The Government Successfully Borrows in the Domestic Market: How to Optimize this Process and to Reduce Debt Management Costs

Report ID: 118

The National Audit Office of Lithuania carried out an audit of the management of the debt on behalf of the State, during which the efficiency of the management of Government securities (hereinafter – GS) issued in the domestic market was assessed. The audit covered the period between 2006-2009; in some cases data of 2010 was also used for comparison. The Government borrows in the domestic market through issuance of bonds – GS with maturity of over one year , with maturity of 3, 5, 7 and 10 years, and Treasury bills – GS with maturity of under one year, with maturity of 1, 3, 6, 9 and 12 months.

Domestic GS comprise about 30 per cent of the debt on behalf of the State. Until the end of 2008, GS were issued in the domestic market only through auctions. Until February 2009, in the domestic market of Lithuania GS auctions were organized by the Bank of Lithuania, later on – AB NASDAQ OMX Vilnius. In 2008 with the start of economic crisis, the Government started to issue GS in the domestic market not only through auctions, but also through private placements concluding a contract with creditors, as well as resumed the issuance of savings bonds. The Ministry of Finance successfully borrows in the domestic market: organization of GS auctions conforms to recommendations of the World Bank and International Monetary Fund, as well as best foreign practice. During the audit no substantial problems related to the borrowing and debt management of the Ministry of Finance were detected; issues indicated in the report and recommendations given would allow to improve the efficiency of the GS management: i.e., to develop the domestic market, increase the demand of GS, which in the long run would help to reduce the debt management costs. The Medium-Term Debt Management Strategy of the Government does not provide for the objective to develop and maintain the efficient domestic market; no analysis was conducted as to what is the maximum possibility to borrow in the domestic market. Establishment of the above mentioned objective and clear means to implement it would allow increasing the demand of GS issued in the domestic market, independence from foreign market and reduce the debt management costs in the future.

GS auctions in the domestic market are insufficiently regular and predictable. In 2nd half of 2006 – 2009 the Ministry of Finance systematically cancelled previously announced auctions, which had a negative impact on auction participants and investors. Such a practice raises the distrust in auction organizers, hampers the market development, and increases the debt management costs in the long–run. The Ministry of Finance does not announce the amount of the issued GS; issuing GS in the domestic market, did not always follow the established borrowing programmes and calendars. Appropriate planning of the borrowing need, announcement of the information about how regularly Treasury bills and bonds will be issued and about the planned amount of the GS issue would enable to attract more investors and develop the domestic market, as well as ensure the transparency of the Government plans. The Ministry of Finance does not use auction evaluation indicators, which show the interest of investors in Government securities with various maturities. Use of Bit-to-Cover or other evaluation indicators showing the interest of investors in auctions would allow attracting more investors. The audit pointed out that issuance and maturity dates of GS were not always closely linked to the need for public cash on respective days. The Ministry of Finance should ensure the balance between the regular nature of borrowing and need for public cash: it would enable to optimize the planning of borrowing and help to reduce the costs of interests. In order to eliminate the possible risk of settlement between auction participants, to ensure the proper understanding of information, stability and transparency, requirements to auction participants issued by the Ministry of Finance should set the minimum and maximum amount of GS, which has to / may be purchased by one auction participant / investor in one auction, as well as to set requirements for non-competitive bids. Seeking to attract the interest of possible new auction participants and potential investors, the Ministry of Finance should announce more information on its website related to the GS issuance process, carrying out of auctions; explain what information has to be submitted along with the bid for GS by auction participants, as well as particularities of various bids and advantages to individual groups of investors. We want to point out that issues set out in the report and the terminology used is technical, specific and in many cases meant only for experts.

Aid through budget support (RiR 2007:31)

Report ID: 205

The Riksdag (Swedish Parliament) adopted a new Policy for Global Development in 2003. This policy established a new objective for development cooperation: to contribute to an environment supportive of poor people’s own efforts to improve their quality of life. At the same time, the Riksdag decided that development aid should amount to 1 per cent of the Swedish gross national income. The growing importance of budget support can be seen against this background. In addition, this development is also a result of international agreements to the effect that aid should increasingly be given in more general forms and that the handling of aid should be harmonised among donor countries.

Budget support is financial support provided to the national budget of a poor country in order to support poverty reduction in that country. The choice of this type of support is based on the assumption that aid will be more effective if it is governed to a greater extent by the recipient country’s own priorities rather than by requirements imposed by donors.

From the perspective of recipient countries, it is important that budget support is predictable. This requires that decisions on budget support be based on long-term positions which, in turn, must build on careful analysis.

The effectiveness of budget support depends on two factors: first, the extent of political will in the recipient country to implement measures to reduce poverty and, second, the effectiveness of economic policy and public financial management in that country. For budget support to be an appropriate type of aid, certain basic conditions with regard to the economic policy and public financial management of the recipient country must be met. In addition, the recipient country must have a poverty-reduction strategy whose content is deemed to be credible and relevant.

The Riksdag has emphasised that the Government should create conditions ensuring that decisions on budget support can be based on a solid foundation, given that budget support constitutes support to the overall policy of the recipient country. The Government has authorised Sida (Swedish International Development Cooperation Agency) to prepare matters, enter into agreements and make disbursements in the field of budget support. This delegation of responsibility makes heavy demands on the ability of the Government Offices (i.e. ministries) and Sida to determine whether the conditions for the provision of budget support are met.

Report of the Task Force on European Banking Union on prudential supervision of medium-sized and small (“less significant”) institutions in the European Union after the introduction of the Single Supervisory Mechanism

Report ID: 259

As from 2008, Europe was hit by a financial crisis and a subsequent sovereign debt crisis. Many governments supported failing financial institutions with public funds amounting to hundreds of billions of euros. In response, the countries of the euro area introduced the European Banking Union, including a Single Supervisory Mechanism. In this Mechanism, the European Central Bank is directly responsible for prudential supervision of all ‘Significant Institutions’. National Competent Authorities are directly responsible for supervising the ‘Less Significant Institutions’, based on guidance of the European Central Bank.

The Supreme Audit Institutions of Austria, Cyprus, Finland, Germany and the Netherlands carried out a parallel audit to examine banking supervision at national level. The objectives of the parallel audit were:

1) to gain insight into differences among EU Member States in the way supervisors have set up and carry out prudential supervision for LSIs, and

2) to collect evidence about possible ‘audit gaps’ that may have emerged as a result of the introduction of the Single Supervisory Mechanism.

One of the findings was that a comprehensive audit mandate assessing the supervisory review and  evaluation process of banking supervision is no guaranteed in the Single Supervisory Mechanism(SSM) and that before November 2014, National Supreme Audit Institutions audit scope went far beyond what the ECA is able to exercise today vis-à-vis the ECB.

EUROSAI website:  https://www.eurosai.org/en/databases/audits/Report-of-the-Task-Force-on-European-Banking-Union-on-prudential-supervision-of-medium-sized-and-small-less-significant-institutions-in-the-European-Union-after-the-introduction-of-the-Single-Supervisory-Mechanism/

Underlying Risks to Sustainable Public Finances

Report ID: 304

Parallel Audit Report to the Contact Committee of the heads of the SAIs  of the Member States of the European Union and the European Court of Auditors by the SAIs of Finland, Latvia, the Netherlands, Portugal, Slovakia and Sweden (Coordinator).

The parallel audit project was endorsed by the Contact Committee at its meeting in June 2015. The participating SAIs followed an agreed broad common audit approach allowing them to conduct their audit work according to their national mandates. Each SAI was free to decide the scope, audit questions and methods for their respective audit while recognising the common approach. This parallel audit report is thus a synthesis of six audits conducted independently by SAIs at the national level. It contains general observations and conclusions but no common recommendations.

The aims of the parallel audit was to 1) draw attention to risks that need to be addressed in order to maintain fiscal sustainability based on recommendations from international organisations; and 2) assess how the governments dealt with the recommendations they received.

This audit was based on reviews of country specific reports and recommendations from the European Union (EU), the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) issued in the period 2011–2015, (the audited period). The participating SAIs have mapped the various recommendations to their respective country as well as the government responses to these recommendations. They have furthermore audited the public availability of the recommendations at national level as well as national follow-up procedures. A number of SAIs have moreover assessed the effectiveness of government measures.

A general observation of the parallel audit working group is that recommendations issued by the three international organisations tend to overlap within each country. This might indicate that the international organisations have pinpointed relevant areas of concern. The overall conclusion is that multilateral surveillance of economic policy, even when the recommendations are not binding, constitutes good opportunities for governments to learn from best practices and to improve their policies.

SOURCE: https://www.eca.europa.eu/sites/cc/Lists/CCDocuments/Underlying%20Risks%20to%20Sustainable%20Public%20Finances/Parallel_Audit_Report_EN.pdf

COMPENDIUM CAROSAI PROGRAME ON COOPERATIVE AUDITS OF REVENUE DEPARTMENT

Report ID: 308

From 2013 to 2015, the SAIs of Bahamas, Barbados, Grenada, Guyana, Jamaica y St. Lucia conducted a parallel audit of revenues,aimed to improve SAI’s professional staff and organisational capacity to conduct and report on audit of revenues / revenue departments (AIM). This audit took place under the framework of a CAROSAI Programme on Cooperative Audits of Revenue Department supported by the INTOSAI Development Initiative (IDI), the INTOSAI Capacity Building Committee (CBC).

The audit objective was to assess the effectiveness of the management of taxes (such as VAT, income tax, business tax) in the participating countries by examining key aspects of the revenue collection process: 1. Registration; 2. Collection; 3. Compliance and enforcement; and 4. Monitoring and Reporting.

A general conclusion was tbat current management performance reporting mechanisms across the agencies audited did not enable management to exercise sufficient ongoing control over the debt collection function. In some instances high level revenue targets were set related to a predetermined value as opposed to an accurate assessment of total obligations.

This impacts governments’ revenue base. The development of a monitoring strategy would provide immediate business benefits by ensuring that where ineffective processes in the debt collections function are identified, they are reported to management promptly so that remedial action can be taken.

Over the longer term, regular management reporting based on monitoring the performance of the debt collection activities (with Key Performance Indicators assigned) would support management’s responsibility to ensure the efficiency and effectiveness of its collections business operations.

Source: https://www.eurosai.org/handle404?exporturi=/export/sites/eurosai/.content/documents/CAROSAI-Compendium.pdf