Moldovan drought crisis and risk managment


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Moldovan drought crisis and risk managment

  1. 1. Crisis and Risk Management in Food Production Case of Moldova From Drought to Rural Development JULY 2008Prepared by Armen Mehrabyan, International Consultant, UNDP Agriculture and Rural Development Expert
  2. 2. Country Brief1.1. Characterization of the economy and relevant demographics1.1.1.. Population size, urban/rural composition, urban/rural compositionAccording to the The National Bureau of Statistics (NBS) in the beginning of 2008 populationwas 3.58 million, that’s about one percent down from the last census in 2004 and about 10percent down since 1990 independence. The yearly population growing arte has been negativeon about 1.5 percent since 1970 since. The demographic structure opf poopulation shown thatthe rate of residency by sex decrise up to 1,8% since 1990 and currently women per 100 mannumber is about 108, it means that about 48,1% of populatrion are man and 51,9% are women.Current density of population is about 118 people per square kilometr and percentage ofurbanisation is decrised since 1990 up to 12,3% and currently the rural population account forabout 58,7 percent of the total. Population annual growth is about 0.87%1.Moldova: Demographic structure opf poopulation (Table 1)Source: National Bureau of Statistics.The agieng factor of population shown that according to the G.Bojo-Garnier scale when thevalue of the indicator is 12 and over the coefficient of demografic agieng incrise from Moldovaindependence period up to 5.46%, it means that number of persons fo 60 years over per 100inhabitants is about 13,5.Moldova: Agieng factor of population (Table 2)Source: National Bureau of Statistics.It is estimated that about 400 000 people or more than 10 percent of the population workingabroad and a further 290 000 people intended to migrate in the following months2. According tothe official data in 2006 its about 854.6 million US$ was transferred through official channels by1
  3. 3. the citizens of Moldovan that are working abroad, that about 25 percent increase over 20053 andthat is about 26 percent of GDP.1.1.2. Poverty lineThe housholds income and expenditures ratio shows that the poverty is pervasive (Table 3) withnational poverty rate of 27 percent, where in rural areas exceeding up to 42 percent 4. In theWorld Bank Report mantioned that “The Government of Moldova’s Economic Growth andPoverty Reduction Strategy Paper (EGPRSP) lays out an ambitious plan for sustaining growthand poverty reduction and reshaping the government to meet the needs of a market economy.The public expenditures envisaged under this ambitious plan, however, vastly exceed thedomestic resources available to the Government.Additional foreign budgetary support may help alleviate some of that resource constraint.Recognizing that the share of tax revenues and expenditures to GDP in Moldova already greatlyexceed comparable international levels, generating additional domestic tax resources riskscrowding out the private sector and undermining growth prospects. This suggests that in order tofinance higher order public expenditures priorities, the Government needs to create fiscal spacefrom within the existing resource envelope. This will require inter and intra-sectoral reallocationof expenditures and an increase in the efficiency of public spending rather than increasing therelative size of government”5.Whereas urban residents saw their incomes rise and their poverty rates decline, poverty actuallyincreased among farmers and rural pensioners. A major proportion of a poor man’s expense isdedicated to food. The lowest quintile spends about 77 percent of its consumption expenditure onfood and non-alcoholic beverages6. Moldova: Structure of Disposable Incomes of Housholds (table 3)3,5 FAO/WFP Crop and Food Supply Assessment Mission, , August 2007
  4. 4. The Kiel Institute (IOM/SICA) study made in 2006 shows that the remittance play a major rolein the national economy and the reemittance levels strongly depend on the country the migrant isworking in. They are highest for migrants in Europe and lowest for migrants in Russia orUkraine. The migrants from rural households remit least amounts of money that is in line withpoverty rates (42 percent rural). Neither public transfers nor private remittances are reachingrelatively poor groups in amounts sufficient to offset the loss of income from other sources, inparticular agriculture.Nearly 70 percent of the population was considered poor and more than 60 percent lived inextreme poverty in 1999. Rapid economic growth between 1999 and 2004 reduced poverty up to26.5 percent and unfortunately economic growth has not been coupled with poverty reduction.Poverty in the rural areas rising up to 70 percent where agriculture being the main source ofinformal employment and income for many households. In 2004 their welfare was below theabsolute poverty line as compared to 40% in 2002 and currently poverty estimated at about 29percent7.1.1.3. Size of the economy: GDP, GDP per capita, growthTogether with poverty rate, inequality level also reduced. The problem of inequality isaggravated by the fact that poor people receive part of their income in kind. Consequently, theaccess of poor people to goods and services becomes limited. This trend is reflected by theDistribution of family income - Gini index that measures inequality at country level and incomeand consumption distribution by quintiles. As a result, in the period of 2000 – 2007 the Gini(Gini 2007 - 37.1 (medium)) coefficient decreased from 0.2 points8. However, inequality remainsat a high level in Moldova compared to other countries9.Economic growth is a pre-condition for higher living standards and poverty reduction. Between2003 and 2007, the estimated average poverty elasticity to average consumption growth wasabout 2.1 %. That means that with each percent of growth, the poverty rate reduces by 2.1%.The statistical results relating to the socio-economic development revealed a number ofincreasing trends in most sectors of the national economy in 2007. The GDP increased by 6 %and starting with the year 2000 the GDP increased by over 43%. In 2007, the GDP per capitaexceeded US$296210. However, the structure of growth has not improved and some challengingtrends in the country’s macroeconomic development were not overcome. Economic and7 IMF, Republic of Moldova: Poverty Reduction Strategy Annual Evaluation9 Armenia, Albania, Ukraine10
  5. 5. investment growth took place in the context of slow restructuring of the national economy,reduction of the growth rate in industry and agriculture. The accelerated growth of import led tohigher share of net production and import duties in GDP, while the share of the gross valueadded in the GDP decreased.Moldovas dependence on Russian energy was underscored at the end of 2005, when a Russian-owned electrical station in Moldovas separatist Transnistria region cut off power to Moldovaand Russias Gazprom cut off natural gas in disputes over pricing. Russias decision to banMoldovan wine and agricultural products, coupled with its decision to double the price Moldovapaid for Russian natural gas, slowed GDP growth in 2006. However, in 2007 growth returned tothe 6% level Moldova had achieved in 2000-05, boosted by Russias partial removal of the bans,solid fixed capital investment, and strong domestic demand driven by remittances from abroad.Economic reforms have been slow because of corruption and strong political forces backinggovernment controls. Nevertheless, the governments primary goal of EU integration has resultedin some market-oriented progress. The granting of EU trade preferences and increased exports toRussia will encourage higher growth rates in 2008, but the agreements are unlikely to serve as apanacea, given the extent to which export success depends on higher quality standards and otherfactors. The economy remains vulnerable to higher fuel prices, poor agricultural weather, and theskepticism of foreign investors. However, domestic demand has been a major source of growth –household consumption and construction fuelled by large remittances from workers abroad,officially estimated at about 30 percent of GDP. Figure 1. Moldova: Origins of GDP, 2004 A g ric . & F i s hi ng 2 1% S er vi c es Ind us t r y 55% 19 % C o ns t r uc t i o n 5% Source: IMF, International Finance Statistics.Public sector investment has remained very low, about 2 percent of GDP, resulting indeteriorating public infrastructure, roads in particular, with negative consequences for economicgrowth. Private investment, on the other hand, has slowly increased since the recovery,averaging 17 percent of GDP per year.The irregular evolution of GDP components led to changes in its structure. Due to an increase of16.4% of taxes weight in GDP, the share of production sector reduced from 88% in 2000 to83.6% in 2005, of which the share of goods production shrank from 42 to 31%, whereas theshare of services increased from 48 up to 54%. Moldova: Key Economic Indicators, 2002–2006 (Table 4) 2002 2003 2004 2005 2006 GDP per capita in Lei (at constant 2000 prices) 5 052 5 401 5 816 6 660 6 914 Real GDP growth rate % change year on year 7.8 6.6 7.4 7.1 4.0 Unemployment rate (incl. underemployment) 18.7 17.1 16.9 17.1 - Employment in agriculture % of total employed 51.0 49.6 43.0 40.5 40.7 Exchange rate Lei:US$ (annual average) 13.6 13.9 12.3 12.6 13.1 Consumer price inflation % change year on year. 5.2 11.6 12.4 11.9 12.5 Trade deficit in million US$ 378 623 754 1 192 1 591 Total external debt in billion US$ 1.8 1.9 1.9 2.1 2.6 Total debt service in million US$ 175 244 159 305 251Source: IMF series, the Central Bureau of Statistics, the National Bank of Moldova and the EIU.
  6. 6. 1. 2. Agriculture, food production, distribution and demand structuresAgriculture’s share of the economy has declined since independence, both in absolute andrelative terms, with agricultural value added shrinking by 50 percent. However, it remains thelargest real sector of the economy, accounting for more than 20 percent of the GDP (30 percentif agro-processing is included) and employing more than 40 percent of the labour force. Theagricultural sector also suffers from policy uncertainty, lack of access to adequate farm inputs,extension services and limited access to financial and insurance services. Inefficient farm sizes,some exceeding 2 000 hectares, and the continued squeeze on small farmers through lack ofaccess to sufficient farm inputs (credit, farm power, improved seeds and extension services) aswell as markets have contributed to the underperformance of the agricultural sector.Land entitlement and ownership security is considered one of the pillars of a market drivenagricultural economy. As part of reforms the government adopted the Land Code and the Law onPeasant Farms in early 1992, which provided the legal tools and mechanisms for landprivatisation and the establishment of individual private farms. The reforms were half-heartedlyimplemented until the USAID-supported National Land Programme (NLP) was initiated in 1997,which primarily focused on individual land entitlements, carved out of the former collectivefarms. Unfortunately, the NLP was not accompanied by efforts to address the agricultural serviceindustries, including input supply and agricultural marketing. The second phase of the NLP,which was initiated only in late 2000 and financed by the World Bank and USAID, attempted toaddress agricultural servicing. It has been argued that focusing only on land distribution, withoutpaying due attention to agricultural skills, extension services, marketing for inputs and outputsand rural finance institutions, had a severe impact on the agricultural sector as a whole. Theagricultural and livestock sectors are still recovering from the shock in the 1990s and ignoringthe agricultural servicing sectors are said to be one of the contributing factors to the shock. Moldova: Structure of Agric. Land Ow nership, 2004 Municipal 8% Reserve 16% State Private 9% 67% Source: State Cadastre. Total Agric. Land 2.5 million ha.Limited options, lack of adequate access to input and output markets as well as agriculturalfinance and farm machinery, have compelled many small holders to lease their land to corporatefarms on unfavourable terms. The terms of the land lease in most cases are such that thelandowners have borne most of the risk. Therefore, a re-collectivisation of farms has taken place,with very large farm sizes, reminiscent of the former collective farms. It is estimated that half ofthe agricultural land is used by 300 000 individual family farms and the rest is managed by300-400 new corporate farms. The average farm size in Moldova is already 4-5 times larger thanin Western Europe, owing to the rapid spread of leasing arrangements. A World Bank study(Agricultural Policy Notes: Agric. Land, December 2005), using Total Factor Productivitymeasure, has conclusively established that small farms are significantly more efficient than thelarge farms, yet, small farms cannot thrive in the current context.According to the Rapid Rural Household Food Security Assessment made by Centre forsociological, Political and Psychological Analysis and Investigations CIVIS in the frame of UN
  7. 7. Drought Response Project, on average, 1,8 ha belong to one rural household, which correspondsto the official data, according to which the peasant households (individual farmers) own onaverage 1,6 ha. Area of the available agricultural land 30% 28,4% 26,7% 25% 20% 14,7% 14,5% 14,7% 15% 10% 5% 1,0% 0% 0 ha 0,1-1 ha 1,1-2 ha 2,1-3 ha 3,1-8 ha 10 ha - 30 haHowever, the agricultural land is parcelled very much, more than a half of the householdssurveyed (55,1%) possess no more than 2 ha of the agricultural land, half of which own up to 1ha. Or, this area is sufficient only to provide the household internal consummation.The practice of the agricultural land tenancy is developed poorly in the Republic of Moldova,which was confirmed only by 4,9% of the households surveyed. The tenancy of the agriculturalland is practiced more often by the households, which do not have their own agricultural land.They normally take small plots of land up to 3 ha in tenancy, preponderantly, to satisfy the needsfor their internal consummation. While the households owning more areas of their own land, areorientated to lease the larger plots of land for the production and sale activities. The minimal areaof tenancy registered in the survey was 0, 12 ha and the maximal one was 120 ha. Besides theagricultural land, which practically all rural households (99 per cent) had received as a result ofthe privatization, they own a plot of land around their households, the surface of which variesfrom 0,02 ha to 0,9 ha.Public expenditure on agriculture in Moldova is relatively low, about 3 percent of the totalbudget, which accounts for about 0.9 percent of GDP. Public expenditure in developingcountries is typically 6-8 percent of the total budget, and in the developed industrialisedcountries the figure is 3-5 percent. The Medium Term Expenditure Framework (MTEF) agreedwith the IMF and other donors does not envisage room for any increase in the near future.Agriculture remains the main source of foreign exchange earnings in Moldova, after remittancesfrom Moldovans working abroad. In 2005 aggregate earnings from agriculture-based exports(US$528 Million) accounted for more than half the total export value. In 2006, despite the banfrom Russia on Moldovan exports, in particular wine, total agricultural-based export revenuewas US$412.8 million, nearly 40 percent of total export earnings. Prospects are good for easingrestrictions on Moldovan exports to Russia, while the European Union is increasingly becomingan important trade partner. Improved market outlets are essential for any improvement of theagricultural sector in Moldova.Agricultural capital and infrastructure have suffered a dramatic decline during the economiccrisis of the 1990s. Recovery, though significant, have not been able to reach the pre-crisisproductive levels. Nearly 50 percent of the orchards and vineyards are out of production,irrigation is only 7 percent of the pre-crisis capacity, farm machinery has declined by 50 percentand existing machinery is on the average a decade old. Most of the high value crops areconverted into high-volume-low-value crops such as cereals and sunflower. Significant
  8. 8. investment through a comprehensive agricultural strategy is necessary to revitalise theagricultural sector.According to the Matthias Moen, FAO assessment expert, report made during 30th of January –20th of February 2008 in the frame of UN Drought Response Project, no more than 58 percent ofthe households are relying either on agriculture, daily labour or livestock as their main source ofincome. For the remaining households, non-agriculture sector activities are their main source ofincome. Main sources of income 20.4% 2.2% 46.5% 17.4% 0.4% 7.9% 5.1% agriculture Livestock Casual labour Commerce Employment Remittances Pension / social supportThe main assets in rural economy in Moldova are animals, houses, mechanical tools (tractors,vehicles, etc.) and land. In general, animals are considered a valuable asset as households investcash savings into livestock holdings. In addition, animal products (milk, wool, skins and meat)are an important source of income. Of the total number of interviewed households, 67.7 percentdeclared that they own animals and 87.4 percent have poultry. Those with big animals have anaverage of 6.5 animal units11, split into 0.1 horses, 0.5 cattle, 1.1 sheep, 0.1 goats and 0.7 pigs perhousehold. On the other hand, those with poultry have in average 13.5 units.1.3. Food supply/demand balance and market condition /prices.National food balance sheets show, overall, how a nation deals with inter-annual fluctuations inthe domestic supply of basic foods by adjusting commercial food imports to meet average totalutilization requirements.The long-term per capita human milled grain consumption trend and the 2006 Household Incomeand Food Consumption Survey indicate an average per capita consumption of cereal and derivedproducts of 392.5 grams/person/day, equivalent to 143.2 kg/capita/year. It is used to set thetarget total human utilization level (unmilled) at 787 100 tonnes. To remain at this level ofaverage consumption, Moldova would have to import about 737 000 tonnes of grain in 2007,assuming that household stocks are totally depleted at the end of the marketing year.11 Animal units: estimated average value of the animals on local markets for slaughter use, average of the different regions, with a sheep or goat as a basic unit, conversion factors as follows: 1 sheep or 1 goat = 1 unit, 1 cattle = 5 units, 1 pig = 3 units, 1 horse = 7 units.
  9. 9. Summary Balance Sheet for 2007 (‘000 tonnes)12 (Table 5) Total gross cereal production 835.2 Losses (%) 153.5 Total cereal seed requirements 181.6 Public stocks 50.0 Total livestock feed 500.0 Net commercial imports 737.0 Total human utilization (unmilled) 787.1Republic of Moldova is a net exporter of cereals in most years. The estimate total grainutilization from both net domestic and outside sources, given post harvest losses, requirementsfor seeds and livestock feed, household and (since 2003) emergency public stocks, and humanconsumption. The evening out inter-annual supply through adding to or subtracting from grainstocks, long-term average per capita consumption of grain, in milled terms, has been consistentwith the 2006 estimate of 143 kg per year13.The rough proportional breakdown of utilization for the total net grain supply, for the period1999-2006 is as follows: Losses 15 percent Seeds 10 percent Household roll-over 3 percent stocks Livestock feed 35 percent Human consumption 37 percentThe most important export market for the Moldovan high value agricultural products, mainlywine, fruits and vegetables, remains the CIS, in particular the Russian Federation. The RussianFederation remains Moldova’s strong trading partner despite the ban on Moldovan agriculturalexports in 2006, in particular wine. Russia accounted for nearly 40 percent of the total Moldovanexports in 2003, which declined to just over 17 percent of the total in 2006. Romania rankedsecond in the export destination for Moldovan exports (14.8 percent of total), which has alsobeen restricted since the former joined the European Union (EU). Russia has gradually easedrestrictions on Moldovan fruit imports, while negotiations still continue to ease restrictions onwine imports. The IMF and the EIU predict that the current trade deficit, estimated at over 40percent of GDP, will continue to persist despite the promised easing of import restrictions byRussia. On the import side, remittances from workers abroad will continue to strengthen demandfor imported consumer goods and foodstuffs, pushing up the trade deficit in 2007-08. The IMFand the EIU also predict that the remittances and the increase in foreign grants may narrow thecurrent-account deficit from 12 percent of GDP in 2006 to around 6 percent in 2007-08.However, this optimism in a narrowing of the current account deficit may have also beencompromised by 2007 severe drought.High logistic costs, the requirement that all exporters use the state transportation, highadministrative and handling costs, dilapidated road networks and lack of adequate storage andcold room facilities have combined to reduce profitability and impede further trade development.Investment in HVAP production, processing and trading is also hampered by lack of adequateaccess to credit. The banking system considers the agricultural sector as a risky investment andinterest rates typically range between 20 percent and 30 percent, well beyond the reach of mostfarmers.12 FAO/WFP Crop and Food Supply Assessment Mission, , August 200713 Source: National Bureau of Statistics
  10. 10. Domestic market for fruits and vegetables are relatively small and saturate rather quickly duringthe harvest season. Cold room capacity is very low and only a fraction of the pre-crisis capacity.Therefore, most of the harvest has to be sold in a relatively short period of time or wasted, whichis reflected in the highly variable seasonal prices. Off-season vegetables and fruits are importedand distributed through a small number of supermarkets and small shops in towns. Domesticallyproduced fruits and vegetables are, by and large, directly marketed by small farmers in smalltowns and weekly markets. Relatively large-scale fruit and vegetable production are usually forexport markets or larger towns, which require further sorting, packaging and processing.Kitchen garden and livestock are the most important elements of household food security both interms of nutrition and income. Most households directly sell their produce in the local weeklymarkets involving little or no marketing costs, i.e. intermediaries, packing and sorting. Dairyproducts are marketed either directly by households in the local weekly markets or sold toprocessors. The collection points for milk is usually situated closer to a large dairy farm andhouseholds with small number of livestock usually rely on large producers to supply toprocessors.Markets throughout the country seem to be well integrated despite deteriorating road networks.A WB study (Moldova, Agricultural Policy Notes: Agricultural Markets, December 2005) showsthat domestic input and output prices are highly distorted and there is a net transfer fromproducers to consumers. Producers receive significantly lower prices for their output, whilepaying much higher prices for purchased inputs compared with international prices. The indirecttaxation of farmers was found not to be the result of Government revenue taxation but ratherother distortions such as (a) inefficiencies and monopoly elements in processing, trading,marketing and transport (e.g. sunflower seed is bought, transported, processed and traded by onlyone company), (b) low product standards and (c) inefficient and distorting governmentinterventions and regulations.Wheat bread is the main staple in Moldova and annual consumption, estimated at about 110 kgper person per year, is similar to the high levels consumed in some Central Asian countries.Large mills dominate the market for wheat flour and bread, while small mills (up to 5 tonnes/daycapacity) are also important players in the market. Government is weary of bread price hikes and
  11. 11. regularly intervenes in the market to ensure stable prices for consumers, sometimes at theexpense of producers.Domestic food prices have begun to rise following the drought. The FAO/WFP CFSAM Missionobserved in some markets vegetable prices had more than doubled compared with the same timelast year, while bread prices had also increased by nearly 40 percent in some areas. Thegovernment has recently suspended import duties on cereal imports 14, and the VAT on essentialstaples, which will ease somewhat pressure on the prices of bread and maize. Figures in table 6indicates that prices in four major markets in the Centre, North, South and East, respectively asshown in the graphs, move together, suggesting good market integration. Prices of sunflowerseeds have slightly increased despite the sharp drop in production, while meat prices havefollowed an upward trend, especially recently (Moldova is a structurally net importer of liveanimals and meat products). Food Prices in Four Major Markets, Lei/Kg, March 2006–August 2007 (Table 6) Wheat Prices, Lei/Kg July 06 - July 07 Maize Prices, Lei/Kg, Mar 06-Aug 07 6 7 Chisinau Chisinau 5 Balti 6 Balti Cahul 5 4 Orhei Cahul 3 4 Orhei 2 3 2 1 1 0 0 6 7 6 7 6 6 7 07 06 -0 -0 -0 -0 l-0 -0 l-0 7 6 07 6 7 06 06 6 7 n- p- ay ay l-0 l-0 ar ar -0 -0 -0 -0 ov Ju Ju v- p- n- Ja SeM M ay ay ar Ju ar Ju M M N No Ja Se M M M M Tomato Prices Lei/Kg, Mar 06-Aug 07 Potato Prices Lei/Kg, Mar 06-Aug 07 35 12 Chisinau 30 Chisinau 10 Balti 25 Balti 8 Cahul Orhei 20 Cahul 6 15 Orhei 4 10 5 2 0 0 7 6 06 7 6 06 06 07 7 7 6 6 7 07 6 06 7 06 l-0 l-0 -0 -0 -0 l-0 l-0 -0 -0 -0 -0 p- v- - n- p- v- ay ay ar ar n- Ju Ju ay ay No ar ar Ju Ju Se Ja No M M Ja Se M M M M M M Beef Meat Prices Lei/Kg, Apr 06-Aug 07 Sunflower Seed Price Lei/Kg Mar 06-July 07 60 16 50 14 12 40 Chisinau 10 Balti 30 8 Cahul 6 20 4 Orhei Chisinau Balti 2 10 Cahul Orhei 0 0 6 7 7 06 07 6 6 06 7 l-0 l-0 v-0 r- 0 r-0 n-0 p- y- y- Ju Ju 6 7 07 6 7 6 06 06 7 Ma Ma No Ja Ma Ma Se l-0 l-0 -0 -0 -0 -0 p- v- n- ay ay ar ar Ju Ju No Ja Se M M M MSource: National Bureau of Statistics and ACSA (March 2006-July 2007), Mission findings, August 2007.14 Until July 2008.
  12. 12. 1. 4. Effects of food crisis and Drought 2007Consumer price inflation has remained in two-digit figures since 2002, reaching 12.5 percent in2006. The International Monetary Fund (IMF) and the Economic Intelligence Unit (EIU)forecast the CPI inflation to drop to a single digit by the end of 2007 and remain so in 2008 and2009. However, the 2007 drought that has devastated the agricultural and livestock sectors mayincrease pressure on prices and a single digit inflation rate may not be a realistic forecast underthe circumstances. The exchange rate (Lei:US$) remains stable and the strengthening of Leiagainst the US$ during the second half of 2006 and the first quarter of 2007 reflects the highvolume of remittances flowing into the country. In addition, the interventions of the CentralBank (the National Bank of Moldova) in the foreign exchange markets have been praised byvarious international organisations, including the IMF, the WB and EIU, as prudent monetarypolicies.The 2007 drought has had severe impacts on the agricultural sector, which directly or indirectlysupport more than 60 percent of the population. In addition, more than 70 percent of the poorlive in the rural areas mostly depending on kitchen gardens and small land areas under theirmanagement (1-6 hectares/household) or earn their living from casual farm labour.All categories of farms, large farms, small individual farms and kitchen gardens have all sufferedreduced output by an average of 60 percent and in some cases the entire crops are compromised.In addition, relatively high prices for food products, in particular vegetables and bread priceshave eroded the purchasing power of households in both rural and urban areas. Pensioners andwage labourers are particularly vulnerable to high food prices.The UN Food and Agriculture Organization and the World Food Programme (FAO/WFP)CFSAM conducted in August 2007 underline that about 84% of the total area of agricultural landof the country has been affected by the drought and the cost of lost production, at market prices,is estimated at nearly €300 million for cereal crops only.Its about 60 per cent of the households do not have their meals or reduce the meals size, eachfifth household of the total of the households surveyed practice not having their meals orreducing them to 3-6 days per or week or oftener. Output of Main Crops, 2004-200715 Output ‘000 tones Decline over Crop Region 2004-20 2007 2006 2005 2004 06 (%) Centre 98 140 258 198 51 Wheat North 185 300 449 276 46 South 181 208 343 319 38 Sub-total Wheat 464 648 1 050 793 44 Centre 118 282 510 314 68 Maize North 89 441 486 744 84 South 70 600 497 552 87 Sub-total Maize 276 1 322 1 492 1 610 81 Centre 19 50 43 50 61 Barley North 24 56 68 80 65 South 43 160 102 142 68 Sub-total Barley 86 266 214 272 6615 FAO/WFP Crop and Food Supply Assessment Mission, , August 2007
  13. 13. Centre 64 115 71 74 27 Sunflower North 142 182 163 170 17 South 38 117 95 90 62 Sub-total Sunflower 244 414 330 334 32 Centre 90 167 186 182 49 Sugar beet North 452 880 758 719 42 South 10 48 3 10 49 Sub-total Sugar beet 552 1 094 947 910 44 Centre 118 194 60 43 19 Vegetables North 104 176 88 64 5 South 44 100 169 173 70 Sub-total Vegetables 265 470 317 280 26 Centre 139 126 138 240 17 Grapes North 2 2 2 3 10 South 217 320 367 442 42 Sub-total Grapes 358 448 507 685 35 Source: National Bureau of Statistics.The correlated data analysis emphasizes that about 90 per cent of the households use both of theabove practices.In addition, 30 per cent of the households either purchase the food on credit, or borrow the food.The service of the social canteens is not offered virtually at all in the rural environment, which isaffirmed by 98 per cent of the respondents. The services of this type are encountered within themunicipality of Chisinau. Another service providing more or less the food security of children ismeals in the educational institutions. However, only 1/4 of the rural households benefit by thisservice. Practically half of the households, which have children up to 17 years do not benefitfrom the meals in the local educational institution. Actions undertaken by the rural households in October 2007 to satisfy the food needs purchase food on credit or borrowing 69,4% 8,1% 13,0% 8,3% 1,2% 2,0% meal through school feeding 75,2% 11,3% 10,0% 1,5% meal from social canteen 98,7% rely on less expensive or less preferred 14,7% 14,2% 26,2% 26,5% 18,4% foods skip a meal or reduce portion size 40,9% 19,1% 19,4% 15,2% 5,4% 0% 20% 40% 60% 80% 100% Never Seldom (1-3 days / month) Sometimes (1-2 days / week) Often (3-6 days / week) DailyReferring to the daily consummation of the agricultural households, we assert that their daily dietis preponderantly formed of cereals and root vegetables as well as of vegetable fat/oil, 86,6%and, respectively 83,0% of the households surveyed consume the respective food products daily.
  14. 14. About 31 per cent of the rural households, which have the livestock, were forced to purchase thefodder on credit or to borrow it. The strategy of the livestock breeding was used by at least 3/4 ofthe households. The percentage of the households, which have sold and/or cut the livestock in March – October 2007 as a result of the fodder insufficiency 80% 77,8% 74,1% at least one all 70% 56,4% 60% 44,6% 50% 39,7% 40% 29,5% 26,5% 30% 17,2% 15,9% 20% 10% 4,1% 0% milk producing cows pigs poultry traction animals sheep, goat, rabbitTherefore, from the month of March 2007, because of the fodder insufficiency and in order tomeet the family food needs, 40 per cent of the rural households, which have milking cows, wereforced to sell them. Moreover, about half of these households have sold their last milkingcow/cows, remaining without this source of existence, which provide the income both in thenatural products and in money.As for the pigs, the situation is more impressive, since about 78 per cent of the households,which own pigs, have sold and/or cut at least one pig as a result of the fodder insufficiency.About half of these households (46, 6%) have sold/cut all pigs they had in their households.Likewise, 41% of the households, which have poultry, have sold and/or cut more than half of thepoultry from March to October 2007, but 4% of the households have sold/cut all the poultry theyhad.1.5. The UN Relief and Technical Assistance Response to the Drought in Moldova.The UN Project “Relief and Technical Assistance Response to the Drought in Moldova” waslaunched in September 2007.The project constitute to a coordinated response to the request for assistance made by the PrimeMinister of the Republic of Moldova to the United Nations Secretary General and aims ataddressing the emergency needs created by the drought which affected the country in 2007.The project includes five key components: - Technical expertise, management, coordination; - Emergency procurement of seeds, fodder and other agricultural supplies; - Emergency assistance to socially vulnerable groups; - Aid monitoring; and - Planning for medium and long-term assistance.
  15. 15. Up to now, 20,500 families affected by the drought have received assistance in the form ofpackages consisting of seeds, fertilizers and fuel which allowed for the planting of 10,250 ha ofwinter wheat.Also 18,500 pregnant women and nursing mothers from 19 districts have received foodpackages.More than 20,000 socially vulnerable farming households have benefited from nearly 9,000 tonsof livestock fodder.Other 82,500 farming households have received maize seeds for spring agricultural works.Beneficiaries from socially vulnerable families had been selected by few NGOs in collaborationwith Local Public Authorities and related ministries, according to vulnerability criteriaestablished by national / international experts and donors. Aid distribution had been monitoredby NGOs selected by the UN.And 22 most vulnerable communities from districts severely affected by the drought hadbenefited from pecuniary aid in order to implement community works projects. These localities,included in UN project, were selected based on drought consequences and cereal harvest lossesevaluation report done by Ministry of Agriculture and Food Industry together with Food andAgriculture Organization and with village categorize report based on deprivation indexes doneannually by Ministry of Economy and Commerce. Totally, 1,800 people participated incommunity works. Selected communities/primarias received from the UN Moldovaapproximately 20,000 USD each.The UN project is financially supported by the European Commission through its Directorate-General for Humanitarian Aid (ECHO), the Swedish International Development CooperationAgency (SIDA), the Austrian Development Agency (ADA), Governments of the Netherlands,Norway, Italy and Finland, the Austrian Federal Ministry of Agriculture, Forestry, Environmentand Water Management, United Nations Development Programme (UNDP) and United NationsPopulation Fund (UNFPA).The project is managed by the UNDP in partnership with the FAO, UNFPA, UNICEF, other UNagencies and the Government of the Republic of Moldova as well as non-governmentalorganizations and local public authorities which are implementing partners of the project.More than 135,000 vulnerable rural households affected by the drought last year were providedwith winter wheat seeds, fertilizers, fuel, maize seeds, livestock fodder, food packages and cashfor work.As a result of successfully implemented assistance, more than 400,000 vulnerable people wereable to overcome the difficulties caused by the drought.Out of 600,000 vulnerable about 400,000 (67% of vulnerable) or 143 845 households receivedUN DRP assistance, that covers 98% of rayons and 96,5% of communities.Total assistance cost was about 9, 9 MLN USD and following results are achieved:a) Eemergency distribution of Winter wheat seeds • 86.4% of the beneficiaries fulfilled the criteria of selection • 80.0% of the population considered that the criteria was correctly followed • Crop Performance analytical tables accepting on time delivery and success of support provided
  16. 16. • Expected yield will be about 3.3 MT / Ha up to 4.8 MT / Ha (in stand and dependent of location). • An increase of up to 35% compared what the farmers are getting usually. • Up to 20% of losses are estimated during the harvest process. • The Combine-harvest owner gets in average 15 – 20 % of the harvested yield. 4.1 4.1 4.0 4.0 Ratings 3.9 3.9 3.8 3.8 3.7 3.7 n rs y e es s io sit c se ill e an ss at en os ft in lo rm td m rl ro e rfo er an te as be in G pe se Pl um w di ll to ra N d ve e an nc O st ta pe is es to R e nc ta is es R R at ing s : 1=muc h wo r s e, 2 =p o o r er , 3 =t he s ame, 4 =b et t er, 5=muc h b et t erb) Animal Feed Distribution: • 84.0% have fulfilled the main criteria • 6.7% have fulfilled inclusive at least one or more additional criteriaAnalyses shows that about 65.7% of beneficiaries would have had to slaughter or sell theiranimals without the UN fodder assistance and about 11% would have had enough fodder forkeeping their animals over the whole winter, due to the mild winter. It needs to be underline thatthe feed distribution support helps to moist vulnerable not only to keep the last cow, but alsomitigate destocking and recognize improvement. Improvements records shows milk productionan increase of 51.9% has been recorded when feeding the cows with the received concentratesFor the first time the Transnistria region was part of an operation of such complexity. About8,200 vulnerable rural households received support in this region, which represents more than21,000 people. Situation Analyzes2.1. The Current Situation with Natural Disasters and Climate Changes in MoldovaThis thoughts , conclusion and recommendations made during all my four missions in Moldova,from July 2007 by May 2008, as an FAO International Consultant and TechnicalAdviser/Agronomist, on the base of experience, collaboration with International and NationalOrganizations and Institutions as well as several reports and important sources such asMillennium Development Goals, A Hazardous Existence (MNLT in Rural Moldvoa) – 5 FEB2007, The World Bank Report, Drought Risk Reduction Framework and Practive - InternationalStrategy for Disaster Reduction – May 2007, Risk measurement in extreme situation –M.Daradur – Chisinau 2005, 3th National Report on the implementation of UN ConventionCombat Desertisation in RM –Chisinau 2006, DROUGHT : Evaluation of Management andMitigation Measures for Central Asia and Caucasus– The World Bank Report No.31998-ECA –March 2005, Convention on Biological Diversity (CBD), the Global Environment Facility(GEF), Syntesis Report of Intergovernmental Panel on Climate Change – 17 NOV 1997, UnitedNations Framework Convention on Climate Change – Bangkok 2008, Kyoto Protocol and
  17. 17. particularly FAO 2007 report on “The State of Food and Agriculture” and 2007 publication of“Climate change: a growing challenge for development and poverty reduction” inCommonwealth Heads of Government Meeting (CHOGM) by Mr.Lennart Båge, President ofIFAD and World Bank Repost on Agriculture for Development report presented in 2008 May inMoldova.2.1. Problem StatementClimate change is expected to put almost 50 million additional people at risk of hunger by 2020.Today about 2.1 billion people live on less than US$2 a day; Almost 1 billion people live on lessthan US$1 a day; the world’s population is expected to rise from 6.5 billion people to 9.1 billionby 2050, with most of the growth in developing countries; to meet projected demand, cerealproduction will have to increase by nearly 50 per cent and meat production by 85 per cent from2000 to 2030; climate change is expected to put 49 million extra people at risk of hunger by2020, and 132 million by 2050; since the 1949s, the Republic of Moldova has experienced a 15per cent decline in rainfall; in Moldova, between 2,5 million people will be exposed to increasedwater stress due to climate change by 2020.Climate change makes it more difficult to predict weather patterns and to plant crops at theappropriate time. Rising sea levels will threaten low-lying coastal areas and cause theStalinisation of surface water and groundwater aquifers in some coastal communities. Morefrequent flooding will arise from heavy and erratic precipitation and ice melts. At the same time,more erratic weather patterns will affect the reliability of water sources for irrigation andlivestock. In some regions, climate change will also lead to a higher incidence of vector-bornediseases, such as malaria, schisto-somiasis and dengue fever, as well as pests affecting livestockand crops.The seriousness of the situation must not be underestimated. Climate change is expected to putalmost 50 million extra people of the World at risk of hunger by 2020. In some high-latituderegions food production may increase with higher temperatures. But in others, yields may dropsignificantly.2.2. Global Climate Changes and MoldovaFollowing the World Bank Report A Hazardous Existence (MNLT in Rural Moldvoa) – 5 FEB2007, Risk measurement in extreme situation – M.Daradur – Chisinau 2005 and 3th NationalReport on the implementation of UN Convention Combat Desertification in RM –Chisinau 2006can be mentioned that after 10 years in Moldova, about 90 per cent of smallholders and 50percent of total farmland area in some extent will be suffer from soil erosion; as much as 80 percent of pasture and rangelands will exhibit some form of degradation. Over 95 per cent ofMoldovan agriculture depends on rainfall. Models indicate that about 400,000 hectare ofagricultural land in Moldova currently deemed constrained will improve as a result of droughtand other climatic change. However, this will be more than offset by the estimated 500,000hectare currently classified as moderately constrained that will become even more severelyaffected. This threatens to further affect food security and exacerbate malnutrition on thecontinent.Cereal production in Moldova could drop by over 20 per cent. In drier areas, climate change isexpected to lead to salinisation and desertification of agricultural land. Productivity of livestockand some important crops are expected to decline.There will be greater competition over water resources available for human consumption,agriculture and industry, as a result of changing rain patterns and the disappearance of glaciersafter 5-6 year from now. Agricultural commodity prices will rise, partly due to changing weather
  18. 18. patterns, and it is believed they will continue to rise in the foreseeable future. This will haveenormous consequences for poor rural people. For some, it will mean new opportunities -particularly poor rural producers with access to markets. But, for households that are net buyersof food commodities, rising prices will cause serious problems.2.3. Who will suffer from Climate Changes? The poorest will suffer most.Three out of four of the world’s one billion poorest people live in rural areas and depend onagriculture and related activities for their livelihoods. More rapid agricultural and ruraldevelopment is essential to the achievement of the Millennium Development Goals (MDGs).The world’s poorest people are subsistence farmers, nomadic herders and day laborers. Manylive on ecologically fragile land. They depend on vulnerable sectors – agriculture, livestock andforestry – for their livelihoods. Women in rural areas, particularly those responsible for fetchingwater and keeping livestock, are expected to pay a particularly high price as the climate changes.The IPCC has said very clearly that climate change will hit the poorest and most vulnerablepeople hardest. There is clearly an economic, social and moral imperative to help poor ruralpeople adapt to climate change in a sustainable way.In the World Bank Report of a Hazardous Existence clearly mentioned that “Agriculturaldamages are clearly identified while the breakdown of other damages such as earthquakes andwater logging between rural and urban settlements is not available. However, most of thesedamages are estimated to occur in rural areas: the rural areas are much prone to and les protectedagainst water logging.” Per year cost of weather hazards, such as drought, etc are estimatedabout 35.76 million USD or 33,7 in per cent of total for the time period of 1996-2005 anddrought only 19.9 in per cent of total or 21.12 million USD. In this case the Drought can beevaluated as a kind of manifestation of Global Climatic Changes that develops desertificationand soil degradation in Moldova.It needs to be mentioned that from 2007 severe drought in Moldova were suffered rural poormanly; about 35% of that who had last milking cow sold them, because of luck of fodder,another 65% received the feed staff from UN DRP in time. More then 75% of stallholders thatcultivated cereal crops were affected by 2007 severe drought and about 65% of those rural poorare receiving humanitarian assistance and support from UN DRP and various donors in time, thatmake possible to mitigate the impacted of the drought.2.4. MitigationThere are several proposals how possible to mitigate the impacted of natural disasters caused byGlobal Climatic Changes, but I would like to mention the human factors and particularly animportant role of rural poor in climate change mitigation by using better agricultural practicesand by promoting forestry activities that will contribute to carbon dioxide absorption.For Moldova particularly, it is very important to: 1. Establish and improve Good Agricultural Practices 2. Promote forestry activities 3. Developing irrigation system and setup rainwater management system as an alternate source of irrigation water 4. Support to setting up solar power systems to help poor households get energy from the abundant sunlight in the area. 5. Make possible to produce that will turning human and animal waste into a mixture of methane and carbon dioxide gases that can be used for lighting and cooking.Above mentioned are just few proposal points for future consideration for medium and shortterm activities that need to be assessed by interagency group of professional. And without clear
  19. 19. understanding the existing situation and realistic assessment of the current situation will be notpossible to make a bridge from rehabilitation to recovery and development of rural Moldova andparticularly agriculture sector.For implementation of all of those activities poor rural can be a part of solution. But, they needsecure access to land and water, as well as to financial resources and agricultural technologiesand services. They need access to markets and the opportunities for enterprise that can help themdiversify and increase their income. They also need effective institutions and the organizationalpower and influence required to advocate for their own needs and take advantage of emergingopportunities.It is clear that climate change will make reaching the MDGs much more difficult unless donorsand governments in developing countries sharply increase investments in agriculturaldevelopment and sustainable land management practices. And IPCC notes that sustainabledevelopment can reduce vulnerability to climate change by enhancing adaptive capacity andincreasing resilience and rural population can pays key role on it.2.5. Agriculture and Rural DevelopmentIt is very clear that the environmental agenda is inseparable from the broader agenda ofagriculture for development. The 2008 World Development Report recognizes that agriculturecan play an important role in mitigation through better stewardship of the natural resource baseon which it depends.Implementing sustainable agricultural practices is more important now than ever. Agricultureand forestry are major sources of greenhouse gas emissions. But, through sustainable practicesand management, both also have great potential to mitigate the impact of climate change. Thismeans that as managers of land, water and forests, poor rural people could have an importantrole to play in mitigation measures. - By using better agricultural practices and by nurturing and protecting forests poor rural peoplecan contribute to absorb carbon dioxide.- By improving livestock management and crop practices, coupled with adaptive management offorests, could have a very significant impact to mitigate the climatic changes.-By adopting better land use practices, such as conservation agriculture, conservation tillage,agro-forestry, and rehabilitation of degraded crop and pasture land, would also help to maintainsignificant amounts of carbon in the soil.Soil is the largest reservoir of carbon in the terrestrial carbon cycle. The emerging markets fortrading carbon emissions also offer new possibilities for small farmers to benefit from land usesthat sequester carbon.Afforestation, reforestation, better land management and sustainable agricultural practices can allcontribute enormously to reducing carbon emissions. For example, the restoration of two billionhectares of degraded land could compensate for three per cent of global annual carbon emissions.Avoiding deforestation is even more important.Poor rural people can play a key role in activities that, but governments and public policies mustalso put the right incentives in place for this to happen, particularly compensation and paymentfor the environmental services poor rural people provide. With appropriate and innovativeincentives, poor farmers, forest dwellers and indigenous peoples can make an importantcontribution to emissions reduction and carbon sequestration.
  20. 20. Climate changes are affecting and will affect us all, but it poses a particular risk to developmentand poverty reduction, and to the achievement of the MDGs. Our efforts will be more effective ifwe recognize poor rural people as effective custodians of the natural resource base, and ensurethey have access to the technology and financing they need to cope with climate change and bepart of the solution. By listening to the voices of poor rural people when planning adaptation andmitigation processes, we can reduce the risks of climate change, while accelerating progresstowards a world without poverty.In Moldova drought and overgrazing had degraded vast areas of the rangelands. And because ofFAO/WFP CFAS and donors’ responds on founds mobilization, because of successfulimplementation of UN Drought Responds Project - rehabilitation programme has led toimproved rangeland productivity, regeneration of cereal production and all of those are helps torecover the gap in agriculture sector..2.6. Helping Rural PoorIt is strongly recommend that future projects and programmes in Moldova needs to be focusedon supporting marginal, rain fed areas that are at risk from water shortage, land degradation anddesertification. Such issues as desertification and changes in cropping patterns due to climatevariability must be main priority. Working closely with poor rural people, most of whom aresmallholder farmers, landless people, herders and small entrepreneurs who depend on agricultureto survive all UN family members need to play lead role for rural development in Moldova todraws in helping rural poor to adapt to climate change.Adaptation will include all activities that help people and ecosystems reduce their vulnerabilityto the impact of climate change and that minimize the costs of natural disasters. There is nouniversal way to adapt; specific measures need to be tailored to specific contexts. That’s whyFeasibility Assessment to Support Rural Livelihoods and the Agricultural Sector Following the2007 Drought needs to be taken place. Crisis and Risk ManagementCrisis means that normal livelihood of population is harmed by disaster. It could be any disasterincluding natural. That’s why risk identification and management are important. Livelihood with development Livelihood interventions (5) recovered crisis by own Normal baseline 4 5 6 means (6) livelihood 3Livelihood with 2 emergency (3) or Effect of 1 rehabilitation crisis on interventions (4) livelihood Livelihood after shock (1) Thresholds - after crisis (1) - with coping mechanism (2) Livelihood with - food secure (3) coping - economical secure (4) - improved livelihood through mechanism (2) development (5) Source: Matthias Molle (Beneficiary Assessment Methodology)
  21. 21. Once risks have been identified, they must then be assessed as to their potential severity of lossand to the probability of occurrence. These quantities can be either simple to measure, in the caseof the value of a lost building, or impossible to know for sure in the case of the probability of anunlikely event occurring. Therefore, in the assessment process it is critical to make the besteducated guesses possible in order to properly prioritize the implementation of the riskmanagement plan.The fundamental difficulty in risk assessment is determining the rate of occurrence sincestatistical information is not available on all kinds of past incidents. Furthermore, evaluating theseverity of the consequences (impact) is often quite difficult for immaterial assets. Assetvaluation is another question that needs to be addressed. Thus, best educated opinions andavailable statistics are the primary sources of information. Nevertheless, risk assessment shouldproduce such information for the management of the organization that the primary risks are easyto understand and that the risk management decisions may be prioritized. Thus, there have beenseveral theories and attempts to quantify risks. Numerous different risk formulae exist, butperhaps the most widely accepted formula for risk quantification is:Rate of occurrence multiplied by the impact of the event equals to risk.Later research has shown that the financial benefits of risk management are less dependent onthe formula used but are more dependent on the frequency and how risk assessment isperformed.In business it is imperative to be able to present the findings of risk assessments in financialterms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting risks in financialterms. The Courtney formula was accepted as the official risk analysis method for the USgovernmental agencies. The formula proposes calculation of ALE (annualized loss expectancy)and compares the expected loss value to the security control implementation costs (cost-benefitanalysis).3.1. Risk AssessmentRisk assessment is measuring two quantities of the risk R, the magnitude of the potential loss L,and the probability p that the loss will occur.Risk assessment may be the most important step in the risk management process, and may alsobe the most difficult and prone to error. Once risks have been identified and assessed, the steps toproperly deal with them are much more programmatical.A risk assessment is an important step in mitigating the impacted of climate changes. It helpsyou focus on the risks that really matter with the potential to cause real harm. This proposedmethodology of risk assessment tells you how to achieve that with a minimum of fuss. This isnot the only way to do a risk assessment and there are other methods that work well, particularlyfor more complex risks and circumstances. However, we believe this method is on of the moststraightforward.A risk assessment is simply a careful examination of what could cause harm to people, so thatyou can weigh up whether you have taken enough precautions or should do more to preventharm. Workers and others have a right to be protected from harm caused by a failure to takereasonable control measures.Natural disasters can ruin lives and affect country business. That’s why it is required to assessthe risks so that you put in place a plan to control the risks.
  22. 22. 3.1.1. Five steps to risk assessment⇒ Identify the hazards⇒ Decide who might be harmed and how⇒ Evaluate the risks and decide on precautions⇒ Record your findings and implement them⇒ Review your assessment and take appropriate measuresPart of the difficulty of risk management is that measurement of both of the quantities in whichrisk assessment is concerned can be very difficult itself. Uncertainty in the measurement is oftenlarge in both cases. Also, risk management would be simpler if a single metric could embody allof the information in the measurement. However, since two quantities are being measured, this isnot possible. A risk with a large potential loss and a low probability of occurring must be treateddifferently than one with a low potential loss but a high likelihood of occurring. In theory bothare of nearly equal priority in dealing with first, but in practice it can be very difficult to managewhen faced with the scarcity of resources, especially time, in which to conduct the riskmanagement process. Expressed mathematically,Financial decisions, such as insurance, often express loss terms in dollars. When risk assessmentis used for public health or environmental decisions, there are differences of opinions as towhether the loss can be quantified in a common metric such as dollar values or some numericalmeasure of quality of life. Often for public health and environmental decisions, the loss term issimply a verbal description of the outcome, such as increased cancer incidence or incidence ofbirth defects. In that case, the "risk" is expressed as:
  23. 23. If the risk estimate takes into account information on the number of individuals exposed, it istermed a "population risk" and is in units of expected increased cases per a time period. If therisk estimate does not take into account the number of individuals exposed, it is termed an"individual risk" and is in units of incidence rate per a time period. Population risks are of moreuse for cost/benefit analysis; individual risks are of more use for evaluating whether risks toindividuals are "acceptable". Risk of losses due to vulnerability and Benefit gain Potential risk treatmentsOnce risks have been identified and assessed, all techniques to manage the risk fall into one ormore of these four major categories: (Dorfman, 1997) (remember as 4 Ts)• Tolerate (aka retention)• Treat (aka mitigation)• Terminate (aka elimination)• Transfer (aka buying insurance)Ideal use of these strategies may not be possible. Some of them may involve trade-offs that arenot acceptable to the organization or person making the risk management decisions.4.1. Risk avoidanceIncludes not performing an activity that could carry risk. Avoidance may seem the answer to allrisks, but avoiding risks also means losing out on the potential gain that accepting (retaining) therisk may have allowed.4.2. Risk reductionInvolves methods that reduce the severity of the loss. Modern software developmentmethodologies reduce risk by developing and delivering software incrementally. Earlymethodologies suffered from the fact that they only delivered software in the final phase ofdevelopment; any problems encountered in earlier phases meant costly rework and oftenjeopardized the whole project. By developing in iterations, software projects can limit effortwasted to a single iteration. A current trend in software development, spearheaded by theExtreme Programming community, is to reduce the size of iterations to the smallest sizepossible, sometimes as little as one week is allocated to an iteration.
  24. 24. 4.3. Risk retentionInvolves accepting the loss when it occurs. True self insurance falls in this category. Riskretention is a viable strategy for small risks where the cost of insuring against the risk would begreater over time than the total losses sustained. All risks that are not avoided or transferred areretained by default. This includes risks that are so large or catastrophic that they either cannot beinsured against or the premiums would be infeasible. Any amounts of potential loss (risk) overthe amount insured are retained risk. This may also be acceptable if the chance of a very largeloss is small or if the cost to insure for greater coverage amounts is so great it would hinder thegoals of the organization too much.4.4. Risk transferMeans causing another party to accept the risk, typically by contract or by hedging. Insurance isone type of risk transfer that uses contracts. Other times it may involve contract language thattransfers a risk to another party without the payment of an insurance premium. Liability amongconstruction or other contractors is very often transferred this way. On the other hand, takingoffsetting positions in derivatives is typically how farms use hedging to financially manage risk.Some ways of managing risk fall into multiple categories. Risk retention pools are technicallyretaining the risk for the group, but spreading it over the whole group involves transfer amongindividual members of the group. This is different from traditional insurance, in that no premiumis exchanged between members of the group up front, but instead losses are assessed to allmembers of the group. Risk ManagementRisk management is the process of measuring, or assessing, risk and developing strategies tomanage it. Strategies include transferring the risk to another party, avoiding the risk, reducing thenegative effect of the risk, and accepting some or all of the consequences of a particular risk.Traditional risk management focuses on risks stemming from physical or legal causes (e.g.natural disasters or fires, accidents, death, and lawsuits). Financial risk management, on the otherhand, focuses on risks that can be managed using traded financial instruments.In ideal risk management, a prioritization process is followed whereby the risks with the greatestloss and the greatest probability of occurring are handled first, and risks with lower probabilityof occurrence and lower loss are handled in descending order. In practice the process can be verydifficult, and balancing between risks with a high probability of occurrence but lower loss versusa risk with high loss but lower probability of occurrence can often be mishandled.Intangible risk management identifies a new type of risk - a risk that has a 100% probability ofoccurring but is ignored by the organization due to a lack of identification ability. For example,when deficient knowledge is applied to a situation, a knowledge risk materializes. Relationshiprisk appears when ineffective collaboration occurs. Process-engagement risk may be an issuewhen ineffective operational procedures are applied. These risks directly reduce the productivityof knowledge workers, decrease cost effectiveness, profitability, service, quality, reputation,brand value, and earnings quality. Intangible risk management allows risk management to createimmediate value from the identification and reduction of risks that reduce productivity.Risk management also faces difficulties allocating resources. This is the idea of opportunity cost.Resources spent on risk management could have been spent on more profitable activities. Again,ideal risk management minimizes spending while maximizing the reduction of the negativeeffects of risks.
  25. 25. 5.1. Steps in the risk management processEstablishing the context involves1. Planning the remainder of the process.2. Mapping out the following: the scope of the exercise, the identity and objectives ofstakeholders, and the basis upon which risks will be evaluated.3. Defining a framework for the process and an agenda for identification.4. Developing an analysis of risk involved in the process.5.2. IdentificationAfter establishing the context, the next step in the process of managing risk is to identifypotential risks. Risks are about events that, when triggered, cause problems. Hence, riskidentification can start with the source of problems, or with the problem itself.• Source analysis Risk sources may be internal or external to the system that is the target of risk management. Examples of risk sources are: stakeholders of a drought project, employees of a trading company, etc.• Problem analysis Risks are related to identify threats. For example: the threat of losing crop/ profit, the threat of abuse of privacy information or the threat of accidents and casualties. The threats may exist with various entities, most important with shareholder, customers and legislative bodies such as the government.When either source or problem is known, the events that a source may trigger or the events thatcan lead to a problem can be investigated. The chosen method of identifying risks may dependon culture, industry practice and compliance. The identification methods are formed bytemplates or the development of templates for identifying source, problem or event.Common risk identification methods are:• Hazards risk identification. Identification the risks on the base of most frequently hazards.• Objectives-based risk identification. Organizations and project teams have objectives. Any event that may endanger achieving an objective partly or completely is identified as risk. Objective-based risk identification is at the basis of Enterprise Risk Management - Integrated Framework• Scenario-based risk identification. In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk.5.3. Risk ChartingThis method combines the above approaches by listing Resources at risk, Threats to thoseresources Modifying Factors which may increase or reduce the risk and Consequences it iswished to avoid. Creating a matrix under these headings enables a variety of approaches. Onecan begin with resources and consider the threats they are exposed to and the consequences ofeach. Alternatively one can start with the threats and examine which resources they would affect,or one can begin with the consequences and determine which combination of threats andresources would be involved to bring them about5.4. Create the planDecide on the combination of methods to be used for each risk. Each risk management decisionshould be recorded and approved by the appropriate level of management.