Credit deepblue4you/iStock
Credit deepblue4you/iStock
Credit deepblue4you/iStock
Credit deepblue4you/iStock
Litigation against the State is an important source of fiscal risk, not just a legal matter. Without adequate integration into public financial management frameworks, it can generate substantial budgetary costs and weaken fiscal sustainability. Colombia's experience demonstrates the importance of incorporating litigation risks into fiscal planning and provides useful lessons for other countries facing similar challenges.
The Emergence of Litigation as a Major Source of Fiscal Risk in Colombia
Litigation against the State has been a major source of fiscal risk for Colombia. The 1991 Constitution enshrined a universal guarantee of fundamental rights and made the State explicitly responsible for ensuring their effective fulfillment. A key instrument to protect these rights was the introduction of a liability regime (Article 90), which holds the State financially liable for unlawful harm resulting from the actions or omissions of public authorities.
This constitutional shift fundamentally altered the relationship between citizens and the State and triggered a sharp rise in litigation. According to the National Agency for the Legal Defense of the State (ANDJE, Spanish acronym), while less than ten claims were admitted between 1981 and 1990, the number increased to 102 in 1991–2000 and to 3,242 in 2001–2010. Litigation then surged dramatically, reaching 77,065 cases in 2011–2020 and 211,511 over the past five years. Currently, 291,919 lawsuits are pending against the State, with total claims estimated at 42 percent of GDP. Over the past five years, labor-related cases have accounted for 43 percent of admitted claims, followed by pension cases (37 percent) and non‑labor cases (19 percent). Measured by the value of claims, litigation is most heavily concentrated in public entities pertaining to the defense, mining and energy, transport and infrastructure, environment, and finance sectors.
The Fiscal Risk Assessment and Management Framework
The government began developing an institutional framework for assessing and managing the fiscal risks from litigation in the late 1990s and early 2000s. However, it was only from 2011 onward that this framework took full shape and began to deliver tangible results. The approach rests on four pillars:
(i) a comprehensive, user-friendly and highly detailed litigation information system (E-Kogui) in which sued entities and legal teams must record all relevant related events and assessments throughout the lifecycle of lawsuits;
(ii) a centralized strategy led by ANDJE, under the Ministry of Justice, to coordinate and strengthen the State’s legal defense and prevent unlawful harm, with a focus on the most complex and high-value cases;
(iii) the introduction of a methodology to quantify contingent liabilities developed by the Ministry of Finance, and
(iv) a legal requirement to report estimates of related contingent liabilities in the Fiscal Risk Statement of the Medium-term Fiscal Framework (MTFF).[1]
The methodology for quantifying the contingent liabilities from litigation is embedded within the E‑Kogui system, allowing for estimating and continuous updating the contingent liability over the litigation process’ lifecycle. It is based on a probabilistic model or probability tree that uses data from more than 1.5 million processes recorded in the system (of which 1.3 million have been closed). It also incorporates qualitative assessments of the likelihood of success based on case‑by‑case evaluations by legal teams representing the State, which are periodically updated. This assessment considers the strength of the evidence, key procedural risks (such as judicial turnover, the timely collection of evidence, and the number of judicial instances involved), as well as outcomes in comparable cases, informed by relevant jurisprudence.[2]
The system also calculates the required corresponding contribution to the Contingency Fund of State Entities, which is a financial reserve to support the payment of fiscal contingencies when materialized. This contribution is charged to the budget of the public entity being sued, creating incentives to strengthen efforts to prevent unlawful harm and to mount a robust legal defense when litigation arises. At the individual level, this incentive is reinforced by the constitutional provision allowing the government to seek full reimbursement from current or former public officials for any amounts the State is required to pay to third parties when the damage results from willful misconduct or negligence.
Framework Results
The adopted approach has shown positive results. The success rate in cases managed by the ANDJE has averaged over 80 percent and, when coupled with a low award‑to‑claim ratio (5–7 percent), it has contributed to a gradual decline in estimated contingent liabilities over time (see Figure).
Colombia: Estimated Contingent Liabilities from Litigation (10‑Year Horizon; Percent of GDP) |
The framework could be further strengthened by reducing litigation-related arrears, addressing the high cost of penalty interest on arrears, and clarifying key legal provisions under Article 90 of the Constitution.[3]
Key Takeaways
Colombia's experience shows that effective management of litigation-related fiscal risks requires centralized information, strong coordination across government, a practical methodology to quantify and mitigate risks, and transparency. Building such a framework takes time and typically starts with the systematic collection and consolidation of litigation data.
The views expressed in this article are solely those of the author and do not necessarily reflect the views or policies of the IMF.
[1] Fiscal Responsibility and Transparency Law (Law 819/2003).
[2] Ministry of Finance of Colombia. Contingent Liabilities: The Colombian Case, 2012.
[3] According to the Commission on Public Expenditure and Public Investment (2018), the application of Article 90 has evolved largely through case law due to the absence of comprehensive implementing legislation. Consequently, courts have significant discretion in determining State liability and assessing damages. The Commission also identified scope to strengthen procedural safeguards, including clearer rules for class actions, more robust standards for assessing damages, and mechanisms to discourage unfounded or disproportionate claims.
