Budgeting for contingent liabilities can be particularly challenging, because payments may become due unexpectedly. If savings cannot be found within the existing appropriations, government may need to go back to the legislature to request a supplementary appropriation-often a difficult and contentious affair.
To overcome these difficulties, some governments introduce particular mechanisms for budgeting for contingent liabilities under PPP projects. As described in Cebotari's paper on managing contingent liabilities [#44, pages 26-28], the first option is to create additional budget flexibility. This can include creating a contingency line in the budget from which unexpected payments can be made. A contingency line could be specific to a particular liability-say, those that are considered relatively higher risk-or cover a range of contingent liabilities. Cebotari also notes that some countries allow spending in excess of the budget without need for additional approval in certain, defined circumstances.
A second option, also described in detail by Cebotari [#44, pages 27-29], is to create a contingent liability fund. A contingent liability fund (or guarantee fund) is an account (which may be within or external to the government's accounts) to which transfers are made in advance, and from which payments for realized contingent liabilities will be made when due. The following are examples of contingent liability funds for PPPs:
• Colombia-Colombia has developed a sophisticated system for managing contingent liabilities arising from guarantees offered to toll road concessions. This system includes assessing the fiscal impact of guarantees before these are granted, and setting aside funds to cover the expected payments from the guarantees [#287, pages 32-33]. A Government Entities Contingent Liabilities Fund, established in 1998, has a special account that is managed by La Previsora, a Trust Company. The fund is funded by contributions by the government entities, contributions from the national Budget, and the returns generated with its resources. The government entities carry out the contingent liabilities valuation which is then approved by the Public Credit Division of the Ministry of Finance. Once the PPP is approved and implemented, the division carries out ongoing assessments of the value of the associated contingent liabilities [#49, Articles 3-8]
• São Paulo, Brazil-In the State of São Paulo, the São Paulo Partnerships Corporation (Companhia Paulista de Parcerias-CPP) was established in 2004 using resources from the sale of the government's stake in State Owned Enterprises [#37, Articles 12-23]. Section 5 of State Governor's Decree [#36, Articles 11-12] describes the duties of CPP. The CPP manages its resources as a fiduciary fund provides real and fiduciary guarantees to PPP projects [#36, Article 15]. The CPP is managed by a Directorate made up of up to three members selected by the Governor of the State, a Management Council made up of up to five members selected by the Governor of the State, and a fiscal council. The CPP is an independent legal entity. The Government of the State can add capital to the fund using funds from the sale of shares in state owned companies or government-owned buildings, public debt titles, other goods or rights that are directly or indirectly owned by the Government. The World Bank review of Subsidy Funds for PPPs in LAC [#287, page 16] provides more background about the CPP
• Indonesia-Indonesia Infrastructure Guarantee Fund, or IIGF, is a state owned enterprise established by Government Regulation and Ministry of Finance Decree in 2009. As one of the fiscal tools of the Government, IIGF is under direct supervision of the Ministry of Finance and has mandate to provide guarantees for infrastructure projects under of PPP schemes. IIGF is part of the government's efforts to accelerate infrastructure development in Indonesia, by providing contingency support/guarantee for the risks caused by the government's action or inaction. The Fund operates as a single window for appraising, structuring, and providing guarantees for PPP infrastructure projects. The single window provides certainty because it constitutes a consistent policy for appraising guarantees, a single process for claims, and it introduces transparency and consistency in the process which is critical for market confidence. IIGF provides guarantees against specific risks based on private sector demand in a variety of sectors-including power, water, toll roads, railways, bridges, ports, and others [#149]
• South Korea-The Infrastructure Credit Guarantee Fund (ICGF) was established in 1994, being managed by a public financial institution. ICGF guarantees each project up to 300 billion won, for an annual guarantee fee capped at 1.5 percent of the total guarantee amount [#221]. Typically, the annual guarantee fees range between 0.3 and 1.3 percent. The guarantee operates as a subrogation-that is, ICGF pays back loans taken by the project company to the financial institutions in the case where the project company defaults on debt payments, if funds become insufficient, the government can provide additional contributions [#171].
As well as providing a clear budgeting mechanism and thereby improving credibility, creating a fund can also help control the government's fiscal commitments to PPPs-depending on how the fund is designed. For example, Colombia's approach encourages discipline when deciding what liabilities to accept, as described in Section 2.4.1: Assessing Fiscal Implications of a PPP Project. Requiring a cash transfer from the implementing agency's budget when a contingent liability is incurred means the decision to accept a contingent liability has an immediate budget impact that must be considered. In Indonesia, the government policy requires IIGF to accept contingent liabilities on the basis of careful assessment of the risk by the fund's management.