Republic of Latvia Cabinet Regulation No. 229 Adopted 29 April 2014

Regulations Regarding the General Management of Fiscal Risks and Methodology for Determining the Amount of Fiscal Security Reserve

Issued pursuant to
Section 16, Paragraph three, and Section 17,
Paragraph three of the Fiscal Discipline Law

I. General Provisions

1. The Regulation prescribes the procedures for implementing the general management of fiscal risks, as well as the methodology for determining the amount of fiscal security reserve.

2. The terms used in this Regulation:

2.1. specific fiscal risk - fiscal risk associated with the implementation of specific State administration functions, the course of natural or social processes;

2.2. individual fiscal risk - fiscal risk associated with an individual case of the implementation of State administration functions, the course of natural or social processes;

2.3. fiscal risk event - occurrence of the possible future event related to fiscal risk;

2.4. fiscal risk impact - deviation from the planned values of the liability indicator or aggregate of such indicators caused by a fiscal risk event and expressed in monetary terms;

2.5. fiscal impact of fiscal risk - deviation from the planned values of one or several fiscal indicators referred to in Section 16, Paragraph one of the Fiscal Discipline Law caused by a fiscal risk event and expressed in monetary terms;

2.6. fiscal impact of fiscal risk on the balance sheet of the general government budget - deviation of the balance sheet value of the general government budget from the planned value caused by the deviation of the fiscal indicator from the planned value and expressed in percentage from the gross domestic product;

2.7. fiscal risk source - type of liabilities causing fiscal risk.

II. Responsibility and Functions of the Authorities Involved in the Management of Fiscal Risks

3. The Ministry of Finance shall be responsible for the general management of fiscal risks. General management of fiscal risks shall include the following functions:

3.1. regular updating of the Register of Fiscal Risks (Annex 1 to this Regulation) which includes identification of new fiscal risks, regular assessment of the fiscal impact of identified fiscal risks and of the probability of their materialisation in accordance with Paragraphs 17 and 18 of this Regulation, and deletion of the obsolete fiscal risks from the Register of Fiscal Risks;

3.2. supervision of and methodological support to the control process of specific fiscal risks, as well as the development of guidelines, provision of proposals to central State institutions for the improvement of the control process of specific fiscal risks;

3.3. provision of proposals to central State institutions for additional measures for the management of fiscal risks;

3.4. determination of the amount of reserve of fiscal security;

3.5. development of the declaration of fiscal risks.

4. The Ministry of Finance shall be responsible for fiscal risks arising from processes which are not attributable to the competence of any other central State institution.

5. Central State institutions shall be responsible for the management of such specific fiscal risks associated with the functions of the State administration which are within the competence of the relevant central State institution and its subordinate bodies. Management of specific fiscal risks shall include the following functions:

5.1. provision and improvement of the process of specific fiscal risk management;

5.2. assessment of the impact of the specific fiscal risk;

5.3. assessment of the probability of materialisation of the specific fiscal risk in accordance with Paragraph 17 of this Regulation;

5.4. accumulation of information regarding individual fiscal risks and fiscal risk events of the specific fiscal risk in order to perform other functions referred to in Paragraph 5 of this Regulation and to prepare fiscal risk management reports in accordance with Annex 2 to this Regulation;

5.5. supervision of the management of individual fiscal risks, as well as methodological support and provision of proposals to the subordinate bodies for the improvement of individual risk management within their competence.

6. Implementers of the projects and measures co-financed and financed from the State budget and European Union policy instruments, and other foreign financial assistance, implementers of public-private partnership projects, and the State commercial companies belonging to the general government sector shall be responsible for the management of such individual fiscal risks which are related to the implementation of the relevant project, measure or relevant commercial activity (if any exist). Management of individual fiscal risks shall include the following functions:

6.1. provision of the process of the individual fiscal risk management;

6.2. assessment of the impact of the individual fiscal risk;

6.3. assessment of the probability of materialisation of the individual fiscal risk in accordance with Paragraph 17 of this Regulation;

6.4. accumulation of information regarding events of the individual fiscal risk in order to perform other functions referred to in Paragraph 6 of this Regulation and to provide information to the central State institution which is necessary for the implementation of its functions.

7. For the central State institution to be able to provide the functions specified in Paragraph 5 of this Regulation, it has the right to assign tasks to other State budget institutions included in its budget department.

8. Within the scope of fiscal risk management, the central State institution has the right to cooperate with project implementers and the State commercial companies belonging to the general government sector in accordance with the procedures specified in other legal acts. The central State institution the competence of which includes supervision of projects or measures of the relevant State budget or foreign financial assistance has the right to assign the budget institution which is implementing the project or measure from the State budget or from resources of European Union policy instruments and other foreign financial assistance to develop procedures for the management of individual fiscal risks associated with the project or measure and coordinate them with the relevant central State institution, as well as to request information regarding procedures for the management of the individual fiscal risks and events of the individual fiscal risks.

9. The central State institution which is supervising a public-private partnership project has the right to include norms in a public-private partnership contract which assign the implementer of the public-private partnership project to develop procedures for the management of individual fiscal risks associated with the project or measure and coordinate them with the relevant central State institution, as well as to request information regarding procedures for the management of the individual fiscal risks and events of the individual fiscal risks.

10. The central State institution which is the holder of State capital shares has the right to assign, with the intermediation of its shareholders, the State commercial company belonging to the general government sector to develop procedures for the management of individual fiscal risks and approve them at a meeting of shareholders, as well as to request information regarding procedures for the management of the individual fiscal risks and events of the individual fiscal risks.

11. The central State institution shall exercise the rights referred to in Paragraphs 8, 9, and 10 of this Regulation to the extent which is necessary for the central State institution to be able to perform the functions laid down in Paragraph 5 of this Regulation, taking into account the procedures for the management of fiscal risks already existing and specified in other legal acts.

III. Procedures for the Exchange of Information between the Ministry of Finance and the Authorities Involved in Fiscal Risk Management

12. Each year until 15 February, the central State institution the competence of which includes management of any fiscal risk shall prepare a fiscal risk management report on the fiscal risks within its competence in accordance with Annex 2 to this Regulation and shall submit it to the Ministry of Finance in accordance with the procedures laid down in the Electronic Documents Law. The fiscal risk management report shall include information regarding fiscal risks in three subsequent years after the year of submitting the fiscal risk management report.

13. Within three weeks the Ministry of Finance shall examine the fiscal risk management reports, if necessary, update the register of fiscal risks, and send the particular information updated in the Register of Fiscal Risks to every central State institution according to the competence for electronic coordination. The abovementioned information shall be coordinated within a week. The Ministry of Finance may request additional information and explanations regarding the fiscal risk management report, and the central State institution shall submit them within the time period specified by the Ministry of Finance which may not be less than one week.

14. Upon examining the fiscal risk management report, the Ministry of Finance shall:

14.1. evaluate the proposals for the exclusion of fiscal risk and inclusion of fiscal risk in the Register of Fiscal Risks;

14.2. evaluate whether the existing fiscal risk mitigation measures are sufficient for accepting the remaining fiscal risk;

14.3. if necessary, perform an assessment of the probability of materialisation and impact of fiscal risk;

14.4. if necessary, prepare proposals for the central State institutions on additional measures for the management of the specific fiscal risks within the competence of the relevant institution.

15. The Ministry of Finance may propose changes to the Register of Fiscal Risks within the competence of the central State institution. If the Ministry of Finance proposes inclusion of new fiscal risks or exclusion of the existing fiscal risks, it shall prepare a proposal for changes to the information to be included in the Register of Fiscal Risks in accordance with Annex 1 to this Regulation and coordinate the inclusion of the fiscal risk within the competence of the central State institution in or exclusion thereof from the Register of Fiscal Risks with the relevant institution.

16. If the central State institution does not agree with proposals of the Ministry of Finance, the Ministry of Finance shall prepare an informative report in accordance with the procedures provided for in laws and regulations. The abovementioned informative report shall be examined and the final decision shall be taken by the Cabinet.

IV. Assessment of the Probability of Fiscal Risk Materialisation and of the Fiscal Impact on the Balance Sheet of the General Government Budget

17. The probability of fiscal risk materialisation shall be assessed by taking into account the fiscal risk mitigation measures already existing, but disregarding the additional measures necessary for fiscal risk mitigation. The probability of fiscal risk materialisation shall be assessed in a 5-point scale, taking into account whether the probability of fiscal risk materialisation is closer to 0 per cent, 10 per cent, 30 per cent, 60 per cent, or 100 per cent accordingly. The probability of fiscal risk materialisation shall be scored with 1 point if the probability of materialisation is closer to 0 per cent, with 2 points if the probability of materialisation in is closer to 10 per cent, with 3 points if the probability of materialisation closer to 30 per cent, with 4 points if the probability of materialisation is closer to 60 per cent, and with 5 points if the probability of materialisation is closer to 100 per cent.

18. Fiscal impact of fiscal risk on the balance sheet of the general government budget, if possible, shall be assessed from the point of view of quality and, if possible, - also from the point of view of quantity as a percentage of the gross domestic product which is laid down in the annual State budget law, upon submitting the fiscal risk management report in conformity with the following conditions:

18.1. the qualitative assessment of the fiscal impact of fiscal risk on the balance sheet of the general government budget is carried out by assessing the fiscal impact as significant, moderate or low. Fiscal impact is significant if the potential impact on the balance sheet of the general government budget exceeds 0.5 per cent of the gross domestic product. Fiscal impact is moderate if the potential impact on the balance sheet of the general government budget is within the limits from 0.01 to 0.5 per cent of the gross domestic product. Fiscal impact is low if the potential impact on the balance sheet of the general government budget does not exceed 0.01 per cent of the gross domestic product;

18.2. the quantitative assessment of the fiscal impact of fiscal risk on the balance sheet of the general government budget is carried out in percentage of the gross domestic product, provided that the error of assessment does not exceed 0.01 percentage point for fiscal risks with fiscal impact below 0.1 per cent of the gross domestic product, 0.1 percentage point for fiscal risks with fiscal impact within the limits from 0.1 per cent to 1 per cent of the gross domestic product, 1 percentage point for fiscal risks with fiscal impact 1 per cent and more of the gross domestic product.

V. Inclusion of Fiscal Risks in the Declaration of Fiscal Risks

19. If the fiscal impact of the fiscal risks included in the Register of Fiscal Risks on the balance sheet of the general government budget has been assessed qualitatively and has not been assessed quantitatively, the Ministry of Finance has the right:

19.1. to indicate them as non-quantifiable fiscal risks in the declaration of fiscal risks;

19.2. to assess their fiscal impact on the balance sheet of the general government in an approximated manner and to indicate such fiscal risks as quantifiable fiscal risks in the declaration of fiscal risks.

20. The fiscal risks included in the Register of Fiscal Risks for which the fiscal impact on the balance sheet of the general government budget has been assessed quantitatively may be indicated by the Ministry of Finance as non-quantifiable fiscal risks in the declaration of fiscal risks by providing an appropriate justification.

VI. Methodology for Determining the Amount of Fiscal Security Reserve

21. Upon calculating the fiscal security reserve, the Ministry of Finance shall take into account only the quantifiable fiscal risks included in the declaration of fiscal risks.

22. The amount of fiscal security reserve shall be calculated by summing up fiscal impacts of all quantifiable fiscal risks which shall be multiplied by the relevant coefficients. The fiscal impact of quantifiable fiscal risks in percentage of the gross domestic product shall be multiplied by coefficient 0.1 if the probability of materialisation has been scored with 2 points, by coefficient 0.3 if the probability of materialisation has been scored with 3 points, and by coefficient 0.6 if the probability of materialisation has been scored with 4 points. Upon calculating the amount of fiscal security reserve, the following formula shall be used:

Fiscal security reserve = k₂ · ∑ _{risks with probability 2} fiscal impact + k₃ · ∑ _{risks with probability 3} fiscal impact + k₄ · ∑ _{risks with probability 4} fiscal impact, where

k₂ - coefficient 0.1;

k₃ - coefficient 0.3;

k₄ - coefficient 0.6.

23. Quantifiable fiscal risks for which the probability of materialisation has been scored with 5 points shall be included in the forecasts of the balance sheet of the general government budget as planned (foreseeable) events.

24. The Ministry of Finance may change the value of coefficient for individual fiscal risks, providing an appropriate justification in the declaration of fiscal risks.

VII. Closing Provisions

25. The Ministry of Finance shall fill in the information provided for in Annex 1 to this Regulation, Register of Fiscal Risks, until 20 May 2014 and send it to the central State institutions. Central State institutions shall, within four weeks, examine the Register of Fiscal Risks and coordinate the information regarding fiscal risks included in the Register of Fiscal Risks which are within the competence of the relevant central State institution and, if necessary, express proposals for the inclusion of new fiscal risks in the Register of Fiscal Risks and for changing the competence. If the Ministry of Finance and the central State institution have different opinions, the Ministry of Finance shall act in accordance with Paragraph 16 of this Regulation. If central State institutions have expressed proposals and there are no differences of opinions, the Ministry of Finance shall, within four weeks, include the proposals of the central State institution and send the supplemented Register of Fiscal Risks to central State institutions for electronic coordination. The abovementioned register shall be coordinated within two weeks.

26. Until 30 April 2015, central State institutions shall submit to the Ministry of Finance the fiscal risk management report on the fiscal risks within its competence in accordance with Annex 2 to this Regulation. The Ministry of Finance shall, within four weeks, examine reports, update the Register of Fiscal Risks, and send it to central State institutions for electronic coordination. The abovementioned register shall be coordinated within two weeks.

27. Paragraphs 12 and 13 of this Regulation shall come into force on 1 January 2016, unless the Law on Budget and Financial Management does not lay down another deadline for the submission of the medium term budget framework draft law to the Saeima which differs from the deadline referred to in Section 16.², Paragraph ten of the abovementioned Law. If another deadline for the submission of the medium term budget framework draft law to the Saeima has been laid down, the schedule for the development of the fiscal risk management report shall be included in the draft schedule for the development and submission of the medium term budget framework draft law and the annual state budget draft law in accordance with Section 16.¹, Paragraph one of the Law on Budget and Financial Management.

Acting for the Prime Minister -
Minister for Transport Anrijs Matīss

Minister for Finance Andris Vilks

 

Annex 1
Cabinet Regulation No. 229
29 April 2014

Register of Fiscal Risks

Registration number of the fiscal risk	Fiscal risk source	Description of the fiscal risk1	Fiscal impact assessment and fiscal indicator affected by the fiscal risk2	Assessment of the probability of fiscal risk materialisation3	Description of the current fiscal risk management (current fiscal risk mitigation measures, existing instruments for the elimination of the consequences of risk, and other information which is useful for the fiscal risk assessment)	Additionally action (measures) necessary for fiscal risk mitigation	Additionally action necessary for the elimination of the consequences of fiscal risk	Central State institution responsible for the management of fiscal risk, other institutions involved
1	2	3	4	5	6	7	8	9

¹ Provide a description of the process, events, circumstances, factors which may cause a fiscal risk event.

² The fiscal impact assessment is carried out in accordance with Paragraph 18 of the Cabinet Regulation No. 229 of 29 April 2014, Regulations Regarding the General Management of Fiscal Risks and the Methodology for Determining the Amount of Fiscal Security Reserve (hereinafter - the Regulation). The fiscal impact assessment must be carried out for three subsequent years following the year of submitting the fiscal risk management report. Detailed information and assumptions which were used for the fiscal impact assessment also must be provided in this column.

³ Assessment of the probability of fiscal risk materialisation is carried out in accordance with Paragraph 17 of the Regulation. Assessment of the probability of fiscal risk materialisation must be carried out for three subsequent years following the year of submitting the fiscal risk management report.

Minister for Finance Andris Vilks

 

Annex 2
Cabinet Regulation No. 229
29 April 2014

Fiscal Risk Management Report

Central State institution

I. Information regarding the fiscal risk events and impact in the previous year

Table 1

Registration number of the fiscal risk	Fiscal risk source	Information regarding the fiscal risk event1	Consequences2

II. Information to be updated in the Register of Fiscal Risks

Table 2

Registration number of the fiscal risk	Fiscal risk source	Description of the fiscal risk3	Assessment of the impact of the fiscal risk4	Assessment of the probability of fiscal risk materialisation5	Description of the current fiscal risk management (current fiscal risk mitigation measures, existing instruments for the elimination of the consequences of risk, and other information which is useful for the fiscal risk assessment)	Additionally action (measures) necessary for fiscal risk mitigation	Additionally action necessary for the elimination of the consequences of fiscal risk	Central State institution responsible for the management of fiscal risk, other institutions involved
1	2	3	4	5	6	7	8	9

III. Fiscal risks to be excluded from the Register of Fiscal Risks

Table 3

Registration number of the fiscal risk	Fiscal risks to be excluded6	Justification7

IV. Proposals for the inclusion of new fiscal risks in the Register of Fiscal Risks

Table 4

No.	Fiscal risk source	Description of the fiscal risk8	Assessment of the impact of the fiscal risk9	Assessment of the probability of fiscal risk materialisation10	Description of the current fiscal risk management (current fiscal risk mitigation measures, existing instruments for the elimination of the consequences of risk, and other information which is useful for the fiscal risk assessment)	Additionally action (measures) necessary for fiscal risk mitigation	Additionally action necessary for the elimination of the consequences of fiscal risk	Central State institution responsible for the management of fiscal risk, other institutions involved
1	2	3	4	5	6	7	8	9

V. Other information¹¹

Table 5

Position	THE DOCUMENT HAS BEEN SIGNED WITH SAFE ELECTRONIC SIGNATURE AND CONTAINS A TIME STAMP		N. Surname

¹ Information is provided in free form and contains at least:

1) the description of the event;

2) the evaluation of the circumstances, events or processes that have caused the relevant event;

3) proposals in order to reduce the possibility of the occurrence of the relevant fiscal risk event.

² Indicate the type of impact (for example, unplanned increase in expenditure, drop in revenue, or loan) and the amount of impact in monetary terms.

³ Provide a description of the process, events, circumstances, factors which may cause a fiscal risk event.

⁴ Impact of the fiscal risk is assessed in monetary terms. The fiscal impact assessment must be carried out for three subsequent years following the year of submitting the fiscal risk management report. Also detailed information and assumptions which were used for the assessment of the impact of the fiscal risk must be provided in this column.

⁵ The assessment of the probability of fiscal risk materialisation is carried out in accordance with Paragraph 17 of Cabinet Regulation No. 229 of 29 April 2014, Regulations Regarding the General Management of Fiscal Risks and the Methodology for Determining the Amount of Fiscal Security Reserve (hereinafter - the Regulation). Assessment of the probability of fiscal risk materialisation must be carried out for three subsequent years following the year of submitting the fiscal risk management report.

⁶ Indicate those fiscal risks which are to be excluded from the Register of Fiscal Risks.

⁷ Provide a justification why the relevant fiscal risk should be excluded from the Register of Fiscal Risks.

⁸ Provide a description of the process, events, circumstances, factors which may cause a fiscal risk event.

⁹ In accordance with the Regulation, impact of the fiscal risk is assessed in monetary terms. The fiscal impact assessment must be carried out for three subsequent years following the year of submitting the fiscal risk management report. Detailed information and assumptions which were used for the fiscal impact assessment also must be provided in this column.

¹⁰ Assessment of the probability of fiscal risk materialisation is carried out in accordance with Paragraph 17 of the Regulation. Assessment of the probability of fiscal risk materialisation must be carried out for three subsequent years following the year of submitting the fiscal risk management report.

¹¹ Provide any information associated with fiscal risks which has not been previously indicated and which has been recognised as important by the central State institution.

Minister for Finance Andris Vilks

 

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Translation © 2018 Valsts valodas centrs (State Language Centre)