Catastrophe Risk Financing
Sept. 23, 2011: Philippines signs US$500 Million Cat DDO
Product Note: Cat DDO [pdf]
A powerful typhoon hit eastern Philippines on September 27, 2011, bringing heavy rain and winds of up to 170 km an hour, forcing more than 100,000 people to evacuate. Typhoon Nesat was the largest storm to hit the Philippines this year. A second one hit the country less than a week after the first. The Philippines is no stranger to such phenomena. The country experiences an average of twenty typhoons per year. But the damage to infrastructure and lives lost to natural disasters is on the rise.
Disaster risk management a key priority
Tropical storm Ondoy and typhoon Pepeng are still fresh in people’s minds. In late September and early October 2009, the Philippines was hit by the two. As a consequence, nearly a thousand lives were lost, and over 9.3 million people were severely affected. The cost to the Philippines’ economy was around 2.7 percent of its GDP [pdf], increasing the number of poor peopleResidents of Metro Manila wading through floodwaters unleashed by Typhoon Ondoy (International name: Ketsana) in 2009. A few days after, another typhoon (Pepeng, internationally as Parma) hit the country. Total damage and losses from both events was equivalent to 2.7 percent of the Philippines' GDP.
by about 500,000.
Tragedies like this serve as a call to hazard-prone countries to build and vigilantly maintain their resilience to the impacts of natural disasters. Stuck as it is in both the pacific typhoon belt and the volcanic “Ring of Fire,” doing nothing was not an option for the Philippines. On May 27, 2010, authorities passed a Disaster Risk Reduction and Management Act that adopts a holistic, comprehensive and integrated approach to address disaster risk. A Strategic National Action Plan for Disaster Risk Reduction (SNAP) followed shortly after. These were important steps in building institutional capacity on disaster risk management.
Mainstreaming disaster risk management in development programs of countries vulnerable to natural disasters is also an important priority for the World Bank. Hence, the 2010-2012 Country Assistance Strategy for the Philippines seeks to reduce the vulnerability particularly of the poor to external shocks, including those arising from natural disasters.
Partnering in risk financing
As part of its support for the country’s integrated framework for disaster risk reduction and management, the World Bank’s Board of Executive Directors approved a contingent line of credit of US$500 million for the Philippines on September 13, 2011. The financing agreement was signed on September 23. The Disaster Risk Management Development Policy Loan with Catastrophe Drawdown Option (Cat DDO) will ensure that the Philippines has immediate access to funding for emergency relief, recovery, and reconstruction efforts following a major natural disaster.
Typhoon victims in the Philippines reaching out for food and relief goods handed out by relief workers during the height of Typhoons Ondoy (Ketsana) in 2009. The Philippines is among the most vulnerable countries in the world to natural disasters. On average, more than 1,000 lives are lost every year, with typhoons accounting for 74 percent of the fatalities, 62 percent of the total damages, and 70 percent of agricultural damages, reflecting their high annual frequency.
“We believe that the Cat DDO will further strengthen the country’s efforts to improve preparedness against natural disasters,” said Mark Woodward, Sustainable Development Leader for the Philippines at the World Bank.
The Bank’s contingency line of credit supports the Philippines’ strategy and action plan. It also complements other Bank engagements in the Philippines related to disaster risk reduction and management, including a recent grant to develop a master plan that will reduce the vulnerability of Metro Manila and surrounding areas to destructive flooding.
Limiting economic disruption;
promoting faster recovery
The Cat DDO allows governments to respond quickly to emergency needs without diverting resources from important long-term development projects. The product is typically used to finance liquidity gaps in the government budget for countries exposed to natural disasters. It is triggered by a Presidential Declaration of a State of Calamity.
“By securing pre-event financing, the Philippines is taking a proactive stand in addressing the economic impact of natural disasters in the country,” said Issam Abousleiman, Head of Banking Products, World Bank Treasury. “The Cat DDO is a contingent line of credit, and very effective as bridge financing while funds from other sources are being mobilized to respond to a natural disaster, as seen in countries like Costa Rica, Colombia and Guatemala.”
DPL with Cat DDO
The Development Policy Loan with Catastrophe Risk Deferred Drawdown Option, DPL with Cat DDO, is a development policy loan that offers IBRD-eligible countries immediate liquidity up to US$500 million or 0.25 percent of GDP (whichever is less) if they suffer a natural disaster. Funds are disbursed when a country suffers a natural disaster and declares a state of emergency. Eligible borrowers must have an adequate macroeconomic framework in place at inception and renewal of the Cat DDO, and a disaster risk management program that is monitored by the World Bank.
The Cat DDO has an interest rate that is charged on disbursed and outstanding amounts, similar to regular IBRD loans. The applicable interest rate is the prevailing rate for IBRD loans at drawdown. In addition, there is a front-end fee of 0.50% and a renewal fee of 0.25% on the loan amount.
Pre-event risk financing instruments include setting up financial reserves, contingent debt agreements, insurance and alternative risk transfer solutions.
“The Philippines has benefited from learning from the experiences of Latin American countries, especially in terms of their ex ante disaster risk management policy measures and disaster risk financing innovations, such as the Cat-DDO. This shows the country’s commitment to improving its capacity to manage the impacts of natural disasters,” said Zoe Elena Trohanis, World Bank infrastructure specialist and team lead for the project.
“This is the largest Cat DDO for the Bank and also the first outside the Latin American and Caribbean region, and has helped to open up dialogue on disaster risk financing with other countries in the Asia Pacific region,” added Miguel Navarro-Martin, Lead Engagement Manager for East Asia and the Pacific for Banking and Debt Management department, World Bank Treasury.
The World Bank has been involved in post-disaster recovery and reconstruction for more than 25 years, and is increasingly involved in risk reduction. The Bank now offers a full menu of products and services [pdf] to help countries adopt pre-event financing strategies to manage the risk of external shocks and facilitate a rapid response when disaster strikes. These products and services are most effective as part of a broader disaster risk management strategy that involves layering resources based on the severity and frequency of natural disasters for highly exposed countries. The Bank draws heavily on its international experience and best practice to offer technical assistance to help member countries understand the risks involved and solutions available.
|Cat DDO Widely Used in Latin America
Like the Philippines, Latin American countries are highly exposed to natural disasters.
Costa Rica was the first country to adopt a Cat DDO. Just months after signing a $65 million Cat DDO, a 6.2 magnitude earthquake struck 20 miles north of San José. Over 120,000 people were affected. Costa Rica drew down $24 million of the Cat DDO to rebuild damaged infrastructure.
A year after Guatemala signed a $85 million DPL with a Cat DDO (April 2009), two major natural disasters — eruption of the Pacaya Volcano and the tropical storm Agatha— caused damages worth $982 million (approximately 2.6 percent of the 2009 GDP). The Government disbursed the full balance of the Cat DDO to respond to reconstruction needs and other expenses.
Colombia too had prepared for this kind of natural disaster by signing a $150 million Cat DDO on June 11, 2009. On December 28, 2010, Colombian authorities disbursed the full balance of the Cat DDO to address a crisis caused by floods and landslides in the country’s worst rainy season in decades.
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