Better Public-Private Partnerships for Disaster Resilience
Delivered at the High Level Multi-stakeholder Partnership Dialogue “Risk-Sensitive Investment: Public-Private Partnerships” during the 3rd World Conference on Disaster Risk Reduction in Sendai, Japan.
Ladies and Gentlemen,
For a new and enhanced Hyogo framework to succeed, it needs to be supported by a combination of adequate and innovative financing flows with the right mix. So the question then is how we go about mobilizing the right blend of resources? Countries vulnerable to frequent and large-scale disasters have incurred immense economic and financial losses, which are beyond national fiscal capacities as well as private sector internal reserve pools and other safeguards.
Official development assistance (ODA) is critical to support disaster resilience frameworks, but this funding needs to be used more strategically. Governments and businesses need recourse to larger, more sustainable and assured financing sources, which need to be available on a timely basis. Furthermore, liquidity is needed to finance both the immediate needs and long term reconstruction and recovery.
Innovative financial markets can help through catastrophic insurance and bonds, financial derivatives etc. that can be leveraged on competitive terms if supported by concessional domestic and external assistance, which together promote disaster resilience.
New solutions to risk-financing and risk-sharing now go beyond simple financial engineering through credit enhancements to leverage funds. Increasingly we are seeing “out of the box” thinking to attract funders with appropriate risk mitigation architecture that encourages risk sensitive investments, to build resilience capabilities, which aim to contain damage and the losses associated with natural disasters.
Probabilistic risk modelling has advanced and benefited from technological and spatial advancements that allow financial markets to factor in, with a degree of precision, cyclicality, frequency and intensity of disasters. The availability and pricing of financing transactions will depend on how public-private partnerships unbundle the risks and develop strategies for risk sharing and to improve the financing mix. Optimally, the public and private sectors should both assume responsibility to properly assess and share risks, while mainstreaming and integrating disaster resilience into their DNA, in such a way that they reinforce each other in the design and structuring of risk mitigation.
Generally, the public sector should take the lead responsibility for defining and introducing mandatory measures, such as embedding land use and industry codes in both policy as well as legal and regulatory disaster risk reduction frameworks, complementing transactions with the right policies and with monetary incentives for risk-sensitive investments.
The private sector, as the key driver of economic activity, needs to integrate disaster risk resilience into its (i) business models and processes, through supportive financing cushions to insure uncovered risks, (ii) investment decisions that do not exacerbate risks, by ensuring compliance with government codes and standards, and (iii) corporate responsibility and sustainability frameworks to ensure economic and societal resilience. Having robust business continuity plans, effectively managed and implemented, should be an integral element of corporate business strategy. This will help to minimize industry and supply chain losses, and sustain the reputation of firms as they deliver on contractual obligations in the eventuality of a disaster.
Pre-disaster public-private partnerships need to concentrate on planning issues, such as: risk identification based on hazard assessments and risk mapping; risk mitigation measures such as building resilient infrastructure in compliance with land use and construction codes and regulations; and disaster preparedness, which involves contingency and business continuity plans with supportive risk financing and transfer arrangements.
Complementing this, post-disaster public-private partnership elements need to be put in place to define standards of relief and reconstruction, with the goal of “building back better” and the recognition that the private sector, as a strategic partner, should be leveraged effectively to properly deploy its expertise, finance and skills.
Insurance helps companies and infrastructure transactions raise financing across disaster risk management (DRM) cycles, through risk pooling, diversification and reinsurance. In developing countries, however, the low insurance culture and penetration, as well as underdeveloped capital markets stand in the way of DRM insurance coverage. Between 1980 and 2012, the share of DRM-insured losses was 9 per cent of the total losses in Asia and the Pacific, relative to 45 per cent in the United States and 28 per cent in Europe. A 2012 Lloyd’s study of seven recent disasters in five countries--China, Japan, Thailand, the UK and the US--found that an increase in insurance penetration of one percentage point can reduce the damage borne by tax payers by about 22 per cent.
To this end, expanding the use of general insurance schemes in economies currently underinsured for natural disasters would significantly increase disaster resilience. Further, for SMEs, industry needs to consider adopting effective risk-transfer mechanisms and tools applied for micro-insurance schemes. This is already happening to some degree in Asia and the Pacific, where the micro-insurance business grew by 40 per cent between 2010 and 2012, with India leading the market and Malaysia and Indonesia also growing rapidly.
Parametric insurance that agrees, prior to disasters, to make a payment upon the occurrence of a triggering event, such as drought, and does not depend on actual losses, must be seriously considered. It overcomes the inherent market failure of the traditional insurance business. Good examples exist in China, India and Thailand, but they need to be scaled up and replicated widely.
In conclusion, the post-2015 disaster risk reduction framework would be well served if it integrated a blueprint for an enabling, sustainable and long-term approach and perspective to public-private partnerships, as outlined above, which advocates mainstreaming and integration of DRM in policy frameworks and reinforces this with emerging risk financing and transfer solutions.
Sustainability and stability calls for the development of financial markets, in particular promoting higher penetration of insurance and supportive capital market industries, and ensuring that public certification and financing are deployed to long-term resilience approaches and solutions. Going forward, building-back-better would be the best and most cost-effective and efficient post-disaster DRM approach.
The significance of the role and intricacies of public-private partnerships in disaster risk reduction have been reinforced by ESCAP’s new joint publication “Resilient Business for Resilient Nations and Communities.”
I thank you.