The Finance Ministry has proposed to change the system of state guarantees for loans

Guarantees more than you need

The current system of state guarantees for loans and investment projects of the enterprises, which business perceives as free budget insurance, has exhausted its possibilities — it is necessary to change: to stop giving guarantees “unprofitable” projects and guarantees with 100 percent coverage of commitments and to introduce a fee for warranty support of the state, should be published on 6 February a policy document of the Ministry of Finance “Basic directions of the state debt policy” in 2017-2019 (.pdf).

By the end of 2019 by state guarantee support “will reach such proportions that its effects — public debt contingent liabilities from the Federal budget will be one of the important factors of financial stability of Russia,” the document says. In 2016, the existing state guarantees reached 2.6 trillion (nearly 24% of the Federal debt), by the end of 2019, their volume will increase to 3.1 trillion rubles, follows from the forecast of the Ministry of Finance.

The Ministry analyzed the results of the state guarantee support in 2013-2016 and concluded that the aid limits laid down in the law on the budget in almost all areas far exceeded the amount of required support, which the authorities indicated in their bids. That is, agencies had systematically overstated their requests for government guarantees for their affiliated industries and enterprises. In the result, the actual level of guarantees issued in rubles in recent years has averaged only 66% of the plan. Direct costs the state almost did not suffer — the company performed the bulk of the guaranteed obligations themselves, and guarantee cases occurred less than 1% of the volume of existing guarantees. But administering such a large-scale government guarantees associated with annual costs at several billion rubles, and to compensate them is not possible, since the guarantees are issued free of charge.

“The official is always maximizing bureaucrat. He will engage with the resources and reserves, if any rules of it is not limit,” — says the Director of the Institute of state and municipal management, Higher school of Economics (HSE) Andrey Klimenko.

Support will be cut

In the next three years the Ministry of Finance will reduce the volume of the newly provided warranty support. In 2017 it is planned to issue state guarantees in national currency for 190,1 billion rubles (87% less than last year’s level), and in the next two years — and 133.5 billion to 119.7 billion rubles. respectively. In foreign currency the amount of guarantees all three years will remain virtually unchanged at the equivalent of 81-85 billion rubles per year.

Financial support for investment projects will reduce on average by 43% compared to last year, although it will continue to consider it a priority. Amount of debt guarantees will continue to grow but at a slower pace compared to previous years. Burden on the budget will increase, and mainly talking about the budget in future periods, as the obligations on the state guarantees — long-term (30 years). The annual volume of the appropriation in rubles for the execution of the guarantees will have to increase — on average by 55.7 bln roubles (+122%).

At the end of 2016, the government decided to prepay almost 800 billion roubles in loans taken out by defence enterprises engaged in the execution of the order for rearmament. This has led to a sharp increase in the deficit compared to the initial plan. In 2011-2014 during the execution of the state defense order was implemented the mechanism of crediting of the enterprises of the defense industry under the state guarantees. During this period, defense companies issued loans under the state guarantees in the amount of almost 1.2 trillion rubles.

The mechanism should be changed

The Finance Ministry has identified several shortcomings of existing practices. First, the lack of responsibility of the beneficiaries of the guarantees for non-investment projects supported by the state. Among the problems the Ministry of Finance also refers to providing support to the “unprofitable projects” and inefficient enterprises, poor assessment of risk-sharing between lender, borrower and government, as well as “a departure from the basic logic of government guarantees”, according to which the government needs to help enterprises of strategically important sectors, and only to those that are having difficulty borrowing because of the macroeconomic situation. In addition, the Ministry of Finance, some of the recipients of the bailout do not comply with the restrictions, in particular, give out awards and bonuses to top managers.

Because of this the business sees guarantees as “deferred government funding,” which helps to increase the yield and to pay off the debts, but at the same time prevents an adequate assessment of risks in projects supported by state guarantees. As a result, the creditor banks lose motivation to monitor the financial position of borrowers. “Moreover, increasingly there are attempts to solve problems of “toxic” assets by obtaining government guarantees when refinancing a deliberately bad debts and shifting all the risks of lending to troubled companies on the Federal budget”, — the document says. This approach puts the state “in obviously unequal position, when the guarantor, not being a full member-guaranteed deals, deprived of the opportunity to manage your business risks.”

In Russia there is no system of payment for warranty support, as, for example, in OECD countries, where the cost of guarantees associated with the risk level of the project, complains that the Ministry of Finance. The authorities always bear the costs in connection with the scope of the assistance they amount to several billion rubles per year. “Under the current budget constraints and mass character of provision of state guarantees, the question of the introduction of charges for the reception of state guarantees ceases to be purely theoretical,” say the authors of “pillars”. Guarantees on a reimbursable basis is the right approach, which will be factored into the agencies and will contribute to the fact that they do not overstate the need for support, agrees Andrey Klimenko.

The Finance Ministry also proposes to abandon the guarantee of the payment of interest on loans, to provide guarantees covering 100% of the obligations, only in exceptional cases, to prohibit the giving of guarantees to banks, the loss of control over the use of funds, strengthen the responsibility of participants in the programs and increase requirements for the selection of projects and borrowers.