(DP 2000-07) Developing a Risk Management Framework for the Philippine Government

Abstract

The rationale for this paper is the increasing amount of risk that the Philippine government has been assuming in the last ten years, primarily in the development of various modalities for encouraging private sector participation in infrastructure development and the provision of guarantees for loans of government-owned and controlled corporations (GOCCs). The Philippine government is often not prepared to deal with the financial and non-financial consequences of calls on such guarantees, some of which are triggered by circumstances under its control. With better coordination among line agencies, the DoF, and the BSP, better project preparation, and more prudent provision of guarantees, the large costs of state support could have been avoided. Henceforth, one of the major objectives of this task is to quantify the amount of risk that the government assumes in such activities using conventional scientific and statistical methods presently being employed by private financial institutions in their estimation of their own exposures to loss. The same framework and methodology presented in this paper is being used by international financial regulators in dictating the amount of capital to be set aside against losses by money center banks. Knowing the amount of risk the government assumes will help reduce the moral hazard in guarantee provision and risk assumption. The aim is ultimately to produce better projects and reduce government exposure to risk in the process.