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

In practice, it is not always feasible to manage all contingent liabilities in one central 
unit. This is particularly the case when specialized expertise is required to assess project-
specific, sector-specific, or credit risk, which may not be available or may not be practicable 
to develop in the DMO, as in the case of guarantees associated with PPPs or programs 
involving guarantee programs (export guarantees, student loans, guarantees to SMEs, deposit 
insurance). As a result, some countries have set up specialized PPP units to deal with the 
risks associated with the PPP projects (see Box 4) or units in charge of specific guarantee 
programs. In Sweden, for example, while the Swedish National Debt Office is in charge of 
managing guarantees in general, four government agencies are in charge of special guarantee 
programs related to export credit, housing, international aid and deposit insurance. Most 
countries that have deposits insurance schemes, export guarantees or guarantee programs for 
SMEs, manage these through specialized institutions. In cases when such specialized units 
exist, they should report to the entity in charge of the overall management of guarantees, 
contingent liabilities or fiscal risks, so that the costs and risks of all government guarantees 
could be taken into account by this entity without getting involved in their day-to-day 
management. The principles applied to the overall management of contingent liabilities 
should apply to these specific programs, i.e., they should have clearly stated objectives and a 
set of rules or a code of conduct for granting specific types of guarantees.
The degree to which management of contingent liabilities can be centralized also 
depends on the public financial management system and capacity. In countries with 
decentralized public financial management systems, where line ministries or public entities 
are allowed to issue contingent liabilities, these ministries or entities should be responsible 
for the management of their contingent liabilities as long as they have adequate financial 
management capacity to do so (which is usually the case in advanced countries). In such 
systems, internal audit units of the ministries or entities play an important role in controlling 
and overseeing the management risks associated with contingent liabilities, supplementing 
the roles played by their accounting officers, the ministries of finance (MoFs) and SAIs, 
although they take time to set up.
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In countries with centralized public financial management 
systems or where capacity outside the MoF is weak (in middle-income and developing 
countries), there is a strong need for a centralized approach to collating, analyzing and 
disclosing fiscal risks. In such centralized systems, the MoF should have overall 
responsibility for managing all contingent liabilities, with the high-level inspectorates 
playing a role in overseeing their management.
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One of the recognized functions of internal audit is indeed to improve the effectiveness of risk management. 
The Institute of Internal Auditors defines internal audit as “...an independent, objective, assurance and 
consulting activity designed to add value and improve an organization’s operations. It helps an organization 
accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness 
of risk management, control, and governance processes.” 

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