Contingent Liabilities: Issues and Practice; Aliona Cebotari; imf working Paper 08/245; October 1, 2008

Budgeting for the Subsidy Cost of Contingent Liabilities 
Another way to correct the bias towards guarantees is to have them compete on an 
equal footing with other forms of government support, such as direct subsidies or 
transfers. This can be done by including the expected cost of the guarantee (i.e., its subsidy 
element) as an expenditure appropriation in the budget of the sponsoring department. This is 
done in countries that budget on an accrual basis, as well as in Canada, Colombia, 
Netherlands, Sweden, and the United States. Budgeting for the subsidy cost of the guarantees 
implies that guarantee programs require parliamentary authorization when new guarantees 
are made. Budgeting also ensures that the guarantee is acknowledged, its cost is internalized, 
and the incentives to rely on guarantees to disguise the true cost of the subsidy to the budget 
are eliminated. The latter two benefits would only come about if budgeting for the guarantee 
forces line ministries to forgo some other expenditure. In Sweden, for example, this 
crowding-out mechanism in the budget works almost automatically, since the budget 
contains strict annual expenditure ceilings determined by the parliament early in the budget 
process (Hörngren, 2003). Even if crowding out does not occur, the benefit of recording the 
expenditure in the budget remains.
The expected cost of the guarantee could be budgeted on either a net present value or 
an annual basis. In Canada, Netherlands, New Zealand, Norway and the United States, the 
net present value of expected guarantee costs are appropriated as expenditures in the year the 
guarantee is issued, effectively budgeting for them on an accrual basis (Schick, 2002; Kraan, 
2004), whereas in Sweden and Colombia the annual expected losses under the guarantee are 
budgeted essentially on a cash basis. The United States adopted the Federal Credit Reform 
Act in 1990, which requires that the estimated long-term cost of a loan guarantee be 
calculated on a net present value basis and included in the budget of the government entity 

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issuing the guarantee. This cost is reestimated annually on the basis of the latest data and an 
automatic expenditure appropriation is provided when costs increase due to factors outside 
government control (Schick, 2002). In Canada, departments sponsoring the guarantees are 
required to provision for these guarantees upfront when these are issued, either from the 
guarantee fees they charge or from their annual appropriations. In Sweden, if parliament 
decides that the recipient of the guarantee does not have to pay the guarantee fee, budget 
expenditures—equivalent to the expected annual losses under the guarantee—are provided to 
cover the fee. Similarly, in Colombia, the annual expected losses under PPP-related 
guarantees are translated by the public debt office into an annual schedule for guarantee fees, 
which are paid by the public entities involved in PPPs into a guarantee fund, by way of 
ensuring the availability of payment when the contingency is called (Cardona Bermeo, et al., 
2002).
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More generally, the fiscal responsibility legislation requires the Colombian 
government to budget at least 15 percent of the liabilities that affect future budgets during the 
year in which their issuance is authorized (with few exceptions).
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