Emerging Issues

Optimism about the country’s ability to successfully recover from tsunami has been based on the pledges made at the donor meeting in May 2005, which seemed more than adequate to meet financing needs. In this context, three questions become important.

• How likely is it that pledges will be fully honoured?
• Can the country effectively utilize such a large amount of foreign assistance?
• Will the external funds be adequate to finance the reconstruction programme, and if not, what options are available to raise necessary funds?

7.1 Aid: Pledges and Realization

The answer to the first question, going by historical experience of other disaster episodes in developing countries is a resounding “Not Very Likely”. For a variety of reasons, pledges made at the time of major disasters have almost never been fully honoured. ²⁷ As Benson and Clay (2004, p. 60) point out, “…ultimately disaster-related external assistance may not be additional but instead may displace funding for development.” Substantial gaps emerge between pledged and actual aid disbursement following major disasters despite the best intentions on the part of donors. This can reflect management constraints – such as procedural difficulties, procurement delays, lack of local counterpart finance, etc, – and new issues that change the political focus and divert attention. Disaster related external assistance may also not be entirely additional beyond the initial year of impact. While the immediate response involves some new money, rehabilitation needs are often met by switching aid money between uses rather than by increasing total aid to the affected country. Thus, total aid commitments may increase in the year of a major disaster, but they tend to fall back after the crisis to reflect longer-term trends in aid inflows. Some of the bilateral aid that comes in is also likely to be ‘tied’ – used to buy anything from food products, telecommunications, transport and technical advice from the donor country – estimated to cut the value of aid to recipient countries by 25-40 per cent because the donor country is not always the cheapest source of those services.²⁸

However, judging by the extent to which pledges have been turned into commitments by major donors (multilaterals and governments) the present case may well prove to be an exception. Nevertheless, it should be noted that a third of the pledges made at the donor meeting in May 2005 came from non-governmental sources, whose own sources of funding are not always firm. There are already indications of emerging problems. Even though 384 NGOs registered with the Department of Social Services had agreed to provide funds amounting to US$ 1,321 million for rebuilding of assets destroyed by the Tsunami, instances of failure to sign MOUs have been observed, while even some NGOs that had signed the MOUs had failed to commence work (GOSL, 2005c). In light of the frequency with which disasters – both natural and man-made – appear to strike the world at present, it seems prudent to prepare for some slippage in this area.

7.2 Aid Utilization

As far as the ability to utilize aid is concerned, Sri Lanka’s past performance raises serious concerns. Effective management and utilization of aid can pose difficulties for developing countries at the best of times but the problems are compounded many times over in the context of a significant inflow of aid following a natural disaster.

Sri Lanka, like many developing countries, has been grappling with problems of underutilization of aid.29 The rate of aid utilization (measured by the disbursement ratio: disbursed aid as a share of cumulated undisbursed aid) indicated a relatively low utilization of aid of around 13-15 per cent towards the end of the 1990s (IPS, 2001). By 2003, there was a gradual improvement in the utilization rate to a more respectable disbursement ratio of around 20-22 per cent, though the cumulative undisbursed balance (CUB) has remained stubbornly in the region of US$ 2.5-3 billion (Annex Table A-1 [ PDF 153KB | 3 pages ]).

Many reasons have been cited for the low levels of aid utilisation: political interference with regard to planning, implementation and allocation of funds; staffing and related problems in project management; implementation delays (including infrastructure bottlenecks, complex and costly procurement procedures), and excessive conditionality imposed by donors have been viewed as the key constraints (IPS, 2001). Availability of counterpart funds (local funds with appropriation) has also been an important factor. Even if budgetary allocations may have been made, cash is sometimes not available when needed. In the case of disasters, several factors further aggravate the capacity for utilisation of foreign funds. The destruction of infrastructure, disappearance of public records, the sheer number of donors and programmes can create a complex web of aid transactions that are difficult for both donors and recipients to manage.

Past failures are of course not necessarily a guide to what may happen in the current situation. But they do provide a warning that, unless there is a concerted effort to meet targets and maintain focus, the potential for domestic slippage is ever present. An interim report by the Auditor General’s Department has found that of US$ 1168 million in aid committed for the reconstruction of six major sectors, the disbursement as of end July 2005 stood at US$ 158 million (or a utilization rate of only 13.5 per cent).³⁰ The role of TAFREN in overseeing the reconstruction effort, the political imperatives driving the programme, and strong pressure from donors may assist aid utilization performance and enable the country to achieve a much improved performance in utilizing the tsunami aid effectively.

7.3 Adequacy of Funding and Cost Escalation

The funds needed for rebuilding houses and other construction activities, including public infrastructure, were initially estimated on the basis of costs and prices that prevailed immediately after the tsunami disaster. However, there is now clear evidence that construction costs have been rising rapidly in recent months and materials (such as river sand).

This is of course not surprising. The scale of construction that is envisaged is several times higher than what is done in a normal year, and dramatically increases demand for labour and materials.³¹ Data obtained in late August from companies and organizations involved in house building and IPS field interviews show that total construction costs for the planned houses for tsunami affected families have risen from the estimated Rs 400, 000 to Rs 550, 000 or more in cases, and are continuing to increase (Table 6 [ PDF 254KB | 10 pages ]). Field interviews indicated that these increases are driven primarily by higher wages for skilled labour (such as carpenters, painters and masons) whose wages have doubled in some locations. Costs have also increased for particular building materials, but price increases for importable materials have been significantly lower than overall construction cost increases (see Annex Table A-2 [ PDF 153KB | 3 pages ]).

It should be noted that these cost increases have occurred at the very beginning of the construction programme. In fact, house building activities are still in their early stages. What these figures indicate is that if and when construction really picks up on the scale envisaged in the reconstruction phase, house construction cost escalation is likely to rise even more sharply. Increases in house construction costs are a useful (if not quite precise) indicator of the extent to which other construction costs, including rehabilitation costs of public infrastructure will increase.

All groups and organisations undertaking construction activities – households attempting to repair or rebuild houses, donors who have taken on commitments to build houses and the government which faces the task of rebuilding public infrastructure – must accept the reality of these cost increases. Further, the heavy demand for goods and services in the construction sector will produce ‘localized’ inflation to begin with, but later this will inevitably spread to the rest of the economy leading to more broadly based inflation. Inflation for the first 8 months of 2005 has risen to 12.7 per cent, significantly above the comparable period in the previous year.³² This raises the question:

How much in the way of extra funds will be required to meet the actual reconstruction costs, and where will these funds come from?

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Comment(s)

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1. Dushi Weerakoon, one of the co-authors
   (posted 31 March 2006 / 11:43:50 AM)
   
   In response to the comment below:
   
   Besides funeral expenses, etc. a cash grant of $50 per month and $3.75 cash and food ration were given to all affected households (for approximately 4 months). For residents outside the buffer zone, if a house is more than 40% damaged, a grant of $2,500 is given in 4 instalments, based on progress. If a house is less than 40% damaged, then a grant of $1,000 is provided, disbursed in 2 stages. For residents within the buffer zone, the government planned to assist not only landowners, but all residents (including encroachers) with some form of housing. This was estimated to require around 50,000 permanent houses. Further quite considerable details on government handouts are contained in the report itself.
   
2. ken bacon
   (posted 18 December 2005 / 06:57:36 PM)
   
   This chapter notes that the government immediately paid money for funeral expenses, livelihood and cooking utensils. What additional government compensation has been provided? I am particularly interested in how the relatively generous post earthquake compensation program in Pakistan compares to government compensation for loss following the tsunami.