Policy Research Working Paper 7635

Disaster Risk Management and Fiscal Policy

Narratives, Tools, and Evidence Associated with Assessing Fiscal Risk and Building Resilience

Reinhard MechlerJunko Mochizuki

Stefan Hochrainer-Stigler

Development EconomicsClimate Change Cross-Cutting Solutions Area April 2016

The Triple Dividend of Resilience

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Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Policy Research Working Paper 7635

This paper is a product of the Climate Change Cross-Cutting Solutions Area, and a background paper to “The Triple Dividend of Resilience” report, a joint initiative by the Global Facility for Disaster Reduction and Recovery and the Overseas Development Institute. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted mechler@iiasa.ac.at.

This paper addresses the question whether and how co-benefits, through disaster resilience building, can be further promoted. Co-benefits are defined as positive externalities that arise deliberately as a result of a joint strategy that pursues several objectives synergistically at the same time, such as disaster risk management and development goals, or disaster risk management and climate change adaptation. Of particular interest is the question of how the economic and broader benefits of disaster risk management can be recognized and realized by those in charge of fiscal policy decisions. The paper considers the interplay between public disaster risk management investment and fiscal policy, and provides an overview of the current debate as well as assess-ment methods, tools, and policy options. In fiscal budgeting,

it has been standard practice to focus on direct liabilities and recurrent spending. Costs of disasters are often dealt with after the fact only, rather than being considered as contin-gent liabilities. As a consequence, the full costs of disasters have often not been budgeted for, and, with a price signal missing, there is lack of clear incentives for investing in disaster risk management. Overall, the paper identifies four steps and three dividends to be harnessed: (i) understanding fiscal risk; (ii) protecting public finance through risk financ-ing instruments, the first dividend; (iii) managing disaster risk comprehensively, the second dividend; and (iv) pursuing a synergistic, co-benefits strategy of concurrently managing disaster risks and promoting development, the third dividend.

DisasterRiskManagementandFiscalPolicy:Narratives,Tools,andEvidenceAssociatedwithAssessingFiscalRiskandBuilding

Resilience

ReinhardMechler,JunkoMochizukiandStefanHochrainer‐StiglerIIASA‐InternationalInstituteforAppliedSystemsAnalysis,Austria

Keywords: Disaster risk management, Fiscal policy, Co‐benefits, Riskfinancing,JEL:Q54,E62,H60,G32

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1 Introduction:Fromunderstandingrisktobuildingfiscalresilience

OverviewDisasterriskhasseenstronglyincreasingrecognitionbyresearch,policyandimplementationoverthelastfewyears.Substantialinvestmentsintodisasterriskmanagement(DRM)havebeenmadeand,accordingtosomeaccounts,thebalancebetweenwait‐andsee(ex‐postreliefandreconstructionfunding)andproaction(ex‐anteinvestmentsintoDRM)hasbeenshiftedfrom95%vs.5%adecade back to about 87% vs. 13% (Kellet and Caravani, 2012). Economicdecision‐support tools have helped to understand the benefits of DRM andshownsubstantialdividendsfromDRM(seeUKGovernmentOfficeforScience,2012).Yet,more effort is needed to further shift this balance. The recent UNISDRGlobalAssessmentreports(UNISDR2013&2015a)issueastarkwarningthateconomic losses linkedtodisastersare“outofcontrol”andwillcontinuetoescalateunlessDRMbecomesacorepartofbusiness investment strategies.The World Bank’s World Development Report 2014 (World Bank, 2013)emphasizestheneedtofurtherswitchfromunplannedandadhocresponsestoproactiveandsystematicriskmanagement.Aswell,recentIPCCassessmentreports(IPCC2012,2014)emphasizetheneedforriskbasedassessmentandcarefulmanagementplanningbeforedisastersstrike.Finally, the lastGlobalRiskReportpublishedbytheWorldEconomicForum(WEF,2015)concludesthat stronger efforts are needed to understand, measure and foresee theevolutionofinterdependenciesofrisk.Governmentsatdifferentscalesare importantactors inDRM. InadditiontoprovidingDRM,regulatingprivatesectoractivity,promotersandcoordinatorsofcollectiveactiononDRM(Wilkinson,2012),theyarerisk‐takers,asalargepartofdisasterriskendsupwiththefiscalposition(Mechler,2004).Overthelastfewyears,therehasbeenincreasingrecognitionandunderstandingoftheneedtodeliberatelyconsiderthisinpublicandfiscalriskplanningfordisastersandimplementdisasterriskreduction(DRM)totheextentpossible.ApproachThispaperprovidesreflectiononthebenefitsofDRMinthecontextoffiscalpolicyandpublic investment,addressingthequestionwhetherandhowco‐benefitsthroughdisasterresiliencebuildingcanbefurtherpromoted.Inlinewith the literature,wedefine co‐benefits aspositive externalities that arisedeliberately as a result of a joint strategy that pursues several objectives

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synergisticallyatthesametime,suchasDRManddevelopmentgoals,orDRMandclimatechangeadaptation(seeHourcadeetal,2001).1OfparticularinterestforthefollowingdebateisthequestionofhoweconomicandbroaderbenefitsofDRMcanberecognizedandrealizedbythoseinchargeof fiscal policy decisions. The discussion considers the interplay betweenpublicDRMinvestmentandfiscalpolicyandprovidesanoverviewofcurrentdebateaswellasassessmentmethods,toolsandpolicyoptions.Currently,infiscalbudgetingpracticeitismostlystandardtofocusondirectliabilitiesandrecurrent spending, such as foreign and domestic sovereign borrowing,expenditures by budget law, future recurrent costs of public investmentprojects,andpensionandhealthcareexpenditure.Costsofdisastersareoftendealt with after the fact only rather than being considered as contingentliabilities.Asaconsequence,thefullcostsofdisastersarenotbudgetedforandwithapricesignalmissingthereislackofclearincentivesforinvestinginDRM.ChartingoutprogressThefollowingdiscussiontracesprogressinthedebateonfiscaldisasterriskmanagement by focussing strongly on analytics and current practice (seefigure1).Weoverallidentifyfoursteps,whicharebeingpursueddeliberately,aswellasthreedividends,whicharebeingharnessed(seealsoODI&WorldBank,2015).(i) Understanding fiscal risk‐ identifying and assessing the relevance of

disasterriskforpublicfinance;(ii) Protecting public finance through risk financing instruments –

identifyingandexamininginsurance‐relatedinstrumentsthatsupportprotectionofthefiscalposition‐the1stdividend;

(iii) Comprehensivelymanagingdisaster risk including risk reductionandriskpreparednessastheyaffectdevelopment–the2nddividend;

(iv) Pursuing a synergistic, co‐benefits based, strategy of concurrentlymanagingdisasterrisksandpromotingdevelopment–the3rddividend.

1Incontrast,ancillarybenefitsareadditionalbenefitsthatarisewithoutdeliberateplanning.Similarly,theremayalsobeco‐costsfromprojectsandpolicies.Thisisnotthetopicofthischapter,butwillneedattentionfurtheron.

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Figure1 Tracingprogressindebateandpractice:FromactsofgodtoDRMaspartoffiscalriskmanagement

Specifically,thepaperaimsatprovidingananalyticalassessmentwitha‘userfocus'basedon the followingbroadguidingquestion:Howcan the findingssupportgovernment’sDRMinvestmentdecisionsasapublicgood?Weprovideempiricalevidence,seektoidentifygood/badpracticesinfiscalpolicydesignand contextualize the discussion with relevant country‐level and regionalexamples, such as from Mexico, the Caribbean states and OECD countries.Overall, we seek to distill entry points for more strongly recognizing andrealizingtheeconomicandbroaderbenefitsofDRMbythoseinchargeoffiscalpolicy.Specifically,weidentifycurrentguidingprinciplesandaimsforfiscalpolicy, thendiscuss ifandhowthosecanbeamendedtosupportDRM. Theensuingdiscussionisorganizedaccordingtothefourstepsanddividendsandfinallyleadsintoashortconclusionssection,whichprovidesfinalcommentaryregardingtheongoingtransition,whichincreasinglypositionsdisasterriskaspartandparcelofresiliencestrategiestoharnessco‐benefitsfrommanagingdisasterriskandstimulatingdevelopment.

2 UnderstandingfiscalriskAfirstlogicalstepformanaging(fiscal)risk,whichiscommonlypursued,istoproperlyunderstandandputriskinthepropercontextoffiscaloperations,forwhichconsiderableefforthasbeenexpandedoverthelastfewyears.

Disasters as acts

of God Understanding

fiscal risk Protec ng public

finance

Comprehensive disaster risk management

Synergis c resilience and development

strategy

Disaster risk integrated with development risk and opportunity

Loss databases, Catastrophe risk

modelling, fiscal risk and hedge matrix

Fiscal gap concept, economic appraisal

Risk layering, modelling risk dynamics and synergies

Fiscal stress tes ng, mul risk matrix and mul ‐

metric evalua on

Tools

Objec ves pre1990s Post HFA

SDG debate 2015

Perspec ve on benefits

Understanding risk and risk avoided

Direct benefits of

DRM

Indirect and comprehensive

benefits from DRM

Co‐benefits (incl. in the absence of

disasters)

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Natural disasters lead to loss of life and assets and have large impacts onpeople, businesses and governments. Governments at different scales aredecisivetoassessing,reducingandfinancingdisasterrisk.Fromaneconomicperspective,governmentsareexposed tonaturaldisaster riskandpotentiallossesduetothreefunctions:(i)theallocationofgoodsandservices(security,education, clean environment), (ii) the provision of support to privatehouseholdsandbusinessinthecaseofmarketfailure,(iii)andthedistributionofincome(Mechler,2004;seeMusgrave,1959).Fromabudgetingperspective,sovereigndisasterriskarisesasacontingentpublicsector liability,whichisassociatedwithgovernment’sfunctionstoproviderelief,supporttorecovery,undertake reconstruction and raise tax revenue. Once a disaster hits, thesecontingent liabilities can lead to large costs accruing to governments forprovidingrelief,recoveryandreconstructionassistance(seeBox1).Box1:GovernmentoperationsandcostspostdisasterReliefoperationsincludeemergencyassistanceprovidedtotheaffectedpopulationtomeetbasicneeds,suchasshelter,foodandmedicalattention.Earlyrecoveryoperationsfollowingtheinitialreliefeffortsarecrucialtolimitsecondarylosses and ensure that reconstruction can start promptly. They include the emergencyrestoration of lifeline infrastructure (e.g., water, electricity and transportation lines), theremovalofdebris,andthelike.Reconstructionoperationsgenerallycenterontherehabilitationorreplacementofassetsdamagedbyadisaster.Theseincludepublicfacilitiesandinfrastructure,whicharethedirectresponsibilityofthestate,butnationalormunicipalauthoritiesusuallyfaceobligationsthatgobeyondtheirownassets.Governmentsoftenarecalledontosubsidizethereconstructionof private assets, in particular housing for low‐income familieswho could not otherwiseaffordtorebuildtheirhomes.Lossoftaxrevenuearisesastheeconomyisdepressedandneedstimetorecover.Source:WorldBank,2010a

2.1 Copingwithrisk:Understandingrisktoleranceandtheneedtoplan

Asdisasterriskisaliability,thequestionariseswhethergovernmentsshouldtakedisasterriskintoaccountexplicitlyorcantheyaffordaresponsivemodeof operations? A seminal paper by Arrow and Lind (1970) on the role ofsovereign risk preference proposed that governments should behave(disaster)risk‐neutrally,astheyareconsideredtheentitybestsuitedtodealwithriskviaefficientlypoolingandspreadingpotentiallosses.Moreprecisely,theargumentdidnotfavorneglectingrisk;ratherArrowandLindsuggestedafiscal management approach based on expected values only: "[…] thegovernmentshouldbehaveasanexpected‐valuedecisionmaker"(ArrowandLind1970).Thismeansgovernments,astheycanaffordtorefinancequickly,

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shouldonlyplanforandreserveforaveragecostsincurredoverlongertimehorizon,andthuswouldnotneedtopaycloseattentiontovariabilityincostswhich isarisesdue to the fact thatdisastersarehigh‐impact‐low frequencyevents(thusaredefinedbystrongvolatilityaroundthemean).ChallengingArrow‐LindOverthelastfewyears,ithasbeenrecognizedthatvariabilitymattersandthatcountriesexhibitdifferentialcopingcapacityfordealingwithrisk(seebox2).Box2:Understandingriskpreference:thecaseofUSandHaitiFigure 2 shows differential coping capacity contrasts recent large disasters in two verycountrieswithextremelydifferentialcopingcapacity–theUSAandHaiti.WhileintheUSA,HurricaneKatrinacausedcolossallossesofaboutUSD125billion,thisamountedtolessthan1per‐centofGDP.Incomparison,whiletheabsolutelossesforHaitiweresmaller,intermsofrelativelossestheyweretremendousatmorethan160percentoftheirGDP,andseriousnegative fiscal andmacro‐economic effects have to be expected in themedium‐to longerterm,althoughinpracticetheseeffectsareoftennotmonitoredanddifficulttoisolatefromthebackgroundnoise(seeNoy,2009).Byallmeans,however,comprehensivelyspreadingthelossesusingtaxrevenueorsavingsseemsimpossibleforHaiti.Thisisalsopartlyduetothesmallerpopulation,andsmalltotalareaofHaitiaswellasrelativelowtaxrevenuesintermsofGDP.

Figure2.DifferentialabilitytospreadriskfortwolargedisastersintheUSandHaiti.

Source:MechlerandHochrainer‐Stigler,2014

Practically,theArrow‐Lindtheoremhasbeenchallengedontheoretialgroundsand the case for risk aversion has been understood (Priest, 2003;Mechler2004; Hochrainer, 2006; Ghesquiere andMahul, 2007; Anginer et al. 2013;MechlerandHochrainer‐Stigler,2014).However,onlyafewoftheseanalyses(Mechler2004;Hochrainer,2006;GhesquiereandMahul,2007;MechlerandHochrainer‐Stigler, 2014) explicitly studied and criticized the details of the

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theoremfor thedisasterdimension. Broadly, theArrow‐Lindtheoremdoesnot apply to governments of countries that exhibit some of the followingcharacteristics (see Mechler, 2004; Mechler and Hochrainer, 2014), and inthesecasesgovernmentsshouldjustifiablyactasrisk‐averseagents.

Highnaturalhazardexposure; Economicactivityclusteredinalimitednumberofareaswithkeypublic

infrastructureexposedtonaturalhazards;and Constraints on resources to finance disaster losses and associated

requirements.Suchsourcesaredeterminedbytheabilitytoreallocatethebudget,domesticsavings,access to financialmarkets,and levelofexternalindebtedness.

While income is not the sole defining variable for risk coping and riskpreference, it is informative to compare income to losses in large event tounderstandwheretolookandwheretoprioritizeaction.Asfigure3suggests,while absolute damages (losses) hve been concntdrated in higher incomecountries, in lowerincomeandparticularlyinsmall islandstates(SIDS),therelativeburdenshavebeenfoundtobemuchlarger(e.g.morethan300%ofGDPinSIDS(WorldBank,2013).

Figure3Countryincomegroupsanddisasterlosses.Source:WorldBank,2013

Ifriskaversionisidentifiedastheproperriskpreference,thisimpliesthatriskhastobetakenintoaccountexplicitly(andbeyondaveragevalues)inbudgetandfiscalplanning.Agovernmentthenshouldgobeyondbeingan‘expectedvalue‘decision‐maker,andconsidervariabilityandriskproperly.

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2.2 Toolsandconcepts:ThefiscalriskandhedgematricesBudgetandresourceplanningfordisastersisnotaneasyproposition.Applyingtheso‐calledfiscalriskmatrixisastepforward.Governmentscommonlyplanand budget for direct liabilities, that is, liabilities that manifest themselvesthrough certain and annually recurrent expenditure. Those liabilities aretermed explicit (as recognized by law or contract), or implicit (moralobligations). Incontrast,disasterriskentersthebalancesheetascontingentliabilities(markedinredintable1),i.e.obligationsthatariserandomlywhena particular event occurs. Explicit, contingent liabilities deal with thereconstruction of infrastructure destroyed by events, whereas implicitobligationsareassociatedwithprovidingrelief–commonlyconsideredasamoralliabilityforgovernments(PolackovaBrixiandMody,2002).

Table1 Governmentliabilities:thefiscalriskmatrixLiabilities Direct

ObligationinanyeventContingentObligationifaparticulareventoccurs

ExplicitGovernmentliabilityrecognizedbylaworcontract

Foreignanddomesticsovereignborrowing,

Expendituresbybudgetlawandbudgetexpenditures

Stateguaranteesfornon‐sovereignborrowingandpublicandprivatesectorentities

Reconstructionofpublicassets

ImplicitA“moral”obligationofthegovernment

Pensionandhealthcareexpenditure

Futurerecurrentcostsofpublicinvestmentprojects

Defaultofsubnationalgovernmentorpublicorprivateentities,

Bankingfailure Disasterreliefandrecoveryassistance

Source:ModifiedafterPolackovaBrixiandModi,2002.Note:DRMrelevantitemsinred.Similarly to the fiscal riskmatrix, a fiscal hedgematrix can be established,which would identify the sources governments have available to generateresourcesgenerallyandinfuture(contingent)events(table2).Riskfinancingwouldthusfallundertheexplicitcontingentsourcesforcopingwithdisasterlosses.

Table2 Governmentsources:thefiscalhedgematrixLiabilities Direct

SourcesinanyeventContingentSourcesifaparticulareventoccurs

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ExplicitDirectcontrolbyGovernment

Taxrevenues(lesstaxexpenditures)

Government‐ownedassetsforpossiblesaleorlease

Transferincomefromthecentralgovernment

Recoveryofloansmadebygovernment(on‐lending)

Legalclaimsagainstthestate Reservefunds Contingentcreditlinesandfinancingcommitmentsfromofficialcreditors

Sovereigninsurance

ImplicitNotdirectlycontrolledbyGovernment

Existingfundsthatareunderindirectgovernmentcontrol(socialsecurityfunds)

Futureprofitsofstate‐ownedenterprisesandagencies

Source:ModifiedafterPolackovaBrixiandModi,2002.Note:DRM‐relevantsourcesinred.Threekeytypesofgovernmentriskfinancingareworthnotinginrelationtodisasters (and will be discussed further below): reserve funds, contingentcreditlines,andsovereigninsurance(traditionaloralternative).

2.3 EvidenceofplanningforcontingentliabilitiesHistorically,countrieshavegenerallynotplannedforcontingentliabilities,andusingex‐postsourcessuchasbudgetreallocations,aidandemergencyloanshavefinanceddisasterlosses.Large,developedcountrieshavereliedontheirnationalreservefunds,thereallocationofthebudget(existingtaxrevenue)ornewtaxrevenuetofundtheaftermathofdisasterevent,andthosecountrieshavedonelessfiscalplanningfordisasterrisk(seee.g.,UNESCAP2013).OECDandlargercountriescangenerallyabsorbtheimpactofadversenaturaleventssincerevenuesfromunaffectedregionscansubsidizetheaffectedregion.Amongothers,thefiscalriskmatrixhasseenapplicationinMexico,Colombia,ThailandandIndonesiawithreferencetodisasterrisk.Colombiahasbeenoneofthepioneersinthisregard(seebox3).Box3:AssessingtheContingentliabilityofDisastersUsingCatastropheRiskModelsinColombia

Colombiaisaleaderinassessingcontingentliabilities.In2010,thegovernmentforthefirsttimeundertookacomprehensiveassessmentofallsuchliabilities.Naturaldisasterriskwasfoundtobethesecondmostimportantliability(afterlegalclaimsonthestate,whichrankedontop)withannualexpectedlossesofestimatedatclosetohalfabillionUSDor0.7%ofthe

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2010budget.Whileaveragesareinformative,variabilityiskeyand100and‐500‐yearreturnperiodwere considered to potentially lead tomore than 4% and 8%per‐cent of budget,respectively

Table3 Contingentliabilities’assessmentforColombia

Source:MinistryofFinanceandPublicCredit,Colombia2011asreportedinGFDRR,2012b

2.4 FiscalstresstestingImprovedunderstandingofriskhasbeenthebasisforfiscalstresstesting,forwhich decision‐supporting tools have been developed. As an indicator offinancialvulnerability,Mechler(2004)suggeststomeasuresovereignfinancialvulnerabilityintermsoftheresourcegapconcept,whichisdefinedasthelackofsufficientfundingforreliefandreconstruction.Governmentswouldthusbefiscallyriskaverseiftheycannotaccesssufficientfundingafteradisastertocovertheirliabilitieswithregardtoreconstructingpublicinfrastructureandprovidingassistancetohouseholdsandbusinesses.Therepercussionsoflargeresource gaps can be substantial. The inability of a government to repairinfrastructureinatimelymannerandprovideadequatesupporttolow‐incomehouseholdscanresultinadverselong‐termsocioeconomicimpacts.Asacaseinpoint,despitesubstantialinflowsofdonoraid,butgivenlimiteddomesticresources,Hondurasonlyreceivedabout50%ofthefundsnecessaryforreliefand reconstruction, and experienced extremedifficulties in repairingpublicinfrastructure and assisting the recovery of the private sector followingHurricane Mitch in 1998. Five years after Mitch’s devastation the GDP ofHonduraswas6%belowpre‐disasterprojections.A report by the World Bank (Cummins and Mahul, 2009) added anotherdimensiontothisframingandassessmentintermsofthetimingofresourceflows. While enough funding may be available over time, there may be asporadicresourcegap,asgenerallyintheaftermathofadisasterevent,urgent

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expenditureneedsarehigh,buttheimmediatelyavailablefinancialresourcesareoftenverylimited.Thetimingoffinancialinflowsforfinancingthelossesisimportantandcandifferfordifferentex‐anteandex‐postinstruments.

EmpiricalinformationonfiscalgapsAlthough therehasbeena considerable amountofdiscussion, there is verylittlereportedevidenceonthescopeandscaleof liquiditygaps.ThecaseofGrenada is a notable exception highlighting various repercussions of fiscalcrisis(seebox4).Box4:GrenadaandthefinancinggappostHurricaneIvanHurricaneIvanstruckGrenadaonSeptember7,2004andlefttremendousdevastationinitswakewithdamagesestimatedatoverUSD800million‐ortwiceGrenada’sGrossDomesticProduct(GDP).Justasit required additional resources to finance relief, clean‐up and emergency rehabilitation, Grenadaexperiencedadramaticdeclineinrevenues.Therevenuereductionwasanestimated5percentofGDPbetween September andDecember2004.The government,whichhadonly limited reserves, facedserious problems financing the public service bill, including salaries and the continuation of keyservices.Italsobecameevidentthatthecountrywouldnotbeabletomeetitsdebtobligationsastheyfell due. In an effort to secure the necessary resources to continuing functioning, the governmentsoughtdonorassistanceinthereconstructionoftheislandandinhelpingitmeetitsexpenseliabilities(importsandcivilservantsalaries).DespiteoverUSD150millioninpledges,onlyUSD12millionwasavailabletoaddressimmediateliquidityneeds.Theremainderofthefundspledgedwasearmarkedforreconstructionprojectsthatwere implementedoverthefollowingtwoyears. Inadditiontotherequesteddonorassistance,thegovernmentalsosoughtthecooperationofitscreditorsbydevelopingaproposaltorestructureover85percentofitscommercialdebt.Thefinaleffortofthegovernmenttoaddressitsrevenueshort‐fallwastopassrevenue‐enhancingmeasuresyieldingover2percentofGDPinApril205,about7monthsaftertheevent.Thesemeasures included:(i)an increaseofabout45percentintheretailpriceoffuel;(ii)anincreaseinexcisetaxesonalcoholandtobacco;(iii)aspeciallevyonincomesoverUSD375permonthforafiveyearperiod;and(iv)improvedtaxadministration.Despitealltheseefforts,Grenada’sfiscalsituationremainedchallengingandthecountrystillfacedafinancinggapof4.5percentofGDPfor2005withtotaldebtprojectedtoincreaseto150percentofGDP.Furthermore,insteadoffocusingonrecoveryandreconstruction,thegovernmentwasdistractedbytheneedtofinancetheemergingresourcegap.Thisledtodelaysintherecoveryandreconstructionperiods. Tomakematters worse, Hurricane Emily followed in 2005, which caused about USD 50million in additional economic losses. The Grenada experience and lessons learnt have beenconsidered an important impetus for the discussion regarding the creation of the CaribbeanCatastropheReinsuranceFacility(CCRIF)in2007(seeWorldBank,2010b).

Yet, the detailed information available on Grenada, including a reportedinstanceofaliquiditygap,israthertheexceptionthantherule,andatbesttheinformationavailableisoftenfragmentary.

2.5 AnalyticaltoolstoassessfiscalriskandgapsGiven the lack of robustness of empirical information on risks, interestedpartiesmaywanttoresorttoanalyticaltoolstoderiverelevantinformation.ModelinganddecisionsupportbasedonworkbyIIASA(seeMechler,2004;Hochrainer,2006;Hochrainer‐Stigleretal.,2014andIDB,2008)overthelast

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few years is available regarding countries’ financial vulnerability andquestionsrelatingtohowmuchandwhattoinsure.CATSIMhasaddressedthisquestion in some detail for many countries and regions. The CatastropheSimulation (CATSIM) model, developed by IIASA, is a risk‐based economicframework for evaluating economic disaster impacts, and the costs andbenefits of measures for reducing those impacts. CATSIM uses stochasticsimulationofdisasterrisksbyrandomlyandrepeatedlygeneratingdisasterevents inaspecifiedregionandexaminestheabilityofthegovernmentandprivatesectortofinancereliefandrecovery.Themodelcomparesassetlossdistributionwithfiscalresilience,definedasthetotalofex‐postandex‐anteriskfinancing(seeFigure4below).

Figure4ModellingfiscalvulnerabilityandresiliencetonaturalhazardsSource:Hochraineretal.,2014

FortheWorldBankWorldDevelopmentReport2010,andrecentlypublishedHochrainer‐Stigleretal.(2014),CATSIMwasusedtoconductglobalanalysisonfiscalvulnerabilityandrisk.Theglobalanalysishighlightedthefollowingcountries to be particularly fiscally vulnerable: (i) various small islanddevelopingstatesintheCaribbeanandPacific,(ii)countriesinLatinAmerica(Honduras, Nicaragua, El Salvador and Bolivia), Africa (Madagascar,Mozambique, Zimbabwe, Sudan, Nigeria and Mauritania) and Asia (Nepal,Cambodia, Laos, the Philippines, Indonesia, Papua New Guinea). Thesecountriesareprimecandidatesforsteppingupactivitiestoplan,reduceandmanagerisks inordertoreduceserioushumanandfinancial lossburdentoexposed populations, business and wider macroeconomic health. Figure 5

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showsaglobalmapoffiscalgapreturnperiods,i.e.theestimatedreturnperiodforwhichcountrieswouldincurafiscalshortfall.

Figure5GlobalmapexhibitingcalculationsofthefiscalgapyearSource:DatabasedonWilligesetal.,2015

The disaster deficit index (DDI) developed by IDB (2008) is based on theCATSIMmethodologyandcanbederivedbydividingthelossbythefinancingavailable.Forexample, infigure6, theDDIofabout4.3fora50yearreturnperiodeventinHondurasmeansthatthelosseswouldamounttomorethanfourtimesthefinanceavailabletorebuildlostassets.

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Figure6CalculatingthedisasterdeficitindexfortheLatinAmericanandtheCaribbeanregion:DisasterDeficitIndexandProbableMaximumLossin50years.Source:IDB,2008

3 ProtectingpublicfinanceAsmentioned,governmentsthroughouttheworldhaveusedtorelyonexpostresources to fund the costs of disasters. In terms of ex ante risk financinginstruments, government reserve funds have been used, and only recentlyotherex‐anteinstruments,suchassovereigninsuranceandcontingentcredithavestartedtobeemployed. Increasingly,attentionhasbeenturningtotheuseofsuchexanteinstruments,becauseofthedelaysanduncertaintimingofexpostinstruments(Mechler,2004;Gurenko,2004;Linnerooth‐Bayeretal.,2005;CumminsandMahul,2009;OECD,2012).Overtheyears,givenidentifiedrisk aversion, fiscal gaps, their size and timing ex ante risk financinginstruments,suchasinsurance,reservefundsandcontingentcredit,havebeenconsideredtocomplementthecommonlyemployedexpostinstruments.

3.1 RiskfinancingandplanningpracticeA number of countries highly susceptible to disaster risk have begun toconsiderdisasterandbudgetplanningandmovemorestronglyfromreactiveto proactive perspective (see table 4), incl. Colombia, Mexico, CaribbeancountriesandPacificSIDS.InAsia,alsothereismomentum,asshownintable4intermsofamovementfromex‐posttoex‐anteriskfinancing.Asonexample,

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most ASEAN countries are currently involved in or actively consideringcontingentriskfinancingorsovereigninsurance.

Table4 SummaryoffiscalriskmanagementarrangementsinASEANMemberStates

Source:GFDRR,2012aYet, while processes and procedures are being implemented, the budgetedamounts remain rather small and inadequate for tackling the increasingburdenfromdisasterrisk(GFDRR,2012a).

3.2 ImplementinginnovativeriskfinancingmeasuresRiskfinancingthroughinsuranceandotherhedginginstrumentsspreadsandpoolsrisks,thuslesseningthevariabilityoflosses,butdoesnotdirectlyreducerisk. By providing indemnification in exchange for a premium payment,insuredvictimsbenefitfromthecontributionsofthemanyothersthatarenotaffected,andthusinthecaseofadisastertheyreceiveacontributiongreaterthantheirpremiumpayment.However,overthelongrun,insuredpersonsorgovernmentscanexpecttopaysignificantlymorethantheir(expected)losses.Thisisduetothecostsofinsurancetransactionsandthecapitalreservedbyinsurance companies for potential losses (or reinsurance), as well as thefinancialreturnrequiredforabsorbingtherisks.The“load”canbesignificant,or asmuch as 500% of the pure risk (expected losses) (Froot, 2001). Still,peoplebuy insurance,and justifiablyso,becauseof theiraversionto(large)losses, i.e., their concern about the volatility of the possible outcomes.Insuranceandotherrisk‐transferinstrumentsarethusjustifiedbytheconcept

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of risk aversion and it is because of aversion to large risks that people arewillingtopayforinsurance.Insurance. Traditional or parametric/index‐based insurance providesindemnificationagainst losses inexchange forapremiumpayment. It is themostcommonformofrisk transfer,andtherearewell‐establishedmarkets.Thedisadvantageisthatthepremiumcanbesignificant,andisadefinitecostagainstthebudget.InaReserveFundamountsarelaidasideonanannualbasis,sothatcapitalcanaccumulate.Thefundaccumulatesinyearswithoutcatastrophesandcanbeusedinthecaseofaneventtofinancethe losses.However, foravulnerablecountryfacingevents,whichmightcostmorethantheentireannualGDP,thisis not practical. Even for larger economies, the fund may not be able toaccumulatesufficientlybeforethefirstdisasteroccurs,anditalwaysneedstobereplenishedafterithasbeenused.Thereisalsoarealdangerthatthefundwillbe‘raided’forotherpurposesifaperiodwithoutdisasterscreatesasenseoffalsesecurity.Contingent credit arrangements do not transfer risk, but spread it inter‐temporally.Inexchangeforanannualfee,therightisobtainedtotakeoutaspecific loanamountpost‐event thathas fixed conditions.Contingent creditoptions are commonly groupedunder alternative risk transfer instruments.TheWorld Bank has recently developed such an instrument, which is nowlabeleda“deferreddrawdownoption”(CATDDO).Thedisadvantageisthattheexercise of the right creates a new debt, which can constrain futuredevelopment.Also, important innovations have been implemented with respect toimplementationdisasterriskfinancingindifferentregions.TheEthiopianweatherderivativeTosupplementandpartlyreplacethetraditionalfood‐aidresponsetofamineoftheEthiopiangovernmentasaidedbytheWorldFoodProgramme(WFP),theWFPdesignedanindex‐basedinsurancesystemtoprovideextracapitalinthecaseofextremedrought,theamountbeingbasedoncontractuallyspecifiedcatastrophic shortfalls in precipitation measured in terms of the EthiopiaDroughtIndex(EDI)(WisemanandHess,2007).Mexico:FONDENandthecatastrophebondIn1996theMexicangovernmentcreatedabudgetaryprogramcalledFONDEN(FundforNaturalDisasters)toenhancetheircountry’sfinancialpreparedness

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for natural disasters. FONDEN’s objective is to prevent imbalances in thefederalgovernmentfinancesasaresultofnaturalcatastrophes.In2006,theMexicangovernmentchosetoinsureFONDENagainstmajorearthquakeswithamixofreinsuranceandacatastrophebond,thusaccessingbothreinsuranceandfinancialmarkets(Cardenasetal.,2007).TheCaribbeanCatastropheRiskInsuranceFacility(CCRIF)TheCaribbean Island States in 2007 formed theworld’s firstmulti‐countrycatastrophe insurance pool, reinsured in the capital markets, to providegovernments with short‐term liquidity in the aftermath of hurricanes orearthquakes.16CaribbeancountriescontributeresourcesrangingfromUS$0.2 toUS$4milliondependingon the exposureof their specific country toearthquakesandhurricanes.CCRIFhascreatedaviableinsuranceinstrument,andishelpingwithimprovingtheregion’scapacitytodealwithdisasters.Also,country risk profiles via a Multi‐Peril Risk Evaluation System (MPRES)catastrophe riskmodelling platform are under way providing a systematicbasisandentrypointformoredetailedinformation(GFDRR,2011).

4 TowardcomprehensiveDRMApproachesorganizedaroundtheprotectionof thebalancesheetusingriskfinancinginstrumentshaveseenalotofemphasisindisaster‐pronecountries.Yet,canthoseleadintobroadlysupportingDRM?Wediscussentrypointsandevidence.

4.1 IntegratingriskfinancingwithriskreductionandreconstructionFigure7exhibitsthedifferentphasesofdisastermanagementsuggestingthevariouslinksfromriskfinancingtoriskreductionaswellastopreparednessandresponseandfinallytodealingwith‘surprise.’Today,stillDRMisstronglyfocusedonex‐postresponse,andtheuptakeofex‐anteriskmanagementtodaydwarfed by spending on post‐disaster recovery and reconstruction. ThegloballyinformationprovidedbyKelletandCaravani(2012)ofaratioof87%to13%infavorofex‐postresponseoverex‐anteriskreductionismirroredbycasestudyinformationforthisreportforMexicowithabalanceofex‐posttoex‐anteinterventionsof90%vs.10%.

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Figure7ComprehensiveDRMapproach.Source.Laletal.,2012

Determininghowmuchshouldbeinvestedinriskreductionandhowmuchinrisk financingaswell findingaproperbalancebetweenex‐postandex‐antedisaster management is not straightforward. It ultimately depends on thewider costs andbenefitsofboth typesof activitieson their interaction (e.g.financial instrumentsthroughincentives,caninfluencepreventionactivities,seeLinnerooth‐Bayeretal.,2011)andtheiracceptability.Costandbenefits,inturn,dependonthenatureofthehazardandrisk.Onewaytothinkaboutthebalanceisillustratedbytherisk‐layeringapproachasshowninFigure8.

Figure8Thelayeringapproachforriskreductionandriskfinancing.Source:afterMechleretal.,2014a

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For the low‐ to medium‐loss events that happen relatively frequently, riskreductionislikelytobecosteffectiveinreducingburdens.Thereasonisthatthecostsofriskreductionoftenincreasedisproportionatelywiththeseverityof the consequences. Moreover, individuals and governments are generallybetterable to finance lower consequenceevents (disasters) from theirownmeans, for instance, savings or calamity reserve funds, and includinginternationalassistance.Theoppositeisgenerallythecaseforriskfinancinginstruments,includingreservefunds,catastrophebondsandcontingentcreditarrangements. For this reason, it is generally advisable to use thoseinstruments mainly for lower probability hazards that have debilitatingconsequences (catastrophes). Finally, as shown in the uppermost layer ofFigure8,individualsandgovernmentswillgenerallyfindittoocostlytouserisk‐financing instruments against very extreme risks occurring lessfrequentlythan,say,every500years.Budgetary policies and risk financing options can in principle also lead toincentives for giving stronger emphasis to risk reduction. Implementing astructured process for risk detection in the balance sheet has potential forproviding a “price signal.” In turn, a strong focus on ex post disastermanagement (the still somewhat dominant approach as discussed before)offerslittleinthewayofriskawarenessandstimulatingthereductionofrisk(Phaup&Kirschner,2010).Whilethereisnodetailedinformationontheselinkagesandincentives,intheliteraturethereissomeevidenceinMexico,which,asoneoftheprimeactorsforfiscalriskmanagement,providesforimportantlearning.Mexico:LinkingriskfinancingtocomprehensiveDRMAsaprimeexample,Mexicoisaimingatbetterlinkingriskreductionandriskfinancing.TheprimaryinterestinMexicoonDRMinthelate1990shasbeenwithin the finance ministry in order to identify sovereign insurance forincreasing fiscal stability. In 1996 the Mexican government created abudgetary program to enhance the country’s financial preparedness fornatural disasters, The Fund for Natural Disasters (FONDEN). FONDEN’sobjective is to prevent imbalances in the federal government finances as aresultofnaturalcatastrophes.OvertheyearsFONDENhasledtoinnovativerisk financingarrangements,suchasusingcatastrophebondstoprotect thebalancesheet.Asanancillarybenefitoftheriskfinancingstrategy,whichalsorequireddetailedinformationfromriskassessments,riskreductionhasbeenincentivized.FondeniscurrentlypromotingDRMinreconstructionactivities,and about 25 percent of FONDEN resources are earmarked to (post‐event)building backbetter of damaged assets against future disasters. As another

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measuretoincreaseriskandcostawarenessFONDENisalsodeliberatingandencouragingrelocationofhousinginhigh‐riskareas.Yet,FONDEN’sreachforencouragingDRMislimitedbythefactthatitisnotanotagovernmentagency,butafinancialinstrument(personalcommunication;WorldBank,2013).

4.2 Informing the transition to holistic DRM integrated withdevelopment:Aneedforbroader‐baseddecision‐makingtools

Moving from riskdetection to risk financing, there is stronger emphasis oncomprehensiveDRM.Whereisthetransitioninthinkingandimplementationleadingtoandwhattoolscanhelptosupportthisshiftinmind‐set?Debateregardingpublicsectordisasterriskmanagementhaslargelyfocusedontheuseofeconomicefficiency–orientedapproaches,whichcanbeanalyzedusing cost‐benefit analysis (CBA). Over the years, appraisals of publicinvestmentdecisionsbuildingonthislogichavemushroomedandimprovedintermsofmethodology.Recentanalysis(Mechleretal.,2014b)highlightsthefactthatCBAandassociatedprocessescanbeveryusefulinsupportingrisk‐reduction decision‐making, if key challenges are properly tackled. Thesechallenges include: complexities in estimating risk; data‐dependency ofresults; negative effects of interventions; inclusion of stakeholders, anddistributional aspects. How this information is used will qualify theacceptabilityandrobustnessofthestudies.Key challenges remain,whichneed attention including the consideration ofintangibles, including multiple objectives such as equity and distributionalissues,aswellastakingastrongersystemsperspectiveonthebenefits,whichmeansunderstandinghowbroad‐based interventions intohealth, educationandinfrastructurecancreatecross‐sectorialbenefits.Asfigure9buildingoncost‐benefit information on the returns of public interventions in varioussectors suggests, this is needed.The chart suggests that investmentswithinsectors suchashealth,nutrition,waterandDRMall reapgood returnswellbeyondthenecessaryconditionofexceedingthebenefit‐costthresholdof1.The decision‐maker, particularly in the finance ministry, ever faced withlimited resources is however left wondering how to create returnssynergistically across sectors, which involves enhance thinking aboutmainstreamingDRMintodevelopmentandresilience‐basedstrategiesthatcanleadtoco‐benefits.

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Figure9BCratiosofmeasuresinvarioussectors.Source:WorldBank,2013

The need for further integration and mainstreaming of DRM into broaderdevelopmentagendasrequiresrethinkingofstrategyanddecision‐toolsusedtoinformthestrategy.Forthis,theuseofsingle‘efficiency’criterion(asusedby CBA) is becoming increasingly obsolete, and more integrative decision‐making frameworks that incorporateadditionalcriteriasuchas ‘co‐benefits’‘robustness’ and ‘public acceptability’ is increasingly needed. Suchbroaderframingmay colloquially be understood as a shift from ‘risk’ to ‘resilience’thinking:policymakers,practitionersandresearchersareincreasinglycalledtolookbeyond‘directrisk’andtofindcriticallinkagestothedevelopment‐risknexus.TheIPCCrecentlyidentifiedon‐goingshiftinthinkingwithreferencesto climate change adaptation (where DRM figures prominently): economicanalysis is moving away from a unique emphasis on efficiency, marketsolutions,andcost‐benefitanalysisofadaptationtoincludeconsiderationofnon‐monetary and non‐market measures, risks, inequities and behavioralbiases,andbarriersandlimitsandconsiderationofancillarybenefitsandcosts(Chambweraetal.,2014).This implies also lookingbeyondCBA to other tools available that canhelppublic‐sector decision makers to make decision on DRM, such as cost‐effectiveness analysis (CEA), which does not require the monetization ofintangibles, and multi‐criteria analysis (MCA), which allows for multipleobjectivestobeassessedconcurrently(table5).

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Table5 Characteristics and applicability of different decision‐support tools forassessingDRM

Opportunities Challenges TypicalApplication

CBA Quantitativeframeworkbasedoncomparingcostswithbenefitsunderasingle‐objectiveeconomicefficiencycriterion

Needtomonetizeallbenefits,difficultyinrepresentingintangibleimpacts,suchasvalueoflife,valuejudgmentsofanalysesnotalwaysfullytransparent

Well‐specifiedhard‐resilienceprojectswitheconomicbenefits

CEA Ambitionlevelfixed,andonlycoststobecompared.Intangiblebenefits,particularlylossoflife,donotneedtobemonetized

Ambitionlevelneedstobefixedandagreedupon

Well‐specifiedinterventionswithimportantintangibleimpacts,whichshouldnotbeexceeded(lossoflife,etc.)

MCA Considerationofmultipleobjectivesandpluralvalues

Multiplecriteriarequireweightinginvolvingmultiplevaluejudgments,whichcanmakereplicationcomplex

Multipleandsystemicinterventionsinvolvingpluralvalues(e.g.,investingininfrastructureandeducation)

Source:Mechleretal.,2014a;Surminski,2014.Note:CBA‐CostBenefitAnalysis;CEA‐Cost‐EffectivenessAnalysis;MCA‐Multi‐CriteriaAnalysis

Particularly, MCA appears a useful decision‐technique for the changingperspectiveondecision‐making forDRM.WhileMCA thinkinghasnotbeenapplied significantly beyond frameworks and pilot studies, 2 it holds goodpotential(seeScrieciuetal.,2014forarecentoverview).

5 Towardfiscalresilienceandcreatingco‐benefitsBridginggapsinintegratinggovernmentriskfinancingwithriskreductionandwith economic and development planning processes holds potential for

2 MCA has been applied to DRM in the UNEP project “Multi‐criteria analysis for ClimateChange(MCA4C),”whichwascommissionedtoprovidepracticalassistancetogovernmentsinpreparingclimatechangemitigationandadaptationstrategies.Theobjectivewastoassistgovernmentdecision‐makers,particularly indevelopingcountriesto identifyandexaminepolicyoptionsandmeasuresforclimatechangethatarelowcost,environmentallyeffectiveandinlinewithnationaldevelopmentpriorities(http://www.mca4climate.info).

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putting a cost on risk and incentivizing investments into risk reduction(Mitchelletal.,2014).However,steppingbeyondafocusonDRMonly,howcanfiscalco‐benefitsbeconsideredandcreatedbyfollowingasynergisticstrategythatfocusesonbothDRManddevelopment?Wediscussrecentdiscourseonrisk and resilience, then turn to entry points with relevance for the fiscalperspective.

5.1 Abroadeningdiscourseonriskandresilience

The DRM discourse is broadening framed around a resilience perspective.There is wide debate as to what such resilience framing would entail, butKeatingetal.(2104)suggestthatthereisanemerging,iftacit,consensusthatseesresilienceasessentiallyforwardlooking(bouncingforward)intermsof:“theabilityofasystem,community,orsocietytopursueitssocial,ecological,andeconomicdevelopmentandgrowthobjectives,whilemanagingitsdisasterrisk over time in a mutually reinforcing way.” (Keating et al., 2014). Thisperspective is also stated in a recent report by UNESCAP (2013).Inthefuture,itisclearthatmanycountrieswillneedtobuildtheirresilienceto adapt and thrive in an unpredictable and shock‐prone environment. Toachieve this they will need to make policy in a different way. Rather thandealingwithproblems in theeconomy,environmentandsocietyseparately,theywillhavetobeaddressedaspartsofanoverallsystem.

Similarly,intheclimatechangedomain,IPCC’sFifthAssessmentReport(AR5)WorkingGroupIIcontributedtothereframingofclimatechangeadaptationwith regard to extreme climate eventsby emphasizing riskmanagement asfundamentaltothepolicyresponse.Thereportsuggestasthebasisforpolicyaction a shift towards the essentiality of managing extreme event risksholistically (to which climate change is contributing in addition to otherfactors),ratherthankeepingaclimatelenswithafocusonclimateadaptationpolicyonly(IPCC,2014).

Impactofaco‐benefitsapproachSynergisticpolicyandpursuingco‐benefits inprogramandprojectplanningmay lead to impact in terms of increased investment in DRM. A recentevaluation by ADB’s Independent Evaluation Department (IED) reports asignificantnumber3ofloansandgrantsdisbursedbyADBforsupportingDRMversussupportingdisasterrecoveryoverthetimeperiod1995to2011(ADB,2012).Thebreakdownreportedbetweenspendingondisasterriskreductionprojects vs. disaster recovery has been 57% to 43% in favor of financial3ProjectsincludingdedicatedDRMprojectsaswellasotherprojectsthatincorporateandsupportbuildingresilience.

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support forpre‐disasteractivities,and21%predominantlyallocated toriskmanagement.Whatexplainsthissurprisingly largeshareofDRMindisastermanagementshowninfigure10?

Figure10BreakdownofADB’sDRMandrecoveryprojectsaccordingtohazard‐type.Source:ADB,2012

AnimportantfactorhasbeenthatoftheDRMrelatedprojects,themajorityoflendinghasbeenundertakentopartiallyorpredominantlysupportfloodriskmanagementaspartofwaterresourcemanagement,irrigationanddrainageefforts. This integration seems to explain why the share of prevention vs.recoveryisamagnitudehigherascomparedtotheglobalevidenceondisasterspending.Whilelendingoccurredatsubstantiallylowerlevels,landslideanddroughtDRMprojectsseeminglyprofitedfromasimilarintegrativestrategy,while forseismicandTsunamiriskco‐benefitswereperceivedsmallor lessvisible,andlendingshowsastrongreactivebias.Ifabroaderperspectiveistobeoperationalized,whataretheentrypointsfordeliberativestrategiesforcreatingfiscalco‐benefits?Basedonthereviewoffiscalriskmanagementapproaches,two,notmutuallyexclusive,entrypointsemerge:fiscaldisasterriskassessmentleadingtothemainstreamingofDRM;and broad‐based contingency planning. Both, albeit with limited evidence,have potential to lead to a broader co‐benefit approach for dealing withdisasterrisk.

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5.2 Disasterriskastheentrypoint:Fiscaldisasterriskassessmentandmainstreaming

Mainstreaming DRM (and CCA) into development planning and policy hasbecometheimperativeandfeaturesalsointheSendaiFrameworkforAction(UN,2015).4Figure11identifiestherationaleandprocessofmainstreamingriskintermsoffactoringrisk,ifestimatedtobeimportant,intodevelopment‐relevantplanningatdifferentlevels,suchasnationalprogramming,sectorialandbudgetaryplanning.Thebudgetprocessholdshighappealasitprovidesfor linksbetweennationaldevelopmentandsectorialplanning,andpolicies,regulations,programsandultimatelyprojects.

Figure11Incorporatingdisasterriskassessmentsintostrategiesandplans.Bettencourtetal.,2006

We discuss approaches on mainstreaming that have foundations in fiscaldisasterriskassessments.4E.g.,page15:“Promotethemainstreamingofdisasterriskassessmentsintoland‐usepolicydevelopmentandimplementation,includingurbanplanning,landdegradationassessmentsandinformalandnon‐permanenthousing,andtheuseofguidelinesandfollow‐uptoolsinformedbyanticipateddemographicandenvironmentalchanges.”

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Mexico:FromsovereigninsurancetowardsholisticDRMandmainstreamingStartingfromafocusininsurancesolutions,Mexicohassincetakenitseffortsforward.Anewcomprehensiveprogrammaticapproachputinplacein2012hasthreepillars(WorldBank,2014):Inadditionto(i)strengtheningMexico’sexistingdisasterriskmanagementsystems,it(ii)supportsjointdisasterandclimate resilience‐building activities across key sectors, and (iii) fosterscollaboration and partnership‐building with many actors domestically andwithintheregion.Amongothers,engagementoccursbetweentheMinistryofAgriculture, Territorial and Urban Development and CENAPRED (NationalDisaster Prevention Center) on mainstreaming risk reduction policies intoterritorial and urban planning; with education authorities aroundstrengthening safe school approaches; and on fostering partnerships thatassessandtacklepovertywithimprovedcatastropheriskmanagement.Atoolforinformationprovisionisarisk‐modelingplatformthataimsatsystematicintegrationofdisasterriskinformationintotheformulationandevaluationoffederalinvestments.Madagascar:MainstreamingDRMacrosssectorsHavingexperiencedsevereshocksfromcyclonesovertherecentpast,andaspartofworktowardssettinguparegionaldisasterriskmanagementplatformfor the Indian Ocean islands,Madagascar over the last few years has beenstronglyfocusingonfiscaldisasterriskassessment.Theintentionhasnotbeento work towards risk financing tools, but to understand the budgetaryimplicationsofdisasterriskandidentifyoptionsformanagingthosebroadly.Given the importance of risk, the country has furthermainstreamed risk indifferentsectors.Officially,theauthorityforDRMsitswiththeprimeministeroffice, which with the finance ministry has been closely engaged on thebudgetary risk analysis. Building on increasing risk awareness, DRM hasincreasinglybecomeacrosscuttingconcernandinvestment inDRMisbeingpursuedbypublicauthorities,suchastheministryofagriculture(keyriskisthe loss of revenue following the physical loss of the export crop vanilla),domesticaffairs,publicworksandtransport(seefigure12).

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Figure12DRMspendingperministrybudgets(average2010‐14).Source:UNISDR2015b

5.3 Holisticfiscalstresstestingandnationalriskassessmentsasentrypoints

Another,related,approachpursuedwithsubstantialeffortisworkingtowardsa co‐benefits approach via the fiscal risk matrix by considering manycontingentrisksandtheirinteractionwithdisasterriskatthesametime.Suchpushhascomefrominsightsgainedduringtherecentandongoingfinancialandfiscalcrises.Intheaftermaths,fiscalrisksarebeingmoresystematicallyassessed, through sensitivity tests on baseline macro and fiscal indicators,which is commonly referred to as stress testing. Also, there has beenincreasing understanding of a need for taking a systemic perspective forunderstandingthepotential forcomplexandinterrelatedshocks,essentiallyleadingtoamulti‐riskapproach(WEF,2015).Disasterriskhasbecometobeconsideredakeythreat,andinarecentsurveyregardingrelevantfiscalrisksinOECDcountries,disasterscameoutasanimportantconcern(table6).

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Table6 RelevanceofdisasterriskforfiscalmanagementinOECDcountries

Source:Kopits,2014

ColombiaandtheUKareexamplesforcountriesthathavestartedtopursuebroadermulti‐riskstrategiesinfiscalandpublicriskmanagement.

Colombia:towardsbroad‐basedfiscalriskmanagementFiscal risk assessment has become an important consideration forworkingtowardsamore sustainableandequitabledevelopment strategy. Fiscal riskassessmenthasbecomemandatoryinColombiaanddisasterrisk,rankedasthesecondmostrelevantrisk,isseenasacriticalcomponentofabroaderfiscalriskmanagementstrategy,whichlooksatthevariousrisksthatareinterlinkedand options for mutually managing risk across issues of concern. As oneexample, the Government of Colombia is intent on upgrading catastropheinsurance requirements for concessions. This would help reducing itscontingentliabilitiesthatarisefrompublic‐privatepartnershiparrangementsundertakenforinfrastructureconstructionandoperation(WorldBank,2011).

UK: National risk assessments as broad based planning tools for multi‐riskstrategiesTheUnitedKingdomsince2008(andsimilarlytheNetherlandssince2007)hastaken a broad‐based perspective on risks throughout. National riskassessments(NRAs)toimprovepolicyrelatedtopreventingandplanningforkeyrisks(suchashealth‐relatedorterroristfocused)arebeingundertakenbi‐annually by the UK cabinet office since 2008 and are being published asNationalRiskRegisters(UKCabinetOffice,2015).Theseassessmentsidentifyand measure main risks bearing upon the country: natural, technological,terrorist,andother typesofrisk followingasystematicmethodologyofriskidentification, scenario building, and determination of impacts. The

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quantitativepartisfinallysummarizedbyanationalriskmatrix(seefigure13),whichorganizesmainrisksaccordingtoprobabilityofoccurrenceandimpact.Thesynopticrepresentationofrisksprovidesforalevel‐playingfield,whichallowsforplanningpolicymeasuresand,intheory,linkingofagendas,suchaswiththenationalclimatechangeriskassessment(UKCCRA),whichhavetobeundertakenevery5yearsasdecreedbytheClimateChangeAct(seeDEFRA,2012).However,itiscurrentlynotclearwhetherthisanalysishastrulyledtotheimplementationofoptions(also,financialrisksarenotconsidered).

Figure13UK’sriskmatrixfor2015.Source:UKCabinetOffice,2015

Note:terroristriskisvisualizedseparatelyinthereport.

Akeybenefitofthiscomprehensiveriskassessmentexerciseisseeninbetterallowing to coordinate and cooperate as well as allocate resources acrossministriesandpublicsectororganizations.Furthermore,suchplanninghelpstoprovideincentivesformanagingriskex‐antebetter,asitanticipatestheex‐postconsequencesandtrade‐offsinvolvedinrespondingtoshocks.Asacasein point, in the Netherlands, cross‐regional competition for resources foremergencymanagementafterlargefloodsisconcernthathasbeenrecognizedusing the risk assessment. Finally, another important point, particularly for

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resilience‐based strategies, is that such broad risk assessments allow foridentifyingnewactors,importantlyinvolvingtheprivatesectoraswell,whichhas been taken part in the assessments as well. Whether and how thesecomprehensive risk assessments are replicable in other places and regionswithmorelimitedcapacityandresources,remainsanopenquestion.Yet,thegovernmentofMoroccowithsupportoftheWorldBankandtheGlobalFacilityfor Disaster Reduction and Recovery has started undertaking a multi‐riskexercise focused on natural disaster risk, commodity price shocks andagriculturalsectorrisks,whichisplannedtoleadintoidentifyingoptionsandconsideringrelevantinstitutionsforimplementingthisagendafurther(WorldBank,2013).

6 Conclusions:Fromfiscalrisk,tobuildingresilience,toharnessingco‐benefits

Alargepartofdisasterriskendsupwiththefiscalposition,andtherehasbeenincreasingrecognitionoftheneedtodeliberatelyplanfordisaster.Yet,fiscalriskmanagement isnotaneasyproposition,asdisaster risk isacontingentliability,i.e.costsaccrueonlyincaseofanevent.Furthermore,alargepartofliabilities are of implicit, unwritten nature (disaster relief and recoveryassistance to affected households and business) as compared to directliabilities(reconstructionoflostinfrastructureandassets).Overthelastfewyears,fiscalpolicyandpublicinvestmentonDRMinmanycountries exposed to disaster risk has seen a step change. Based onexperiencingandbetterunderstandingthelargefiscalandeconomicburdensfrom disasters, fiscal and development planning has graduated from aperspectiveofriskignorancetooneofriskawareness.Thiseffectivelymeansthatincreasinglyriskisexplicitlytakenintoaccountinfiscaldecisionsandisbeingconsideredaspartofcontingencyliabilityplanningindicatingashiftinperspectivesfromarisk‐neutraltorisk‐averseplanningstance.Progressinfiscalriskplanninghasbeenachievedbasedonthetoolsavailabletosystematicallyassessandmanagerisksinthefiscalbalancesheet(fiscalriskandhedgematrices).Betterriskplanningmayleadtoimprovedriskdetectionacrosssectors.Countrieshavestartedtodevelopbroadriskmatricesthatchartout probability vs. impact for many diverse risks, which helps to considermeasuresthatbroadlyenhancefiscalstability.Reducedbudgetaryuncertaintyallowsgovernmentstofocuslessoncrisismanagementandmoreonlonger‐termissues.

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At thesametime, identifying fiscalrisksvis‐a‐vis fiscalhedging instrumentshelpstodevelopalevelplayingfieldforinvestmentsinDRMandotherpriorityinvestment areas. Such systematic thinking has mostly informedconsiderations of sovereign insurance across highly exposed developingcountries,yetinsuranceisonlyoneelementinthedisasterriskmanagementtoolbox,anditiswidelyrecognizedthatinthefaceofincreasingrisk,abroad‐basedperspectiveisnecessarytoincentivizeriskreduction,avoidriskcreationand generate co‐benefits that go beyond the direct and indirect gains bycreating a third dividend that ‘beyond disasters’ contributes to providingresilienceagainstshocksmoreholistically.This discussion traced the development of fiscal disaster riskmanagementaroundfoursteps.Thesestepsandactivitiesmayleadtothreedividendsasframedintheprojectoverallasfollows:(i) Understandingfiscalrisk;(ii) Protecting public finance through risk financing instruments (1st

dividend);(iii) Working towards comprehensively managing disaster risk including

risk reduction and risk preparedness as they affect development (2nddividend);

(iv) Pursuing a synergistic strategy of managing disaster risks andpromotingdevelopment(3rddividend).

Aswehaveshown,allstepsandfociareseeingsomeactivity:steps(i)and(ii)havebeenimplementedinanumberofcountries,andincreasingly(iii)isbeingtackled, while (iv) will need more attention in the future to truly createmeasureableco‐benefitsandbuildresiliencethroughout.Thereisincreasingrecognition that a broad‐based perspective is necessary to incentivize riskreduction, avoid risk creation and generate additional co‐benefits that gobeyondthedirectand indirectgains fromreducingrisk. Co‐benefitscanbeachieved by better integration of disaster riskmanagementwith fiscal riskmanagement,publicdebtmanagement,anddevelopmentpolicyandplanning,assuggestedinfigure14.

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Figure14Suggestedintegrationofdisasterriskmanagementwithfiscalriskmanagement,publicdebtmanagementanddevelopmentpolicyandplanning.AdaptedfromHolm‐Nielsen,2012

Our discussion tentatively suggests that fiscal disaster stress testing andnationalriskassessmentcanbeentrypointsformoreholisticallytacklingDRManddevelopment in termsofa co‐benefits strategy.These twoentrypointswerefoundactiveforalimitednumberofcountries,assummarizedintable7.

Table7 Adoptedstrategyandentrypointsforsynergisticco‐benefitsstrategiesCountry Entrypoint Strategy

Madagascar Fiscaldisasterriskassessment FiscaldisasterriskassessmentleadingtomainstreamingDRM

Colombia Fiscaldisasterriskassessmentandsovereignriskfinancing

Fromfiscaldisasterriskassessmenttowardsabroadfiscalriskmanagement

strategyMexico Sovereigndisasterriskfinancing Sovereigninsuranceleading

intocomprehensiveDRMandmainstreaming

UK,Netherlands(Morocco)

Nationalriskassessment Multi‐riskplanningforsynergisticrisk‐basedpolicies

Thepotentialco‐benefitsoffiscalDRMoverallwouldcomprise,amongothers, Improvedplanningprocessesforcontingenciesprovidingthegroundsfor

synergisticinvestmentsintovarioussectorsatthesametime. Solidreturnsfrommanagingmultiplestressesandshocksatreducedcost.

For example, sorely needed investments into health and infrastructure

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oftenhelptobuilddisasterresilienceandatthesametime,mainstreamingdisasterriskreductionintothesesectorialinvestmentshelpstosafeguardanybenefitsthatwillaccruedespitestrongexposuretoshocks.

Risk planning helps with improving risk detection across sectors andidentifyingkeypublicandprivatesectoractorsformanagingrisks.Asoneexample,theUKhasdevelopedariskmatrixthatchartsoutprobabilityvs.impact for many diverse risks, and thus allows taking options that cutacrosssectorsandbroadlyenhanceresilience.

Analyticalinsightandtoolsarekeytosupportingthisongoingtransition,andweidentifiedfiscalstresstesting,nationalriskassessmentsandmulti‐metricevaluationsasimportantelementsofabroad‐basedtoolbox,which,ifappliedwith sufficient stakeholder involvement across local to national tointernationalscales,canhelptoworktowardscreatingstrongdividendsthathelptobettermanagedisasterrisk.AcknowledgmentsThispaperisanoutputofaninitiativefundedbytheGlobalFacilityforDisasterReductionandRecovery(GFDRR)attheWorldBankandledbytheOverseasDevelopment Institute (ODI). The authors are very grateful for substantialguidanceandveryhelpfulcommentsreceivedfromSwenjaSurminski(LSE),ThomasTanner(ODI),StephaneHallegatteandMookBangalore(WorldBank).

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