While the dark clouds and incessant rains in Kerala are finally gone, reality is now sinking in about the enormity of the reconstruction efforts and the need to build resilience to face future disasters. Over the course of the last month and a half, the state has faced non-stop flooding and invaluable loss of life and property. While voluntary relief activities of the public and efforts of the government have helped in the short run, restoring things to the old state is a different challenge altogether especially given the huge costs involved.
The long-short problem
When catastrophes strike in vulnerable geographies, the government has to be prepared to tackle the problem immediately and offer relief and rescue operations. On the other hand, the rebuilding efforts such as the current scenario in Kerala demands resources far more than needed for the relief operations. Estimates suggest an expenditure of more than Rs 20,000 crore, half of which will be needed to rebuild roads and bridges alone. This spending should be seen as not only for reconstructing what is lost but also being used towards making the state stronger to withstand a similar crisis in the future. The state government, therefore, has a two-fold long-short problem to solve in the coming days and years.
The short problem – financing the reconstruction
While there are traditional ways to finance a project of this scale, the government must look beyond the obvious, given the size of the project and importantly, given the times we live in. Crowd funding is a modern financing option that the government can take up to raise money for reconstruction. Crowd funding as a source of raising capital is a disruptive method and is finding a lot of traction in recent times. It is an alternate method of funding projects (commonly used by start-ups and small-scale enterprises) focused on raising small amounts of money from a large number of people using web-based platforms or applications. Given the scale of disruption caused by the Kerala floods, it is time to look at disruptive methods to rebuild the state. Crowd funding as a means to raise capital perfectly fits this agenda. Instead of the typical start-up company, the Kerala government can act as the fundraiser, while the capital providers can be from any part of the world. Capital providers can provide amounts as sm
all as Re 1 to as large as possible. This is similar to the Chief Minister’s Distress Relief Fund but would have a dedicated purpose of financing the current operations on a project mode and may be folded up after the project is over. Any money left over can then be rolled over to a long term fund to strengthen public infrastructure for disaster management. This method of fundraising would open up the government’s reach to NRIs all across the globe, and also global capital providers such as philanthropists and donor agencies.
The government can also issue purpose specific, disaster-relief bonds to raise capital. Bonds are risk-free instruments (from the investors’ point of view) that governments commonly use to raise money from capital markets. As government bonds dominate the Indian bond market, this could be an opportunity for the state government to raise capital from existing investors. Ideally, this bond would be a zero-coupon security specifically issued to rebuild the state and would offer a nominal risk-free return that an investor could earn elsewhere (with tax benefits). This would give the government access to long term funds without worrying about servicing the debt in the short to medium run.
Involving the corporate social responsibility (CSR) programmes of large companies in rebuilding Kerala is another way to raise funds, which not only serves the rebuilding purpose, but also allows the government to make a fresh beginning in engaging with corporations, given the industry-shy nature of the state. Using the CSR route, the government can tap into capital and also look at other aspects of the rebuild process. Acting as a coordinator, the government can prepare demand-side details of rebuilds including affected roads, buildings, schools, hospitals etc. and, through their CSR departments, corporations can specifically choose the activities they would like to take up. The government, acting as a coordinator, can even extend this activity to encourage corporations to adopt villages, finance school education of children from affected families, rebuild hospitals, provide equipment etc. The CSR law allows companies to provide disaster relief under heads such as medical aid, sanitation, housing and shelter. This would be an attractive option for the corporations, who typically use CSR as an image-building exercise in running their business.
This activity need not be restricted merely to the classic corporate firms, but can be opened up to other types of enterprises that are looking at India as a potential market. As an example, AS Roma, an Italian football club currently playing in the Serie A (an Italian football league), auctioned the match worn jerseys of five of its players after a game and donated the proceeds for Kerala rebuild. With more and more football clubs looking at India as a market, and the huge social media value factor, this is a win-win for both the enterprise (in this case, the football club) and the state.
The long problem disaster relief/rebuild fund
While the focus in the next few weeks and years is about rebuilding the state post the floods, there is also the distant future to prepare for. Kerala receives a lot of rainfall each year, and another catastrophe is always on the horizon. While it may not happen immediately, the state has to be prepared for another emergency. A parallel to Kerala floods is the hurricane-based catastrophes that are commonly associated with the state of Florida in the United States. Learning from history, the state of Florida has created a Florida Hurricane Catastrophe Fund in 1993, “structured as a tax exempt state trust fund under the direction of the State Board of Administration.” The fund’s main aim is to maintain the insurance capacity in Florida by reimbursing insurers for a portion of losses due to hurricanes.
What hurricanes are to Florida, heavy rainfalls are to Kerala. The current situation is a wake-up call for the government to plan for the future, and develop a special purpose vehicle (SPV) to finance the recovery of future natural disasters. The government can create an SPV tailored to rebuild the state after a flood-based catastrophe and run it like a disaster based trust fund, under the watch of the market regulator. From the point of view of individuals, the government can encourage private residents to insure their homes and properties to be better prepared for the future. However, for those belonging to lower income groups, the government can provide a free disaster related insurance, so that all sections of society are financially secure in situations of natural disasters.
Kerala is a debt-stressed state with annual fiscal deficit of close to Rs 24,000 crore. Half of this deficit is simply for meeting current expenses such as public sector salaries. The crisis is also a lesson for the state to strengthen its public finances, shore up revenues, explore innovative financing options and make itself financially resilient to handle disasters in the future without having to depend on too many external sources.
(The writers are faculty, Indian Institute of Management, Kozhikode)
