Fast-disbursing Credit Auditing 1

In Mexico, the contracting and use of resources stemming from public debt transactions are ruled by the Political Constitution of the United Mexican States, the General Public Debt Law, the Law of Revenue, the Federal Law of Budget and Treasury Responsibility and the Planning Law. Regulatory Framework 2

Federal Government can use four general concepts to contract a loan on the state’s credit: Productive public investment. Exchange or refinancing of Federal Treasury obligations. Dealing with an emergency declared by the President of Mexico. Monetary regulation. Regulatory Framework 3

According to Public Debt Law, Federal Government can perform credit transactions with: International Financing Bodies (IFB). National Commercial Bank. International Commercial Bank. International Monetary Fund and other international financial cooperation bodies or which group central banks. Institutions to contract a debt with 4

The Congress of the Union authorizes external and internal direct net indebtedness sums for public financing of Federal Government and government agencies. These sums are included in the Revenue Law and its use must be approved in the Expenditures Budget of the Federation. Authorization 5

For making a loan, it is necessary to: Include, in the Expenditure Budget of the Federation, the sums for financing projects. Contract credit for investment projects or productive activities. Assess the cost and benefit of investment projects to be financed. Requirement 6

(Cont.) Credits generate sufficient resources for their payment. Count on the adequate guarantees. That the borrowing bodies have sufficient payment capacity to timely settle the commitments. Requirements 7

The IFBs offer two basic types of loans: Long-term loans for investment projects. Fast-disbursing loans for development policies. Credit Classification (IFB) 8

Through auditing, the Superior Audit Office has determined irregularities in public debt policy and in contracting and use of resources stemming from fast-disbursing loans for development policies, contracted with IFBs. Problems 9

Strategies and guidelines of debt policy presented in the National Financial Program for Development (PRONAFIDE ) propose to use long-term debt in local currency to finance federal government deficit, which does not fit in with the regulatory framework for public debt contracting, that rules the use of resources derived from transactions made on the credit of the state. Public policy problems 10

(Cont.) Along the same lines, public policy is not in line with the Political Constitution of the United Mexican States and with the General Public Debt Law, because public debt policy envisages that resources stemming from external financing can be applied in non- controlled concepts. Public policy problems 11

Three loans contracted with IFB have been audited systematically in the last Public Accounts (2006, 2007 and 2008). Revisions made to these credits have shown irregularities in resources use and contracting because: Loans problems 12

(Cont.) They are agreed on already made actions. Resources are not earmarked to investment projects or profitable activities. Evidence to verify that the credit genered enough resources for its payment is not provided. Loans problems 13

(Cont.) Evidence to know the credit resources use is not provided. Consultig bodies in public credit do not analyze credit planning, budgeting, practice and monitoring. Resources are poured in the Federation Treasury and its final use is unknown. Loans problems 14

Loans problems Fast-disbursing loans contracting is made over already carried out actions, what prevents knowing resources specific use and does not allow its proper auditing. Agree on tangible actions to be performed with loans, allowing identifying the resources specific use for its auditing. What really happens What should be 15

Conclusion about loans problems Credit’s virtue is to bring a future good to present, what cannot be determined for fast-disbursing loans, because the resources use and the expected outcome of their application are unknown. 16

Conclusion about loans problems (Cont.) The Superior Audit Office of Mexico considers that the Ministry of Finance and Public Credit does not comply with normative regulations relating to operation of consulting bodies on public debt and the application of resources stemming from loans. 17

Conclusion about loans problems (Cont.) Likewise, terms agreed on contracts do not define the schedule of meetings to exchange points of view on the achievements reached during the program execution neither for writing reports about its implementation. 18

Conclusion about loans problems (Cont.) Evidence of credits being allocated to investment projects or productive activities was not obtained, studies to corroborate that credits will generate enough resources for its payment were not carried out; and, there was no evidence about resources being allocated to development policies. 19

Proposal for a Public Debt Sustainability Audit 20

Auditing public debt sustainability in Mexico As a result of the audit carried out by the Superior Audit Office about the resulting debt of fast-disbursing loans, a discrepancy between public policy and applicable legislation was found, therefore, an audit on public debt sustainability in Mexico was programmed. 21

The General Public Debt Law states that the Federal Executive and its dependencies will be able to contract financing only through the Ministry of Finance and Public Credit. The decentralized sector and the development bank will be able to contract external financing only with previous authorization of the Ministry of Finance and Public Credit. Regulatory Framework 22

The Political Constitution of the United Mexican States allows the federal states and municipalities to contract obligations or loans as long as they are not either contracting them with other nations government, with societies or foreign private citizens, or paying with a foreign currency or outside the national territory. Regulatory framework 23

(Cont.) Credits should be used in public and productive investments, according to bases established by local legislative bodies for specifical purposes and no higher than the amount yearly set in their respective budgets. Regulatory framework 24

According to the General Public Debt Law, the Ministry of Finance and Public Credit is in charge of granting the Federal Government guarantee to the credit transactions carried out with international bodies of which Mexico is a member, or with public or private, national or foreign entities. Federal Government endorsement and guarantee 25

According to the Fiscal Coordination Law, federal participations corresponding to federal entities or municipalities could be used to guarantee obligations in case of non compliance or serve as a means of payment of those obligations contracted with the Federation, credit institutions operating in national territory or with physical or moral Mexican nationals. Federal Government endorsement and guarantee 26

Executing entities of resources stemming from public credit are: Federal Executive and its dependencies. Federal District Government. Decentralized public bodies. Companies with a majority government ownership. Executors 27

(Cont.) Institutions rendering public banking and credit services (development bank). National auxiliary credit organizations. National insurance and security institutions. Trusts in which the trustee is the Federal Government. Executors 28

Objective Assessing the Ministry of Finance and Public Credit performance in terms of efficacy, effectiveness and economy in its transactions regarding evolution and sustainability of financial and non-financial liabilities constituting public debt and the public federal sector federated entities and autonomous bodies contingencies. 29

Scope The public and contingent debt balance as of December 31, 2009, from public federal sector, public-state sector and autonomous bodies. 30

Procedures It will be proved that the financial program from the public sector corresponding to the 2009 fiscal year, under which the public debt was managed, including the provision of foreign currency required for external debt management, was created. 31

Procedures The monitoring mechanisms implemented by the Ministry of Finance and Public Credit allowing to check the capacity of payment of the entities that contract financing, performance of approved financing programs, the adequate financial structure of accredited entities and management resources stemming from financing, will be reviewed. 32

Procedures It will be reviewed that the destination of the contracted credits observe the lines stated by the Federation Revenue Law for the 2009 fiscal year. The balance integration, registry, interest rates, maturities and changes in the last five years of the gross domestic debt will be revised. 33

Procedures The total of the state and municipal endorsed public debt, its integration and registry, interest rates, maturities and its changes in the last five years will be revised. 34

Procedures The total of federal public sector laboral liabilities; that of the state public sector, in accordance with the information offered by the Ministry of Finances and Public Credit and that of the autonomous bodies, its integration and registry, its changes in the last five years, its accounting and the actuarial studies will be revised. 35

Procedures The total of the public sector endorsed obligations, its integration and registry, and its changes in the last five years will be revised. The total of the 1995 financial crisis debt, its integration and registry, and its changes in the last five years will be revised. 36

Procedures The total of the State Oil Company debt, its integration and registry, and its changes in the last five years will be revised. The total of the State Electricity Company debt, its integration and registry, and its changes in the last five years will be revised. 37

Public Debt problems 38 From the previous analysis about public debt, we can observe that the local indebtedness grew and divested in the exterior, and finally a considerable part of these resources became available instead of being allocated to material investments, the very same year in which the biggest economic recession has happened in the country since the 1930’s.

Public Debt problems 39 On the other hand, we can observe that the use of debt to fund the deficit of the Federal Government is preferably used, when is supposed to be allocated to the execution of projects, activities and enterprises that support economic and social development plans, that generate revenue for their payment, that are used for the improvement of the structure or for effects of monetary regulation, as established in the regulatory framework.

Public Debt problems 40 Finally, to evaluate the public debt sustainability, involves knowing not only the federal sector total amounts, that are included in the annual public account, but it is also important to know what is the contingent debt, the endorsement granted to the states and entities, what is the labor liabilities value and, most of all, to assess the risk and consequences in which the country is to face its obligations in relation to the financial cost and its repayment.