This presentation was made by Ali Uppal and Shirley Beard, United Kindom, at the 18th Annual Meeting of OECD Senior Financial Management and Reporting Officials held at the OECD Conference Centre, Paris, on 1-2 March 2018

1. Fiscal Risks and Contingent Liabilities
Ali Uppal, Head of Balance Sheet Analysis, HM Treasury
Shirley Beard, Ministry of Defence
March 2018

2. Outline
2
1. The Fiscal Risks Report
2. Overview of quantifiable contingent liabilities (CLs)
3. Approval and Monitoring of CLs
 Old process vs. new process
 The CL checklist
4. One year stocktake and year ahead
5. Contingent liabilities in the Ministry of Defence
6. Annex

3. 1. The Fiscal Risks Report (FRR)

4. 4
 The FRR covers all risks to the public finances over a medium (5 year) and
long-term (50 year) horizon. The key risks to the public finances identified
included:
• macroeconomic risks such as weak productivity growth and the risk of a
recession with lasting negative effects on the economy;
• the sensitivity of debt interest spending to interest rates and inflation;
• demographic and healthcare pressures on spending; and
• the erosion of tax bases (such as from work patterns).
 The FRR includes 57 open questions to government. The UK government has
committed to respond to the FRR within a year of publication.
Key conclusions from the FRR

5. 5
The FRR stress test
Impact on borrowing Impact on debt

6. 2. Overview of Quantifiable CLs

7. Growing fiscal risk?
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
100
200
300
400
500
600
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Provisions and Contingent Liabilities (£bn)
Remote
contingent
liabilities
Non-remote
contingent
liabilities
Provisions
% of GDP
Source: WGA
7

8. 8
Remote CLs have fallen due to the closure of financial stability schemes
set up during the crisis while the non-remote have more than doubled
over the last 7 years, from c.£40bn to over £100bn…
0
50
100
150
200
250
300
350
400
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Remote Quantifiable Contingent Liabilities (£bn)
Other
Financial Guarantees to depositors with public sector banks
Credit Guarantee Scheme
Asset Protections Scheme
Government Indemnity Scheme DCMS
National Rail
Outstanding loans to EU member states
Gov's potential obligations wrt coins in circulation
Callable capital in International Financial Institutions
Callable capital to Europe Investment Bank
0
20
40
60
80
100
120
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Non-remote Quantifiable CLs (£bn)
Other
Pension Protection Fund
Military contracts
Transport infrastructure projects
Supporting int orgs
Loss of tax rev from oil and gas field decomm
Export gurantees and insurance policies
Financial stability interventions by HMT
Clinical negligence claims DoH
Taxes subject to challenge HMRC

9. 2. Approval and Monitoring of CLs

10. 10
A more centralised and systematic approach to approving and
monitoring CLs will help manage the growing fiscal risks…

11. 11
Each new contingent liability will go through a checklist
composed of 5 key elements
a) What is the problem that needs
to be solved and why is
Government intervention
necessary?
b) Why is incurring/modifying a CL
necessary to address the market
failure? Why is it better than
increasing spending?
c) What other alternatives have
been explored? E.g., subsidies.
a) What is the maximum
size of the CL, if any?
b) Why is this size
necessary?
c) What is the maturity
of the CL, if any?
d) Why is this maturity
necessary?
e) Do we have an exit
strategy?
a) What are the triggers for potential crystallisation of
the CL?
b) What is the likelihood of complete crystallisation
over what timeframe?
c) What is the expected loss associated with the CL?
d) What is the distribution of possible losses over the
life of the CL?
e) How do the risks compare to the returns on the CL?
a) Who will manage the risks associated with the CL and what is the
governance process around the management of these risks?
b) What risk mitigation tools have been explored? E.g., partial guarantees,
collateral, controls on risk-taking behaviour, reinsurance, etc.
c) Is the Exchequer being adequately compensated for bearing the risk
associated with the CL? E.g., guarantee fees, contingent claims, profit-
sharing, etc.
d) How should the Exchequer guard against the residual risk? E.g.,
contingency fund, setting aside financial assets, hedging, etc.
a) If the CL crystallised, to what extent would it be
possible to meet the required payment out of
the department's budget?
b) What is the ratio of the CL’s expected loss to
the department’s available resources?
c) If the CL crystallised, how would it affect PSNB
and PSND?
1.Rationale 2.Exposure 3.Risk and Return
4. Risk Management and Mitigation 5.Affordability

12. 3. One year stocktake

13. Published Guidance in July 2017
13

14. Received over 40 requests for approval which we have
compiled into a new centralised database
14
• Centralised database for monitoring portfolio of CLs
• 40+ new CLs gone through CL process
Section of
checklist
Rationale Exposure Risk vs
Return
Risk Mgt Affordability
Where have we
seen most
improvement
✔ ✔ X ✔ X
More than half have no credible
estimate of expected loss

15. 15
The database allows for analysis by category of ‘trigger’ as
well as maturity
0
3
6
9
12
15
18
0
10
20
30
40
50
60
Contracts Gov insurer of last
resort
International Trade Housing International
Development
SME support
Billions
Maximum Exposure (LHS axis) and Number (RHS axis) of CL by category
Maximum
Exposure
Number of
CLs
0
1
2
3
4
5
0 5 10 15 20 25 30 35 40
NumberofCLs
Maturity (years)
Contingent Liabilities by Maturity

16. 16
• How to further embed the process to shape policies that
give rise to CLs at the earliest instance?
• How to ensure robust analysis (for example, credible
estimates of expected loss)?
• How to balance fiscal risk management with policy
priorities?
• How to limit overall CL exposure?
Challenges and further questions

17. Shirley Beard
5. Contingent liabilities in the MoD

18. Quantifiable Contingent Liabilities
Non Remote ~ £1.5 Bn
Remote < £1 Bn
Unquantifiable ……….

19. a) Checklist tailored to policy
change
b) Usually suppliers wanting to limit
their exposure to risk
a) Estimation difficult
b) What is the worst
case ?
a) Likelihood of crystallisation
b) Calculation of expected loss
c) Value for money case
d) Late Identification
a) Governance
b) What are the alternatives ?
a) Unquantifiable CLs outside the affordability of
the department – catastrophic events – e.g.
nuclear
1.Rationale 2.Exposure 3.Risk and Return
4. Risk Management and Mitigation 5.Affordability
Experience of Using the Checklist

20. What Next
• Closer working with HM Treasury
• Improved Departmental Focus, Training and
Communication
• Improved analysis of Scenarios that lead to CLs
• Better explanation of value for money cases
• Balance Sheet Review

21. Annex: Understanding Provisions and Contingent Liabilities in WGA
21