Executive summary
This report identifies and estimates the contingent liabilities from natural disasters in Sri Lanka and presents options to manage them. Expenditures made in response to disasters are referred to as disaster-related contingent liabilities (OECD 2012). These expenses arise only if a contingent event, such as a disaster, happens. Two techniques are used in this report to estimate the value of contingent liabilities from natural disasters: direct estimation using historical expenditure data, and probabilistic modeling.
Using direct estimation, the disaster-related liabilities belonging to the Government of Sri Lanka (GoSL) are assessed, on average, at LKR 11 billion a year (US$70 million). Analysis of historical expenditure data indicates that GoSL spent LKR 68 billion (US$425 million) in 2012–2017 in response to natural disasters.
In 2017, GoSL’s contingent liability was LKR 23.8 billion (US$149 million), or approximately 1 percent of total government expenditure. The reconstruction and rehabilitation of infrastructure and public assets are a major source of contingent liabilities for the government. Other areas of liability (of smaller magnitude) are relief payments, resettlement of affected communities, premiums for disaster-linked insurance schemes, and transfers to state-owned agencies.
Using probabilistic modeling, the annual average explicit contingent liability attributable to the GoSL from natural disasters is estimated at LKR 20.5 billion, or 21 percent of total associated loss. The average of 21 percent was derived from the average loss identified in the post-disaster needs assessments for 2016 and 2017, where the actual loss incurred by the public sector was 9.8 percent and 31.7 percent, respectively.
GoSL is currently managing its post-disaster liabilities through reallocations between budgeted lines of expenditure, dedicated budget lines, supplementary budgets, and use of the Miscellaneous Fund held by the Ministry of Finance. Budgeted lines of public spending are often reduced to release resources for unbudgeted post-disaster categories that need to be increased. In some instances, international assistance is also being used to fund or manage post-disaster liabilities.
Over the short to medium term, there are several options that GoSL could consider to manage its disaster-related liabilities. The options have been split into two categories: preventive measures, or those that can physically reduce the impact of disasters; and financial measures, or those that can help manage the cost from expected and unexpected contingent liabilities.
In the short term, GoSL should consider developing and implementing a national disaster risk financing strategy, which would help in the coordination and prioritization of options presented below:
Preventive measures
- Continue to invest in disaster risk reduction
Building on work outlined in the Sri Lanka Comprehensive Disaster Management Plan, 2014-2018, the GoSL could do more to reduce the impact of disasters, and hence post-disaster expenditure. Key initiatives could include ensuring that the capital projects being funded have integrated disaster-mitigating measures in their design and are in secure locations. This is particularly important for state-owned enterprises that play an important role in infrastructure and core public services.
The GoSL could also invest in climate-proof Public Investment Management processes, could investigate and implement measures to stimulate the domestic insurance market, and could provide tax incentives to encourage the uptake of disaster mitigation measures.
- Improve coordination across ministries in the provision of relief
The amount of relief expenditure paid by the Ministry of Disaster Management has increased substantially in the past two years. In 2017, relief payments were also made by the Ministry of Women and Children. One way that GoSL could manage contingent liabilities is to ensure that there are clear relief guidelines in place across multiple ministries, that guidelines are strongly adhered to, and that there is good coordination across government. Moreover, given the recurring nature of weather-related events, and the fact that the poor and vulnerable are disproportionately affected by disasters, it may be prudent for Sri Lanka to investigate the feasibility of consolidating, scaling up, and amending existing social protection schemes.
This step could reduce the administrative costs that arise when multiple agencies provide support to communities.
Financial measures
- Enhance risk management capacity within the Ministry of Finance
With limited analysis of contingent liabilities and their potential quantity and impact, the GoSL is limited in its ability to devise an appropriate strategy to manage unexpected costs. An enhanced ability to analyze contingent liabilities would not reduce them, but it would help the Ministry of Finance devise the best strategy for managing the fiscal impact of disasters, direct or contingent. It is therefore recommended that the Ministry of Finance increase its capacity to identify, quantify, and use data on contingent liabilities. This effort could include taking a gender and poverty perspective in its work, possibly by establishing a fiscal risk unit or by ensuring that disaster risks are explicitly included in the mandate of existing teams that may be looking at fiscal risk issues.
- Maintain dedicated budget lines and use budget reallocations for low-frequency events
The GoSL uses dedicated budget lines, financed through annual appropriations, to fund some contingent liabilities (e.g., item 1702–Flood and Drought Relief under the National Budget Department). This approach enables the GoSL to respond immediately to disaster without having to cut other spending programs or seek additional legislative authority. Given the high opportunity cost of maintaining a liquid reserve, these budget lines are useful for high-probability events. In addition to maintaining dedicated budget lines, the Ministry of Finance could also choose to earmark a certain percentage of the “other miscellaneous items” and/or “other contingency payments” budget lines toward post-disaster expenditure.
- Transfer risk through insurance of key public assets, NNDIS (National Natural Disaster Insurance Scheme), and sector-specific insurance
To manage disaster-related liabilities, GoSL could transfer risk through insuring key public assets and strengthening existing insurance mechanisms—in particular NNDIS and sector-specific insurance such as agriculture insurance. The rehabilitation of infrastructure after a disaster is estimated to account for over 50 percent of total post-disaster expenditure. Standardizing insurance cover across key public assets would generate economies of scale, thereby potentially lowering premiums.
At present, the state-owned Sri Lanka Insurance Corporation (SLIC) is the dedicated insurer for all state assets and insures public infrastructure construction such as roads and bridges, as well as some major hotels. Reviewing the current coverage and alternative private catastrophe risk insurance programs for public assets should be considered. Strengthening the National Natural Disaster Insurance Scheme, and the viability and cover of sector-specific insurance, would also help manage the liability arising from disasters.
