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OECD World Bank Study on Contingent Liabilities: Boosting Fiscal Resilience to Natural Disasters


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Key findinds from and OECD & World Bank Study on Contingent Liabilities, "Boosting Fiscal Resilience to Natural Disasters". For more information see:

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OECD World Bank Study on Contingent Liabilities: Boosting Fiscal Resilience to Natural Disasters

  2. 2. Significant disaster risks facing APEC region Source: OECD calculations based on insured losses and total damages reported for natural disasters (floods, storms, earthquake, droughts/fires/heat waves and other natural disasters) in Swiss Re sigma annual reports on natural and man-made catastrophes (2006-2016). 0% 10% 20% 30% 40% 50% 60% 0 50 100 150 200 250 300 350 400 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Insured share of total losses Total losses (USD billions) Disaster losses in APEC economies, 2006-2015 Total losses Insured losses (share) Annual average losses: USD 120 billion 30% of losses insured, hence a large share of recovery costs shouldered by government;
  3. 3. In the context of increasing pressure on public finances … …. where balance sheets have been eroded in many APEC economies by the global financial crisis -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% United States Thailand Singapore Russia Peru Japan Chile Canada Australia Change in general government balance: (share of GDP) 2006-2015 Source: OECD calculations based on APEC economies covered in the IMF Government Finance Statistics in 2006 and 2015 (net borrowing/lending by general government as a share of GDP).
  4. 4. • The costs of disasters often represent a contingent liability for governments – both on the expenditure side and the revenue side of national budgets: • Governments often expected to fund reconstruction of public assets, post- disaster relief for citizens and businesses (as a result of both explicit and implicit commitments made prior to disasters) • Any disaster-related disruptions to economic activities can have negative implications for government revenues • Major disasters, although rare in occurrence have potentially high financial and economic impacts, and are often difficult or impossible to predict - making these kinds of costs challenging to incorporate into traditional budgeting frameworks • Different approaches to managing these contingent liabilities will create different incentives for risk reduction across other levels of government and the private sector Disaster-related contingent liabilities: the challenge for governments
  5. 5. Sources of a government’s disaster related contingent liabilities Source: Gamper et al. (2017). Managing disaster-related contingent liabilities in public finance frameworks, OECD Public Governance Working Paper
  6. 6. I. APEC’s Cebu Action Plan suggests to: • Improve the availability of disaster data • Promote disaster insurance (including micro-insurance) & deepen insurance penetration) • Support governments’ efforts to respond to disasters: How to enhance financial resilience to disasters? – some international guidance II. OECD Recommendation on the Governance of Critical Risks suggests governments “plan for contingent liabilities within clear public finance frameworks by enhancing efforts to minimise the impact that critical risks may have on public finances and the fiscal position of a country.” III. OECD Recommendation on Disaster Risk Financing Strategies suggests governments “manage the financial impacts of disasters on public finances” by evaluating exposures and developing plans for managing those exposures.
  7. 7. A joint OECD-World Bank cross-country study has aimed to: • Strengthen countries’ understanding of governments’ disaster and climate related contingent liabilities • Enhance countries’ management of such liabilities within public finance frameworks and within their fiscal risk assessment processes • Emphasise the importance of a good understanding of contingent liabilities to inform effective risk reduction actions • Share emerging good practices in managing disaster-related contingent liabilities Participating countries: Australia, Canada, Colombia, Costa Rica, France, Japan, Mexico, New Zealand, Peru Country progress in implementing international guidance: an OECD-World Bank study
  8. 8. Policy evaluation framework The policy evaluation framework underpinning the analytical study approach: Source: Gamper et al. (2017). Managing disaster-related contingent liabilities in public finance frameworks, OECD Public Governance Working Paper
  10. 10. Overview of common explicit government liabilities 10 • Explicit commitments for post disaster financial assistance vary widely across countries • Japan: wide range of explicit commitments versus limited in Peru Central govt. to finance disaster response & recovery Cost-sharing arrangements to finance disaster response & recovery Central govt. to reconstruct/ maintain central government– owned public assets Central govt. to finance rehabilitation & reconstructio n of private assets Central govt. for other expenses incurred by subnational govts. Govt. guarantees for losses incurred by public corporations & PPPs Japan       Peru X   X X X
  11. 11. Overview of common explicit government liabilities (ctd.) 11 • Across studied countries, an important liability arises from damages to government building assets and public infrastructure – some countries have actively sought to limit them: • Mexico’s FONDEN rules on repeated infrastructure damage claims • Post-disaster assistance for individual households is often provided independent of any preventative measures taken – all countries provide relief assistance, a number also provide support for the rehabilitation of private assets: • Australia: support for demolishment and rebuilding of houses provided • New Zealand: support provided by the EQC • Peru: such supported is limited to poorest population strata
  12. 12. Overview of common explicit government liabilities (ctd.) 12 • Governments’ financial support for damages incurred by state-owned enterprises has been actively limited • New Zealand: exceptions made for exceptional hardship • Post-disaster assistance for businesses has been recognised as a key factor in limiting the wider and prolonged negative economic impact of disasters; measures include: • Concessional interest rate loans, interest rate subsidies, wage subsidies
  13. 13. Common sources of implicit disaster related contingent liabilities 13 • Implicit government disaster related contingent liabilities rise when extreme events occur • Japan: GEJE increased central government share of financing relief • Mexico: issued zero coupon loans, without a prior commitment basis, to subnational governments • Australia: “Category D” measures under the Natural Disaster Relief and Recovery Arrangements • Implicit liabilities are greater where explicit, ex ante commitments are fewer • Peru, Colombia
  14. 14. Quantification and integration in fiscal risk frameworks 14 Contingent liabilities can be quantified using two main methods: direct estimation or estimation through probabilistic modelling Type of disaster-related expenditure What gets recorded Relief spending Temporary housing, medical care, waste disposal, dispatching of Self-Defence Forces, etc. Spending for the reconstruction of damaged public infrastructure and assets Recovery/reconstruction of infrastructure assets, public schools, government buildings, etc. Spending for the reconstruction of damaged private assets Financial support for livelihood recovery of disaster victims, provision of disaster condolence grants, support for the reconstruction of agricultural facilities, etc. Spending on increased social transfers due to a post- disaster economic slowdown May include items such as school attendance support, tuition support, expansion of job creation programs and unemployment assistance Expenditures due to guarantees issued to public or private entities suffering disaster losses Earthquake reinsurance claims, disaster risk insurance for agriculture and fishery, credit guarantee for small and medium enterprises Post-disaster payments to subnational governments Subsidy to disaster-affected subnational governments Reduced tax collections General changes in tax revenue are published in the highlights of the general account budget document and in the accompanying documentation on Japan’s fiscal condition Disrupted operations of public corporations Not included Disrupted operations of private corporations Not included Deterioration in the terms at which the government can in the short term refinance public debt or raise additional debt Not included Sources for directly estimating liabilities in Japan:
  15. 15. Quantification and integration in fiscal risk frameworks (ctd.) 15 Dedicated disaster risk funds can be a useful source of information for estimating the size of potential liabilities: Economy Types of funds1 Australia - Natural Disaster Relief and Recovery Arrangements (NDRRA) provide financial assistance from the central government, reimbursing up to 75% of eligible expenditure on relief and recovery payments made by subnational governments. Canada - Disaster Financial Assistance Arrangements (DFAA) provide financial assistance from central government, reimbursing up to 90% of eligible expenditure on relief and recovery payments made by subnational governments once a minimum expenditure threshold has been met. Costa Rica - National Emergency Fund (Fondo Nacional de Emergencia, NEF) provides funding for disaster recovery measures. Colombia - National Disaster Risk Management Fund finances knowledge generation about risk, risk reduction, risk management, recovery and financial protection activities. - National Adaptation Fund is dedicated to financing disaster risk prevention. France - Emergency relief fund finances assistance for immediate disaster relief - Relief fund for overseas territories (FSOM) finances Assistance for the reconstruction of uninsured private assets, uninsurable subnational assets, and for immediate disaster relief - National guarantee fund for agricultural disasters (FNGRA) finances compensation for uninsurable crop losses due to natural hazards or disease outbreak - state-guarantee to the CATNAT insurance scheme Japan - Annual Reserve for Disaster Recovery Mexico - FONDEN (Fund for Natural Disasters) finances ex post disaster risk management measures. - FOPREDEN (Fund for Disaster Prevention) - Fund to Support the Rural Population Affected by Climate Hazards New Zealand - Natural Disaster Fund Peru - FONDES (Fund for Interventions to Face Natural Disasters) finances both ex ante and ex post disaster risk management measures. - FONIPREL (Promotion Fund for Regional and Local Public Investment) may also be used for financing disaster risk management measures. - The Fiscal Stabilization Fund can be used to finance national emergencies that affect Peru’s fiscal stability.
  16. 16. Estimating fiscal impacts of disaster related contingent liabilities 16 • To estimate fiscal impacts: • Sensitivity analysis calculating the impact of a disaster on the forecast of public debt or fiscal deficit, e.g. Philippines Philippine national government debt-to-GDP scenario analysis Source: Republic of the Philippines, 2013 Objective: Increase visibility in the fiscal policy making process
  17. 17. Mitigating contingent liabilities 17 Mitigation strategies for governments could include all or a mix of the following four lines of action: • The definition of clear cost-sharing mechanisms across levels of government; • Setting incentives for both subnational governments and non- governmental stakeholders to reduce disaster risks ahead of disasters • The consideration of a ceiling on disaster recovery costs the government; • The development of financial strategies to cover for residual risks
  19. 19. Policy recommendations • Design clear framework rules for a government’s post disaster financial assistance and, to a maximum extent possible, spell out their details • Establish clear cost sharing mechanisms across levels of government. • Include the assessment of disaster related contingent liabilities in fiscal risk management frameworks • Make risk reduction part of the framework conditions for financing post disaster needs • Make provisions for managing residual risk Based on the survey of country practices, following guidance proposed for governments to better control and limit disaster related contingent liabilities:
  20. 20. For further information 20 Please contact: - Catherine Gamper, OECD Public Governance Directorate, - Benedikt Signer, World Bank,