PPPs are complex and long term arrangements between the public entity and private partner. In such arrangements, it is a challenge to foresee all possible risks and liabilities that could emerge during the project lifecycle (during the agreement period). It is in such situations that all the risks and liabilities that are identified are clearly explained and addressed in the agreement executed between the parties (also referred to as committed liabilities) and those liabilities which trigger but are uncertain events, are referred to as contingent liabilities.
Contingent liabilities can create management problems for Governments. They have a cost associated with them and it is difficult to estimate or assess the probability of occurrence of such costs. It has been observed that, except in the case of contingent liabilities created by simple guarantees of debt, public entities usually incur contingent liabilities without budgetary approval or recognition in the public entity's accounts. This could lead to inadequate provisioning of funds even in cases of a reasonable likelihood of the event arising.