ACCORDING to a report issued by the Commission on Audit (COA) at the end of last week, the handling of more than P1 trillion – yes, that’s trillion, with a T – in public obligations by the government in 2013 was “contrary to the transparency policy” embodied in the Philippine Constitution.
This has got to be the understatement of the year, even coming from the normally soft-spoken COA.
The budget items, P1.03 trillion in all, were identified by the COA as “contingent liabilities,” and included entries for, among other things, P920 billion in projects under the public-private partnership (PPP) program, P32 billion in loan guarantees from the national government and the Development Bank of the Philippines, and P77 billion in private sector foreign loan guarantees via the Home Guaranty Corporation (HGC) and the Trade and Investment Development Corporation of the Philippines (Tidcorp).
To be clear, the P1 trillion is not a ‘debt’ in the usual sense, nor does the COA’s revelation mean that there is necessarily a large amount of money missing from public coffers. Some news reports have been misleading on these points, most likely because “contingent liability” is a tricky concept to understand and needs to be explained to readers who probably do not all have a background in finance and accounting.
In accounting, a contingent liability is a possible financial obligation that arises from a past or present action and which may be payable in the future, depending on whether particular circumstances not within the government’s control occur or do not occur. A contingent liability can also be a current obligation, the amount of which is not known or cannot be reliably estimated, or for which settlement is not probable.
For example, a warranty is a common type of contingent liability. A manufacturer of cell phones, for instance, would consider the costs of repairing or replacing defective phones as a contingent liability, because the expense can be estimated fairly accurately and has a possibility of occurring that falls somewhere between “probable” and “unlikely.” In the context of government spending, an example of a contingent liability would be a guarantee by the government to cover a loan taken by a contractor building a project; if the contractor is, for some reason, unable to pay the loan in the future, the obligation then passes to the government. Under international accounting standards, the amount of the guarantee should be disclosed, even if it is not probable that the government will actually have to make good on it.
The discrepancy between what the COA uncovered and the P474 billion the government actually disclosed almost certainly comes from differing interpretations of international accounting standards, which provide three ways to handle contingent liabilities. If the expense is probable and can be reasonably estimated, the liability is recorded on the balance sheet. If the contingent liability is reasonably possible but not probable, or if the liability is probable but the amount cannot be estimated, then the liability is simply disclosed as a note accompanying the financial statement. If the contingent liability is unlikely to occur under any circumstances, then it can be ignored in the financial records.
Clearly, the Department of Finance and the Department of Budget and Management have less stringent standards as to whether a contingent liability should be disclosed or not than the COA does.
This obviously creates a serious problem. As the COA explained, “The total national government exposure, or the extent of the national government risk which needs monitoring, is not known. Government guarantees in new or incoming PPP projects are extended without having determined how much is the national government’s existing exposure and how much new projects are to be added to the said risks.”
In other words, the government may be setting itself up for large, unexpected future expenses for which it has apparently made no provisions, either by setting some funds aside for possible use for the purpose, or by determining from what parts of the national budget the potential costs would be covered.
We should thank the COA for at least attempting to put the brakes on what appears to be a wholesale effort by the Aquino Administration to (potentially) mortgage the country’s financial future for the sake of scraping together something that looks like achievement now. Not that it seems likely to improve the administration’s approach at all; the critical COA report was met with the usual dedma, ignore-it-and-it-will-go-away response from Malacañang, leaving the rest of us with the sole and not at all comforting option of holding our collective breath and hoping none of this becomes a problem later.