Indonesia

Advancing a National Disaster Risk Financing Strategy – Options for Consideration

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Executive Summary

This study presents options for a national disaster risk financing strategy in Indonesia, drawing heavily on international experience. The study discusses a series of complementary options for a national disaster risk financing strategy, based on a preliminary fiscal risk analysis and a review of the current budget management of natural disasters in Indonesia. It benefits from the international experience of the World Bank, which has assisted several countries in the design and implementation of sovereign catastrophe risk financing strategies (for instance, in Mexico, Colombia, Vietnam, Philippines, and the Caribbean island states) and property catastrophe risk insurance programs (for instance, in Turkey, Romania and Eastern Europe). This experience is tailored to the institutional, social and economic characteristics of Indonesia.

The Government of Indonesia (GoI) requested the World Bank’s technical assistance to improve its financial response capacity in the aftermath of natural disasters. The World Bank has assisted the Ministry of Finance in developing a national disaster risk financing strategy for the financial protection of the state against natural disasters. It has also assisted the National Agency for Disaster Management (BNPB) in improving timely post-disaster assistance funding mechanism. The World Bank has worked closely with Ministry of Finance (Fiscal Policy Office (BKF), Bureau of Insurance, Capital Market Financial Institution Supervisory Agency (Bapepam LK), DG Budget, DG State Assets), National Agency for Disaster Management (BNPB) and BAPPENAS.

The BNPB also requested the World Bank’s technical assistance to explore options to improve its current post-disaster assistance funding mechanism. The World Bank has assisted BNPB in building its capacity to conduct Post Disaster Needs Assessment (PDNA) as one of the basis for funding allocation and to improve the timely disbursement of its post-disaster financial assistance.

This technical assistance is part of the broader partnership with the GoI on disaster risk management and climate change adaptation. The adoption of Law 24/07 on Natural Disaster Management emphasizes the importance of disaster risk management. The National Action Plan for Disaster Risk Reduction 2010-2012 includes the design and implementation of a national disaster risk financing strategy within a three year time frame.

The potential cost of a major disaster in Indonesia could exceed 3 percent of GDP. While the annual economic impact of natural disasters is estimated at 0.3 percent of Gross Domestic Product (GDP) over the last decade, simulations show that a major earthquake (occurring once every 250 years) could cause losses in excess of US$30 billion, that is, 3 percent of GDP of Indonesia. Damage and loss assessment reports from recent major disasters show a consistent ranking of reconstruction needs with housing accounting for the largest expenditures followed by public infrastructure (primarily roads, schools and health facilities).

The Rehabilitation and Reconstruction Fund is the main budget instrument for the GoI to finance public post-disaster expenditures, but it is under-capitalized. Post-disaster reconstruction is largely funded through the reserve of the State’s General Treasury (Bendahara Umum Negara), which requires parliamentary approval. An annual allocation of about IDR 4 trillion (US$450 million) was made through this process in 2010 and 2011. While this represents a 30 percent increase from 2009, it may still be insufficient to deal with a major catastrophe or a series of moderate to severe disasters in a given fiscal year. More importantly, a budget re-appropriation is required after almost every disaster. The study estimates that the immediate liquidity required for public post-disaster recovery spending could exceed US$2billion in major disaster years.