1. Dr. GÁBOR PÓSCH State Audit Office Hungary Rural Credit Guarantee Schemes Budapest, 12-13 January 2006. STATE GUARANTEES IN HUNGARY

2. 2 INTRODUCTION LEGAL BACKGROUNDLEGAL BACKGROUND CLASSIFICATION OF STATE GUARANTEESCLASSIFICATION OF STATE GUARANTEES INSTITUTIONAL FRAMEWORKINSTITUTIONAL FRAMEWORK CHARACTERISTIC DATACHARACTERISTIC DATA GUARANTEES FOR AGRICULTURAL SECTOR AND FOOD INDUSTRYGUARANTEES FOR AGRICULTURAL SECTOR AND FOOD INDUSTRY EXPERIENCES OF THE STATE AUDIT OFFICEEXPERIENCES OF THE STATE AUDIT OFFICE

3. 3 INTRODUCTION STATE GUARANTEE Financial mean for economic policy of the government Financial mean for economic policy of the government Indirect subsidy from the state budget Indirect subsidy from the state budget Function: to be of assistance for necessary credit for investment or maintain the business Function: to be of assistance for necessary credit for investment or maintain the business The institution of state guarantees were introduced firstly in the state budget of 1991

4. 4 1. LEGAL BACKGROUND Act on State Household  Parliament ensures appropriations (expenditures) in the yearly budget for financing the acceptance of guarantees  authorises the Government to engage specific state guarantees in limited holdings  authorises the Government to guarantee credits provided by international financial institutions  legal base for counter-guarantee

5. 5 Act on yearly State Budget defines  limit of the specific governmental guarantee  limit of state guarantee on exhibitions of fine arts  appropriations (expenditures) for direct and counter- guarantees  for counter-guarantee companies - holdings of guarantees - maximum amount of credit to be guaranteed - maximum percentage of credit to be guaranteed

6. 6 Governmental/Ministerial Decrees procedure of direct state guarantees and counter- guarantees engagement engagement acceptance of the guarantee acceptance of the guarantee regain regain process of accountancy process of accountancy control of the procedure control of the procedure

7. 7 2. CLASSIFICATION OF STATE GUARANTEES DIRECT STATE GUARANTEE 1.Based on acts  state budget  other acts student credit housing credit housing credit for public servants

8. 8 2. Specific governmental guarantee based on governmental resolution Performance: TAX AUTHORITY INDIRECT STATE GUARANTEE Counter-guarantee Performance: guarantee company

9. 9 3. INSTITUTIONAL FRAMEWORK MINISTRY OF FINANCE Evaluation / Follow up Evaluation / Follow up Counter sign / Control Counter sign / Control acceptance for specific governmental guarantees and guarantees on by-laws Proposal for appropriations Proposal for appropriations

10. 10 HUNGARIAN STATE TREASURY Data process Data process Money transfer Money transfer Accountancy Accountancy TAX AUTHORITY Responsible for Specific governmental guarantees Specific governmental guarantees Guarantees on by-laws Guarantees on by-laws Agricultural guaranteesAgricultural guarantees

11. 11 GUARANTEE COMPANIES EXIMBANK CO EXIMBANK CO EXPORT CREDIT INSURANCE CO EXPORT CREDIT INSURANCE CO HUNGARIAN DEVELOPMENT BANK CO HUNGARIAN DEVELOPMENT BANK CO CREDIT GUARANTEE CO CREDIT GUARANTEE CO RURAL CREDIT GUARANTEE FOUNDATION RURAL CREDIT GUARANTEE FOUNDATION

12. 12 ACCEPTANCE OF GUARANTEES AND REGAINS Expenditures2000.2001.2002.2003.2004. Direct state quarantees 0.1 - - 9,5 - Counter-guarantees 5,7 7,3 3,4 2,9 2,7 —————————————— Σ 5,8 7,3 3,4 12,4 2,7 Bn HUF 4. CHARACTERISTIC DATA

13. 13 Incomes2000.2001.2002.2003.2004. Direct state quarantees 3,0 2,9 2,7 1,9 0,5 Counter-guarantees 2,7 2,1 1,5 1,0 1,9 —————————————— Σ 5,7 5,0 4,2 2,9 2,4 —————————————————————————— Balance -0,1 -2,3 0,8 -9,5 -0,3 ——————————————————————————

14. 14 Holdings of state guarantees Bn HUF 2000. 475,5 2001. 817,4 2002. 805,3 2003.1 124,9 2004.1 166,1 2005.1 211,3 1. half

15. 15 Outstanding Debts to State Bn HUF 2000. 7,9 2001. 6,8 2002. 3,4 2003. 9,9 2004. 9,5

16. 16 5. GUARANTEES FOR AGRICULTURAL SECTOR AND FOOD INDUSTRY Yearly State Budget defines  Objects of credits  Percentage of guarantee  Holdings of guarantee  Expenditure for acceptance of guarantee

17. 17 Decree of the Minister of Agriculture regulates  Conditions of guarantee  Rights and obligations of the banks and debtors  Procedure

18. 18 Tax Authority  Performs the acceptance of guarantee  Controls the relevant documents in situ as well  Makes resolution on application concerning acceptance of guarantee  Transfers the relevant amount to creditors  Obliges the deptor for repayment of the guarantee paid for the banks  Makes the necessary steps to collect the debts

19. 19 Agricultural Guarantees Holdings of Guarantees Bn HUF 2000. 33,5 2001. 36,2 2002. 39,2 2003. 36,5 2004. 31,8 2005. 50,6 1. half

20. 20 Agricultural Guarantees Acceptance of guarantees and regains Mill. HUF ExpendituresIncomes Balance —————————————————————————— 2000 641,1 120,7 -520,4 2001 2 723,4 83,4 -2 640,0 2002 641,0 205,3 -435,7 2003 179,4 68,1 -111,3 2004 404,3 74,8 -329,5 2005 548,8 108,4 -440,4 1.half

21. 21 Agricultural Guarantees Outstanding Debts to State 2000. 8,9 2001. 4,8 2002. 1,3 2003. 1,6 2004. 1,4 Bn HUF

22. 22 6. EXPERIENCES OF THE STATE AUDIT OFFICE CONSTITUTION DECLARES The State Audit Office has to audit the final accounts of the budget and has to inform the Parliament concerning the execution of the budget and the regulatory of accounts. The appropriations are an integrated part of the budget. The audit of state guarantees is a very extended one: about 50% of transactions are controlled every year.

23. 23 AUDIT FINDINGS  in the first years after introducing state guarantees the government exceeded the limit of the specific governmental guarantees the government exceeded the limit of the specific governmental guarantees the principle of gross accounting was neglected (separate accounts should keep for expenditures and incomes) the principle of gross accounting was neglected (separate accounts should keep for expenditures and incomes) to spare expenditures: the government covenanted guarantees to spare expenditures: the government covenanted guarantees

24. 24  in the last 5 years improvement of the practice improvement of the practice failures were corrected failures were corrected proper and regulatory use of public money proper and regulatory use of public money