CPPM Policy Chapter 9: Guarantees and Indemnities
This Core Policy and Procedures Manual chapter describes two main contingent liabilities for government: guarantees and indemnities, and their related approval and authority requirements. Effective management by ministries requires assessment and control of the underlying risks associated with guarantees and indemnities.
- 9.0 Guarantees and Indemnities
- manage and control government's contingent liabilities
- ensure that the underlying risks associated with guarantees and indemnities are fully understood, and limit the amount and duration of risk to the extent possible
- establish the guarantees and indemnities approval process to support legislation
- establish standards for when a guarantee or indemnity payment becomes necessary
- maintain an accurate and complete record of guarantees and indemnities for reporting purposes
Two important contingent liabilities of the government are guarantees and indemnities. A guarantee is a contract under which the government agrees to pay a debt or perform a duty if the other party to the contract fails to do so. An indemnity is an agreement whereby the government agrees to secure another party against an anticipated loss or damage.
Various statutes provide for the specific legislative authority for granting guarantees and indemnities. Overall legislative control is contained in sections 72 and 75 of the Financial Administration Act. Payments in respect of guarantees and indemnities are provided for in section 74 (1) of the Act. Unless otherwise provided for by an Act or Regulation, the Guarantees and Indemnities Regulation under the Financial Administration Act sets out government's approval requirements for guarantees and indemnities.
Roles and Responsibilities
- The Minister of Finance has approval authority for guarantees and indemnities for both government and government corporations. Ministers, Treasury Board or the Lieutenant Governor in Council also have approval authority for guarantees, in relation to the contingent liability of the government under the guarantee. For specific requirements, see the Guarantees and Indemnities Regulation.
- The Risk Management Branch (RMB) reviews indemnity proposals and maintains a record of all approved indemnities. The director or a delegate of RMB can approve an indemnity provided that RMB also has reviewed and accepted the indemnity proposal. The director is responsible for any payment requests related to indemnities issued.
- Ministries are responsible for their own processes to manage guarantee and indemnity requests, including the review and assessment of underlying risks and reporting on an annual basis.
Government recognizes the need for operational flexibility in program management, but also the fact that guarantees can have a significant effect on the financial position of the Province.
- Ministry legal counsel must review guarantees prior to submission for approval. Where a ministry expects to submit similar guarantees for approval, it may establish a standard guarantee in consultation with legal counsel.
- The underlying risk of any guarantee requested must be assessed, and the assessment included in the documentation submitted for approval. (See Appendix A, section 9.4 for a suggested risk assessment checklist.) Submissions must include the following:
- name and address of the person or persons guaranteed;
- the amount of the guarantee;
- any conditions attached to the guarantee;
- the collateral held or assigned to secure the guarantee;
- the analysis of risk; and
- details of the debt or obligation guaranteed.
- Where ministry guarantees under a program have the same risk assessments, the ministry may seek Treasury Board approval for a general risk assessment. When a general risk assessment has been approved, future submissions need not provide risk assessments for each submission under that program.
- Ministries must identify and reconcile their record of guarantees issued with those recorded by the Ministry of Finance on a periodic basis (at least quarterly).
- Ministries must review all guarantees, primary debts or obligations, and risk reassessments at least on an annual basis.
- Ministries must ensure that collateral held to secure a guarantee is safeguarded and controlled.
- Positions specifically assigned authority must sign off requests for payment of guarantees for this purpose.
- When it has become necessary for the government to make a payment in respect of a guarantee, ministries, in consultation with legal counsel, must immediately exercise any rights of the government. Any assets that are realized must become assets of the Crown and must only be liquidated according to procedures established by the Ministry of Finance. For liquidation procedures, consult with Financial Reporting and Advisory Services, Office of the Comptroller General.
- Proceeds received as reimbursement of a guarantee payment or from liquidation of collateral must be credited to the Consolidated Revenue Fund.
- Ministries must make provisions in the annual estimates of the programs under which guarantees are issued for the costs involved in the protection and liquidation of subrogated collateral.
- The chief financial officer of the ministry or government corporation must ensure that the system of financial administration provides for the accounting and control of all guarantees issued.
- Ministries must report to Financial Reporting and Advisory Services those guarantees issued for the fiscal year for which approval of the Lieutenant Governor in Council or Treasury Board was received. The report must include the dollar amount and provide a brief description of the guarantee issued.
Indemnities can create a very significant contingent liability for government. Indemnities are much broader in scope than guarantees because they can be enforced without the necessity of default, and the amount of a contingent liability is often difficult to estimate.
- Ministries and government corporations must establish processes for the review of indemnities, and for submitting requests to RMB for approval of indemnities where not prescribed by statute, regulation or Treasury Board directive.
- Ministries and government corporations must establish processes for the review and approval of indemnity clauses in contracts. Indemnity provisions contained in contracts must be given specific consideration in the contract approval process.
- All indemnities must, where possible, contain limits as to the amount to be indemnified and a time limit on the term of the indemnity, or that calls for a periodic review of the necessity for continuing the indemnity agreement.
- RMB, Provincial Treasury, must maintain a central record of all approved indemnities.
- The Director, RMB must refer an indemnity to the Minister of Finance for approval where there is a dispute between the director and the ministry or government corporation, as to whether or not the liability assumed under the indemnity is reasonable for the activity or program.
- Government corporations applying for exemption to the approval process must include its documented procedures for the review, control and approval of indemnities.
- The Minister of Finance may provide blanket approval to a government corporation to allow it to give indemnities in the course of carrying out its programs. Such approval could apply to a specific program, or to all indemnities given by the government corporation. The Minister of Finance determines the time period for which this approval will apply.
- Requests for payment of indemnities must be signed off by positions specifically assigned authority for this purpose, and must also be approved by the Director, RMB, Provincial Treasury.
- The chief financial officer of the ministry or government corporation must ensure that the system of financial administration provides for the accounting and control of indemnities given.
- Ministries must report to Financial Reporting and Advisory Services those indemnities issued for the fiscal year for which approval of the Lieutenant Governor in Council or Treasury Board was received. The report must include the dollar amount and provide a brief description of the indemnity issued.
- The Guarantees and Indemnities Regulation (BC Regulation 258/87) provides the approval and authority requirements for ministries and government corporations, and also identifies certain exceptions where not otherwise provided for by another statute or regulation.
- RMB should be consulted for advice and information on indemnities. The branch can also be consulted on issues related to guarantees.
- Appendix A presents a checklist that can be used as a starting point to assess risk in respect of a guarantee. This checklist is not exhaustive and should be modified where appropriate and relative to the subject guarantee. The assessment should estimate the impact of all relevant factors.
Risk Assessment Checklist for Guarantees
- Risk Factors
- Corporate Factors
- assessment of management capability, past performance of firm and relative strength of the competition, type of business activity and associated risks, i.e., manufacturing, new product development, etc.
- credit rating of the firm and long-term debt repayment plan
- standard financial ratios, i.e., current ratio, debt to equity, etc.
- Market Factors
- market trends, stability of market/likelihood of dramatic shifts
- influence of technological changes on the market
- Environmental Factors
- industry outlook, general economic outlook
- likelihood and possible effects of changes in exchange and interest rates
- likelihood and possible effects of changes in government, barriers to trade, tariffs, quotas, etc.
- Corporate Factors
- Overall Risk Assessment – using subjective judgment, convert each of the above described risk factors into an assessment of risk: low, medium or high. From these develop an overall risk assessment using the same scale.
- Most Likely Case – most probable size of payout, i.e., should a payment be required, how large is it most likely to be? (The single most likely outcome.)
- Worst Case – worst case payout, i.e., what size of payment would not be exceeded?
- Grant Option – is it possible to provide a grant as an alternative to the guarantee? If so, how large of a grant would be required?