Peru
Prevalence of natural hazards
The risk of disasters caused by natural hazards in Peru is linked to its geographical location and the nature of its exposed assets and infrastructure. Peru is located on the Pacific Ring of Fire, a region exposed to major earthquakes and active volcanoes. In addition, the presence of the Humboldt Current, the proximity of the Equator, the influence of the Amazon region, and Peru’s rugged terrain traversed by the Andes mountains expose Peru to a number of geological hazards, including mudflows, and landslides. Its location in the tropical and subtropical belts on the western coast of the South American continent also exposes Peru to climatological events such as the El Niño phenomenon, which can cause extreme rainfall, floods, droughts, freezes, hailstorms, and strong winds.
Peru is characterised by high seismicity. In Peru, as in its Andean neighbours, seismic activity originates in the subduction zone between the Nazca and South American plates and in the continental fault system in the Andes Mountains. The highly seismic hazard zones are concentrated along the coast, where the nation’s capital, Lima, and the port city Callao are located. As home to almost a third Peru’s population and around 45% of its gross domestic product (GDP), Lima and Callao together make up Peru’s disaster hotspot. Close to three quarters (71%) of Peru’s population are at very high or high seismic risk. The most recent major earthquakes occurred in Nazca in 1996, (with economic losses exceeding USD 1.2 billion), Arequipa in 2001 (losses of USD 311 million) and Pisco in 2007 (losses exceeding USD 1.2 billion and almost 600 fatalities).
The northern coast of Peru is especially vulnerable to El Niño oscillations that are typically characterised by prolonged torrential rains, mainly in the regions of Tumbes, Piura, Lambayeque, La Libertad and Ancash. The impacts of El Niño in Peru mainly have to do with flooding. At least 23% of the population of Peru live in flood-prone areas. The 1982/83 and 1997/98 El Niño events were especially devastating for Peru’s economy; estimated damages were USD 1.2 billion for the 1983 floods, and an estimated USD 1.8 billion for the 1997/98 (EM-DAT, 2017).
Catastrophic landslides primarily in the Andes occurred due to seismic activity or heavy rains, claiming thousands of casualties in communities downstream from the Huaytapallana, Huayhuash, Urubamba and Vilcabamba cordilleras. The last major landslide occurred in 2010 in Cusco; economic losses were estimated at USD 230 million. The most recent major drought occurred in 1992 and caused an estimated USD 250 million in losses.
The estimated annual average loss from disasters is USD 4 billion, with the probable maximum loss for 100-year and 500-year return periods estimated at USD 22.3 billion and USD 52.6 billion, respectively (PreventionWeb, 2017). For a major (1 000-year return period) earthquake hitting the Lima and Callao regions in Peru (with an annual exceedance probability of 0.1%) losses for all private property and infrastructure are estimated to be over USD 72 billion (IADB, 2009).
Since 2011, structural investments and measures for risk reduction have been registered within the Budgetary Programme 0068 for Vulnerability Reduction and Emergency Response to Disasters. Through this budgetary programme, USD 2.49 billion has been invested between 2012 and 2016, which corresponds to an approximate annual total of USD 498 million (MEF, 2017c).
The Budgetary Programme 0068 is a results-based budget programme focused on preparedness and prevention measures for disaster risk management. Ex post disaster risk management spending is currently not reported through a specific results-based budget line, but introducing such a budget line is being considered. The Budgetary Programme 0068 is financed mostly by ordinary budget, but may receive funding from other sources. The majority of funding from the programme is used for ex ante disaster risk management, but funding may also be redirected towards emergency response and disaster management once a disaster has occurred. Central funding is complemented by subnational funding. In addition to the funding available via the Budgetary Programme 0068, the Fund for Interventions to Face Natural Disasters (Fondo para Intervenciones ante la Ocurrencia de Desastres Naturales, FONDES) finances both ex ante and ex post disaster risk management measures. In addition to emergency relief, FONDES may be used to support the implementation of recovery and rehabilitation measures. The competition-based Promotion Fund for Regional and Local Public Investment (Fondo de Promoción a la Inversión Pública Regional y Local, FONIPREL) may also be used to fund disaster risk management activities.
Responsibility for managing the contingency reserve lies with the National Civil Defence Institute (Instituto Nacional de Defensa Civil, INDECI). The Ministry of Finance, co-ordinating with INDECI, is responsible for transferring resources to public entities at national, regional and local level. Use of the contingency reserve is fully disclosed, operation by operation, in the quarterly financial evaluation of budget execution.1
From 2003 to 2016, the contingency reserve allocated USD 178 million to disaster recovery, an average of USD 12 million per year. The Budget Law of 2016 allocated a USD 917 million transfer (0.5% of GDP) in additional funding to the contingency reserve for the exclusive purpose of funding recovery in response to the El Niño event; however, Law No. 30458 allocated only USD 91 million for the FONDES fund. During the 2003-15 period, support for populations affected by emergencies amounted to USD 62 million – or an average of USD 5 million per year.
Peru has another dedicated fund for ex post financing, called the Fiscal Stabilisation Fund (FSF). The Law to Foster Fiscal Responsibility and Transparency (No. 30099) authorises the use of resources from the FSF in major national emergencies that can affect Peru’s fiscal stability, such as a disaster. The Ministry of Finance has had access to public balance statements of the FSF since 2006. From 2006 to 2016, resources from this fund were not withdrawn for disaster purposes. At the end of 2016, the fund’s resources were at USD 8 258 million, but they have previously exceeded USD 9 billion. In 2016 a decision was made to allocate amounts in excess of 4% of GDP to a newly created infrastructure public-private partnership (PPP) fund.
In 2016 Law No. 30458 created another contingency fund earmarked for disasters: the aforementioned FONDES, which allows resources to be transferred to the three levels of government with the purpose of strengthening risk reduction, preparedness and recovery. The law allocated USD 91 million to create the fund; in 2017 the regular budget allocated another USD 15 million; and the Emergency Decree No. 004-2017 added USD 400 million to respond to the El Niño costero events that affected Peru from November 2016 to May 2017.
In April 2017, the Ministry of Finance published a report to update its macroeconomic projections, taking account of the El Niño costero events that had been affecting Peru since November 2016. The update projects an increase in public spending of 3.2% of GDP (USD 6.4 billion) for the period 2017 to 2021.2 Resources are managed by the recently created Reconstruction with Changes Authority (Autoridad para la Reconstrucción con Cambios).
Peru has expanded its financial protection against disasters beyond budgetary resources, contingency reserves and dedicated funds. Since 2010, Peru has been accumulating contingent credit lines. The main purpose of these credit lines is to provide liquidity in the event of a disaster, and so ensure that Peru has enough resources at hand to respond appropriately. In 2016, Peru had contingent credit lines for a total of USD 4 billion. From this balance, USD 1.2 billion is dedicated exclusively to disasters and another USD 2.8 billion is multi-purpose, meaning that could also be used for disaster response. Therefore, a total of about USD 4 billion is available to provide liquidity for post-disaster assistance. These credit lines have not yet been used for emergency events, but the El Niño costero event will likely require funding from them.
Managing disaster-related contingent liabilities
Identification of disaster-related contingent liabilities
Identification of disaster-related contingent liabilities requires the documentation of both explicit and, to the extent possible, implicit liabilities. To identify explicit contingent liabilities arising from disasters, it is necessary to understand Peru’s legal and policy frameworks that determine the government’s obligations to shoulder the costs caused by the disasters.
Explicit contingent liabilities
Explicit contingent liabilities arise from legal commitments by both central and regional governments to provide disaster assistance. The table below shows that in Peru, laws do not explicitly articulate the responsibility of the central government to finance post-disaster response and recovery.
There is a robust legal framework for disaster risk management in Peru, including specific measures and assignment of responsibility for financial management, together with strategies to be implemented at various levels. However, this framework does not provide explicit public obligations for post-disaster financial assistance, apart from giving the Ministry of Economy and Finance (Ministero de Economía y Finanzas, MEF) the role of designing a financial protection strategy and the right to contract ex ante financing (such as contingent credit facilities) in preparation for possible post-disaster expenses. There is no specific mention of cost-sharing arrangements between central and subnational governments, nor any specific legal responsibility for central government to provide funding in support of subnational measures related to the management of disasters. Nor is the central government legally responsible for the reconstruction of publicly or privately owned assets. Finally, the government does not provide guarantees for disaster losses incurred by public corporations and PPPs. Instead, each PPP contract specifies its own provisions for responding to disasters. In some cases this means that insurance is purchased, while in others a reserve is created or the state acts as a grantor to cover the costs caused by disaster-related damages. When the state acts as grantor, contracts may also specify financial guarantees by the MEF in support of a payment to be made.
Implicit contingent liabilities
Disaster-related contingent liabilities are understood as implicit liabilities when they are not determined by a law or a contractual rule. In this case, the public resources provided in the aftermath of a disaster are based on a moral commitment by the government.
Peru’s repeated and significant commitment to provide disaster assistance in the past is based on moral commitment and political will rather than a legal obligation. Past expenditures by the central government in the aftermath of disasters reveal a number of implicit liabilities.
The national government has provided financial support to the affected population during emergencies; has assumed the rehabilitation and reconstruction costs of public infrastructure and services; and has compensated the poorest population groups for the loss of private houses. For example, after the Pisco earthquake in 2007 the government granted subsidies to support affected families to rebuild their houses. In response to the 2016-17 floods caused by the El Niño costero event, the government also took action with several emergency decrees that included measures and funding for the following:
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Allowing national, regional and local governments to redirect their budgets to finance emergency activities;
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Providing cash transfers to each local government in emergency areas;
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Expanding grants to protect vulnerable houses exposed to seismic risk;
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Providing transfers to regional governments to finance maintenance activities in hospitals located in emergency areas;
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Authorising the housing ministry to deliver temporary housing solutions to citizens in disaster-affected areas;
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Granting assistance to affected families with collapsed houses.
All emergency decrees have a limited time of validity, typically less than a year after approval (MEF, 2017a).
Estimation of insurance payouts
Although insurance of all public assets (national, regional and local) is compulsory in Peru, the regulations state that compliance may be subject to an entity’s priorities and budget availability (World Bank, 2016).3 The government of Peru does not regularly estimate the size of insurance payouts in case of a disaster; but in 2014, at the request of the Ministry of Finance, the World Bank undertook a first preliminary analysis of public assets’ insurance for some institutions of the government. It found that not all of the assets reviewed were insured, and that those entities that had taken out insurance had done so on their own initiative due to the lack of compulsory “corporate insurance” procedures. The analysis also identified several cases in which finding a company to insure these public assets had been difficult.
Quantification of disaster-related contingent liabilities
The government of Peru has relied on modelling disaster losses and damages for the purpose of estimating disaster-related contingent liabilities. The Ministry of Finance, together with the Inter-American Development Bank (IDB), developed a national seismic profile in 2014. The results of the study showed that the value of state assets exposed to seismic risk was USD 69 billion. The maximum probable loss for a 1000-year event was USD 1.1 billion for public assets (IDB, 2015).
The government does not conduct an inventory of disaster-related contingent liabilities on a regular basis. However, Peru has produced relevant information to quantify disaster-related contingent liabilities, such as the following:
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1. Historical data on government expenditures
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2. Expenditure reported from a general annual budget contingency appropriation
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3. Expenditure reported from a dedicated disaster contingency appropriation
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4. Expenditure by the emergency management authority
Established by Law No. 29664, INDECI is responsible for identifying and assessing risks to public infrastructure, while the National Centre for Risk Estimation, Prevention and Reduction (CENEPRED) is responsible for gathering information on the vulnerability of public assets, which includes the estimation, prevention and reduction of risks. Peru has developed a spatial information system4 that allows identification of hazards and vulnerabilities by regions as well as identification of evacuation routes. The system also features a structural seismic vulnerability study of Lima hospitals. However, it does not provide information related to the value of properties. Concerning past impacts of disasters on public assets, Peru does not record specific information on the costs of asset rehabilitation and reconstruction following a disaster. There information on general public asset spending on rehabilitation and reconstruction, but this does not specify whether the activities were undertaken in the aftermath of a disaster or not.
Although state-owned enterprises may be another source of potential disaster-related contingent liabilities for the central government, the central government is not legally obliged to assume such costs. Where assistance may be necessary, the responsibility is at the subnational government level.
Estimating the fiscal impacts of disaster-related contingent liabilities and integrating them into overall fiscal forecasting
The Ministry of Finance does not have a central unit responsible for managing fiscal risks in relation to a disaster event. Several directorates have responsibilities related to risk management functions: the Risk Management Directorate, the General Directorate of Macroeconomic Policy and Fiscal Decentralisation, the General Directorate of Public Investment and the General Directorate of Public Budget. Peru also does not have a global strategy for managing fiscal risks, although fiscal risk management is included in macro fiscal policy guidelines; these encourage holistic analysis of fiscal risks to foster holistic management of overall fiscal risks, with the goal of improving public asset and liability management.
According to the Law to Foster Fiscal Responsibility and Transparency (No. 30099 – Article 18), the Ministry of Finance is responsible for publishing Multiannual Macroeconomic Framework (MMF) reports, which include macroeconomic projections and assumptions for a four-year period (the published year and the next three). Projections are reviewed by the central bank and the document is published twice a year (April and October). Information on the long-term sustainability of fiscal policy is limited to analysis of public debt trends (IMF, 2015).
The only reference in MMF reports to contingent liabilities arising from disasters appeared in the 2016-18 editions. The government analysed the impact of a severe El Niño episode (similar to the 1997/98 event) in fiscal projections through a probabilistic scenario analysis based on historical data. The analysis suggests the debt and deficit would increase slightly compared to the baseline.
The scenario included an increase in public spending of 1% of GDP to finance prevention and reconstruction plans for public infrastructure and services, in addition to regular use of the contingency reserve resources. Taking into account the increase in spending combined with the reduction in fiscal revenues, the projected fiscal deficit would be between 1% and 1.5% of GDP.
The law also requires the publication of a report assessing government’s explicit expected contingent liabilities. In June 2015, the authorities published the first report on explicit contingent liabilities of the non-financial public sector, although this does not examine disaster-related contingent liabilities. In 2016, a special mention of disaster-related contingent liabilities was introduced into the report.
Implementation arrangements for providing post-disaster financial assistance
In 2011, Law No. 29664 created the National Disaster Risk Management System (SINAGERD), which provides Peru with the legal framework for implementing comprehensive disaster risk management by all public entities at all levels of government (national, regional and local). The subsidiarity principle contained in the law places the decision-making level as close to the population as possible. Regional and local governments are thus responsible for implementing disaster risk management processes, including assessment, prevention, reduction, emergency response, rehabilitation and reconstruction. The national government will intervene only when the amount of assistance required exceeds the funding capacities of regional and local governments.5
Each year in the budget formulation process, regional and local governments prioritise the allocation of resources to provide direct and immediate support to the population affected, and to launch action to quickly recover interrupted basic services as well as rehabilitate public infrastructure. Based on the subsidiarity principle, when the emergency needs exceed the response capacity of sub-national governments, the Ministry of Finance evaluates and identifies the most adequate and cost-efficient tools to obtain the complementary financial capacity at national level required to respond properly to the emergency and reconstruction phases.
The National Disaster Risk Management Council6 is the authority in charge of political decision-making in the aftermath of disasters, but it did not convene for the 2015 El Niño event, or during the 2017 El Niño costero event. Within the council, the president of the republic and the Presidency of the Ministries Council work with the INDECI to lead the emergency response. The Ministry of Economy and Finance is responsible for implementing the strategy for financial protection against disasters.
In order to assess the gap between capacity and needs, INDECI developed a national mechanism to evaluate losses and needs.7 Based on this mechanism, governments at national, regional and local level report losses and needs and are able to assess the gaps in capacity. The mechanism identifies and registers qualitative and quantitative information regarding the extension, intensity and location of damages.
During an emergency, accounting guidelines for national, regional and local budgets are published to ensure that the emergency expenses are properly recorded in the Financial Management Integrated System (SIAF). The government budget office must request the required budget codes for the disaster-related activity from the General Directorate of Public Budget at the Ministry of Economy and Finance. Once the government has this information, expenses can begin to be charged to the activity.
Mitigating disaster-related contingent liabilities and financing residual risks
In 2016, the Ministry of Economy and Finance published the financial protection strategy it had designed and been implementing since 2012, with six priority lines of action for evaluating, reducing and managing disaster-related fiscal risks, as follows:
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1. Identification, quantification and assessment of the fiscal risk of disasters associated with natural hazards
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2. Formulation of components for developing and implementing tools for risk retention and transfer
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3. Establishment of guidelines for the use of available funds in responding to major disasters
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4. Promotion of the assessment, prevention, and reduction of disaster risk, as well as promotion of emergency preparedness through financial mechanisms within the results-based budget framework
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5. Promotion of the development of a domestic catastrophe insurance market for responding to disasters associated with natural hazards
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6. Co-ordination and promotion of the operational continuity of the state (MEF, 2016a).
Article 42 of the SINAGERD law on operational rules stipulates that the financial risk management strategy is organised around three lines of action: 1) risk assessment, prevention and reduction; 2) risk preparation, response and rehabilitation; and 3) reconstruction. In the preparation, response and rehabilitation process, resources are used from annual budgets of public entities (budgetary programmes), from the contingency reserve; those from the Fiscal Stabilisation Fund; those from contingent credit lines and from other sources. As of 2017, the priorities are no longer specified; instead, Article 42 now only clarifies the sources of financing (Supreme Decree No. 057-2017-PCM).
Peru has also developed permanent financial mechanisms for disaster risk reduction measures. In 2010, the Budgetary Programme 0068 for Vulnerability Reduction and Response to Disasters was created within the results-based budget framework. The purpose was to have a connecting disaster risk management policy among the various ministries of central government as well as subnational governments (regional and local). This tool can be used to assign resources for interventions aimed at reducing the population’s vulnerability – thus allowing the government to identify, prioritise, and co-ordinate its action more efficiently.
In addition, disaster risk management has been incorporated into the design, formulation, and execution of public investment projects within the framework of the National Multi-year Programming System (Sistema Nacional de Programación Multianual y Gestión de Inversiones). The aim is to ensure the sustainability of public investment and reduce the cost of restoring services and rebuilding infrastructure following a disaster. The new public investment system “Invierte.pe” is expected to fully incorporate disaster risk management as well.
Furthermore, Supreme Decree No. 111-2012-PCM approved the National Policy on Disaster Risk Management as a mandatory policy for national government entities. Within the results-based budget framework, the ministries are expected to allocate more resources for ex ante risk reduction through Budgetary Programme 0068 and other mechanisms (municipal incentives and funds that promote the development of programme budgets), in order to reduce the possible medium- and long-term fiscal effect of disasters on the government.
Another example of Peru’s promotion and implementation of disaster risk reduction policies is Law No. 30191, approved in 2014. Its purpose is to establish measures to assist national, regional and local government entities in preventing and mitigating disaster risk factors and in preparing to respond to disasters at the national level. This law led to the creation of the Protection Bond for Dwellings Vulnerable to Seismic Risks (Bono de Protección de Viviendas Vulnerables a los Riesgos Sísmicos), designed to reduce the vulnerability of homes in poverty-stricken areas through structural reinforcement.
References
EM-DAT (2017), The Emergency Events Database – Université Catholique de Louvain (UCL) – CRED, D. Guha-Sapir, Brussels, Belgium, www.emdat.be (accessed 14 September 2017).
IDB (2009), Peru Risk Profile, Inter-American Development Bank, Washington, DC.
IDB (2015), Disaster Risk Management Indicators, Inter-American Development Bank, Washington, DC, https://publications.iadb.org/handle/11319/6981?locale-attribute=en.
IMF (2015), “Fiscal transparency evaluation: Peru”, International Monetary Fund and Inter-American Development Bank, October, www.imf.org/external/pubs/ft/scr/2015/cr15294.pdf.
INDECI (2017). “Consultas estadísticas” [Statistics], https://www.indeci.gob.pe/estadisticas/banco_datos.htm.
MEF (2015), “Multiannual Macroeconomic Framework 2016–2018”, Ministry of Economy and Finance, Peruvian Government, www.mef.gob.pe/contenidos/pol_econ/marco_macro/MMM_2016_2018_Revisado.pdf.
MEF (2016a), “Peru: A comprehensive strategy for financial protection against natural disasters”, World Bank report for public policy discussion, Ministry of Economy and Finance, Peruvian Government, https://mef.gob.pe/contenidos/pol_econ/documentos/PeruFinProtectionFL_ENG_low.pdf.
MEF (2016b), “Explicit contingent liabilities report of 2015”, Ministry of Economy and Finance, Peruvian Government, www.mef.gob.pe/contenidos/pol_econ/informes/Informe_Contingencias_Explicitas_2015.pdf.
MEF (2017a), “Transparencia económica Peru”, Ministry of Economy and Finance, Peruvian Government, https://www.mef.gob.pe/es/portal-de-transparencia-economica.
MEF (2017b), “Multiannual macroeconomic framework update 2017–2021”, Ministry of Economy and Finance, Peruvian Government, https://www.mef.gob.pe/contenidos/pol_econ/marco_macro/informe_actualizacion_proyecciones.pdf.
MEF (2017c), “Programa presupuestal 0068 – Reducción de la vulnerabilidad y atención de emergencias por desastres” [Budgetary Programme 0068 for Vulnerability Reduction and Emergency Response to Disasters], Ministry of Economy and Finance, Peruvian Government, https://www.mef.gob.pe/contenidos/presu_publ/ppr/prog_presupuestal/articulados/0068_atencion_emergencias_desastres.pdf.
MEF and IDB (2014), “Multiannual Macroeconomic Framework 2015–2017”, Ministry of Economy and Finance, Peruvian Government and Inter-American Development Bank, www.mef.gob.pe/contenidos/pol_econ/marco_macro/MMM_2015_2017.pdf.
PreventionWeb (2017), “Peru - Disaster & risk profile”, http://www.preventionweb.net/countries/per/data/.
World Bank (2016), “Peru: a comprehensive strategy for financial protection against natural disasters”, World Bank Group, Washington, DC., http://documents.worldbank.org/curated/en/718281475183108912/pdf/108665-WP-PUBLIC-FINAL-PeruFinProtection-ENG-Low.pdf.
Notes
← 1. The contingency reserve consists of three elements: 1) a mandatory provision for unforeseeable events, such as natural disasters (1% of ordinary revenues); and two non-mandatory provisions for 2) payroll policy and 3) policy decisions under consideration but not finalised at the time of budget submission. The average overall reserve over the past five years was about 3.5% of initial total budget spending.
← 2. In August 2016 Law No. 30499 was approved to establish the structural fiscal path of the non-financial public sector for 2017-21. For 2017, the deficit target was 2.5% of GDP.
← 3. The relevant law is General Law of the National System for State Assets (No. 29151), approved by order No. 007-2008-VIVIENDA.
← 4. Information about the system (called SIGRID, Sistema de Información para la Gestión del Riesgo de Desastres) is available at http://sigrid.cenepred.gob.pe/sigrid/.
← 5. Peru classifies emergencies and disaster damages in five levels. Levels 1, 2, and 3 are types of disaster events that sub-national governments can handle on their own. Levels 4 and 5 warrant national government intervention. At these levels, the Ministry of Finance in co-ordination with INDECI intervenes to supply central government resources. Level 5 refers to a major event of catastrophic proportions that exceeds Peru’s response capacity and requires the declaration of a state of national emergency, signalling that international aid might be needed.
← 6. The council is formed by the president, the Presidency of the Ministries Council, and the Ministries of Finance, Defence, Education, Security, Environment, Agriculture, Transport and Housing. The president has the power to call other ministries as well as public and private entities when needed.
← 7. INDECI, “Guide for Assessing Damages and Needs in Peru”, http://www.indeci.gob.pe/objetos/secciones/MTc=/MzI2/lista/OTYx/201705101716401.pdf.