managing risk.pdf

94 Chapter 7 - Disaster Management: Preparing for the WorstBox 7.1 Catastrophe Risk DDOThe World Bank Group is offering a new financial product, the catastrophe risk DDO (CAT DDO), togovernments of middle-income countries. Similar to a line of credit, the product is designed for countriesthat have no immediate need for funds but that might need them if unforeseen events make it difficult toaccess the capital markets. In this case, the purpose is to make financing immediately available aer a naturaldisaster. The CAT DDO is intended to fill the gap while other sources of funding, such as emergency reliefaid, are being mobilized. A government can access funds from the facility if it declares a state of emergencyas a result of a natural disaster. Countries that sign up for the CAT DDO must have an adequate hazard riskmanagement program in place. The maximum amount available will be US$500 million or 0.25 percent of acountry’s GDP, whichever is smaller. The funds may be drawn down over a three-year period, which may berenewed up to four mes for a total of 15 years. The CAT DDO allows countries to defer disbursements forup to three years and, upon renewal, for another three years.The new policy addresses certain disincenves to using the opon. The revisions ensure that borrowerswill have greater certainty of availability of funds because the World Bank will connuously monitor theborrower’s economy to allow disbursement upon request. The funds may be drawn down at any me, unlessthe Bank gives prior noficaon to the borrower that one or more of the drawdown condions have notbeen met. In addion, the CAT DDO’s revised pricing eliminates the commitment fee and surcharge for thelonger maturity and is thus aligned with standard Internaonal Bank for Reconstrucon and Developmentterms.Source: Adapted by authors from World Bank (2008).Box 7.2 Buro-Tangail Conngency Fund, BangladeshThe Buro-Tangail Fund in Bangladesh has been a pioneer in disaster planning. While its conngency fund isready for emergencies, those reserves also help the instuon to deal with smaller challenges. If a borrowerdies or becomes permanently incapacitated, the fund can be used to cancel the outstanding debt. Also, thefund can be used to provide supplemental loans to borrowers when their producve assets are damaged orstolen. Finally, when a loan is more than six months overdue, the reserve fund can be applied to the balance.Source: Adapted by authors from Nagarajan (1998).There are also regional and international mechanisms for immediate financial responses to some types ofdisasters. Six governments in the Caribbean have signed a DDO loan with the World Bank, with open creditlines in the case of a disaster that reaches a certain magnitude (such as hurricanes classified above a certaincategory). Such facilities ensure immediate access to Bank funds in the event of a disaster, at a low cost to thegovernment (see box 7.3). MFIs could investigate whether such liquidity and risk management options couldcover their clients’ short-term needs as well. The Bank and governments in Central and South America arealready discussing how to set up similar multicountry risk management and liquidity systems.