, domestic borrowing refers to debt obligations issued/contracted in the 8.1 C local capital market. External debt refers to obligations denominated in foreign currency subjected to international capital market legislation. The wholesale debt market is characterized by large volumes to be traded either on primary or secondary markets. Institutional investors are the main players in that market. In contrast, the 8.1 C retail debt market requires small volumes to be traded allowing individual house investors to allocate their savings on public debt instruments. The calendar should be consistent with the ABP (Annual Borrowing Plan). Deviation from the calendar could be a result of extreme market turmoil or sudden operational challenges, such 8.1 C that there is insufficient demand or that clearing yields would be significantly out of line with the secondary market. A rule of thumb would be that market participants generally support the changes, and the government is not forced to incur excessive costs. Though the DeMPA doesn’t take account of when the results are published, advanced practice is to publish the key parameters within 1h of the auctions. The results must include (for each 8.1 C security): the volume of bids received; volume of securities issued; cut off rate, weighted average yield for issuance (or single price as appropriate); and range of successful yields. This is only a minimum requirement. Although not a requirement for the DeMPA, advanced countries should publish the breakdown 8.2 B between the total number of bids and accepted bids. 8.2 B Virtual meetings are acceptable. Market-based instruments: The main instruments are bonds, notes and bills. Direct bank credits may also be market-based, if conducted through open procurement or other mechanisms ensuring a market interest rate. Retail debt should be at market-based rates. 8.2 C A key test is that the authorities do not control interest rates on government debt instruments, i.e., they are formed freely in the market. Excessive use of discretion to scale back auctions, or evidence that the clearing price/yield stays the same in auctions over time, may indicate that the process is not genuinely market-driven. 76 Debt Management Performance Assessment Methodology Guidance notes when determining compliance with the requirements Market based mechanisms. The main mechanisms are auctions and syndication (tap and private placement are acceptable). However, the WB/IMF Guidance Note on the topic suggests that, 8.2 C at a minimum, 50% of the placements should be undertaken through auctions and syndication in aggregate. Terms and conditions of instruments need to include: description and form of the instrument, 8.2 C calculation of settlement prices from yields, calculation of interest payments and accrued interest, and day count conventions. The issuance guide needs to include all steps in the issuance process, e.g., for auctions this would include eligibility to bid, announcement of the auction, bidding time period (opening time 8.2 C and closing time), processing of bids, approval of auction cut-off interest rate, announcement to successful bidders and the market, and settlement of the auction. Supporting documentation • A copy of the information memorandum or prospectus for each instrument • A copy of the operating procedures for investors or participants in the primary market • A copy of the issuance program for T-bills and T-bonds announced by the DMO, the DM entity responsible for the domestic wholesale borrowing, or the central bank • Issuance Guide • A copy of the agenda of the most recent meeting with market participants • A copy of operating procedures for other domestic instruments such as direct back credit, if used • The regulation governing the PD system. 77 Debt Management Performance Assessment Methodology Indicative questions to ask • Which instruments are issued by the government in the domestic market, and how are they issued? • What is the share of each issuance mechanism in the annual issuance? (Auction, syndication, tap, private placement) • What is the share of the cancelled auctions? • When does the government announce the domestic borrowing plan, and what information is provided? How frequently is this information updated during the year? • What are the processes, institution/staff roles and responsibilities, and timetable for conducting auctions of T-bills and T-bonds with regard to: • announcement of the auction; • bidding time period (opening time and closing time); • processing of bids; • approval of auction cutoff; • announcement to successful bidders and the market; and • settlement of the auction? • What are the processes, institution/staff roles and responsibilities, and timetable for issuing T-bills and T-bonds on tap issue or syndication, if these methods are used? • How are retail instruments issued? What are the pricing rules? • Is there an information memorandum or prospectus for each government instrument? Is it published, or is an electronic copy available on the government or central bank website? What is the content of the information memorandum or prospectus? • Are there operating procedures or guidelines for the issuance of each government instrument? Are these published, or is an electronic copy available on the government or central bank website? What is the content of the operating procedures? • Is there a PD system in place? If so, what are the obligations and rights? • How often are meetings with market participants held? Who is invited, and what topics are discussed at these meetings? • How is the interest rate determined if direct bank credit is used? 78 Debt Management Performance Assessment Methodology DPI-9 External Borrowing DPI 9.1. Appropriate organizational arrangements and processes for external borrowing from all sources, includes financial analysis of terms and conditions The rationale is to ensure that external borrowing operations are undertaken in compliance with delegations and the DMS and ABP, that they are carefully planned, and subject to a thorough analysis of the expected terms and conditions from all potential creditors and markets. Organizational arrangements and processes For many developing countries, borrowing from foreign or external sources is primarily from multilateral and bilateral sources. Since the Global Financial Crisis (2008) many countries debuted in the sovereign debt bond market and accessed international commercial finance. Countries are eligible for funding on concessional or market-based interest rates, depending on their respective borrowing status. The primary tasks of the DMO (or the DM entity responsible for external borrowing) are: (a) to liaise with the government entity responsible for formulating the project, in cases where the loan is tied to a specific project; (b) to identify the creditor that can offer the most beneficial or cost-effective terms and conditions for the external borrowing; (c) to ensure that proposed borrowings (including terms and conditions) are consistent with the ABP and DMS; (d) to negotiate the terms and conditions of the loan with the creditor (including currency, maturity, interest rate, fees and conditions, and the use of collateral when applicable)65; (e) to finalize all loan documentation. There should be appropriate organizational arrangements to ensure that the negotiation and execution of external borrowing is undertaken by authorized officials, who are normally located in the front office. The front office (sometimes alongside with the middle office) provides financial analysis of terms and conditions, and the back office is responsible for confirming and recording loans and settling/making payments (see DPI 12). Over the last decade, an increasing number of developing countries have borrowed in the international capital markets. This activity is very different from official borrowing and the DMO should establish appropriate steps and processes. They can be summarized as: (a) to establish a team responsible for the issuance; (b) to select advisors and banks to execute the transaction; (c) to prepare bond documentation; (d) to communicate with investors and rating agencies; (e) to execute the transaction (price guidance, book-building, and allocation, in consultation with banks); and (f) to manage after-issuance processes (settlement, market monitoring)66. For a C score, the DMO only needs to follow a clear process for external borrowing that includes the steps outlined above, and the staff responsible for executing transactions need to be authorized to perform this role. In order to help ensure that processes are followed it is sound practice to have fully documented procedures, approved by the head of the DMO (or a higher level), needs to be updated. This is a requirement for a B score. At the highest level, an A score, the procedures need to have been updated within the last year. 65. For more guidance on collateralized transactions, see IMF-WB (2020), Collateralized Transactions: Key Considerations for Public Lenders and Borrowers, Washington D.C. 66. For a detailed discussion on the topic, see van der Wansem, Patrick B. G.; Jessen, Lars; Rivetti, Diego. 2019. Issuing International Bonds: A Guidance Note (English). MTI Discussion Paper; no. 13. Washington, D.C. : World Bank Group 79 Debt Management Performance Assessment Methodology Financial analysis A fundamental requirement in the external borrowing process is to ensure that all potential external creditors and markets (including international bond borrowing) are identified, by their respective financial terms and conditions offered by creditors and investors to the specific debtor. The DMO should actively approach creditors who offer the best terms and conditions. The terms and conditions of the loans need to be subject to financial analysis that goes beyond concessionality analysis. The aim is to obtain the lowest possible borrowing costs, including grants and technical assistance, within the guidelines of the ABP (in line with the DMS) in terms of currency, maturity, and fixed or floating rate composition. The financial analysis should include interest rates (including fees); currency, and concessionality of the loans; penalty fees and other charges; the disbursement and maturity profile; and impact on the existing debt service profile. For a C score, the DMO must assess the cost-effectiveness and terms from each potential creditor on an annual basis, as well as ensure that all external borrowing is consistent with the current strategy. The creditor analysis and the borrowing plan will be subject to changes during the course of the year as a result of changes in: creditor offerings, the country’s credit status, and the changes in the external borrowing requirement. By undertaking more frequent financial analysis, the DMO may be able to obtain more favorable terms for its borrowing. Accordingly, this is reflected in higher scores. The requirements for a C score are: 1. Organizational arrangements and processes: a. The staff responsible for the external borrowing is able to articulate (and follow) the steps C required to borrow from each creditor and market-based funding source.67 2. Financial analysis: a. Assessments of the most beneficial or cost-effective terms and conditions for external borrowing that potential creditors and markets can provide must be conducted annually. b. Prior to undertaking each external borrowing, its consistency with the ABP or DMS (if there is one) is checked. For a B score, the requirements are: 1. Organizational arrangements and processes: B a. There are updated documented procedures for all external borrowings, including from international capital markets. • The procedures should be approved by senior management and should detail the steps taken in all processes. 67. Note that the staff responsible for executing transactions is authorized to perform this role- see DPI 1.1. 80 Debt Management Performance Assessment Methodology 2. Financial Analysis a. Assessment of the most beneficial or cost-effective terms and conditions for external borrowing are updated as changes in the borrowing conditions or requirements become apparent during the year. For an A score, the requirements are: 1. Financial analysis: A a. DM staff monitors market conditions on a continuous basis; and b. Assessments of the most beneficial or cost-effective terms and conditions for external borrowing, that potential creditors and markets can provide are undertaken before the start of each loan negotiation. DPI 9.2. Availability and degree of involvement of legal advisers before signing the loan contract Debt managers need to receive appropriate legal advice and ensure that the transactions they undertake are backed by sound legal documentation. Several issues deserve particular attention, including: (a) the definition of indebtedness; (b) the design of provisions of debt instruments, such as clear definitions of default events, especially if such events extend beyond payment defaults on the relevant obligations68; (c) the breadth of a negative pledge clause; (d) the use of pari passu clauses; (e) inclusion of collective action clauses; (f) the scope of the waiver of sovereign immunity; (g) the existence of confidentiality clauses preventing the disclosure of debt instruments; and (h) the existence of clauses preventing coordinated debt restructuring. Disclosure obligations in the relevant markets must be analyzed in detail as they can vary from one market to another. Evidence of consultation with legal advisors, for example, any recommendations on changes to clauses submitted at various stages of the negotiation process, should be available. The degree of involvement of legal advisors gradually increases with scores increase during the negotiation phase. For a score C: C 1. Legal advisers must approve all clauses of the legal agreements before concluding the negotiation process. B For a B score: 1. Legal advisors are consulted during the negotiation process. For an A score, the requirements are: A 1. Legal advisers are consulted from the first stage of the negotiating process to the conclusion of the legal agreements related to the borrowing. 68. For example, cross-defaults and cross-accelerations 81 Debt Management Performance Assessment Methodology Table 9. Scoring: External Borrowing (DPI 9) Score Requirements by DPI 9.1. Organizational arrangements and processes for external borrowing; financial analysis of terms and conditions. 1. Organizational arrangements and processes: a. The staff responsible for external borrowing is able to articulate (and follow) the steps required to borrow from each creditor and market-based funding source; 2. Financial analysis: C a. Assessments of the most beneficial or cost-effective terms and conditions for external borrowing that potential creditors and markets can provide must be conducted annually. b. Prior to undertaking each external borrowing, its consistency with the ABP or the DMS (if there is one) is checked. 9.2. Involvement of legal advisers: 1. Legal advisers must approve all clauses of the legal agreements before concluding the negotiation process. 9.1. Organizational arrangements and processes for external borrowing; financial analysis of terms and conditions 1. Organizational arrangements and processes: a. There are updated documented procedures for all external borrowings, including from international capital markets. • The procedures should be approved by senior management and should detail the B The minimum steps taken in all processes. requirement for score C is met. In addition: 2. Financial analysis: a. Assessment of the most beneficial or cost-effective terms and conditions for external borrowing are updated as changes in the borrowing conditions or requirements become apparent during the year. 9.2. Involvement of legal advisers: 1. Legal advisers are consulted during the negotiating process. 82 Debt Management Performance Assessment Methodology Score Requirements by DPI 9.1. Organizational arrangements and processes for external borrowing; financial analysis of terms and conditions 1. Financial analysis: A a. DM staff monitors market conditions on a continuous basis; and The minimum b. Assessments of the most beneficial or cost-effective terms and conditions for external requirement for score B is met. borrowing, that potential creditors and markets can provide are undertaken before the In addition: start of each loan negotiation. 9.2. Involvement of legal advisers: 1. Legal advisers are consulted from the first stage of the negotiating process to the conclusion of the legal agreements related to the borrowing. 9.1. The minimum requirement for score C is not met. D 9.2. The minimum requirement for score C is not met. 83 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 9) Guidance notes when determining compliance with the requirements For borrowing from official sources, the steps should include: a) liaise with ministries and project entities as appropriate; (b) assess the most beneficial terms and conditions; (c) negotiate the 9.1 C terms and conditions of the loan with the creditor (including currency, maturity, interest rate, and fees); (d) finalize all loan documentation; For issuance in the international capital markets, the steps should include: (a) establish a team responsible for the issuance; (b) select advisors and banks to execute the transaction; 9.1 C (c) prepare bond documentation; (d) communicate with investors; (e) execute the transaction (price guidance, book-building, and allocation, in consultation with banks); and (f) manage after- issuance processes (settlement, market monitoring). Financial analysis: includes comparison of different options regarding the level of interest rates, currency, fees, other charges, disbursement profile and impact on the maturity profile. The loan/ bond should be consistent with the ABP. There needs to be an assessment of the most cost- efficient borrowing conditions from creditors and markets in respect to the currency, tenor and 9.1 C interest rates that are offered. Guidance: This goes beyond just checking concessionality levels. The assessment should contain analysis of the all-in cost from each source, including all fees and other costs. Apply expert judgment on quality. The frequency will depend on the level of market activity and market-based operations in any 9.1 A particular setting. Advanced practitioners monitor market conditions daily. Guidance: seek evidence of legal advisors’ approval, e.g., internal memoranda or email. Legal 9.2 C advisors can be part of the DMO, they can be MoF lawyers, or come from the Attorney General Office’s, they may also be legal experts that are hired for specific transactions. Legal advisors typically verify if the agreements: i) have a clear definition of indebtedness, default 9.2 C events and related clauses; ii) describe the scope of the waiver of sovereign immunity; and how much these vary across debt contracts. 84 Debt Management Performance Assessment Methodology Supporting documentation • A copy of the information memorandum or prospectus for each instrument • A copy of the operating procedures for investors or participants in the primary market • A copy of the issuance program for T-bills and T-bonds announced by the DMO, the DM entity responsible for the domestic wholesale borrowing, or the central bank • Issuance Guide • A copy of the agenda of the most recent meeting with market participants • A copy of operating procedures for other domestic instruments such as direct back credit, if used • The regulation governing the PD system. Indicative questions to ask • Which instruments are issued by the government in the external markets, and which issuance mechanisms are used? • What is the basis for choosing to issue or to borrow from multilateral, bilateral, and commercial sources? How are the terms and conditions set for each loan, and what scope is there to negotiate these terms and conditions? • What is the decision-making and approval process to contract or issue each external debt instrument? • What are the processes, institution/staff roles and responsibilities, and time- table for contracting or issuing each external debt instrument? • When are legal advisers involved in contracting new loans? What is their involvement and their role? • Are technical evaluations carried out for new borrowing proposals to analyze their all-in cost as well as their effect on the currency composition, interest rate structure, and the maturity profile of the overall loan portfolio? • Are there documented procedures for borrowing in foreign markets? What is the content of the documented procedures? • Does a borrowing plan exist? How often is it revised? 85 Debt Management Performance Assessment Methodology DPI-10 Loan Guarantees, On-Lending, and Derivatives Governments often support public investment programs, regional business developments, as well as the business needs of state-owned enterprises through loan guarantees, direct government lending, or on-lending of borrowed funds. These instruments may provide an adequate supply of credit for the beneficiary, as defined by the respective government policy. DPI 10.1. Issuance of central government loan guarantees The rationale is to ensure that the central government has clear policies for the issuance of loan guarantees. The authorities need to abide by a formalized guarantee framework, see DPI 1.1- on DPI 10, they also need to focus on the process of issuing and monitoring guarantees. Loan guarantees represent potential financial claims against the government that have not yet materialized but could trigger a financial obligation under certain circumstances (contingent liability). To cover this risk, the government should charge a guarantee fee based on a thorough credit risk assessment. The establishment of a contingency fund (to protect the budget in the case a guarantee is called) or the use of collateral is desirable if the government wants to be protected against such risks. Recovery mechanisms may assume different forms such as cash deposits, notional accounts, or budget protected appropriations. The forms themselves are not material to the DeMPA scores. For score C, the requirements are: 1. There is clarity on the decision-making process; a. Staff can articulate the process and follow the existing policy to issue guarantees. This includes verifying the beneficiary’s request to issue a guarantee (e.g., purpose/ eligibility), the supply of relevant information for the DM entity analysis, and the final decision to issue a guarantee; C • To obtain evidence, the assessors need to judge whether the process is clear and they need to obtain guidance on the required steps. For the higher scores, there are procedures to help protect the government against credit risk from the beneficiaries before the decision has been made to issue the guarantee. There is also a requirement to monitor the credit risk during the life of the guarantee. Credit risk assessments of the beneficiaries are helpful for the decision-making process before the guarantees are issued and for monitoring throughout the operation’s tenor. Typical recovery mechanisms are collecting fees, requesting collateral or defining budget appropriations/contingent funds to cover the losses in case of default. 86 Debt Management Performance Assessment Methodology The criteria for the B score are: B 1. The staff must undertake a credit risk assessment on the beneficiary before the guarantee is issued; 2. There are internal procedures manuals reflecting up-to-date operational practices.69 • The procedures should be approved by senior management. For the highest level (score A) the guarantor needs to: A 1. Charge a fee or request collateral from the beneficiary, allocate budget appropriation, or provide a contingency fund to cover credit risk on the beneficiary before the guarantee is issued; 2. Evaluate and monitor the credit risk during the life of a guarantee. DPI 10.2. On-Lending Operations Governments often support public investment programs, regional business developments, as well as the business needs of state-owned enterprises through direct government lending or on-lending of borrowed funds. Such on-lending instruments may provide an adequate supply of credit for the beneficiary, as defined by the respective government policy. On-lending is often a substitute for guaranteeing loans that are raised directly by the beneficiary. The government is expected to price on-lent credit according to the credit risk of the beneficiary and the prevailing financing conditions at the time of the operation. For a score C, the requirements are: 1. There is clarity on the decision-making process; a. Staff can articulate the process and follow the existing policy to undertake on-lending. This includes verifying the beneficiary’s request for on-lent credit, the supply of relevant information C for the DMO analysis, and the final decision to approve the operation; • Assessors need to judge whether the process is clear and obtain guidance on the required steps. Higher levels require the operations to abide by a formalized on-lending framework describing the government’s general policy on the use of this instrument and the actions taken by the government to mitigate credit risk. 69. In some countries, the principal guarantee entity may be given the responsibility to assess the credit risk. More often, the DMO keeps records of all outstanding loan guarantees in the debt recording and management system (see DPI 12). 87 Debt Management Performance Assessment Methodology The criteria for the B score are: 1. The staff must undertake a credit risk assessment on the beneficiary before the on-lending is performed70; 2. There are procedures manuals reflecting up-to-date operational practices71. • The procedures should be approved by senior management. B When the government borrows (liability) from an original creditor and on-lends (asset) to a beneficiary, its balance sheet is netted out as the government is simultaneously converted into a debtor and a creditor for that specific operation. This situation is stable as long as the beneficiary of the on-lent credit is performing well. Therefore, the government needs to regularly monitor the on-lent credit (asset) to safeguard its balance sheet. Such monitoring should include regular assessments of the repayment capacity of the loan beneficiary (credit risk), risks of misguided spending, or an unexpected economic downturn. Analogous to guarantees, the assessment can be used to develop effective recovery mechanisms in case of default, such as defining spreads over the interest rate, requesting collateral or defining budget appropriations/contingent funds to cover the losses in case of default. For the highest level (score A) the lender needs to: A 1. Set the interest rate (or spread) for the loan, request collateral from the beneficiary, allocate budget appropriation, or provide a contingency fund to cover credit risk before the on-lending is undertaken; 2. Evaluate and monitor the credit risk during the life of an on-lent credit. DPI 10.3. The use of derivatives The rationale is to ensure that the government has the capability to handle financial derivatives and that documented procedures are in place. For the higher scores, there is a separate risk monitoring and compliance unit to monitor all risks connected with the derivatives and there are rules in place for managing the counterparty exposure risk. Derivatives used as hedging instruments (for example, swaps, caps, and futures) normally entail market and credit risks, as well as substantial operational risks. These instruments must be transacted within a clear risk management framework, they need to be backed by sound legal documentation, and systems need to be in place for proper recording and accounting of these transactions. 70. It is common for the principal guarantee entity to be given the responsibility to assess the credit risk and keep records of all outstanding on-lending. This is normally done in the debt recording and management system (see DPI 12). 71. Definitions of on-lending framework; credit risk assessment and procedures manual are analogous to the ones used for guarantees. See guidance on DPI 10.1. 88 Debt Management Performance Assessment Methodology At a minimum (score C), the documentation of derivative operations must include: C 1. Derivatives’ purpose, following official guidelines; 2. Clarity on the decision-making process; this process outlines the steps to be followed by the staff. 3. Legal advice is provided from the first stage of the negotiating process to conclusion of the legal agreements with each counterparty. For the B score: B 1. There need to be operational procedures that define rules requiring all risks connected with derivatives be monitored by a dedicated unit responsible for risk monitoring and compliance. At the highest level (score A): A 1. The DMO quantifies and manages counterparty credit risk throughout the life of the transaction; 2. The DMO publishes derivative purposes, exposures, and counterparties. 89 Debt Management Performance Assessment Methodology Table 10. Scoring: Loan Guarantees, On-Lending, Derivatives (DPI 10) Score Requirements by DPI 10.1. Issuance of Loan Guarantees: 1. There is clarity on the decision-making process; a. Staff can articulate the process and follow the existing policy to issue guarantees. This includes verifying the beneficiary’s request to issue a guarantee (e.g., purpose/eligibility), the supply of relevant information for the DM entity analysis, and the final decision to issue a guarantee; • To obtain evidence, assessors need to judge whether the process is clear and they need to obtain guidance on the required steps. 10.2 On-Lending Operations: 1. There is clarity on the decision-making process: C a. Staff can articulate the process and follow the existing policy to undertake on-lending. This includes verifying the beneficiary’s request for on-lent credit, the supply of relevant information for the DMO analysis, and the final decision to approve the operation; • Assessors need to judge whether the process is clear and obtain guidance on the required steps. 10.3. The use of Derivatives: The documentation of derivative operations must include: 1. Derivatives’ purpose, following official guidelines; 2. Clarity on the decision-making process; This process outlines the steps to be followed by the staff. 3. Legal advice is provided from the first stage of the negotiating process to conclusion of the legal agreements with each counterparty. 10.1. Issuance of Loan Guarantees: 1. Staff must undertake a credit risk assessment on the beneficiary before the guarantee is issued; B 2. There are internal procedures manuals approved by senior management reflecting up-to- The minimum requirement for date operational practices. score C is met. In addition: 10.2. On-Lending Operations: 1. The staff must undertake a credit risk assessment on the beneficiary before the on-lending is performed;72 72. It is common for the principal guarantee entity to be given the responsibility for assessing the credit risk and keeping records of all outstanding on-lending. This is normally done in the debt recording and management system (see DPI 12). 90 Debt Management Performance Assessment Methodology Score Requirements by DPI 2. There are procedures manuals reflecting up-to-date operational practices; • The procedures should be approved by senior management. 10.3. The use of Derivatives: 1. There need to be operational procedures that define rules requiring all risks connected with derivatives be monitored by a dedicated unit responsible for risk monitoring and compliance. 10.1. Issuance of Loan Guarantees: 1. Charge a fee or request collateral from the beneficiary, allocate budget appropriation or provide a contingency fund to cover credit risk on the beneficiary before the guarantee is issued; 2. Evaluate and monitor the credit risk during the life of a guarantee. 10.2. On-Lending Operations: A The requirements 1. Set the interest rate (or spread) for the loan, request collateral from the beneficiary, allocate for score B are met. budget appropriation, or provide a contingency fund to cover credit risk before the on-lending In addition: is undertaken; 2. Evaluate and monitor the credit risk during the life of an on-lent credit. 10.3. The use of Derivatives: 1. The DMO quantifies and manages counterparty credit risk throughout the life of the transaction; 2. The DMO publishes derivative purposes, exposures and counterparties. 10.1. The minimum requirement for score C is not met. D 10.2. The minimum requirement for score C is not met. 10.3. The minimum requirement for score C is not met. 91 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 10) Guidance notes when determining compliance with the requirements Fees, collaterals, budget appropriation, contingency funds or any other recovery schemes are actions intended to protect the government balance sheet from default from the beneficiaries of 10.1 A guarantees and on-lent credit. As such, they should not be symbolic, they must also be large and enough to cover any losses (partially or fully) that the government may incur. The allocation 10.2 A of funds can be cash-based or set in notional terms, as long as they can be effectively used when needed. Guarantees framework: A set of rules and procedures (primary or secondary legislation) comprising: (i) sound governance arrangements, including the legal framework and institutional setup, where guarantees are defined; the purpose of the guarantees is described; and the entities or sectors to benefit from the guarantees are specified; (ii) institutional and technical 10.1 C setup to evaluate the contingent liabilities from guarantees; (iii) tools to manage and monitor the CLs, such as setting limits on guarantees; deciding on new guarantees by means of guidelines; charging guarantees fees; properly recording and reporting guarantees; and arrangements to pay when necessary. Such analysis seeks answers to the following: Does the credit risk assessment show an 10.1 B understanding of the business and the drivers of credit risk? Does the assessment provide a and qualitative or quantitative analysis of credit risk? Does the analysis provide decision-makers with 10.2 B clear advice on situations when credit losses could occur? The procedures manuals should provide details of how the credit risk should be assessed, together with measures to recover the loss and minimize its budget effects. 10.1 B and The procedures also reinforce: (i) the purpose of borrowing; (ii) the decision making-process; 10.2 B (iii) rules for database entry (and accounting); (iv) governance, as it must be approved by the management. For the DeMPA, the guarantees issued are attached to a loan. A guarantee normally has a contract between the creditor and the beneficiary (debtor); a contract between the creditor and 10.1 C the government (guarantor); and if applicable, a contract between the debtor and the guarantor binding on recovery schemes. The process issuing guarantees must observe the existing written regulation that guides the 10.1 C operations. The objective is to ensure that the specific transaction folds into the existing guidance and avoids guarantees being issued on an ad hoc basis . Assessors need to judge how clear the process is, they need to get some guidance on steps that 10.1 C are required. 92 Debt Management Performance Assessment Methodology Guidance notes when determining compliance with the requirements Embedded options in certain loan agreements are not considered derivative transactions in the DeMPA tool. These embedded options may include options to change a floating interest rate to 10.3 C a fixed interest rate, to cap a floating interest rate, to change the original borrowing currency to another currency, or to prepay a loan before the final maturity date. Supporting documentation • Formal policy used to issue guarantees or undertake on-lending • Operational procedures for issuing loan guarantees including the method for calculating guarantee fees, the method for monitoring risks related to guarantees, and guidelines to analyze and potentially quantify risks related to guarantees • Operational guidelines for government on-lending, including guidance for controlling for credit risk • Risk management framework, policies and procedures, and master derivatives agreement for transacting and managing financial derivatives Indicative questions to ask • Does the government provide loan guarantees/on-lending? If so, who is responsible for approving and signing loan guarantees/on-lent funds? Who is responsible for assessing the credit risks before the approval of any loan guarantees/ on-lending? • Which risk mitigation tools does the government apply (for example, guarantee fees, guarantee limits, spreads on on-lent loans, reporting, budget allocations, contingency accounts, covenants, and so on)? • Who is responsible for monitoring the risk related to loan guarantees/on-lent credit, particularly credit risk? • Does the government charge a guarantee fee or a spread over on-lent interest rate loans? How is this fee/ spread calculated? • Does the government allow for risks in the budget? If so, are these budget allocations transferred to a contingency account (cash or notional)? • Does the government undertake derivative transactions? If so, who is responsible for negotiating, approving, and undertaking derivative transactions? Who is responsible for assessing and monitoring the risk of these transactions? • Are there documented procedures for the use of derivatives? What is the content of the documented procedures? • At what point are legal advisers involved in the negotiating process of concluding the legal agreements with the derivatives counterparty? What is their involvement and role, and how much value or experience do they provide? • Are limits imposed on counterparty exposure risks? How are the limits set? 93 Debt Management Performance Assessment Methodology 3.4. Cash Flow Forecasting and Cash Balance Management Government receipts and expenditure rarely match, and the timing and size of flows (revenues and expenditures) can be difficult to predict on a daily basis. This means that cash management is an important task for the debt manager, working with the cash manager, to ensure that there are always sufficient funds to meet the government’s financial obligations, and that cash surpluses are managed in a safe and cost-effective manner. Government debt service payments are predictable, but redemptions of large benchmark bonds require special attention from both cash and debt managers, e.g., by building up cash well in advance to manage roll-over risk. In many LICs the budget is not always credible. Revenues are often overestimated while important expenditures are underestimated. At the same time, government borrowing is not used for accommodating the revenue shortfalls or the increased expenditures. Instead, the expenditures are not fully executed relative to the budget (cash rationing). As such, the cash management unit (and committee) end up focusing on payment prioritization, thus, accumulating arrears while the government seldom issues short-term securities to face cash mismatches, and the cash balances are often small/non-existent. 94 Debt Management Performance Assessment Methodology Thus, debt and cash management functions must coordinate closely in both advanced and less advanced settings. Debt managers require reasonably reliable and timely forecasts of the aggregate level of cash balances in government bank accounts to facilitate borrowing plans. In countries with effective cash management, short-term securities are issued on the basis of a cash forecast extending some months ahead, to help ensure that the balances remain above a designated minimum. At the same time, all cash should be invested at market rates to reduce the cost of carry; during periods when cash balances are temporarily higher than a defined liquidity buffer. This may mean investing in a wider range of short-term assets, which in turn requires governments to have appropriate investment policies in place. In more advanced settings, both cash flow forecasting and cash balance management have greater granularity – daily in the best performing examples. In such cases, a high level of accuracy is expected for forecasts and maintenance of cash balance targets.73 73. See Cangoz, Mehmet Coskun; Puccini Secunho,Leandro.2020. 95 Debt Management Performance Assessment Methodology DPI-11 Cash Flow Forecasting and Cash Balance Management DPI 11.1. Effectiveness of forecasting the aggregate level of cash balances in government bank accounts The rationale is to ensure that reasonably reliable forecasts of the central government cash balance for the period ahead are produced and available to the DMO (or principal DM entity). The DMO requires information on current and future end-of-the-day aggregate levels of overnight cash balances to plan its borrowing program, particularly the issuance of short-term instruments. It also needs the information to ensure that the cash balance corresponds to the level/range set by government policy. To this end, cash flow estimates for the near future will need to have a more granular breakdown (and more frequent updates) than those for the medium to long-term. It is a common procedure for government line ministries (or the equivalent) to prepare monthly profiles74 of the budget provision; these are used to allocate funds or provide expenditure warrants on a monthly or quarterly basis, as a part of the budget programing. Associated with the profiles may be a monthly cash plan, which is the planned pattern covering flows of all receipts, expenditures, and financing. The cash plan and the implied availability of cash, during and at the end of the year, help monitor the consistency of the budget and its financing plans. Figure 4. Schematic Representation of Budget Execution and Financing Parliamentary Authority THE OBJECTIVE Release of Budget Budget executed Budget Profile spending preparation in line with Plan authority Medium-Term Cash Plan TSA Balance as Fiscal (periodically updated) planned Framework Medium-Term Debt Annual Issuance Debt portfolio in Management Strategy Borrowing Plan Calendar line with MTDS (Parliamentary Endorsement) The cash plan should be updated throughout the year as circumstances change, but it may be constrained at any time to the currently approved budget targets. These profiles and plans are a good starting point for the forecast, but do not always consider the timing of expenditures and collection of revenues into the government bank account(s), which should be the bottom line of cash flow forecasts. Profiles and in-year updates may also be constrained to the approved budget; the forecast on the other hand has to identify what will happen, not what should happen, and should be an 74. The budget profile is the agreed pattern of expenditure across the year of the approved annual budget. It may be the basis for the release of spending authority; but in any event will be used to monitor budget execution. 96 Debt Management Performance Assessment Methodology unbiased and unconstrained best estimate. The two series (cash plan and forecast) will often diverge as the budget year unfolds as Figure 4 and Figure 5 illustrate. Since legal budget limits and estimates are usually defined for the fiscal year, monthly cash plans should always be available until the end of the residual fiscal year. However, given the constraints to produce realistic and sufficiently detailed estimates of actual cash flows for the full year, cash flow forecasts can be focused on a shorter, 3-month horizon; but they should be rolled forward regularly, at least monthly. The forecasts need to be broken down by month and be available at least one week before the start of the 3-month period. These forecasts cannot be constrained by any approved budget, and also need to be available in the absence of an approved budget. The forecast will need to be extended into the next year as the year progresses, even if the legislature has not yet approved the budget. It could be based on the current draft budget or past budgets. Forecasters will need to develop reliable contacts in the major line ministries and revenue authorities at the operational level to be able to produce good quality forecasts. These contacts will be the first to hear of changes in trends or unexpected flows. They need to provide their own unbiased forecast flows in the period immediately ahead, and may also need to provide information about the timing of large flows. Real time intelligence on what is happening is relevant to the forecasting process as judgment is needed to see whether any divergence from the expected profile is likely to be sustained or reversed. Besides an adequate time-horizon, the forecast’s time granularity is crucial: end-month estimates of cash balances may give little idea of the likely need for cash on specific days or weeks during the month. Estimates will need to be broken down on a monthly basis and also on a weekly, and in due course daily basis. Moreover, the estimates need to be updated frequently. Sound practice also requires analysis of forecast performance. This can be done by identifying the sources of forecast errors and changes in the TSA balance.75 There are two reasons for this: planning short-term responses to forecast deviations; and learning lessons to apply in future forecasts. Figure 5. Schematic Representation of Cash Management Budget outturn to date Line Ministries, New spending Data on Commitments, Revenue agencies, authority THE OBJECTIVE invoice queues, ETC Regional offices Invoicing delays Cash Plan, TSA Objective Cash Flow Cash Coordination TSA Target or latest spending [Always>0] Forecast Committee or similar Cash Buffer authority [Within a range] Updated issuance plans TSA: current Adjusted issuance, [Depending on & serving projections balance and Investment of active or passive target surplus cash cash management] 75. This refers to the case where there are lags in the reconciliation of accounts within the TSA, which can distort the estimates. 97 Debt Management Performance Assessment Methodology The minimum requirements (for the C score) are: 1. A monthly cash plan of the approved budget is available for the DMO for the budget year, this covers expenditure, revenue and financing; is updated during the year in line with any budget revision or more frequently if necessary. 2. A rolling forecast of cash flows is available for each month extending at least three months ahead. The forecast must also be shared with debt managers: a. Forecasts must be shared (directly or via an institutional mechanism such as a cash coordinating committee). The information should be taken into account when developing the borrowing plan for the period ahead.76 3. There are processes in place to measure and improve forecast performance, which could be C evidenced by the following: • Forecasts are compared against outturns; • Deviations are used when developing policy (in responding to forecasts and in improving the forecasting process); • Forecast errors should be reducing over time; • Forecasts of future cash flows are obtained from others in the Ministry of Finance, and from line ministries, revenue authorities and other agencies, covering at least 80 percent of expenditures and revenues.77 Note that the evidence above do not constitute strict requirements. Instead, they provide guidance for the assessment. Scores B and A also focus on cash flow forecast granularity and frequency of updates, with increasingly stronger requirements. For score B: B 1. Cash flow forecasts for the coming month are broken down on a weekly basis for at least one month ahead. Forecasts are updated monthly. The highest-level (score A) is achieved if: A 1. Cash flow projections are broken down by week for at least three months ahead, and by day for one month ahead; forecasts for the next three months need to be updated at least weekly. 76. Although this is not a requirement for this indicator, the use of forecasts is captured in DPI 3.3. 77. Debt interest will usually come from elsewhere in the MoF/DMO and may be substantial; in some countries, salaries are managed centrally; information on dividends from SOEs will often be available from the MoF. 98 Debt Management Performance Assessment Methodology DPI 11.2. Effectiveness of cash balance and liquidity management The rationale is to ensure that the government has a positive cash balance, and that its balances, including any short- term investment of temporary surplus cash, are remunerated at a relevant market rate. The government needs to avoid going into overdraft in its account at the central bank, other than as a short-term safety net, which must be well defined (see DPI 7.3). Some governments may have access to overdraft facilities or credit lines provided by commercial banks, but these are likely to be more costly than issuing Treasury bills. In order to avoid the need for overdrafts, cash managers and debt managers need to coordinate on the timing and magnitude of borrowing, particularly when issuing short-dated securities. Precautionary cash balances, or a “buffer” are needed to avoid overdrafts. The size of the buffer depends on a number of variables, but all things equal, the poorer the quality of cash forecasts, the larger the buffer needs to be78. Maintaining positive cash balances usually poses a cost to government, as the rate of interest earned is generally less than the cost of borrowing at longer maturities.79 Some liquidity buffer is required to ensure that cash is available to meet commitments; however, the government needs to earn a fair, or market, rate on its cash balances. This reduces the cost of carry and provides the right economic signals to cash managers for managing their cash balances. Accordingly, for a C score, government cash balances need to earn a market rate of return. Many governments maintain their primary bank account at the central bank (i.e., the TSA), in which case the market rate may be the official policy or overnight rate, or its equivalent.80 The ability of the government to access financing sources is also an important consideration, and past experiences of market closures would be one input, i.e., the period of time that a buffer may need to cover without market access. All governments should develop cash or liquidity management policies that define a cash balance target, or buffer, that provides sufficient protection against periods of market instability, cash flow forecasting errors, and volatility in expenditure and revenues (a formally-specified buffer is not a requirement for the C level). In some countries, the policy is defined dynamically, e.g., the cash buffer is set at a level that covers net cash flows for the next three months without the need for borrowing. On the other hand, very high levels of cash could lead to an unnecessarily high cost of carry; in such cases some countries aim to invest temporary surplus cash above the buffer or set an upper bound on the targeted level of cash to create a target range. This policy also has the benefit of supporting monetary policy: reducing the volatility of the government’s cash balance at the central bank also reduces (other things equal) the volatility of its mirror image: banking sector liquidity. Countries that have formal cash balance targets are likely to be investing temporary surplus liquidity in a range of instruments, not just at the central bank. These include commercial bank deposits (ideally collateralized), repos, and liquid securities.81 78. The size of the cash balance may also depend on the instruments that managers are able to access. Advanced practice usually implies using repos/reverse repos with banks. 79. This is oftern referred to as cost of carry. 80. Judgment may need to be applied as to whether the rate provided by the central bank is “market-based”. The objective is to ensure that opportunity costs are factored in when investing cash balances. See guidance. 81. The emphasis here is on a temporary cash surplus, i.e., cash that will be needed for cash management purposes for a maximum of 3 or 6 months. A structural surplus, i.e., cash that is likely to be surplus over a longer period should be managed separately (e.g., as a stabilisation or sovereign wealth fund), with its own objectives, governance and structure. If temporary surplus cash is left in the central bank as a term deposit, it should receive an appropriate market interest rate, which is likely to be higher than that paid on the TSA balance. 99 Debt Management Performance Assessment Methodology An appropriate investment policy is required for this, the main elements of which are: • definition of the size of cash targets, ranges, and buffers; • authorized instruments for investments, with limits on each; • internal procedures for identifying and approving investment, management of collateral and mitigation of operational risk; • credit limits for each institution (or instrument) based on credit ratings, or other credit assessment, taking available collateral into account. Higher scores require these policies to be formally in place. Compliance with the country’s own policy can be measured by assessing whether balance or liquidity targets are followed on 75% of days (B score) or 90% of days (A score) respectively. In summary, the minimum requirements (for the C score) are: 1. The government maintains positive balances in its bank accounts (in the banking sector or in C the TSA), as necessary using short-term instruments (such as T-Bills) to cover temporary cash shortages and avoid payment delays. A CB overdraft cannot be considered part of the positive balance;82 2. The government earns a market rate on its cash balances. In the case of deposits at the central bank the market-rate may be the official policy rate, overnight cash rate or its equivalent. For a B score, the requirements are: B 1. There is a well-defined liquidity buffer or target, and an appropriate investment policy in place, as described above; 2. Actual cash and liquidity balances have met the specified target on at least 75% of days in the previous year. For an A score: A 1. The actual cash and liquidity balances have met the specified targets on at least 90% of days in the previous year. 82. See DPI.7.3 for consistency. 100 Debt Management Performance Assessment Methodology Table 11. Scoring: Cash Flow Forecasting and Cash Balance Management (DPI 11) Score Requirements by DPI 11.1. Cash Balance Forecast: 1. A monthly cash plan of the approved budget is available for the DMO for the budget year; this covers expenditure, revenue and financing; it is updated during the year in line with any budget revision, or more frequently if necessary. 2. A rolling forecast of cash flows is available for each month, extending at least three months ahead. In addition, the forecast must be shared with debt managers: a. Forecasts must be shared (directly or via an institutional mechanism such as a cash coordinating committee). The information should be taken into account when developing the borrowing plan for the period ahead. 3. There are processes in place to measure and improve forecast performance, which could be evidenced by the following: C • Forecasts are compared against outturns; • Deviations are used when developing policy (in responding to forecasts and in improving the forecasting process); • Forecast errors should be reducing over time; • Forecasts of future cash flows are obtained from others in the Ministry of Finance, and from line ministries, revenue authorities and other agencies, covering at least 80 percent of expenditures and revenues. 11.2. Cash Balance Management: 1. The government maintains positive balances in its bank accounts (in the banking sector or in the TSA), as necessary using short-term instruments (such as T-Bills) to cover temporary cash shortages and avoid payment delays. A CB overdraft cannot be considered part of the positive balance; 2. The government earns a market rate on its cash balances. In the case of deposits at the central bank the market-rate may be the official policy rate, overnight cash rate or its equivalent. 11.1. Cash Balances Forecast: 1. Cash flow forecasts for the coming month are broken down on a weekly basis for at least one month ahead. Forecasts are updated monthly. B The minimum 11.2. Cash Balance Management: requirement for score C is met. 1. There is a defined liquidity buffer or target, and an appropriate investment policy in place, In addition: evidenced by: • well-defined cash targets, ranges, and buffers; • authorized investment instruments with limits on each; 101 Debt Management Performance Assessment Methodology Score Requirements by DPI • internal procedures for identifying and approving investment, management of collateral and for mitigating operational risk; • credit limits for each institution (or instrument), based on credit ratings or other credit assessment, taking account of available collateral. 2. Actual cash and liquidity balances have met the specified target on at least 75% of days in the previous year • This is evidenced by comparing end-of-day daily cash balances for that period against the liquidity buffer target from the previous year. 11.1. Cash Balances Forecast: 1. Cash flow forecasts are broken down by week for at least three months ahead and by day for one month ahead; forecasts for the next three months need to be updated at least weekly. A 11.2. Cash Balance Management: The requirements for score B are met. In addition: 1. The actual cash and liquidity balances have met the specified targets on at least 90% of days in the previous year. This is evidenced by: • comparing end-of-day daily cash balances for that period against the liquidity buffer target from the previous year. 11.1. The minimum requirement for score C is not met. D 11.2. The minimum requirement for score C is not met. 102 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 11) Guidance notes when determining compliance with the requirements A Cash Flow Forecast may be defined as an estimate of future government cash inflows and outflows, the objective of which is to ensure that a sufficient cash balance is available for the 11.1. C budget to function, it will also support other cash management objectives. The government has control over the cash balance (usually in domestic currency in the TSA). The forecasts should be distinct from cash plans which are based on a time profile of the approved budget. Budget Profile: the agreed profile across the year, usually monthly, of the approved annual budget. The profile may be the basis for the release of spending authority; but in any event will be used to monitor and control execution of the budget. Cash Plan: the planned pattern (usually monthly) of all government cash flows across the year. It 11.1 C includes flows of receipts and expenditure (i.e., the budget profile noted above) and of financing. Cash Forecast: Designed to identify what will happen, not what should happen. This needs to be an unbiased and unconstrained best estimate. The two series (cash plan and forecast) will often diverge as the budget year unfolds. Note the evidence under 11.1.c3 are not strict requirements. They should be seen as guidance 11.1 C for assessment teams. There is a presumption against going into overdraft or borrowing from the central bank. However, 11.2 C any borrowing within a well-defined policy consistent with DPI.7.3, does not disqualify from the C mark. To determine if the interest rate on cash deposits at the central bank is “market-based” it could be 11.2 C compared to the policy or overnight interbank rates. Other remuneration schemes involving the CB, i.e., CB notes, T-bills or repo rates may also be used. Investment policy: formal rules for using instruments and counterparts when investing cash, including the use of risk mitigation tools (e.g., use of collateral, limited investment tenor). Appropriate investment policies may include: (a) the investment instruments, typically seeking 11.2 B market-based short-term, liquid and low risk alternatives; with collateral where relevant; (b) limits on each type of instrument; (c) specified internal procedures; and (c) credit limits for each institution that should reflect the credit risk of counterparts. 103 Debt Management Performance Assessment Methodology Supporting documentation • Evidence of aggregate daily cash balances in CB bank accounts • Examples of forecasts of government cash flows; and of the aggregate level of overnight cash balances in CB bank accounts. • Examples of forecasts as submitted to the DMO, to a cash coordinating committee or similar (ideally with advice taken from the forecasts). • Evidence of returns from outside the forecasting unit (i.e., from elsewhere in the MoF, large ministries, revenue authorities or other agencies) projecting their future cash flows; these forecasts need to cover at least 80 percent of cash inflows and outflows. • Evidence of a process to compare forecasts with outturns and to use the results for policy decisions. • Examples of forecast performance analysis: indicators may include the number of instances that the aggregate cash balance fell below a minimum balance in the past 12 months (e.g., especially if it required a call on the overdraft, or the ways and means advance, or if it generated excess funds that were not anticipated and therefore could not be invested. Also relevant is whether, for any series, the standard deviation over a period of the deviation between the forecast and outturn (i.e., the forecast error) fell from one period to the next; or is less than the standard deviation of the series (this will help to understand if the forecast was able to predict and track the volatility of the series). • Evidence of a protocol or MoU governing the rate of interest paid on cash balances (or bank statement) • Evidence of a liquidity buffer or liquidity target policy • Evidence of an investment policy, as described above Indicative questions to ask • Who is responsible for forecasting government cash flows and aggregate cash balances? How accurate are the forecasts? How often are forecasts updated, and for what period are they calculated? • How is the short-term issuance program developed? Is it linked to cash balance forecasts? • Has the government set a target or range for the balance in the government bank account? If so, what is the range, and who decided this range? • Who monitors that the cash balance is within the determined range, and which actions are taken to ensure that the cash balance remains within this range? How often are actions taken to keep the cash balance within the determined range? • What are the related coordination mechanisms and decision-making processes? • How often has the aggregate cash balance fallen below the minimum balance in the past 12 months, especially when that would require a call on the overdraft or the ways and means advance? How often has the aggregate cash balance generated excess funds that were not anticipated and could not be invested? • Does the central bank pay interest on surplus balances? If so, on what basis? Is that rate achieved in practice? Is the government able to invest surplus balances? If so, which investments are used? Which instruments are used to manage surplus balances or excess liquidity? How are these instruments integrated with the government’s domestic debt issuance program? • Are there investment policies to invest the temporary surplus cash? 104 Debt Management Performance Assessment Methodology 3.5. Debt Recording, Payments, and Operational Risk Management Recording and monitoring DM transactions are essential for ensuring accuracy of debt records, and for picking up error and fraud. Payments processes must also include safeguards to ensure that they are timely and accurate. These processes are designed in a similar manner to their counterparts in the private sector and include: segregating responsibilities and operational units; double checking all data entry and payments by different staff members; defined deadlines for entering, processing, and monitoring transactions throughout their life, coordination with the Central Securities Depository (CSD) and effective use of IT systems. In the most advanced settings, full electronic processing of payments (straight-through processing) further reduces the risk of errors. The DMO IT infrastructure should be well-developed and capable of supporting DM operations and safeguarding data and financial records. Access permissions for staff should be tightly controlled and segregated responsibilities should be imposed. It is important for physical and electronic records to be backed up and stored in safe and secure locations. In more advanced settings, the IT infrastructure allows the DMO to operate remotely; it is capable of producing audit trails and is linked to broader financial management information systems. 105 Debt Management Performance Assessment Methodology A debt management information system (DMIS) is the backbone of any sovereign debt management office. A robust, well-functioning and user-friendly system will help governments to strengthen their debt management environment83. The DMIS needs to support core functions and business processes, managing the flow between debt creation and debt repayment. The system’s functionalities should reflect the range of responsibilities of the DMO, and the number and complexity of debt instruments in the overall portfolio. The DMIS should be based on: (i) data input; (ii) storage, processing and retrieval; (iii) information output. The problem of operating outside a DMIS, is that it significantly increases operational risk. Managing large and complex portfolios without a proper DMIS means that staff members register and report debt operations in spreadsheets only, which can result in poor recording and reporting human risk is increased, and unintentional errors or fraud are less likely to be detected or audited. The DMO should be capable of continuing operations in the event of disasters or other disruptions. Tested disaster recovery and business continuity plans need to be in place. A broader operational risk management plan, based on a systematic assessment of vulnerabilities and the potential impact of negative events, is also desirable. The DMO has to record all debt instruments, based on the cash-flow generating records that result from transactions, such as domestic, external debt instruments, loan guarantees, on-lending operations, derivatives, past debt relief, restructured debt and unpaid (defaulted) debt. Central Bank financing (overdraft) and fiscal arrears resulting from unpaid budgetary obligations are not necessarily recorded by DMOs as they do not come from debt transactions; they don’t generate a well-defined future cash flow and therefore will not be assessed under this DeMPA core function. However, those liabilities are part of the government’s obligations84 and must be reported, captured in DPI-4.85 In addition to having complete and up-to-date records the government should ensure that there is a secure registry system (CSD)86 to record the holders of its domestic debt securities. Securities are typically held in electronic form, often the only record of ownership and consequently the system must be extremely accurate and secure. Ownership of government securities may change daily through transactions in the secondary market and the system must be able to handle a high volume of updates in a timely and accurate manner. 83. See Aslan et al, 2018 and DPI-15 for DMIS scoring. 84. Normally captured on below-the-line figures. 85. Arrears should be captured in the cash flow forecasts. See IMF (1998), Government Expenditure Arrears: Securitization and Other Solutions – WP/98/70. 86. Central Securities Depository. 106 Debt Management Performance Assessment Methodology DPI-12 Debt Recording, Monitoring, and Payments DPI 12.1. Recording debt-related transactions The rationale is to ensure the DM entity has strong controls and is capable of recording all debt instruments and related transactions (e.g., guarantees, on-lending, derivatives) that follow a sound organizational structure and well-defined processes. Segregating data entry responsibilities and having other staff members double check the data will help ensure accuracy in the recording process. Staff must record all debt-related transactions in the debt recording system immediately. The general principle is that the unit where the debt originated should begin the debt recording process, validated by the back office. In the case of securities, the unit responsible for issuances should initiate recording in the debt system. The back office should then check the terms and conditions of the offering: whether it was an auction, direct issuance, or syndication. The record will typically include the amount sold and the security’s specific characteristics, including issue date, ISIN, principal, interest rate, indexation (if any), and amortization schedule for each instrument (or series). While securities are normally settled within a week, it may take longer for loans, as their internal bureaucracy is different, and they are commonly used for project financing. Loans also need to be registered as soon as they are signed as there may be applicable fees and charges on any committed funds, even before the actual disbursements and subsequent impact on outstanding debt.87 However, loans rarely require payment within one month of signing. Charges and fees can take effect after two or three months, underscoring the need for the contract to be registered straightaway so that staff can verify the flows. In that respect, the DeMPA methodology accommodates widely different realities related to the management of contractual debt, guarantees and on-lent funds. The requirements for a C score are: 1. Initial debt recording and final confirmation need to be clearly separated (two steps, dual control). This could be evidenced by: • One staff member undertakes the initial recording and another staff member confirms this after checking the transaction parameters (volume, tenor, interest rates, currency, disbursement C schedule) against information provided by the creditor/counterparty at settlement.88 • The segregation of duties is mirrored in the authorizations in the system, i.e., no staff is allowed to enter/modify or confirm transactions in the system without proper authorization.89 • Staff members who participate in debt negotiations should not undertake the final recording. 2. Debt transactions are recorded in the Debt Management Information System (DMIS) within three months of issuance or signing/disbursement. 3. Securities are recorded within a week after issuance. 87. For details on recording securities, loans, guarantees and on-lending operations see Proite, Andre (2020). 88. Checking should be undertaken using independent source documentation. 89. See DPI 13.1.c1 for restricted access to the DMIS. 107 Debt Management Performance Assessment Methodology • In this case, securities can be recorded in the CSD, DMIS or other. • The completeness of records in the DMIS is assessed in DPI 14.1. For the C level, the above does not need to be reflected in detailed procedures manuals.90 For higher levels (see B score) the DMO should: 1. There is organizational separation between the initial debt recording and final confirmation (two steps, dual control). There is evidence that: B • Different units with separate reporting lines in the organizational structure record transactions; 2. Debt transactions are entered in the Debt Management Information System (DMIS) within two months of issuance/signing/disbursement. 3. There are up-to-date procedures manuals, that reflect updated operational practices. a. Procedures manuals are approved by senior management and are followed.91 A For the highest level (score A): 1. All debt transactions are recorded in the DMIS within one month of issuance/signing/disbursement. Box 2. Debt Monitoring The DMO must ensure that once debt is regularly monitored as it has been created and recorded. Any changes in the outstanding debt must be checked and the same unit responsible for recording should track stocks and flows by verifying with clearing houses in the case of securities, and creditors in the case of contracts. All contracts must be monitored, either directly or indirectly under the principal DM oversight. Monitoring loans requires close coordination with creditors and disbursing units. Recording units need to stay in contact with individual creditors; they need to collect information about any financial activity underlying a contract in order to be able to monitor any events that could impact the debt. Staff should check disbursements and repayments with every creditor and debtor on a regular basis, especially if the entities spending the resources are located outside the Ministry of Finance. It is good practice for disbursement requests to be processed through the DMO. Securities monitoring requires regular exchange of information with the CSD. The frequency should be proportional to the use of issuances, buybacks, exchanges and redemptions for all nominal or indexed securities. The objective of monitoring debt events is to ensure that the debt recording system is always complete and up-to-date, allowing it to function as the basis for payments, and that it is the data source for DMO reports and analysis produced. In this sense, monitoring is closely linked to recording, translated into indicators in the DeMPA methodology. 90. Satisfactory performance can be achieved based on precedent or corporate culture. 91. At least by the head of department. This also applies to DPI 12.2 score B. 108 Debt Management Performance Assessment Methodology DPI 12.2. Debt payments The rationale is to ensure the DM entity has strong controls and is capable of processing debt-related payments in line with a sound organizational structure and well-defined processes. Initiating, processing and controlling payments to effect settlement of government debt-related transactions are key responsibilities of the DMO. The financial execution and controlling process should facilitate accurate, timely, and secure payment administration with minimal errors. Payment instructions must be prepared, then authorized with controls in place to ensure that there is independent double checking by staff to validate and execute the transaction. It is common to observe DMOs initiating the payment process, however, final execution is undertaken by a different unit responsible for treasury-related functions in the ministry of finance or central bank/financial agent.92 The requirements for a C score are: 1. Payment instructions (initiation and processing) are subject to a minimum two-person authorization. This could be evidenced by: • The staff member initiating the payments should not have rights to enter/modify or confirm final data in the DMIS93; 2. Debt payments are prepared based on the DMIS records and are checked against creditor’s notifications (invoices) before execution94; 3. Payments are made on the due date and are recorded within one month. C Two definitions are important: (i) Payment initiation relates to moving resources from the government to the creditor. Operationally, it means preparing the payment order, normally inserted in the Financial Management Information System (FMIS) with respective financial, budgetary and accounting records. (ii) Payment processing is the execution of the payment order using dedicated resources and budgetary authorization in the relevant currency for a specific beneficiary. This is typically undertaken in the FMIS and can be tracked for auditing purposes. For the B level, evidence is required to show that the organizational structure reflects different units with separate reporting lines for preparing payments and final processing (execution). User and technical manuals that accompany debt recording and management systems are not enough to meet the minimum requirements. Documented procedures manuals reflecting the up-to- date payment process are required and need to be approved by senior management. 92. Although not required for DeMPA methodology, advanced debt management offices directly carry out the full payment process, starting from payment preparation, based on the DMIS, to final execution which withdraws the resources from the TSA and sends them to the national payments system or financial agent. For details, see Proite (2020). 93. See DPI 13.1.c1 for restricted access to the DMIS. 94. When applicable, assessors should capture how discrepant the invoices’ billed values are from DMIS estimates for payment. 109 Debt Management Performance Assessment Methodology For a B score to the DMO needs to: 1. Have organizational separation between the payment initiation and final processing; 2. Perform based on up-to-date procedures manuals reflecting current operational practices. B Advanced payments practice includes straight-through processing where the data flow enables a single data entry and modification point to execute transactions. The method consists of transmitting payment notices to the Treasury, which are automatically forwarded to the payment agent (usually the central bank) for actual settlement/repayment. Automated sequencing minimizes operational risks compared to methods that rely on human intervention. A For a score of A: 1. The debt payments are prepared and issued electronically, and use straight-through processing. 110 Debt Management Performance Assessment Methodology Table 12. Scoring: Debt Recording, Payments (DPI 12) Score Requirements by DPI 12.1. Debt Recording: 1. Initial debt recording and final confirmation need to be clearly separated (two steps, dual control). This is evidenced by: • One staff member undertakes the initial recording and another staff member confirms this after checking the transaction parameters (volume, tenor, interest rates, currency, disbursement schedule) against information provided by the creditor/counterparty at settlement. • The segregation of duties is mirrored in the authorizations in the system, i.e., no staff member is allowed to enter/modify or confirm transactions in the system without proper authorization. • For securities, the staff member may use information from auction results (or another issuance modality) to record in the DMIS; • For Loans/Guarantees/on-lending, the staff member may use information from contracts and disbursement. • Staff members who participate in debt negotiations should not undertake the C final recording; 2. Debt transactions are recorded in the DMIS within three months of issuance/ signing/disbursement. • There is no evidence of transactions if they are not recorded in the debt system. 3. Securities are recorded within a week after issuance. • In this case, securities can be recorded in the CSD, DMIS or other. • The completeness of records in the DMIS is assessed in DPI 14.1. 12.2. Payments: 1. Payment instructions (initiation and processing) are subject to a minimum two-person authorization. This could be evidenced by: • The staff member initiating the payments should not have rights to enter/modify or confirm final data in the DMIS; 111 Debt Management Performance Assessment Methodology Score Requirements by DPI 2. Debt payments are prepared based on the DMIS records and are checked against the creditor’s notifications (invoices) before execution. This is evidenced by: • The staff member extracts the debt service from the debt system to prepare payment orders. 3. Payments are made on the due date and are recorded within one month. This is evidenced by: • Absence of delays/penalties or technical default for not paying the full amount on time. 12.1. Debt Recording: 1. There is an organizational separation between the initial debt recording and final confirmation (two steps, dual control). There is evidence that: • Different units with separate reporting lines in the organizational structure record transactions; 2. Debt transactions are recorded in the Debt Management Information System (DMIS) within B The minimum two months of issuance/signing/disbursement; requirement for score C is met. 3. There are up-to-date procedures manuals that reflect updated operational practices. In addition: a. Procedures manuals are approved by senior management and are followed. 12.2. Payments: The DMO needs to : 1. Have organizational separation between the payment initiation and final processing; 2. Perform based on up-to-date procedures manuals reflecting current operational practices. 12.1. Debt Recording: 1. All debt transactions are recorded in the DMIS within one month of issuance/ A signing/disbursement. The requirements for score B are met. In addition: 12.2. Payments: 1. The debt payments are prepared and issued electronically, and use straight-through processing. 12.1. The minimum requirement for score C is not met. D 12.2. The minimum requirement for score C is not met. 112 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 12) Guidance notes when determining compliance with the requirements Straight-through processing is the ability to send payment instructions directly from a management information system to a secure financial messaging system (for example, SWIFT), the central 12.2 A bank or commercial banks. With these electronic links in place, there is no need to reenter data into payment systems, reducing operational risk and increasing efficiency. Control over the authorization of payments is maintained through access rights to the system, enabling the minimum two-person verification. 12.1 B User and technical manuals that accompany a debt recording and management system are not and enough to meet the minimum requirements. In such cases, the indicators should be read as if the 12.2 B procedures manuals are not in place. Organizational separation means different units with separate reporting lines in the organizational structure to record transactions. For payments it means that the staff member preparing the 12.2 C payment order is different from the staff member clearing the payment, both report to distinct and hierarchical lines. A variety of set-ups can fulfill this requirement, for example: a back office 12.2 B sub-unit prepares the payment and a different sub-unit that is responsible for the settlement (or overall head of department) clears it before releasing for payment execution. 12.1 C and The requirement for restricted access to the DMIS is explicit in DPI 13.1.c1. 12.2 C 12.1 C Final recording confirms registration in the system. Countries with a simple portfolio can record in an appropriate software application. Simple 12.1 C portfolios are defined as less than or equal to 30 loans and plain vanilla securities. Payment Initiation means preparing the payment order, normally extracting payment data from the DMIS, comparing with creditor invoices and inputting into the FMIS with respective financial, 12.2 C budgetary and accountability records. Note: When applicable, assessors should capture how invoices’ billed values are different from DMIS estimates for payment. Payment Processing means the execution of the payment order using dedicated resources and 12.2 C with budgetary authorization in the relevant currency for a specific beneficiary. This is typically undertaken in the FMIS and can be tracked for auditing purposes. 113 Debt Management Performance Assessment Methodology Guidance notes when determining compliance with the requirements Not applicable for countries with a simple portfolio; they can prepare the debt payment based on 12.2 C the information registered in any software application. Simple portfolios are defined as less than or equal to 30 loans and plain vanilla securities. Supporting documentation • Evidence of recording, validation procedures of debt-related transactions • Evidence of validation procedures against payment notifications • A copy of the procedures manual for processing debt-related recording, validation and payment • Evidence of a two-person authorization processes Indicative questions to ask • How does the DMO undertake debt-related transactions recording and payments? • How long does it take to record the debt-related transactions after they are undertaken? How often does the principal DMO reconcile loan data with creditors? • Does the DMO have a procedures manual for recording and monitoring/validating debt data, as well as for processing debt-related payments? If so, what is the content of the manual, and how often is it updated? • Who is involved in arranging debt service payments, and what is the authorization process? • Does the DMO prepare debt payments based on the debt recording system? If not, why? • Has the government met all debt service payment obligations by the due date? • How often have payments been late, and how late have they been? What were the reasons for the delay? • Have penalty charges been imposed for late payment? How significant were these penalty charges? Are penalty charges recorded as a cost on the loan? 114 Debt Management Performance Assessment Methodology DPI-13 Data Security and Business Continuity DPI 13.1. Data access, backups and IT infrastructure The rationale is to ensure that there is restricted and regulated access to the DMIS; data backups need to be made frequently and stored in a separate, secure location. The IT infrastructure needs to ensure that technical systems and other IT components are designed to support business requirements. Data Access Access to the debt-recording system by users and IT specialists should be tightly restricted with access permissions and password controls according to their authorizing credentials. Access permissions for individuals should be updated on the day that their responsibilities change. Backups To the extent that architectural modernization has transitioned to the cloud and has eliminated on-premises servers, there are several technology solutions to make IT infrastructure architecture effective and secure. Such architecture may be based on the use of cloud technology, containers, virtualization, among others. At a minimum, there should be frequent digital backups of the debt database; these backups need to be stored in a secure server and not in the building where the debt database is located. Locations such as the CB or another ministry building are acceptable, however, the house (home) of the head of the DMO or the IT person is not acceptable. The backup storage location should be protected from incidents such as theft, fire, flood, or anything else that may damage or destroy them. Debt data backups should be tested regularly (at least quarterly) to make sure that they can be retrieved and used if needed. For higher scores, the frequency of data backups is closer together. IT infrastructure IT infrastructure allows an organization to deliver IT solutions and services to its employees, partners, and/or customers. It is usually internal to an organization (MoF) and deployed within the organization’s own facilities. It refers to hardware, software, network resources and services required for the existence, operation and management of the IT environment. The assessment team should meet with the debt management and IT supporting team to see if anything in the IT infrastructure could cause any significant impediments to existing DM operations and if system providers are able to resolve requests for corrections within a reasonable amount of time. The adequacy of the hardware, software, network and services required to operate the DM activities should be verified (see guidance). 115 Debt Management Performance Assessment Methodology The requirements for a C score are: 1. There is restricted access to the debt recording system; 2. There are monthly secure backups; 3. Signed copies of contracts (loans, guarantees, on-lent loans, etc) are electronically stored in a secure location; 4. The IT infrastructure and technical standards support debt recording, payment administration and C data security; 5. Corrections from system providers are performed timely • within a year from request. In order to meet business requirements in the event of a disaster (e.g., fire, natural disaster, pandemic), public sector entities should be able to operate core areas of the infrastructure remotely. DMOs are relying increasingly on technology to allow staff to operate anywhere, connecting people through virtual meetings, monitoring market activity, undertaking debt issuances, transmitting documents, and undertaking back office processes and performing debt planning. For a score B the minimum requirements are: 1. There are weekly secure backups; 2. The IT infrastructure allows the DMO to operate remotely. • As a minimum, borrowing transactions, recording and payment should be able to be operated remotely. B For the highest score, the system must produce audit trails that show who has accessed the system, the time that it was accessed, the level accessed, and the activities of each user. The audit trails should be monitored for exceptions on an ongoing basis. Advance practice requires the IT architecture to integrate platforms (or software), such as the recording and PFM systems into external platforms such as the clearing systems and national payment system (typically managed by the central bank). The highest score requires, at least, that the Debt Management Information System (DMIS) be integrated with the Financial Management Information System (FMIS)95 to execute payments and to manage financial, budgetary, and accounting registries.96 It is acceptable for the links between the two systems to be implemented by either interface or integration. For the highest score A the requirements are: A 1. The DMIS produces audit trails; 2. There are daily secured backups; 3. The debt recording system (DMIS) and the Financial Management Information System (FMIS) are integrated. 95. New versions of FMIS integrate various primary treasury systems interfaces. This typically includes: budget system, treasury system, banking interface, tax system, audit interface and the DMIS. For more information, see A Handbook on Financial Management Information Systems for Government - A Practitioners Guide. Ali Hashim. World Bank 2014 96. Other examples of linkages include the connection between the DMIS and: (i) auction modules to facilitate gathering bids from market participants; (ii) data stream services; (iii) electronic trading platforms; (v) access to clearing houses and settlement systems. Note that the payment function can be performed by other agents such as the Central Bank on behalf of the DMO. 116 Debt Management Performance Assessment Methodology Examples of information exchanged through linked systems (either interfaced or integrated) are: (i) estimates of loan disbursements and bonds proceeds; (ii) estimates of budgetary revenues allocated for debt; (iii) budget releases for debt payments; (iv) debt service forecast; (v) recording of financial transaction; (vi) reconciliation of debt records; (vii) debt reports consistent with financial/ accounting records. DPI 13.2. Business Continuity (BC) and Disaster Recovery (DR) Plans The rationale is to ensure that there are business continuity (BC) and disaster recovery (DR) plans. The higher scores also require documented guidelines for operational risk management (see guidance). A variety of risks can negatively affect normal business operations. An operational risk assessment is needed to determine: what constitutes a disaster; which risks the organization is most susceptible to; which systems and activities are critical; and what the potential impact (financial and reputational) might be. The assessment covers incidents such as natural disasters, fire, power failure, terrorist attacks, organized or deliberate disruptions, cyber-crime, theft, fraud, system and/or equipment failures; human error; computer viruses; legal issues; worker strikes or disruptions; and loss of key personnel. Actions for mitigating risks are included in the operational risk management plan. A DR plan is part of the business continuity process. This is quite a comprehensive approach for restoring IT systems to full functionality, and to ensure that staff can still operate in the case of a problem or outage. In some countries, the central bank may have a DR plan, although the Ministry of Finance may not, although this is where many DM operations are located. If the MoF does not have a DR plan then minimum requirements for a DMO to be covered by a DR have not been met. If the MoF has a DR plan, it must cover DM operations, and DMO staff members need to be fully up to date with all details therein. There should be periodical practices to test the plan. To meet the minimum requirements (C score), the DMO must have: C 1. Written BC and DR plans; • BC and DR plans can be combined in a single document 2. The plans must have been tested within the past 2 years; For a B score the requirement is: B 1. There is an operational recovery mechanism; 2. The mechanism is tested annually. A For the highest level of score A, the DMO must provide evidence that: 1. There are documented guidelines for operational risk management. 117 Debt Management Performance Assessment Methodology Table 13. Scoring: Data access, Backups, and IT Infrastructure (DPI 13) Score Requirements by DPI 13.1. Data Access, Backups, and IT Infrastructure: 1. There is restricted access to the debt recording system; 2. There are monthly secure backups; 3. Signed copies of contracts (loans, guarantees, on-lent loans, etc.) are electronically stored in a secure location; 4. The IT infrastructure and technical standards support debt recording, payment administration and data security. 5. Corrections from system providers are performed timely C • Within a year from request. 13.2. Business Continuity (BC) and Disaster Recovery (DR): The DMO must have: 1. Written BC and DR plans; • BC and DR plans can be combined in a single document 2. The plans must have been tested within the past 2 years. 13.1. Data Access, Backups, and IT Infrastructure: 1. There are weekly secure backups; 2. The IT infrastructure allows the DMO to operate remotely; B The minimum • As a minimum, borrowing transactions, recording and payment should be able to be requirement for score C is met. operated remotely. In addition: 13.2. Business Continuity (BC) and Disaster Recovery (DR): 1. There is an operational recovery mechanism; 2. The mechanism is tested annually. 13.1. Data Access, Backups, and IT Infrastructure: 1. The DMIS produces audit trails; 2. There are daily secured backups; A 3. The debt recording system (DMIS) and the Financial Management Information System The requirements for score B are met. (FMIS) are integrated. In addition: 13.2. Business Continuity (BC) and Disaster Recovery (DR): 1. There are documented guidelines for operational risk management. 118 Debt Management Performance Assessment Methodology Score Requirements by DPI 13.1. The minimum requirement for score C is not met. D 13.2. The minimum requirement for score C is not met. Guidance and Definitions (DPI 13) Guidance notes when determining compliance with the requirements Interface means automated, but not integrated with FMIS, typically set by web-based solution (API - Application Programming Interface, cloud computing) or a secure network connection between designated servers, point-to-point integration or direct connection. 13.1 A Integration modules are set on a single logical database to ensure data integrity and security across all operations. Modules function together under a single solution framework. Examples of information that is typically exchanged between the DMIS and the FMIS are: (i) estimates of loan disbursements and bonds proceeds; (ii) cash flow forecasting; (iii) budget 13.1 A releases for debt payments; (iv) debt service forecast; (v) transaction recording (financial/ budgetary/accounting); (vi) reconciliation of debt records; (vii) debt reports consistent with financial records. Operational Risk Management. An operational risk assessment would determine the following: what constitutes a disaster; the risks to which the organization is most susceptible; systems and activities that are critical, and the potential impact (financial and reputational) of that. It covers 13.2 A incidents such as natural disasters, fire, power failure, terrorist attacks, deliberate disruptions, theft, fraud, system and/or equipment failures, human error, computer viruses, legal issues, worker strikes, and loss of key personnel. Actions to mitigate these risks are included in the operational risk management plan. “Operate remotely” is to undertake core debt operations from a location other than the primary 13.1 B office (e.g., home-based operating). Core DM activities are typically associated with borrowing transactions, recording, monitoring and payments. Disaster Recovery mechanisms can be an alternate device, a virtual setting, or a site that can be 13.2 B used in the event of a failure of the primary data center. Without appropriate backup and recovery mechanisms, a “disaster” can mean data loss and have significant impacts on debt management. 13.1 C “Secure” means stored in a separate location and protected against destruction. 119 Debt Management Performance Assessment Methodology Guidance notes when determining compliance with the requirements Cloud computing (“the cloud”) is the delivery of on-demand computing resources over the internet on a pay-for-use basis. This includes everything from applications to data centers. 13.1 C A container is a standard unit of software that packages up the code and all of its dependencies so that applications function reliably across computing environments. Infrastructure includes: (i) hardware (servers, computers, data centers, switches, hubs, routers, etc); (ii) Software (DMIS, productivity applications, etc.); (iii) network resources (network 13.1 C enablement, internet connectivity, firewall, security); (iv) services required for existence, operation, and management of the IT environment. This also includes human users: (a) administrators, developers, (b) designers, (c) end-users with access to any IT appliance or service. Business continuity planning allows an organization to be prepared for anything that could 13.2 C jeopardize its performance, its ability to meet business objectives, or its long-term health. Risks can be local e.g., building fires, regional such as earthquakes, or national like pandemics. Disaster Recovery is the process of regaining access to data, hardware, and software. It is also the ability to resume critical business operations after a natural or human-induced disaster 13.2 C with the minimum number of staff. A disaster recovery plan (DRP) should also include plans for coping with the unexpected loss of key personnel. A DRP is part of the business continuity planning process. Supporting documentation • Evidence of the digital storage of signed copies of loan and derivative agreements in a secure location and/ or of the scanning and maintenance of such agreements in electronic form in a secure location • A copy of the system access permissions and evidence of system security and access controls • Evidence that audit trails are monitored • Evidence of the storage location of debt recording and management system backups (location verified by the assessors) • A copy of the business continuity plan and disaster recovery plan • A copy of an operational risk management plan or guidelines 120 Debt Management Performance Assessment Methodology Indicative questions to ask • Who sets the access levels and functions for those who access the debt recording and management system? Do these persons also enter data into the system? • Are there documented procedures for controlling access to the central government debt recording and management system, and the payment system? • Are loan agreements and debt administration records scanned? If so, where are the scanned copies stored? Do these include key DM processing documents that have been scanned or are maintained on the servers? • Is there evidence of physical storage of digital signed copies of loan and derivative agreements in a secure location? • Who is responsible for backing up the debt recording and management system? What is the process for making the backups? How often are backups made, and where are they stored? • Where is the storage location for debt recording and management system backups? • Does the IT structure support DM operations and data security? Where is the hardware and software? • Does the IT architecture allow staff to operate remotely? • Are audit trails produced for the debt recording and management system and for the payment system? If so, who is responsible for monitoring these audit trails? Who is responsible for monitoring users who have accessed the system? • Is the DMIS linked to the FMIS? If so, in which functionality? • Are there BC and DR plans? If so, is there an alternative recovery site for relocating the business, and where is it? When was the plan last tested? How was the test conducted? • Are there documented guidelines for operational risk management? What risks are covered in these guidelines? 121 Debt Management Performance Assessment Methodology DPI-14 Debt Related Records DPI 14.1. Completeness and timeliness of central government debt records The rationale is to ensure that the central government has complete records of its debt, loan guarantees, on-lending, and any debt-related transactions, such as derivatives (e.g., currency and interest rate swaps). Sound practice requires a comprehensive debt management system that records, monitors, settles, and accounts effectively for all central government debt and debt-related transactions, including past debt relief and debt restructuring (or rescheduling). This system will create an accurate, consistent, and complete database of domestic, external, and guaranteed debt. It forms the basis for all DM activities, including the cost-risk analysis of the debt portfolio, DMS development, borrowing plans, and debt service. Box 3. Arrears and Related Liabilities In the DeMPA methodology, arrears coming from the fiscal side are not considered debt instruments and are not required to be recorded in the DMIS, as they will not immediately generate cash flows. However, debt managers can choose to record them by importing the stock of arrears and adding to the stock. Alternatively, debt managers can create a representative security to insert the arrears in the system, for example, by transposing the fiscal liability into a recordable debt instrument to be redeemed at a future date. Government officials can effectively eliminate the existing stock of arrears by borrowing in the market (and clear the arrears), in which case it should be recorded in the DMIS immediately. This would increase the stock of explicit government debt, but would not decrease government net worth, as the liability occurred de facto when the government created the arrears (related to fiscal operations). Similarly, when the government securitizes the arrears, the result is an increase in the cash budget deficit at the time of the securitization, equalized by the increase in stock of explicit debt, and offset by the reduction in the stock of implicit debt. When the newly created explicit debt matures, it will not affect cash budget deficits as the operation will be registered below the line as amortization of internal debt. Only the interest component will influence future cash budgets. For statistical purposes, arrears should be reported as debt and as a memo item under the government balance sheet, as captured in DPI 4. More details on arrears are in Annex IV. 122 Debt Management Performance Assessment Methodology To meet the minimum requirements (C score), the DMO must show evidence based on the DMIS that: 1. There are complete central government debt records in the debt recording system with up to a three-month lag; C • This includes all securities, even if they are also recorded in the CSD; 2. Reporting and cost-risk analysis is based on data in the debt recording system. Higher scores require that the time lag of debt records is shortened relative to the C level. B For a Score B the requirement is: 1. A maximum recording lag of two months; A While for score A : 1. A maximum recording lag of one month. DPI 14.2. Secure registry systems and debt holders The rationale is to ensure that there are accurate and secure registry systems for government debt securities in electronic form. A secure registry system such as a Central Securities Depository (CSD) is essential for any debt securities issued in electronic form (often referred to as “dematerialized,” “book-entry,” or “scripless” securities). Instead of keeping debt securities in paper or physical form in a secure location, investors in these securities now rely completely on an electronic registry system to keep track of their legal titles and due dates for interest and principal payments. There must be evidence that securities have an ISIN or CUSIP code or that they are digitally managed. The ownership of government securities may change daily through transactions in the secondary market, which means that processes for timely, accurately, and securely updating the registry need to be robust. In most countries, the registry system is developed and managed by the CB, in others it is provided by an external party like a commercial bank or a specialized private company. The following aspects can determine if the registry system is secure: • Identification of the entity responsible for managing the registry system and its location; • Assessment of registry system management, available resources, and management procedures, including security checks for system maintenance; • Assessment of the government securities settlement process; • Frequency and nature of registry and registry system audit; 123 Debt Management Performance Assessment Methodology When the registry system allows nominee accounts,97 the beneficial owner can only be determined from the custodian’s books. In such cases, the central bank (or central depository) should ensure that information on the amount of domestic debt held by foreigners is available for statistical reporting purposes. The registry also needs to ensure that holders of government securities receive regular statements of their holdings. Internal or external performance audits of the registry system should be carried out, and this needs to include an examination of internal checks and operational risk management. (See description of audits in DPI-5.) The minimum requirements for a C score are: C 1. Securities are dematerialized and kept in a Central Securities Depository (CSD) with updated information on debt holders. 2. Registry system and records are subject to internal audit every second year; B Score B requires: 1. Yearly audits And score A requires: A 1. Settlement to be performed on a Delivery-Vs-Payment (DVP) basis. • DVP is a settlement method widely used in the industry to ensure that transfer of securities only happens after payment has been made. 97. Accounts that are in the name of a local bank, where securities are held on behalf of clients. 124 Debt Management Performance Assessment Methodology Table 14. Scoring: Debt Records (DPI 14) Score Requirements by DPI 14.1. Completeness and Timeliness: 1. There are complete central government debt records in the debt recording system with up to a three-month lag; • This includes all securities, even if they are also recorded in the CSD. 2. Reporting and cost-risk analysis is based on data in the debt recording system. C 14.2. Secure Registry Systems and Debt Holders: 1. Securities are dematerialized and kept in a Central Securities Depository (CSD) with updated information on debt holders; • Evidence that securities have an ISIN code or are digitally managed. 2. Registry system and records are subject to internal audit every second year. 14.1. Completeness and Timeliness: B 1. A maximum recording lag of two months. The minimum requirement for score C is met. In addition: 14.2. Secure Registry Systems and Debt Holders: 1. Yearly audits. 14.1. Completeness and Timeliness: 1. A maximum recording lag of one month; A 14.2. Secure Registry Systems and Debt Holders: The requirements for score B are met. In addition: 1. Settlement to be performed on a Delivery-Vs-Payment (DVP) basis. • DVP is a settlement method widely used in the industry to ensure that transfer of securities only happens after payment has been made. 14.1. The minimum requirement for score C is not met. D 14.2. The minimum requirement for score C is not met. 125 Debt Management Performance Assessment Methodology Guidance and Definitions (DPI 14) Guidance notes when determining compliance with the requirements Complete Debt Records: Domestic, External, Guarantees, debt-related transactions, including 14.1 C past debt relief and debt restructuring. Arrears, from unpaid fiscal spending, will not typically have a corresponding debt instrument 14.1 C recorded in a DMIS, although they represent a liability for the government. Sound reporting (DPI 4) and cash management (DPI 11) need to capture and to measure such obligations. As in DPI 12.1, countries with a simple portfolio can use any software application for recording. 14.1 C Simple portfolios are defined as less than or equal to 30 loans and plain vanilla securities. Delivery versus payment (DVP) is a widely-used settlement method to ensure that securities are 14.2 A only transferred after payment has been made. DVP stipulates that the buyer’s cash payment for securities must be made prior to or at the same time as the delivery of the security. CSD is a specialized financial organization holding securities such as bonds and shares in 14.2 C certificated or uncertificated (dematerialized) form so that ownership can be easily transferred via book entry rather than the transfer of physical certificates. ISIN: International Securities Identification Number 14.2 C CUSIP: Committee on Uniform Security Identification Procedures. Both are digit codes for the purposes of facilitating clearing and settlement of trades. Book-entry: A system of tracking ownership of securities where investors are not given a 14.2 C physical certificate. Supporting documentation • A sample of reports generated from the debt recording/management systems to evaluate current debt records • Copies of recent disbursement and payment notices • Evidence that records in the registry system have been reconciled and audited 126 Debt Management Performance Assessment Methodology Indicative questions to ask • What debt recording and management system is used? • Does the debt recording and management system capture all debt transactions and loan guarantees? • What is the time period or lag from the time a loan is disbursed to the time the disbursement is recorded in the system? • How does the registry system operate? • How frequently are registry records reconciled and audited? • Does the registry system allow nominee accounts? If so, how is the residency of government securities holders determined? • What physical security is in place for the registry system and operations? • Has the registry system been audited to assess internal control system effectiveness and data security? • Does the registry provide regular holdings statements to investors (or allow electronic access to the same)? • Have major government securities holders experienced any problems with accuracy or timeliness of registry services? • What is your contractual relationship with the system – how is your risk exposure safeguarded? 127 Debt Management Performance Assessment Methodology DPI-15 Debt Management Information Systems (DMIS) DPI 15.1. Use of Debt Management Information Systems (DMIS) Debt Management Information Systems (DMIS) helps to explain how DM is performed. It is crucial for managing debt as it relates to: budget preparation and accountability, debt recording, reporting, preparation of payments, and cash flows. There are five core aspects in a DMIS: (i) data inputs (record all transactions and exogenous data); (ii) storage processing; (iii) generation of outputs (calculate cost-risk indicators and produce reports); (iv) ability to export/import data; and (v) technology/interface with users.98 The DeMPA focuses on observable aspects related to the processes that have been evaluated in DPIs, and the usability employed by debt managers. Because this is a high profile topic the team is expected to use selected aspects scored on DPIs 12-14 and to bundle them in a dedicated indicator99. The requirements for a C score are: C 1. The DMIS store all debt related transactions (see DPI 14.1); 2. Reporting and Cost-Risk Analysis is based on data from the DMIS (see DPI 14.1); 3. Debt payments are prepared based on DMIS records (see DPI 12.2); 4. Corrections from system providers are performed timely (within a year from request, see DPI 13.1); B For the B score, the requirements are: 1. The IT infrastructure allows the DMO to operate remotely (see DPI 13.1); For the A score: A 1. The DMIS produces audit trails (see DPI 13.1); 2. The DMIS is integrated with other PFM systems (e.g., FMIS) (see DPI 13.1). 98. The functionalities above could be part of a series of modules or integrated systems. 99. The DeMPA does not evaluate standalone capabilities of DMIS or the fundamental structures of the software. 128 Debt Management Performance Assessment Methodology Table 15. Scoring: Debt Management Information Systems (DPI 15) Score Requirements by DPI 15.1. Use of the DMIS: 1. The DMIS store all debt related transactions (see DPI 14.1); 2. Reporting and Cost-Risk Analysis is based on data from the DMIS (see DPI 14.1); C 3. Debt payments are prepared based on DMIS records (see DPI 12.2); 4. Corrections from system providers are performed timely (within a year from request, see DPI 13.1) B The minimum 15.1. Use of the DMIS: requirement for score C is met. 1. The IT infrastructure allows the DMO to operate remotely (see DPI 13.1) In addition: A 15.1. Use of the DMIS: The requirements for score B are met. 1. The DMIS produces audit trails (see DPI 13.1); In addition: 2. The DMIS is integrated with other PFM systems (e.g., FMIS) (see DPI 13.1); D 15.1. The minimum requirement for score C is not met. 129 4 References Debt Management Performance Assessment Methodology Bachmair, Fritz. 2016. “Contingent Liabilities Risk Management: A Credit Risk Analysis Framework for Sovereign Guarantees and On-lending: Country Experiences from Colombia, Indonesia, Sweden, and Turkey”. Washington DC. World Bank https://openknowledge.worldbank.org/handle/10986/23713 Balibek, Emre; Storkey, Ian; Yavuz, H.Hakan. 2021. “Business Continuity Planning for Government Cash and Debt Management”. Washington, DC. IMF Technical Notes and Manuals n.10/2021. https://www.imf.org/en/Publications/ TNM/Issues/2021/09/21/Business-Continuity-Planning-for-Government-Cash-and-Debt-Management-466017 Cangoz, Mehmet Coskun; Puccini Secunho, Leandro.2020. “Cash Management – How do Countries Perform Sound Practices?”. MTI Insight series; note 2 Washington, D.C.: World Bank Group http://documents.worldbank.org/curated/ en/403731603139041759/Cash-Management-How-do-Countries-Perform-Sound-Practices INTOSAI (International Organization of Supreme Audit Institutions). Undated. “Guidance for Planning and Conducting an Audit of Internal Controls of Public Debt.” International Standards of Supreme Audit Institutions (ISSAI) 5410, INTOSAI Professional Standards Committee, Copenhagen. https://www.intosaicommunity.net/document/articlelibrary/ issai_5440_e.pdf IMF (International Monetary Fund). 2001. Government Finance Statistics Manual 2001. Washington, DC: IMF. https://www.imf.org/external/pubs/ft/gfs/manual/ ———. 2007. Manual on Fiscal Transparency. Washington, DC: IMF. http://www.imf.org/external/np/pp/2007/ eng/101907m.pdf ———. 2009. “Balance of payments and international investment position manual.” Washington, DC: IMF. https://www.imf.org/external/pubs/ft/bop/2007/pdf/bpm6.pdf ———. 2011. “Public Sector Debt Statistics: Guide for Compilers and Users.” Washington, DC: IMF. https://www. imf.org/en/Publications/Manuals-Guides/Issues/2016/12/31/Public-Sector-Debt-Statistics-Guide-for-Compilers-and- Users-Guide-for-Compilers-and-Users-24905 ———. 2014. “External Debt Statistics: Guide for Compilers and Users/Inter-Agency Task Force on Finance Statistics.” Washington, DC: IMF. https://www.imf.org/external/np/sta/ed/guide.htm ———. 2015. “Designing Legal Frameworks for Public Debt Management” Prepared by Elsie Addo Awadzi Washington, DC: IMF. http://pubdocs.worldbank.org/en/753401510086709870/PDM-Publication-LegalFramework-DesigningLegalF rameworksforPublicDebtManagement.pdf IMF (International Monetary Fund) and World Bank. 2001. Developing Government Bond Markets: A Handbook. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/13865 ———. 2012. “Central Bank Credit to the Government: What Can We Learn from International Practices? Jácome, L.I.; Matamoros-Indorf, M.; Sharma, M.; Towsend, S. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Central- Bank-Credit-to-the-Government-What-Can-We-Learn-From-International-Practices-25654 ———. 2013. “Staff Guidance Note on the Application of the Joint Bank-Fund Debt Sustainability Framework for Low- Income Countries.” Washington DC: IMF and International Development Association (World Bank). http://www.imf. org/external/np/pp/eng/2013/110513.pdf 131 Debt Management Performance Assessment Methodology ———. 2014. Guidelines for Public Debt Management— Washington, DC: IMF and World Bank. https://www.imf.org/ external/np/pp/eng/2014/040114.pdf ———. 2010. Guidance for Operational Risk Management in Government Debt Management — Washington, DC: World Bank. http://pubdocs.worldbank.org/en/428971510086804641/PDM-Publication-OperationalRisk-GuidanceforO perationalRiskManagementinGovernmentDebtManagement.pdf ———. 2018. “Developing Medium-Term Debt Management Strategy (MTDS)– Guidance Notes for Country Authorities.” Washington, DC: IMF and International Development Association (World Bank), Washington, DC. https:// www.worldbank.org/en/programs/debt-toolkit/mtds ———. 2018. “G-20 Note: Improving Public Debt Recording, Monitoring, and Reporting Capacity in Low and Middle- Income Countries: Proposed Reforms ” Washington, DC: IMF and International Development Association (World Bank), Washington, DC. http://documents1.worldbank.org/curated/es/645621532695126092/pdf/128723-repo-For- VP-IMPROVING-PUBLIC-DEBT-RECORDING-clean.pdf ———. 2020. “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers”, Washington D.C. https://www.imf.org/~/media/Files/Publications/PP/2020/English/PPEA2020010.ashx Proite, Andre. 2020. Recording, Monitoring, and Reporting Public Debt - Organizing a Back Office : A Guidance Note. MTI Discussion Paper;No. 18. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/ handle/10986/33654 Razlog, Lilia; Irwin, Tim; Marrison, Chris. 2020. A Framework for Managing Government Guarantees. MTI Discussion Paper; No. 20. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/33828 van der Wansem, Patrick B. G.; Jessen,Lars; Rivetti,Diego. 2019. Issuing International Bonds : A Guidance Note (English). MTI Discussion Paper;no. 13 Washington, D.C. : World Bank Group. http://documents.worldbank.org/ curated/en/491301554821864140/Issuing-International-Bonds-A-Guidance-Note Wheeler, Graeme. 2004. Sound Practice in Government Debt Management. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/15017 Yaker, F. Israel, Saxena, Sandeep, Williams, Mike. 2020. “How to Develop a Framework for the Investment of Temporary Government Cash Surpluses”. IMF How To Notes – Fiscal Affairs Department. Washington D.C. https://www.imf.org/ en/Publications/Fiscal-Affairs-Department-How-To-Notes/Issues/2020/12/21/How-to-Develop-A-Framework-for-the- Investment-of-Temporary-Government-Cash-Surpluses-49954 132 Annexes Debt Management Performance Assessment Methodology Annex I. The DeMPA Spreadsheet Tool The DeMPA spreadsheet Tool is formed by series of tabs listing the all DPIs (1.1, 2.1, 2.2, … 14.2, 15.1). Each DPI is further broken down into sub-DPIs and grouped by score level (C, B, A) to reflect the specific requirements attached to the DPI. For each sub-DPI (rows), the assessment team should verify two angles: (a) INSTITUTIONAL and (b) IMPLEMENTATION, suggesting tests to evaluate the angle, which typically reflects a YES/NO question. To meet the requirement described in the sub-DPI the evaluator should mark YES for both INSTITUTIONAL and IMPLEMENTATION, as indicated in the sheet. In most cases the INSTITUTIONAL angle is not applicable due to the marking intended by the sub-DPI. This is clearly indicated in the Tool. To illustrate, DPI 1 is further broken down into DPI 1.1.c1, 1.1.c2, 1.1.c3, 1.1.c4 which labels the requirements in Table 1. These sub-DPIs respectively cover the legal framework and specifies the authorization to borrow; authorization to issue guarantees; the definitions of debt instruments used by the authorities and purpose of borrowing. The existence of such legislation constitutes the INSTITUTIONAL angle. To score a C, the legislation must be followed, which is marked by the IMPLEMENTATION angle. In the example below, the legislation satisfies the requirements for the B level, denoted by DPI 1.1 b1 and 1.1 b2 from the INSTITUTIONAL ANGLE. This is not the case from the IMPLEMENTATION angle as the subject fails the tests. Therefore, the score is deemed to be C as implementation prevails over the institutional angle. Example: Sub-DPIs 1.1.c1 to 1.1.c4: Requirements Institutional/Design Y/N Implementation Y/N Yes or No Yes or No Test: There is clear autorization to c1 Authorization to Borrow Y Test: Check if the Law is Y borrow in the (primary or secondary) complied with legislation. Who can borrow? Yes or No Authorization to issue Test: There is clear autorization to Yes or No Guarantees and c2 issue Guarantees and undertake Y Test: Check if the Law is Y undertake on-lending on-lending in legislation complied with operations (primary or secondary) ? Yes or No The definition of debt Yes or No Test: Does the legislation define the c3 instruments used by Y Test: Check if the Law is Y debt instruments that can be used the government complied with by the gov’t? Yes or No Yes or No Test: The primary/secondary c4 Purpose of borrowing Y Test: Check if the Law is Y Legislation states the purpose complied with of borrowing 134 Debt Management Performance Assessment Methodology Annex II. DeMPA Debt Performance Indicators (DPIs) Indicator Title 1.1 Central Government’s legal framework 1.2 Public Sector Entities’ legal framework 2.1 The managerial structure for CG borrowing and debt transactions 2.2 The managerial structure for issuance of CG guarantees and on-lending operations 2.3 Staff and Human Resources 3.1 The quality of the DM strategy document 3.2 The decision-making process and publication of the DM strategy 3.3 Annual borrowing plan 4.1 Central government (CG) debt report – Content and timeliness 4.2 Reporting to the legislature 4.3 Public debt report – Government coverage 5.1 Frequency, comprehensiveness of external audits (Financial, Compliance, Performance) and public disclosure 5.2 Degree of commitment to address audit outcomes 6.1 Provision of debt service forecasts 6.2 Fiscal risks monitoring in the Non-Financial Public Sector 6.3 Availability of key macro and fiscal variables and DSA 7.1 Separation between monetary policy and DM operations 7.2 Coordination with the CB through regular information sharing on debt and CG cash flows 7.3 Limits of direct access to CB funding 8.1 The publication of a borrowing calendar for wholesale securities and publication of issuance results 8.2 Domestic market operations and clarity in rules and procedures 9.1 Appropriate organizational arrangements and processes for external borrowing from all sources, including financial analysis of terms and conditions 9.2 Availability and degree of involvement of legal advisers before signing the loan contract 10.1 Issuance of CG loan guarantees 10.2 On-lending operations 10.3 The use of derivatives 11.1 Effectiveness of forecasting the aggregate level of cash balances in government bank accounts 11.2 Effectiveness of cash balance and liquidity management 12.1 Recording debt-related transactions 12.2 Debt payments 13.1 Data access, backups and IT infrastructure 13.2 Business Continuity (BC) and Disaster Recovery (DR) plans 14.1 Completeness and timeliness of CG debt records 14.2 Secure registry systems and debt holders 15.1 Use of Debt Management Information Systems 135 Debt Management Performance Assessment Methodology Annex III. Mapping of the Revised DeMPA DeMPA 2015 DeMPA 2021 Governance and Strategy Development DPI-1 Legal Framework (1 dimension) DPI 1.1 partially edited* and creation of DPI 1.2. DPI-2 Managerial Structure (2 dimensions) DPIs partially redesigned. Incorporated DPI 2.3 on Staffing. DPI-3 Debt Management Strategy (2 dimensions) ABP dimension added (DPI 3.3). DPI-4 Reporting and Evaluation (2 dimensions) New dimension added for debt reporting coverage (DPI 4.3). DPI-5 Audit (2 dimensions) DPI 5.1 edited to focus on external audits Coordination with Macroeconomic Policies Coordination with Fiscal Policy Adjusted Sub-DPIs for 6.1. Introduction of fiscal risks DPI-6 (2 dimensions) monitoring (DPI 6.2). Coordination with Monetary Policy DPI-7 Edited Sub-DPIs on 7.3. (3 dimensions) Borrowing and Related Financing Activities DPI-8 Domestic Borrowing (2 dimensions) DPIs partially redesigned on 8.1 and 8.2. DPI-9 External Borrowing (3 dimensions) DPIs partially redesigned on 9.1 and 9.2. Loan Guarantees, On-Lending, and DPI-10 DPIs partially redesigned on 10.1 and 10.2. Derivatives (3 dimensions) Cash Flow Forecasting and Cash Balance Management Cash Flow Forecasting and Cash Balance DPI-11 DPIs 11.1 and 11.2 entirely redesigned. Management (2 dimensions) Debt Recording and Operational Risk Management** DPIs partially redesigned resulting in new DPI 12.1 and DPI-12 Debt Administration and Data Security 12.2. Segregation of Duties, Staff Capacity, and DPI-13 DPIs partially redesigned resulting in DPI 13.1 and 13.2. Business Continuity DPI-14 Debt Records DPIs partially redesigned. DPI-15 Use of DMIS** Introduced to highlight the topic. * See DPI 1.1.c3 ** This indicator uses selected sub-DPIs (requirements) from DPIs 12 to 14. Note: DeMPA = Debt Management Performance Assessment. DPI = DM Performance Indicator. 136 Debt Management Performance Assessment Methodology Annex IV. Treatment of Arrears in Finance Statistics A common definition of debt in public debt management laws is the following: All financial liabilities are created by (a) borrowing, (b) issuance of debt securities to regularize arrears, (c) assumption of payment obligations under a guaranteed loan, and (d) credits accepted under supplier’s credit agreements. Except for (d) this debt is commonly managed by the DM unit. For statistical purposes, arrears in general should also be reported as debt (IMF 2001, 2009, 2011). In these documents, arrears should be recorded as a memorandum item under the government balance sheet. Securitization is often the trigger to add arrears to domestic debt, but this should not be the only trigger, according to these recommendations. IMF (2009) suggests that the definition of debt would also include arrears that are rescheduled or refinanced. Other examples are unpaid pension contributions to the public service pension agency that have been outstanding for years, and substantial amounts of arrears in general that are rolled over from one year to the next. Annex V. Guidance on the Country Background Section A section describing the country’s economic background and government debt usually precedes the scores in the DeMPA Report. The background section aims to summarize (two pages) the context in which the government operates, including growth dynamics, the fiscal sector (and fiscal rules if applicable), financial stability, structural reforms, future challenges, contingent liabilities, relationship with SOEs and any other relevant factor. Key macroeconomic data is presented on public sector debt (% GDP), GDP growth rate and GDP size (USD bn); inflation, fiscal balance and current account (% GDP). Data could be shown on an annual basis with a historical 3-5 year plus a 1-2 year projections. Government debt (public and public guaranteed) dynamics are also show the DSA risk, the major variation factors. Debt composition and profile are presented to depict the split between external and domestic debt alongside main debt holders. In addition, this section could cover the currency composition and other risk indicators such as ATM and ATR whenever available. 137