Collaborators:

British High Commission, Port of Spain

Ministry of Foreign Affairs and Trade of the Republic of Turkey

This CD-Rom includes data on institutions that may finance activities related to natural disasters. It also contains a description of the disaster financing mechanisms that governments can use before, during and after disasters whether in prevention, preparation, mitigation, relief, rehabilitation, or reconstruction. The information contained is presented from a risk management perspective, and is intended to assist ACS member states in their efforts towards reducing the risk to natural hazards that contribute to disasters.

This CD-Rom was developed taking into account the needs of public authorities and government officials in charge of activities related to natural disasters. This CD-Rom will hopefully provide them with a tool that contributes to their efforts when accessing financing mechanisms or identifying funding sources. Furthermore this tool includes entities which traditionally fund non-governmental organizations, allowing government officials to alert Civil Society in their countries about these opportunities.

The data included in this CD-Rom was last updated in April 2004. The information here included was taken from the organization's websites and from direct interviews with key informants from these entities. Due to the fast evolution of information in this field, users are invited to directly contact the institutions mentioned for further information. Comments, especially about new information, can be sent to ACS.

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All the documents are available on CD-ROM. Please contact the ACS Liaison in your Ministry of Foreign Affairs to receive a copy of the CD-ROM "Post-Disaster Financing Mechanisms".

I) DISASTER FINANCING MECHANISMS TO BE USED EX ANTE:

Disaster Prevention Sector Facility
Managed by the Inter-American Development Bank

The Sector Facility, in particular, will assist countries to take an integrated approach to reducing and managing their risk to natural hazards before a disastrous event. This mechanism is used to fund, on a reimbursable basis, individual operations requested by borrowing member countries. Individual operations will be for an amount of up to the equivalent of US$5 million.

The following five activities are contemplated by this mechanism: (1) Risk identification and forecasting to understand and quantify vulnerability and disaster risk; (2) mitigation to address the structural sources of vulnerability; and (3) preparedness to enhance a country's readiness to cope quickly and effectively with an emergency. Financing will also be made available for (4) building risk transfer measures to spread financial risks over time and among different actors and (5) establishing effective national systems for risk reduction.

Prevention and Mitigation Projects
Mechanism Managed by the World Bank

In addition to emergency assistance, the Bank may support freestanding investment projects for disaster prevention and mitigation in countries prone to specific types of emergencies. The financing modality is the same as free standing investment projects. Some examples of activities financed by this mechanism include: (a) developing a national strategy, (b) establishing an adequate institutional and regulatory framework, (c) carrying out studies of vulnerability and risk assessment, (d) reinforcing vulnerable structures and adjusting building and zoning codes, and (e) acquiring hazard-reduction technology.

Disaster Mitigation Facility for the Caribbean (DMFC)
Managed by the Caribbean Development Bank (CDB)

Established in Sept. 2000 this is a grant-funded initiative to promote the reduction of natural hazard risk in CDB member countries. This mechanism is managed by the Caribbean Development Bank and funded mainly by USAID. The primary objectives of this initiative are to adopt and institutionalize mitigation policies and practices at country level and within the CDB's own work program. USAID has recently provided a grant of $3 million to complement the CDB's resources.

Sector-wide approaches (SWAps),
Managed between the Donor Entity and Recipient Government

The sector-wide approach is a relatively new way of working between governments and donors. SWAps work differently in different countries however they are a transaction in which the insurer undertakes to make payments to an investor on a specified portfolio of securities, and, in return, the investor assumes the insurer's liabilities in the event of a Disaster.

SWAPS are typified by the following features: a) All significant government and donor funding for the sector supports a single sector policy and expenditure programme. b) Government leads the process and its implementation. c) Common approaches are adopted across the sector by all funding parties (government and donors). d) There is progress towards relying on government procedures to disburse and account for donor funds. The activities this mechanism will finance are to be agreed between recipient government and donor.

For more information on SWAps go to: http://www.cbo.gov/showdoc.cfm

Catastrophe Bonds
Managed by the financial institution that issues the bond

The party that wishes to transfer the risk would issue a special bond. In the event of a disaster, interest payments by the issuer may be cancelled or s/he may receive a percentage of the bond's principal. The percentage would depend on the magnitude of the catastrophe (triggering indicator) and on the terms of the contract.

Recognizing the lack of financial capacity in the face of natural disasters, the insurance industry has attempted to transfer part of these risks through capital markets by floating catastrophe bonds, options and similar instruments. Catastrophe bonds have been issued mainly by insurance companies in order to spread risks and enter into insurance contracts that would have been too risky at the margin in the absence of such a mechanism. If the catastrophe occurs, the insurance company can default on the principal of the bond and the interest payments on it, giving it the resources necessary to make payments to the catastrophe-affected agent, mainly for reconstruction.

For more information on Catastrophe Bonds go to: http://www.cbo.gov/showdoc.cfm

Weather Derivates
Managed by various institutions

These are contracts that make payments if a trigger with respect to some weather outcome (such as rainfall, temperature or snow) is exceeded over a specified period of time. IMF is currently developing this mechanism for low income countries. This mechanism is generally used by utilities and other enterprises with weather exposure, e.g. ski resorts. The market in weather derivates has grown rapidly in recent years, with a market value of $4.5 billion in the USA in 2001. The market for weather derivatives has also spread to Europe and Japan. The International Finance Corporation (IFC) is investigating the feasibility of developing such a market in Ethiopia, Morocco, Tunisia and Nicaragua.

For more information about Weather Derivates go to: http://www.up.ac.za/academic/ecoagric/fulltext/mg9.pdf

Insurance and Reinsurance
Managed by Insurance and Re-insurance companies

This is a financing mechanism that allows for the transfer of risk from one country or individual to a collective, and if needed to an international collective. In addition to guaranteeing quick access to funds for reconstruction, insurance mechanisms have the advantage of promoting prevention and mitigation actions, for example through discounts in premium levels and deductions offered to customers who have made progress in those fields. This mechanism can be used mainly for reconstruction and recovery of insured assets. There is an ongoing discussion about the pros and cons related to transfering responsibility of risk management to third parties. No definite and widely accepted conclusion has been reached.

For more information about Re-insurance go to: http://www.swissre.com/

National Disaster Fund
Managed by the Federal Government

This is a mechanism whereby the Government establishes a disaster fund with adequate resources in order to meet critical needs without altering the normal public finances at national, regional or local levels. National Disaster Funds are an effort to reduce the negative effects of natural catastrophes, strengthen disaster preparedness and response capabilities. Typical activities funded by this mechanism include: Emergency Preparedness and Disaster Response.

One example of this mechanism is the FONDEN (Fondo Nacional para Desastres Naturales) in Mexico.

For more information on Mexico's FONDEN go to: http://www.gobernacion.gob.mx/

Community Financing Mechanisms
Communities affected by Disasters

These mechanisms are intended to channel resources to the populations that need them most. They are particularly important for reducing the vulnerability of impoverished groups. Some examples of this mechanism include:

i) social or municipal funds, which are frequently financed in part with multilateral or bilateral resources that are disbursed through municipal governments and other local entities;

ii) community development projects financed by national and international nongovernmental organizations ;

iii) micro enterprise credit programs, and

iv) informal financing mechanisms such as local informal credit markets.

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II) DISASTER FINANCING MECHANISMS TO BE USED EX POST:

Budget Support
Managed by Donor Entity and recipient Government

Budget support is a form of quick disbursing programme aid which is channelled directly to partner governments. This mechanism uses local accounting systems and is linked to sector or national policies rather than specific project activities. It aims to promote growth through encouraging fiscal stability and more equitable and efficient allocation and use of public funds. It offers the potential to address key cross cutting issues such as public sector reform, gender, and environment in ways that other aid instruments cannot and also makes maximum use of local capacity. The activities this mechanism finances are to be agreed between donor and recipient country.

Flex: Cotonou Agreement (Previously Lomé Convention),
Managed by the European Union

This is a EU mechanism for providing "fast-disbursing" support to ACP countries coping with fluctuating export earnings. Disbursements under FLEX are triggered not by losses in the export value of a specific commodity, but by government revenue losses due to declines in exports of goods. Countries are eligible for financing if they have experienced a 10 percent loss (lower percentage in the case of least-developed countries).

Eligible criteria include the following: (a) loss of goods export earnings compared with a three-year prior average, or (b) loss of export earnings from agricultural or mineral products compared with a prior three-year average, combined with (c) decrease in the programmed public deficit due to losses in government revenue. Support under FLEX is limited to four successive years. Currently, €2.2 billion are available for the non-programmable needs, for which FLEX is one of the triggering mechanisms, with varying portions of this amount allocated to each ACP country. Evaluations of requests are to be completed in the first semester of the year following the application year. At this point, requests for financing under FLEX have been evaluated for those countries who applied on the basis of application years 2000, 2001 and 2002.

For more information on FLEX go to: http://www.europa.eu.int/comm/development/cotonou/index_en.htm

Special Taxes,
Managed by the affected Government

This mechanism is activated when Governments establish a special reconstruction tax in order to deal with the disaster. An example of this mechanism was in Colombia after the Armero, Colombia, disaster. Other examples and cases exist, however experience is limited within the region, and limited mainly for reconstruction and recovery.

Mobilization of multilateral and Bilateral Resources
Managed by the Donor Entity and Recipient Government

Bilateral and multilateral assistance may take the form of reimbursable or non reimbursable financing and, in some cases, the refinancing or forgiving of past debts. The availability of ex post financing via donations or through low interest loans tends to create perverse incentives, insofar as governments may prefer to depend on these soft foreign resources rather than adequately manage risk to forestall the impact of disasters. As has been noted, foreign aid is not always immediately available, nor does it always come in the form that would be required by the particular country at a time of crisis.

Bilateral or multilateral Humanitarian aid
Managed by donor entity and recipient entity

This mechanism, usually non-reimbursable, is immediate relief provided so that a country might address the most critical problems caused by disasters. Worldwide about one-third of this assistance is spent for natural disasters while the rest is used for complex emergencies. Typical activities that this mechanism will fund include: Immediate survival activities such as food shortages, temporary housing, emergency water and sanitation, emergency health and population displacement.

Disaster Management Fund for the Eastern Caribbean Donor Group (ECDG)

This mechanism provides support to affected countries in order to coordinate external assistance during the emergency phase immediately after a disaster. The Donor Group is composed of: DFID, CIDA, CDB, EU, UNICEF, UNDP, USAID/OFDA, and WORLD BANK. The following organizations are also part of this forum: PAHO, CDERA, RSS (Regional Security System), CERO, and Barbados Meteorological Office. Support organizations include: Inter-American Development Bank (IADB), Organization of the American States (OAS), Food and Agriculture Organization (FAO), International Telecommunications Union (ITU), Caribbean Planning for Adaptation to Global Climate Change (CPACC).

Some of the funding include:

UNICEF: US$10,000 per event, for each country.
PAHO:US$10,000 for health sector needs.
USAID/OFDAUS$50,000 per event, per country during emergency phase.
UNDP:US$50,000 for emergency assistance.

For further information consult: www.Caribank.org

Thematic Trust Fund for Crisis Prevention and Recovery.
Managed by UNDP

This mechanism was designed for prevention and recovery. Since 1996, when the fund was created, a total of US4180 Million has been disbursed. Some of the line items are:

Crisis Prevention and Peace Building
Recovery
Reforms to the security sector and transition to justice
Small arms reduction
Natural disaster reduction
Demining

For a full description of this fund go to: http://www.undp.org/trustfunds/TTFCrisis03.pdf

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ASSOCIATION OF CARIBBEAN STATES
Please send question / comments/ suggestions to:

Association of Caribbean States
Transport and Natural Disasters Directorate
5-7 Sweet Briar Road, St Clair
P.O. Box 660, Port of Spain
Trinidad and Tobago, W.I
Tel: (868) 622-9575
Fax: (868) 622-1653
E-mail: mail@acs-aec.org
Website :http://www.acs-aec.org

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