Australia
Prevalence of natural hazards
The vast territory of Australia is marked by diverse climatic conditions and landscapes, and accordingly by a wide variety of weather-related and geophysical risks ranging from bushfires, floods and storms to earthquakes (See table below). The occurrence, frequency and intensity of different types of natural disasters vary with location.
Bushfires are prevalent in the Australia’s hot and dry climate. Their potential magnitude depends not only on the prevailing climatic conditions when they occur, but also on the characteristics of the fires themselves, such as their temperature, moisture, wind speed and slope angle. Bushfires occur in Southern Australia mostly during the summer and autumn; in New South Wales and southern Queensland during the spring and early summer; and in the Northern Territory in winter and spring. They can cause significant destruction when they occur in populated areas; as did the 2009 Black Saturday bushfires in the state of Victoria, for example, which took the lives of 173 persons and cost over AUD 1.2 billion (USD 905 million) in insured losses alone.
Australia is also subject to frequent riverine and flash floods, often brought on by the effects of El Niño and La Niña. Riverine flooding is prevalent in low-lying inland regions and it can spread over large areas. Flash floods affect Australia’s mountainous and coastal regions. Floods cause an estimated 30% of the annual recorded damage from all natural hazards in Australia. The 2010 Queensland flood took 36 lives, affected 200 000 people, and caused over AUD 6 billion (USD 4.5 billion) in damages.
Tropical cyclones – ten each season on average – develop over the warm Coral Sea and the Indian Ocean; these affect mostly the north western parts (in Western Australia, the Northern Territory and northeast Queensland), and occur predominantly during the summer. Cyclones can be very destructive, causing an annual average loss of an estimated AUD 266 million (USD 200 million), around one-fourth of the annual damages resulting from natural hazards. Severe storms such as thunderstorms can occur in all parts of Australia, and cause an annual average loss comparable to that of cyclones. The 1999 hailstorm in New South Wales caused an estimated AUD 2.3 billion (USD 1.7 billion) in damages.
Sitting on the edge of plate movements (the Indo-Australian plate pushing north against the Eurasian, Philippine and Pacific plates), Australia is exposed to a moderate earthquake risk; few potential events in the area could significant damage. Most of the earthquake damage recorded is attributed to one single event in 1989 in Newcastle (New South Wales), which resulted in 13 fatalities and around AUD 4 billion (USD 3.2 billion) in damages.
The impacts of climate change are expected to increase the severity of some natural hazards – bushfires, storms, floods, costal inundations – which could expose a higher number of people to risk in the future.
Past fiscal impacts of disasters
Estimates of the average annual loss from natural disasters in Australia vary significantly. They range from AUD 2.2 billion (USD 1.7 billion) (PreventionWeb, 2017) to AUD 11 billion (USD 8.3 billion)1. On average, less than half of damages are covered by insurance (Andrews et al., 2016). (Those figures include intangible costs such as mental health impacts.) Even though extreme temperatures and bushfires are the most deadly of natural hazards, storms – followed by floods – are the most destructive in terms of economic damage (EM-DAT, 2017).
The total amount of government spending for disaster response is estimated at AUD 700 million (USD 528 million) annually, of which the central government pays around 80%2, a share that is estimated to increase over time (Deloitte Access Economics, 2013). Australia exhibits a significant vertical fiscal imbalance3, and the central government has served as an important safety net for subnational governments facing fiscal risks from disasters, mainly by providing ex post financial assistance for disaster relief and recovery, i.e. through transfers.
Central government spending on ex ante disaster risk management (i.e. preparedness and risk prevention) has amounted to AUD 555 million (USD 415 million) over the period between 2002 and 2014. In the same period the central government spent AUD 13 billion (USD 9.8 billion) on ex post disaster risk management), with the Natural Disaster Relief and Recovery Arrangements (NDRRA) programme accounting for the bulk of this funding. The National Commission of Audit (2014) pointed out that payments by the NDRRA pose a considerable risk for managing the government’s budget and fiscal strategies.
Source: Australian Productivity Commission, 2014.
The records for subnational spending on ex ante and ex post disaster risk management are less complete. Since a significant amount of embedded ex ante spending on resilience measures - relating for example to public infrastructure - is made by subnational governments, ex ante expenditures are likely underestimated.
Managing disaster-related contingent liabilities
Identification of disaster-related contingent liabilities
Explicit contingent liabilities
Explicit contingent liabilities arise from legal commitments of both central and subnational governments to provide disaster assistance. A comprehensive legal framework gives the Australian government a clear role in providing financial support for post-disaster relief and recovery. The table below summarises of the government’s explicit obligations.
The Australian central government provides direct ex post disaster assistance for 1) individuals; 2) regional governments, and 3) public and private corporations. The main ex post funding for recovery and reconstruction is provided through the NDRRA, the Australian Government Disaster Recovery Payment (AGDRP) and the Australian Government Disaster Recovery Allowance (AGDRA), although other small funding envelopes exist in other government departments for specific types of costs and disaster events (e.g. support for the agricultural sector to address drought-related losses). The AGDRP and AGDRA provide limited income support and are meant to address immediate needs before any insurance payments become available; payments therefore do not take into account insurance coverage. The amount of support provided is pre-defined, although there is some discretion in the scope of eligibility for such payments. Most of the NDRRA funding is provided for recovery costs of state-owned public infrastructure, particularly in response to flood events.
For individuals, the following assistance is provided in the aftermath of a disaster4.
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The Australian Government Disaster Recovery Payment5 is a one-off payment of AUD 1000 for adults and AUD 400 for children adversely affected by a major disaster in Australia or overseas. The prime minister determines whether an event qualifies as major based on advice from the attorney-general.
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The Disaster Recovery Allowance6 is a short-term (maximum 13-week) income support payment for those whose income has been affected by a disaster. It is paid to employees, small business owners and farmers.
For subnational governments, the central government provides financial assistance under the NDRRA, reimbursing up to 75% of eligible expenditure on relief and recovery payments.7 The exact percentage of the reimbursement depends on the size of the disaster-related costs that the subnational government has incurred in a given year. Expenditure thresholds are established to calculate the level of financial support; these take into account the capacity of individual states to fund relief and recovery assistance. As the cost to the subnational government increases, so too does the assistance provided by the central government.
Eligible relief and recovery expenditures fall under the following four categories:
Category A measures (emergency assistance for individuals):
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emergency food, clothing or temporary accommodation
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repair or replacement of essential items of furniture and personal effects
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essential repairs to housing, including temporary repairs and repairs necessary to restore housing to a habitable condition
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demolition or rebuilding to restore housing to a habitable condition
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removal of debris from residential properties so as to make them safe and habitable
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extraordinary counter-disaster operations
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personal and financial counselling
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coverage of extraordinary costs associated with the delivery of any of the above forms of assistance.
Category B measures:
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restoration or replacement of an essential public asset
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betterment of an essential public asset
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concessional interest rate loan to small businesses and primary producers whose assets have been significantly damaged
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concessional interest rate loan to needy individuals or non-profit organisations whose assets have been significantly damaged
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concessional interest rate loan to small businesses, primary producers or non-profit organisations that have suffered a significant loss of income
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interest rate subsidy to small businesses or primary producers whose assets have been significantly damaged
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interest rate subsidy to small businesses, primary producers or non-profit organisations that have suffered a significant loss of income
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freight subsidy to primary producers whose assets have been significantly damaged
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grant to needy individuals or non-profit organisations whose assets have been significantly damaged
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counter-disaster operations to protect the general public
Category C measures are available only for major disasters, in addition to Categories A and B measures, and only after the disaster impacts have been assessed. Reimbursements under this category must be requested by subnational governments and approved by the prime minister. Eligible expenditures include clean-up and recovery grants for small businesses and primary producers and/or the establishment of a community recovery fund.
Category D measures provide assistance during major disasters when Categories A to C are insufficient. Reimbursements under this category also must be requested by subnational governments and require approval by the prime minister.
For private and public corporations the central government provides post-disaster assistance in the form of indemnities and guarantees for certain events, as described in Budget Paper 1 (Commonwealth of Australia, 2016a).
Implicit contingent liabilities
Category D measures provide ex post disaster assistance to regional governments in exceptional circumstances, beyond the assistance provided through Category A, B and C measures. In the past, this category of assistance was used for exceptional costs, such as the dredging of a port after the 2010-11 Queensland floods, and was meant to provide the government with the necessary flexibility to support unforeseen recovery and reconstruction needs. However, since “exceptional circumstances” are defined rather broadly and the exact amount of possible reimbursement not specified, this category grants significant discretion of the assistance provided and may entail a substantial fiscal impact. There has in fact been a concerted effort across levels of government to ensure that such payments do not raise unrealistic expectations with regard to future levels of central government assistance. For example, the assistance is provided only once the details of the disaster’s impact have been assessed, and is subject to authorisation from the prime minister.
Estimation of insurance payouts
The proportion of losses covered by insurance can be an important determinant of the size of government contingent liabilities. Australia has a comprehensive general insurance market; cover is available for the majority of natural hazard risks to residential and commercial property, although some high risk properties may face unaffordable insurance rates.
The 2010/11 Queensland floods revealed the significant underinsurance of flood risk in that state. Many households had mistakenly believed that overland flood coverage was included in their standard fire insurance policy, and therefore did not purchase additional protection against flood risk. Since that time, the insurance industry and governments have invested significantly in improving consumer understanding of available coverage. Those efforts, combined with the flooding experience, have led to a major increase in the purchase of flood coverage. Investments in flood mapping by the insurance industry have also led to a better understanding of risk and a more granular approach to risk-based pricing of flood insurance. These in turn have led to very high premiums for some households in high-risk areas. The government has considered different approaches to addressing affordability concerns, most recently through a Northern Queensland Premium Affordability Task Force (Commonwealth of Australia, 2015); but no specific measures have been implemented thus far.
Commercial policies are generally “all risk”, covering damages and losses from all types of natural hazards. Insurance availability and take-up is high, meaning that underinsurance among Australian businesses is unlikely.
The NDRRA may provide reimbursements for limited assistance to individuals for some losses granted by subnational governments, such as for debris clearance and replacement of household contents (e.g. white goods), although this is rare. Some assistance may also be provided to businesses, although this normally takes the form of subsidised loans. When such assistance is granted, it does not take into account whether coverage was provided (or available) through insurance for property damage or business interruption/ additional expenses. Government officials perceive the assistance to individuals and businesses as providing for immediate needs in complement to, or as a bridge to any insurance payments.
In addition to natural hazard insurance for households and the private sector, the public assets of more than 160 Australian government entities (including all departments of state) are insured through Comcover, the Australian government’s general insurance fund. Comcover covers only those entities that are within the general government sector and subject to the Public Governance, Performance and Accountability Act 2013 (i.e. Fund Members). Managed by the Department of Finance, Comcover keeps a register of insured public assets that are declared by each Fund Member, and provides cover for all general insurable risks including natural hazards (but excluding workers’ compensation, which is the responsibility of Comcare). Comcover seeks information from Fund Members on assets to be covered by the fund and charges property premiums based on the sum insured and past claims experience, while taking into account the value of the property premium pool for the entire fund. Many states and territories also have self-managed funds or other public insurance arrangements for public assets under their responsibility. In some states and territories premiums are risk based, and reinsurance is secured to transfer some of the exposure to private markets.
Quantification of disaster-related contingent liabilities
Across all levels of government, Australia has recognised the need to assess disaster-related contingent liabilities as part of budget planning and fiscal risk considerations. The central and subnational governments in Australia carry out regular inventories of past disaster-related expenditures and expected future expenditures arising from past incidents. These assessments include an examination of spending at the subnational level based on data provided in NDRRA reimbursement requests and on public accounts of subnational governments. The process is jointly managed by the Attorney-General’s Department, the Treasury and the Department of Finance. The type of information gathered is summarised in the table below.
Estimating the fiscal impacts of disaster-related contingent liabilities and integrating them into overall fiscal forecasting
The government discloses information on its explicit disaster-related contingent liabilities in the “Statement of Risks” in its Budget Papers, specifically Budget Paper 1 (Commonwealth of Australia, 2016a). Future disasters are recognised as an unquantifiable contingent liability in the budget documents. Since 2014, the Statement of Risks has explicitly acknowledged disaster-related contingent liabilities, defined as potential costs to the central government arising outside its control (Australian Productivity Commission, 2014). Similarly, some subnational governments, such as those of Victoria or New South Wales, consider potential disaster-related expenditures among their contingent liabilities (Commonwealth of Australia, 2014). Budget estimates include expected NDRRA expenditures for eligible costs not yet incurred for recovery and reconstruction from past events, although estimates do not include a forecast of expenditures due to potential future events that might entail NDRRA expenditures. The main reason for this is that NDRRA expenditures have varied significantly from year to year, making it difficult to forecast future expenditures with any level of accuracy.
AGDRP, AGDRA and NDRRA expenditures are funded from general revenues through special appropriation; no specific funds are set aside for these expenditures on an annual basis. Significant events in the past, most notably the 2010/11 Queensland floods funded recovery and reconstruction through a levy (which varied based on income, and was collected through the income tax system as part of the population’s Medicare contributions) and cost-saving measures.
The following sources are frequently used to estimate the potential fiscal impacts of disasters: 1) expenditure reported from a general annual budget contingency appropriation; 2) identifiable projects for reconstructing public infrastructure; and 3) transfers to subnational governments to meet the cost of disaster recovery and rehabilitation that are identifiable in separate budget lines.
To mitigate the fiscal impact of disaster-related contingent liabilities and other fiscal risks, a non-appropriated Contingency Reserve8 is included in the budget. Under the NDRRA no provision is made for future disasters, but the annual Budget Paper 3 (Commonwealth of Australia, 2016b) outlines expected payments to subnational governments for disasters that occurred in the previous fiscal year (see tables below).
To arrive at a longer-term projection of the future cost of disasters, the government performs different projection exercises. In 2014, for example, the Australian Productivity Commission estimated that the annual economic costs of disasters until 2018 would range between AUD 2.4 billion (USD 1.8 billion) and AUD 14.6 billion (USD 11.1 billion) annually, and would mount to AUD 2.6 billion (USD 1.9 billion) and AUD 15.1 billion (USD 11.5 billion) annually until 2023 (Australian Productivity Commission, 2014)9.
The central government also holds a qualitative discussion to evaluate the potential fiscal impacts of disasters; the expectation is that the effect will be more strongly felt at the subnational level. There are no standard procedures to evaluate a macro-fiscal scenario that follows a combination of extreme events. Instead of projecting the coincident occurrence of such events, the government instead has had to learn from actual experiences such as the 2010/11 Queensland floods, which occurred, when Australia’s economy was feeling the impacts of the global financial crisis.
Implementation arrangements for providing post-disaster financial assistance
Disaster response is the main responsibility of subnational (state and territory) governments, but central government assistance following a disaster is provided based on shared responsibilities between levels of government and other stakeholders. Subnational governments finance post-disaster assistance through a Disaster Relief Account, whose annual allocation is based on an estimated annual average need for ex post disaster financing (Australian Productivity Commission, 2014).
It was in recognition of the significant cost of disasters that the central government established the Natural Disaster Relief and Recovery Arrangements to provide disaster assistance to subnational governments. There are other national government programmes that provide post-disaster assistance, but the NDRRA is the major source.
Subnational governments determine the areas and stakeholders eligible for compensation as well as the level of assistance that will be provided to individuals and communities, without having to seek central government approval.
In the event of a disaster that activates the NDRRA, the central government provides the subnational governments with up to 75% of what the latter have determined to be eligible expenditure on relief and recovery assistance, as described in section 4.3.1. A number of different agencies are involved at the central government level in making post-disaster financial payment decisions. The figure below demonstrates the decision-making process.
For AGDRP and AGDRA assistance to Australian citizens and ex gratia assistance to New Zealand citizens, the Attorney-General’s Department advises on how to determination eligibility (whereas the prime minister determines whether the event is eligible outright for assistance); he Department of Finance manages the appropriation, and the Department of Human Assistance handles the payments.
NDRRA generally provides funds to return assets to their pre-disaster state. State and territory governments are expected to consider any need to relocate assets or build in additional resilience during reconstruction, although the Commonwealth government currently has few (if any) tools to encourage state and territorial governments to build back better. The states and territories are able to seek reimbursement for some costs related to investments that improve resilience, although such requests are not very frequent. There is some discussion of increasing NDRRA funding support for such investments.
Mitigating disaster-related contingent liabilities and financing residual risks
To mitigate previously identified, quantified and disclosed disaster-related fiscal risks, governments need to manage the size of contingent liabilities and decide how to provide for the residual risk.
In an effort to limit its disaster-related contingent liabilities ex ante, Australia takes the following steps:
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putting in place a clear cost-sharing formula with subnational governments for disaster reconstruction costs;
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clearly limiting the scope of compensation or financial assistance that will be made available (e.g. limiting private sector support to small business persons and farmers who experience a loss of income as a direct result of a disaster event);
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providing stakeholders with incentives to reduce or transfer disaster risks they face through several means:
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fiscal transfer mechanisms to subnational governments to finance disaster risk reduction measures;
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limits on the compensation available to individuals for damage that could be (have been) insured;
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limiting the compensation available to subnational governments for damage that could be (have been) insured;
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exercising centralised control over granting of government guarantees and other forms of contingent fiscal support.
Aside from these measures, the government invests in risk reduction. Disaster risk prevention and mitigation measures are primarily the responsibility of subnational governments. However, as with ex post assistance, the central government recognises its responsibility to support these measures to strengthen community resilience. Financial and capacity assistance is provided to disaster-affected regions. The overall budget for central government’s structural and organisational risk reduction measures is AUD 26.1 million (USD 19.9 million) annually, which is complemented by regional and local government contributions. There is no central accounting of how much is spent on risk reduction in total by all actors.
Central and subnational governments have invested significant resources in structural changes to provide better services before, during and after disasters. At the subnational level, five states (Victoria, Western Australia, Queensland, Tasmania, Northern Territory) have combined all emergency management functions under the respective authority/commission as well as assurance authorities (Inspector-General officers). These changes are meant to assure governments that reform measures are being implemented, and are effective. (See Australian Productivity Commission, [2014] for an evaluation of the effectiveness of central government support to subnational governments.)
References
AIDR (2017), “Australian Disaster Resilience Knowledge Hub”, Australian Institute for Disaster Resilience, https://knowledge.aidr.org.au/disasters.
Andrews, T. et al. (2016), “The cost and funding of natural disasters in Australia – Current position paper”, Draft for discussion, Actuaries Institute of Australia, www.actuaries.asn.au/Library/Events/GIS/2016/NaturalDisastersWorkingGroup2016.pdf.
Australian Productivity Commission (2014), Natural Disaster Funding Arrangements: Productivity Commission Inquiry Report, Volumes 1 and 2, No. 74, Canberra, www.pc.gov.au/inquiries/completed/disaster-funding/report/disaster-funding-volume1.pdf; www.pc.gov.au/inquiries/completed/disaster-funding/report/disaster-funding-volume2.pdf.
Commonwealth of Australia (2016a), “Budget Strategy and Outlook 2016–17, Budget Paper No. 1.”
Commonwealth of Australia (2016b), “Federal financial relations 2016–17, Budget Paper No. 3.”
Commonwealth of Australia (2015), “Northern Australia Insurance Premiums Taskforce final report”, https://treasury.gov.au/publication/northern-australia-insurance-premiums-taskforce-final-report/.
Commonwealth of Australia (2014), “Budget 2014–15 – Statement 8: Statement of risks”, www.budget.gov.au/2014-15/content/bp1/html/bp1_bst8-01.htm.
Deloitte Access Economics (2013), Building Our Nation’s Resilience to Natural Disasters, Report for the Australian Business Roundtable for Disaster Resilience and Safer Communities, Sydney, http://australianbusinessroundtable.com.au/assets/documents/White%20Paper%20Sections/DAE%20Roundtable%20Paper%20June%202013.pdf.
EM-DAT (2017), The Emergency Events Database, Université Catholique de Louvain (UCL) – CRED, D. Guha-Sapir, Brussels, Belgium, www.emdat.be (accessed 6 December 2017).
National Commission of Audit (2014), Towards Responsible Government: The Report of the National Commission of Audit, https://www.ncoa.gov.au/report.
OECD (2014), OECD Economic Surveys: Australia, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-aus-2014-en.
PreventionWeb (2017), “Australia disaster and risk profile”, www.preventionweb.net/countries/aus/data.
Notes
← 1. The variation can be explained by (among other things) extreme events that drive the annual average significantly upwards, as well as by differences in measurement approaches.
← 2. Not all subnational expenditure may be captured in this assessment.
← 3. Vertical fiscal imbalance describes the situation where the central government raises revenues in excess of its spending responsibilities, while subnational governments have insufficient revenue from their own sources to finance their spending responsibilities (OECD, 2014).
← 4. Additional contingent liabilities may arise due to man-made disasters. For terrorist attacks, for example, the Australian Victims of Terrorism Overseas Payment is a one-off payment, administered by regional governments, of up to AUD 75000 for Australian residents who are harmed or whose close family member is killed as a direct result of overseas terrorist acts.
← 5. Section 1061K of the Australia Social Security Act 1991.
← 6. Ibid
← 7. Payments are usually made through reimbursements but advance payments can be made in response to extremely damaging disasters, where the cost is likely to be greater than what the state can manage in the short term.
← 8. The Contingency Reserve in the annual budget is an allowance that principally reflects anticipated events that cannot be assigned to individual programmes at the time the budget is drafted. It is not a general policy reserve and, as stated, not appropriated. Allowances included in the Contingency Reserve can only be drawn upon once they have been appropriated by parliament.
← 9. Potential climate change effects were excluded in this projection.