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					Financial Management of
      Trust Funds
Currency and Commitment Risks


      CFP Financial Management
              (CFPFM)
                                     Roadmap



1. Basis of Commitment for Trust Funds Programs


2. Foreign Exchange Risk in Trust Fund Programs




                                                  2
                                                            Life cycle of
                                                        TF contributions

• The typical life cycle of TF contributions, payments, allocations, commitments
  and disbursements:
  1. Donors agree to contribute to a TF, through a contribution agreement
  2. Funds are either paid in shortly after signing of agreement, or according to an
     agreed schedule of (multi-year) installment payments
  3. The TF program manager allocates the TF resources to specific projects or
     activities, in accordance with the contribution agreement
  4. Funding is committed to final recipients through grant agreements
      • Commitments represent obligations to pay subject to availability of donor funds
  5. Funds are disbursed over time as projects are implemented

• Risks arise when TFs make commitments based on future donor funds yet to
  be received
                                                                                          3
                                                Different TF
                                      Bases of Commitment
                                                create risks
• There are two “bases for commitment” for TFs:
   1. Liquid assets (cash received and invested) = USD18 billion (March 2010)
   2. Donor contribution receivables (including promissory notes held and not yet
      encashed) = USD10 billion (March 2010)
• Entering into grant commitments based on future donor receivables entails
  risk for final recipients, should donors not contribute as agreed (donor credit
  risk). In addition, there is currency exposure.
• Donor contribution agreements and governing documents do not generally
  indicate the basis of commitment
   • Exception: Larger TFs and FIFs, such as GEF and Global Fund, often have
     explicit guidelines for commitments, set by their governing bodies

• For new TFs, there is evidence of an increasing degree of commitment
  against donor contribution receivables, rather than cash
                                                                                    4
                                                        TF grant commitments
                                                        have doubled over the
                                                                   past years
.. and in recent years, signing grant agreements based on future donor
                 receivables has become more prevalent
                   4.5
                          Annual commitments                              Average commitments 2007 - 2009: USD3.8 bln
                   4.0

                   3.5
                         Average commitments 2000 - 2006: USD1.9 bln
                   3.0
    USD Billions




                   2.5

                   2.0

                   1.5

                   1.0

                   0.5

                    -
                         2001      2002        2003      2004          2005      2006       2007      2008       2009

                                                                                                                        5
   Note that this data excludes FIFs, IFC, MIGA and ICSID commitments
                                 Measures being taken
                                           to manage
                              Basis of Commitment risk
1. Strengthening legal agreements and enhancing disclosure to donors and
   grant recipients
2. Strengthening internal controls, including enhanced data recording
3. Aligning financial reporting of TFs with their basis of commitment (i.e. non-
   cash TFs to report on an “accrual” basis)
4. Enhancing training and certification for task managers of TFs whose basis
   of commitment includes donor receivables
5. Exercising targeted IT system controls based on the actual basis of
   commitment for each TF
6. Establishing the ability for TFs to draw on the Donor Balance Account
   (DBA) in case of a funding shortfall
7. Adjusting commitment authority available to TFs based on specific risk
   factors
                                                                                   6
                                     Roadmap



1. Basis of Commitment for Trust Funds Programs


2. Foreign Exchange Risk in Trust Fund Programs




                                                  7
                                   Growth in TF volume
                                 and currency exposure

• Trust Funds have grown substantially, in size and complexity
   • TF disbursements of $6.9 billion in fiscal year 2009 were equivalent to
     70% of annual IDA disbursements, or 20% of total World Bank (IBRD,
     IDA and Trust Funds) disbursements
   • There are now 245 TF donors, from 77 countries, providing funding in
     some 30 different currencies

• Most TFs provide grants to final recipients in US dollars. However,
  the majority of donor contributions is in currencies other than the US
  dollar, thus creating a currency mismatch
   • With the recent strengthening of the US dollar against major currencies,
     the US dollar value of donors’ non-US dollar contributions decreases,
     lowering the funding available for grant recipients
                                                                                8
                               Sources of currency risk


• Currency risk exists until donor receivables have been paid in cash and
  converted into the target currency (“holding currency”) for a TF

• Currency risk in TFs arises in 4 main ways:

  1. The national currency of donors differs from the agreed currency of
     contribution
  2. The agreed currency of donor contribution differs from the holding
     currency for a TF (=> this is the main source of currency risk for TFs)
  3. The holding currency for a TF differs from the currencies of grant
     agreements
  4. The TF grant agreement currency differs from the national currency/ the
     primary procurement currency of final grant recipients
                                                                               9
                                                                    TF contribution &
                                                             disbursement currencies
  87% of TF donor contributions                                                           88% of TF grant disbursements
   are in non-USD currencies                                                                       are in USD
           Contributions (USD Equivalent)                                                         Disbursements (USD Equivalent)
                    XDR AUD                                                                                          CAD
                    1% 3% CAD CHF                      AUD                                                            1%           AUD
                            4% 1%
                                                       CAD                                                                         CAD
     SEK         USD                                                                                                       EUR
     2%                                                CHF                                                                 11%     CHF
                 13%
                                                       DKK                                                                         DKK
  NOK
  6%                                                   EUR                                                                         EUR
                                        EUR
                                        28%            GBP                                                                         GBP

        JPY                                            JPY                                                                         JPY
        14%                                            KRW                                                                         KRW
                                                       NOK                                                                         NOK
                                                                                                          USD
                       GBP                             NZD                                                                         NZD
                                                                                                          88%
                       28%                             SEK                                                                         SEK
                                                       USD                                                                         USD



Note: These are aggregate portfolio amounts; individual trust fund contribution/ disbursement profiles may differ.                       10
                                                                                        Resulting TF
                                                                                  currency exposure

    The mismatch between contribution and disbursement currencies results in
                   some USD 4 billion of currency exposure
Currency Name      ISO Code Exposure in USD Equivalent                                      SEK         XDR      AUD
Australian Dollar    AUD                   242,523,361                                      4%          2%       6%    CAD            AUD
                                                                                                                       4% CHF
Canadian Dollar       CAD                  146,023,686                                                                     2%         CAD
                                                                                                                                DKK
Swiss Franc           CHF                   85,118,620                                                                                CHF
                                                                                                NOK                             1%
Danish Krone          DKK                   45,659,019                                          14%                                   DKK
Euro                  EUR                  941,972,826
                                                                                                                                      EUR
British Pound         GBP                1,476,604,110                                    JPY
Japanese Yen          JPY                  205,328,336                                    5%                                EUR       GBP
Korean Won           KRW                       422,954                                                                      24%       JPY
Norwegian Kroner     NOK                   563,846,910                                                                                KRW
New Zealand Dollar    NZD                    5,825,640                                                                                NOK
Swedish Krona         SEK                  149,324,850
                                                                                                      GBP                             NZD
US Dollar             USD                    2,140,065                                                38%
SDR                   XDR                   55,003,919                                                                                SEK
South African Rand    ZAR                    2,362,095                                                                                USD
                                         3,922,156,392

Note: These are aggregate portfolio amounts; individual trust fund contribution/ disbursement profiles may differ.                          11
                                                           The US dollar has
                                                     strengthened during the
                                                              financial crisis
US dollar appreciation against donor contribution currencies since mid-2007
                        is a particular issue for TFs
          120


          115


          110


          105


          100


           95

                            Basket of contribution
           90
                            currencies

           85


           80
           1-Jan-05        1-Jan-06            1-Jan-07    1-Jan-08        1-Jan-09        1-Jan-10


      Currency composition in the basket: EUR, GBP, JPY, SEK, NOK, CHF, NZD, CAD, AUD, and SDR        12
                                                 Example of TF
                                             currency exposure

• As the US dollar value of donor receivables falls, less total funding will
  be available for project expenditures in US dollars for a given TF:
   • Overall, a given TF program will have less funding available in US dollars,
     adversely impacting programming ability
   • Individual grant recipients may also be at risk if grant commitments are based
     on donor receivables (and are not limited to cash received from donors)
       • Example: A TF commits EUR10 million to a recipient, equivalent to USD14
         million at the time of commitment (EUR1 = USD1.40). The recipient then
         purchases goods or services based on this commitment. If the EUR
         depreciated to parity (EUR1 = USD 1.00) against the USD by the time the
         EUR is contributed to the World Bank, there would only be USD10 million
         available to pay to the recipient.


                                                                                      13
                                       Possible approaches
                                       for managing the risk

• Risk mitigating measures that can be deployed at the individual TF
  level include the following:
  1. Limiting grant commitments to available TF cash balances only – the
     most conservative risk management approach

  2. Establishing a “reserve” that acts as a valuation buffer for future donor
     receivables
     (Examples: GEF currency reserve; limiting grant commitments against
     non-USD donor receivables to xx% of their USD equivalent value)

  3. Donors can decide to contribute to TFs in the grant commitment currency,
     thus taking on the currency exposure at the donor level


                                                                                 14
                                        Possible approaches
                                        for managing the risk
                                                                       continued

• The US dollar value of donor receivables could be locked in, using
  currency hedges from the capital markets. In the case of IDA15,
  IBRD was able to intermediate such hedges for donor receivables.
  For trust funds, however, specific challenges include:
   1. Some 850 active TFs, with different currency exposures
   2. Conditional and qualified donor commitments, which could not be hedged
   3. Lack of legal status of TFs, with resulting credit issues for markets/ for IBRD

• As a result, setting up a currency hedging framework for TFs would
  be complex and costly

                                                                                   15
                                        Possible approaches
                                        for managing the risk
                                                                      continued

• If using currency hedges, possible methods would include:
   1. Hedging exact currency flows for individual TFs within an overall “pool”
      structure
   2. Hedging donor contributions “at the source”, i.e. directly with the donors
   3. Creating a rolling macro foreign exchange position that TFs could buy into
      as a partial hedge of their currency risk


• The World Bank will explore these and other options, provided there
  is sufficient demand from TF donors and recipients


                                                                                   16
Thank you




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