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

The fees paid into the contingency funds can be earmarked for specific guarantees or 
not. Guarantee funds are frequently set up for different guarantee programs (export 
guarantees, housing, student loans), often for practical reasons when these programs are 
managed by different institutions. Some countries earmark the fees to payments on the 
specific guarantees that gave rise to them. In Colombia, for example, public entities maintain 
a separate account with the Contingency Fund for State Entities for each project and for each 
type of risk within a project (Cardona Bermeo, et al., 2002). While this allows an assessment 
of the adequacy of pricing individual guarantees, it can hamper flexibility in managing the 
resources of the fund and in pooling risks from different guarantees. A case, nevertheless, 
could be made for earmarking guarantee funds for each PPP project by way of guaranteeing 
the government’s financial obligations as set out in the contract. 
B. Instruments for Managing High Impact Liabilities 
Insurance and Hedging 
Market insurance or hedging could help secure the resources needed to deal with the 
consequences of large negative outcomes. The most common types of insurance include 
insurance against catastrophic risk and environmental liabilities, which may increase 
significantly in the coming years if climate change adds to countries’ financing needs.
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• Despite large exposures to natural disasters in many countries, reliance on catastrophe 
insurance to transfer risk to the financial markets remains limited.
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Cardona (2004)
(continued) 
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If an actual fund invests money in government bonds, it is easy to manage but is also not much different from 
a notional fund (see OECD, 2005a). 
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Given that most contingent liabilities involve credit risk or catastrophic risk, hedging techniques have not 
generally been used to mitigate such risks. 
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According to the UNDP (2004), about 75 percent of the world’s population lives in areas that have been 
affected at least once by earthquake, tropical cyclone, flood, or drought between 1980 and 2000. 160 countries 

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