Introduction
Large-scale catastrophic and smaller recurrent disasters1 generate considerable economic losses. Over the past 30 years, damages from major disasters have increased significantly. In the last ten years alone, both high-income and fast-growing middle-income economies have experienced an estimated USD 1.2 trillion in economic costs from disruptive shocks due to hazards such as storms or floods (OECD, 2014a). Single shocks, such as recent earthquakes in New Zealand and Chile, have caused damages in excess of 20% of gross domestic product (GDP), with local economies and populations disproportionately affected. Disasters also take a tragic toll on development and poverty reduction by forcing an estimated 26 million people into poverty every year (Hallegatte et al., 2017).
The costs of disasters are often largely shouldered by governments, particularly where insurance coverage for these costs is limited (OECD, 2012). Often governments are not only responsible for the costs related to restoring public assets and services, but are also asked to provide financing for other explicit and implicit commitments made prior to a disaster. The costs that disasters impose on governments, and ultimately on taxpayers should be considered contingent liabilities or, when disasters lead to reductions in public revenues, contingent revenue losses. These expenses and revenue losses arise only if an uncertain event, such as a disaster, actually happens.
Disaster-related contingent liabilities are one type of government contingent liability. Other government liabilities stem (for example) from state guarantees or are related to off-balance public private partnerships (PPPs). The key difference that marks disaster-related contingent liabilities is the uncertain intensity and frequency of disasters in any given fiscal year, and hence the difficulty of carrying out adequate financial planning.
Unclear rules on “who pays for what” following a disaster may not only lead to delays in disaster response; they may also create larger costs for the government that can cause major budget volatility when they materialise. In recent years, disasters have hit some middle- and high-income economies in times of increasing public debt, making a challenging situation worse.
Financial planning for disasters helps governments shift their role from emergency borrowers to effective risk managers, and helps match potential liabilities with appropriate financial resources. Nevertheless, ad hoc arrangements still characterise many official approaches to meeting the costs of disasters. Japan, for example, had to rely on ad hoc post-disaster borrowing after the 2011 Great East Japan Earthquake (Mahul, Benson and Boudreau, 2013). But a growing number of governments have started to develop and implement financial protection strategies that help smooth fiscal shocks and avoid disruption of longer-term economic growth and fiscal objectives.
This report presents the findings of a comparative study that assesses how effectively governments manage disaster-related contingent liabilities, and the potential fiscal risks arising from them, within public finance frameworks. The report documents and compares the policies and practices of a set of nine selected middle- and high-income economies (Australia, Canada, Colombia, Costa Rica, France, Japan, Mexico, New Zealand and Peru), focusing on their response to and plans for disasters from a public financial perspective. Economies were selected on the basis of their exposure to and regular experience of natural disasters, and with the aim of including economies of different sizes and fiscal capacity. The nine detailed case studies are included as part 2 of the report.
Part 1 of the report first describes the economic impacts, and more specifically the fiscal impacts, arising from disasters in the selected economies (chapter 1). It then assesses and compares governments’ approaches to identifying and managing disaster-related contingent liabilities in the context of public finance frameworks and related fiscal risk assessments (chapter 2). Finally, it compares their strategies for mitigating or reducing their financial exposure, such as through risk reduction policies and investments, and also highlights good practices and makes policy recommendations for effective public financial planning for disasters (chapter 3).
In addition to documenting good practices, this report seeks to inform the implementation of existing guidance issued by the World Bank and the Organisation for Economic Co-operation and Development (OECD):
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It provides lessons learned from middle- and high-income economies to inform the implementation of the World Bank operational framework for disaster risk finance (Mahul et al., 2014).
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It complements a study documenting the experience of G20 economies in risk assessment and risk financing (Government of Mexico and World Bank, 2012).
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It complements a World Bank study assessing evidence on the development impact of disaster risk finance (World Bank Group, 2016).
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It complements World Bank recommendations for increasing the effectiveness of sovereign climate and disaster risk pooling by providing examples of how governments integrate specific financial instruments in a broader public financial management framework (World Bank Group, 2017).
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It supports the implementation of the OECD Council Recommendation on the Governance of Critical Risks (OECD, 2014b), which includes the recommendation that governments “plan for contingent liabilities within clear public finance frameworks by enhancing efforts to minimise the impact that critical risks may have on public finances and the fiscal position of an economy”.
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It supports the implementation of the OECD Council Recommendation on Disaster Risk Financing Strategies (OECD, 2017), which includes the recommendation that governments “manage the financial impacts of disasters on public finances” by evaluating exposures and developing plans for managing them.
Finally, the report also aims to support one of the key objectives of the Asia-Pacific Economic Cooperation (APEC) Cebu Action Plan, which is to enhance the region’s financial resilience to disasters and improve its financial response to disasters through innovative disaster risk financing mechanisms that reduce the potential fiscal burden arising from disasters (APEC, 2015a; 2015b).
References
APEC (2015a), “Cebu Action Plan: Annex A: APEC finance ministers’ process roadmap”, https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-Meetings/Finance/2015_finance/annexa.
APEC (2015b), “Cebu Action Plan: Annex B: Strategy for implementation of the Cebu Action Plan”, https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-Meetings/Finance/2016_finance/annexb.
Government of Mexico and World Bank (2012), Improving the Assessment of Disaster Risks to Strengthen Financial Resilience: A Special Joint G20 Publication by the Government of Mexico and the World Bank, World Bank, Washington, DC, https://openknowledge.worldbank.org/handle/10986/26784.
Hallegatte, S. et al. (2017), Unbreakable: Building the Resilience of the Poor in the Face of Natural Disasters, Climate Change and Development, World Bank, Washington, DC, www.openknowledge.worldbank.org/bitstream/handle/10986/25335/9781464810039.pdf?sequence=16&isAllowed=y.
Mahul, O., C. Benson and L. Boudreau (2013), “Risk assessment and management of natural disasters from a fiscal perspective in developing economies”, World Bank working paper (draft).
Mahul, Olivier et al. (2014), “Financial protection against natural disasters: From products to comprehensive strategies”, World Bank, Washington, DC, https://www.gfdrr.org/sites/gfdrr/files/publication/Financial%20Protection%20Against%20Natural%20Disasters.pdf.
OECD (2017), “OECD recommendation on disaster risk financing strategies”, www.oecd.org/finance/oecd-recommendation-disaster-risk-financing-strategies.htm.
OECD (2014a), Boosting Resilience through Innovative Risk Governance, OECD Publishing, https://doi.org/10.1787/19934106.
OECD (2014b), “Recommendation of the council on the governance of critical risks”, www.oecd.org/gov/risk/Critical-Risks-Recommendation.pdf.
OECD (2012), “Disaster risk assessment and risk financing: A G20/OECD methodological framework”, https://www.oecd.org/gov/risk/G20disasterriskmanagement.pdf.
World Bank Group (2017), “Sovereign catastrophe risk pools: World Bank technical contribution to the G20”, World Bank, Washington, DC, www.openknowledge.worldbank.org/handle/10986/28311.
World Bank Group (2016), “Disaster risk finance as a tool for development: A summary of findings from the disaster risk finance impact analytics project”, World Bank Group, Washington, DC. https://openknowledge.worldbank.org/handle/10986/24374.
Note
← 1. In the remainder of this document, the term “disasters” refers to disasters resulting from natural hazards and excludes any other type of disaster.