September 2017 Disaster Risk Finance Country Note: Armenia World Bank Europe and Central Asia Disaster Risk Management World Bank Disaster Risk Financing and Insurance Program ©2017 The World Bank Group 1818 H Street NW Washington D.C. 20433, USA Internet: www.worldbank.org Disclaimer: This report is a product of staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Disaster Risk Finance Country Note: Armenia World Bank Europe and Central Asia Disaster Risk Management World Bank Disaster Risk Financing and Insurance Program Acknowledgements This note was prepared by a World Bank team composed of Benedikt Signer, disaster risk financing and insurance specialist, Tafadzwa Irvine Dube, disaster risk management specialist, Fernanda Senra de Moura, Aram Hovhannisyan, and Nora Mirzoyan, consultants. The team gratefully acknowledges the data, information, and other invaluable contributions made by representatives of the government of the Republic of Armenia. Particular thanks go to the Ministry of Finance, and the Ministry of Emergency Situations as without their knowledge and expertise, the compilation of this note would not have been possible. Anne Himmelfarb edited the report. The team is grateful for the financial support received from the Japan – World Bank Program on Mainstreaming Disaster Risk Management in Developing Countries of the Global Facility for Disaster Reduction and Recovery (GFDRR), which enabled this project. Image credits: Benedikt Signer Layout by: Studio Grafik DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 3 Table of Contents 9 1. Introduction 11 2. Armenia’s Hazard Profile 13 3. Impacts of Natural Disasters in Armenia 13 3.1. Disaster Damage and Losses in Armenia: Beyond Earthquakes 15 3.2. The Impacts of the Spitak Earthquake 15 3.3. The Challenges of Disaster Data Management in Armenia 17 4. Fiscal Management of Natural Disasters in Armenia 17 4.1. Sources of Funding 17 4.1.1. Ex Ante Sources of Funding 21 4.1.2. Ex Post Sources of Funding 22 4.2. Disaster Response Fiscal Indicators 22 4.2.1. Fiscal Indicators Based on the Armenian State Budget 24 4.2.2. Fiscal Indicators Based on the Cabinet Contingency Fund Decrees 26 4.3. Funding Gap Analysis 26 4.3.1. Central Government (Non-Spitak Earthquake) Funding Gap Analysis 27 4.3.2. Central Government (Earthquake) Potential Funding Gap Analysis 31 5. Key Findings 33 6. Options for Consideration 35 7. References 37 Annex 1. Recorded Natural Disasters in Armenia by Hazard Type, 2010–2015 39 Annex 2. Recorded Natural Disasters in Armenia by Region, 2010–2015 4 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA FIGURES 12 Figure 1. Number of Recorded Natural Disasters in Armenia, 2010–2015 12 Figure 2. Number of Recorded Natural Disasters by Region, 2010–2015 (excluding earthquake) 13 Figure 3. Annual Disaster Damage and Losses in Armenia, 1994–2013 19 Figure 4. Damage and Loss Assessment and Reporting Procedure 23 Figure 5. Disaster Response Fiscal Indicators Based on the Armenian State Budget 24 Figure 6. Disaster Response Fiscal Indicators Based on the Cabinet Contingency Fund, 2009–2015 (decrees) 25 Figure 7. Disaster Response Fiscal Indicators: Disbursements within the Cabinet Contingency Fund, 2009–2015 25 Figure 8. Central Government Disaster Response Fiscal Indicators, 2009–2015 26 Figure 9. Central Government (Non-Spitak Earthquake) Funding Gap Analysis, 2009–2015 (recurrent disasters excluding earthquakes) 28 Figure 10. Potential Government Liability from Earthquakes in Armenia (scenario-based analysis) 29 Figure 11. Potential Funding Gaps from Earthquakes in Armenia TABLES 11 Table 1. Most Severe Recorded Earthquakes in Armenia 11 Table 2. Timeline of Major Natural Disasters in Armenia 14 Table 3. Weather-Related Cropland Damage and Financial Losses in Agriculture, 1995–2013 17 Table 4. Summary of Instruments for Disaster Risk Financing in Armenia 23 Table 5. Disaster-Related Expenditures under Armenian State Budget, 2010–2015 (billion AMD) 24 Table 6. Cabinet Contingency Fund of the Armenian State Budget, 2010–2015 33 Table 7. Options for a National Disaster Risk Financing Strategy in Armenia DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 5 ABBREVIATIONS AAL annual average losses AMD Armenian Dram CAT DDO Catastrophe Deferred Drawdown Option CRED Centre for Research on the Epidemiology of Disasters DRFI disaster risk financing and insurance GDP gross domestic product GFDRR Global Facility for Disaster Reduction and Recovery MoES Ministry of Emergency Situations MoF Ministry of Finance and Economy OCHA Office for the Coordination of Humanitarian Affairs (United Nations) OFDA Office of U.S. Foreign Disaster Assistance UNDP United Nations Development Programme UNISDR United Nations Office for Disaster Risk Reduction All monetary amounts are in Armenian dram (AMD) or U.S. dollars (US$), as indicated. Exchange rate as of August 2017: US$1 = AMD 478.7 6 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 7 Preface This Disaster Risk Finance Country Note is the first jointly by the World Bank’s Disaster Risk Management activity of the World Bank’s support to the Government Team for the Europe and Central Asia Region and the of the Republic of Armenia on strengthening financial Disaster Risk Financing and Insurance Program (DRFIP). protection against natural disasters. It takes stock of The note builds on the operational framework for Disaster existing mechanisms and instruments used to finance Risk Finance, which was developed by DRFIP drawing on disaster response in Armenia and lays the foundation for collaboration with over 60 countries in strengthening their the development of a comprehensive disaster risk financing financial resilience to disasters and climate risks. Funding to strategy. Relevant government stakeholders were consulted enable this engagement was provided by the Japan – World during the development of this note, and the findings of Bank Program on Mainstreaming Disaster Risk Management this analysis and options for next steps were discussed in Developing Countries of the Global Facility for Disaster and agreed with the government. This note was developed Reduction and Recovery (GFDRR). 8 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 9 1. Introduction This note presents a preliminary assessment of the fiscal Together with a review of the budgetary process for disaster impacts of natural disasters in Armenia and the current response in the country, the results suggest that the public state of the country’s financial protection capacity. Drawing financial management of both recurrent and rare disasters on a disaster damage and loss data set assembled from could be strengthened by reviewing the country’s current existing global disaster impact data and selected local risk retention mechanisms and by adopting contingent reports and on a set of fiscal indicators assembled under financing or risk transfer instruments. the scope of this study, it analyses the funding gap for Chapter 2 briefly presents the country’s hazard profile, and recurrent events. It also presents the same exercise for chapter 3 describes the data set on the damage and losses earthquakes (with a focus on less frequent events) based on caused by disasters in Armenia in the recent past. Chapter an earthquake risk profile developed by the World Bank as 4 reviews current mechanisms for financing disaster part of a regional initiative. response. It then carries out a funding gap analysis for both The note takes stock of the existing legal and institutional recurrent events and rare earthquakes. The note concludes framework for financial resilience against disasters in with a summary of key findings and preliminary options the Armenia. It further offers an overview of mechanisms government may want to consider to further strengthen its currently in place to provide funds to finance disaster financial resilience against disasters. response and reconstruction. 10 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 11 2. Armenia’s Hazard Profile Armenia has a history of natural disasters that includes Armenia lies in a region of high seismicity1 and faces significant catastrophic earthquakes, such as the devastating Spitak exposure to earthquakes, but it is also exposed to other hazards; earthquake that hit the country in 1988. Historically, indeed, it is one of the most disaster-prone countries in the earthquakes of at least 5.5 magnitude have an average southern Caucasus (World Bank 2009). Drawing a precise reoccurrence interval of 30 to 40 years (World Bank 2009). picture of the country’s historical hazard profile is not possible Some of the most severe earthquakes in the history of the because a comprehensive data set of disaster occurrence in country are listed in table 1. Armenia is not available. Case studies and partial records, however, suggest the relevant risks faced by the country. Table 1. Most Severe Recorded Earthquakes in Armenia Flooding is among these risks. Although Armenia does not Year Name Magnitude have abundant flowing surface water, more than 50 percent of 1679 Garni 7.0 annual discharge occurs during spring due to snow melting. This can increase water volume in some river basins tenfold, 1827 Tsaghkadzor 6.5 and can also trigger seasonal flooding, particularly in the 1840 Ararat 7.4 Araks, Hrazdan, and Aghstev river basins (World Bank 2009). 1893 Dvin 6.5 1937 Parakar 4.7 Table 2 shows a timeline of the major natural disasters in 1972 Talin-Arouch 6.5 Armenia, 2 and suggests that floods and downpours are 1988 Spitak 7.0 relatively frequent events. Although not shown in the table, Source: World Bank 2009. Table 2. Timeline of Major Natural Disasters in Armenia No. of events 4   1 1 1   1 2 2 3 2 2 Period 1679–1893   1937 1972 1988   1994 1995 1996 1997 1998 1999 Typology EQ   EQ EQ Spitak   Floods Floods & extreme EQ & Floods & extreme EQ weather other weather No. of 2 2 2 2 2 2 2 2 — 1 1 1 1 3 events Period 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Typology Drought Floods & Floods and downpours   Extreme weather Storms & extreme extreme weather weather Note: EQ = earthquake; “— “= not available. Extreme weather includes droughts, hot dry winds, hail, and spring frosts. 1. UNISDR (United Nations Office for Disaster Risk Reduction, “Central Asia and Caucasus Disaster Risk Management,” http://www.unisdr.org/files/11641_ CentralAsiaCaucasusDRManagementInit.pdf. 2. Major events are those events for which there are records in international data sets or damage and loss assessments and other cases studies. The designation is not based on the magnitude of the event, since systematic information on magnitude is not available. 12 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA Armenia is also prone to landslides that can be secondary in figure 1 refer to the number of records across various effects of earthquakes or heavy precipitation. locations. If the same event was reported by two different geographical units, it could appear twice in the totals. Droughts also cause significant damage to the country. The most severe drought among recent events was in 2000 and Figure 2 shows the number of natural disasters recorded affected approximately 300,000 people. The country is also by region. The numbers, which do not include earthquakes, exposed to hail storms, with at least 38 experienced every suggest that Lori and Aragatsotn were the regions hit most year between 2010 and 2016. frequently. In the capital city of Yerevan, natural disasters were recorded 125 times from 2010 to 2015. The figure Data were collected on the number of times different regions presents information only on the frequency of events; in Armenia were affected by natural disasters during the information was not available on severity or on the exposure 2010–2015 period, as shown in figure 1. Earthquakes, snowfall, and vulnerability of populations and assets across regions. and storms were the most frequently reported hazards. Data Figure 1. Number of Recorded Natural Disasters in Armenia, 2010–2015 500 400 Other 300 Snow all & snowstorm 200 Strong wind, storm, hurricane, 100 tornado, dust storm Earthquake 0 2010 2011 2012 2013 2014 2015 Source: National Statistical Service of the Republic of Armenia, “Socio-Economic Situation of RA,” January–December 2010, 2011, 2012, 2013, 2014, 2015, http://www.armstat.am/en/?nid=82&id=1890. Note: “Other” includes hail storm, ice slick, rockslide, river flood, forest fire, heavy rain, landslide, landfall, thunderstorm, downpour, and increased groundwater. Figure 2. Number of Recorded Natural Disasters by Region, 2010–2015 (excluding earthquakes) 300 250 200 150 100 50 0 Armavir Ararat Tavush Kotayk Yerevan Shirak Vayots Gegharkunik Syunik Aragatsotn Lori Dzor Source: National Statistical Service of the Republic of Armenia, “Socio-Economic Situation of RA,” January–December 2010, 2011, 2012, 2013, 2014, 2015, http://www.armstat.am/en/?nid=82&id=1890. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 13 3. Impacts of Natural Disasters in Armenia In reviewing the impacts of natural disasters in Armenia, The total assessed damage and losses from 1994 to 2013 this study considers the damages and losses caused by the came to approximately US$1.5 billion dollars (at 2015 Spitak earthquake separately from those caused by other values). Given the data limitations, it is important to notice events. This approach takes account of the cumulative that these estimates should be interpreted as a lower bound impact of the more frequent events in the country. for the actual impacts of disasters in the country. As the next section shows, this amount exceeds Armenia’s financial response capacity for natural hazards. 3.1 Disaster Damage and Losses in Figure 3 shows the annual value of disaster-related damage Armenia: Beyond Earthquakes and losses (at 2015 values) in Armenia. During the period considered, which does not include the Spitak earthquake, There is currently no detailed and comprehensive data set the average annual damage and losses were US$76.5 million. on historical disaster damage and loss in Armenia. This This amount includes the impacts of floods, droughts, and study assembled a data set on damage and losses based on other extreme weather–related events from 1994 to 2013 available information from global data sets (the EM-DAT based on damage and loss estimates for 19 events. database) and various damage and loss case studies from particular events. Figure 3. Annual Disaster Damage and Losses in Armenia, 1994–2013 250,000 thousand USD - at 2015 values 200,000 150,000 100,000 50,000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sources: Approximated values are based on various case studies and on the EM-DAT database (D. Guha-Sapir, R. Below, Ph. Hoyois, EM-DAT: The CRED/ OFDA International Disaster Database, Université Catholique de Louvain, Brussels, www.emdat.be). Note: Double counting was avoided. Yearly values are based on annual averages when only multi-period damage and loss estimates were available. For several events recorded, no damage and loss estimates were found. No records were found for 2008. U.S. dollar amounts are at 2015 values. 14 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA For many years very little information was available on In 2006, a localized drought decreased cereal crop disaster damage and losses; based on the recorded events production by more than 35 percent from the previous presented above, we can assume that missing data are year, which forced Armenia to import cereals to meet its significantly biasing down the totals and averages. It is requirement of 597,000 tons (World Bank 2009). In recent also not possible to learn much about the evolution of the decades, extreme weather events (drought, hot dry winds, damage and losses over time because some damage and hail, spring frosts) have been more frequent and lasted loss estimates were available only for a multi-year period, longer, and have inflicted great damage on agriculture. meaning that the yearly values presented above were The assessment of extreme weather–related damage to obtained based on average annual values. In addition, public agriculture in Armenia between 1995 and 2013 is presented data sets likely miss many smaller localized disaster events, in detail in table 3. which nevertheless can have a very significant impact on During the 2004–2007 period, rain damaged about 200 government finances. community areas and 600 sections of main roads. Average Despite these limitations, the above picture is able to annual damage caused by rain during this period was capture large impacts, such as the relevance of the 2000 estimated at US$2.9 million. drought, which caused an estimated US$110 million in Though damage varies greatly across regions, from 1994 to damage, triggered a seed shortage the year after, and caused 2007 the total damage caused by floods was approximately a further US$43 million in agricultural production losses. US$41 million (nearly AMD 13 billion) (UNDP 2013). For At the time, agriculture in the country accounted for 42 example, floods in 2004 caused an estimated US$10 million in percent of employment and one-third of gross domestic damage, while the floods of 2005 caused an estimated US$5 product (GDP) (World Bank 2009). million in damage (Armenian Red Cross Society 2007). Table 3. Weather-Related Cropland Damage and Financial Losses in Agriculture, 1995–2013 Year Damaged land area Losses (million AMD) Official exchange Losses (1,000 ha) rate (AMD per US$, (thousand US$, period average) current values) 1995 86.96 17.00 405.91 41,881 1996 36.65 12.59 414.04 30,408 1997 129.82 26.53 490.85 54,049 1998 63.41 14.95 504.92 29,609 1999 430.03 11.33 535.06 21,175 2000 Not available 59.78 539.53 110,801 2001 83.50 23.94 555.08 43,129 2002 74.55 15.14 533.45 28,381 2003 48.67 82.63 578.76 142,770 2009 35.37 11.89 363.28 32,729 2010 17.47 35.50 373.66 95,006 2011 4.06 0.91 372.50 2,443 2012 2.22 0.49 401.76 1,220 2013 11.10 23.92 409.63 58,395 Total 336.60 691,996 Source: Republic of Armenia 2015. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 15 (ii) not all disaster occurrences are included in this data 3.2 The Impacts of the Spitak set, as about 30 percent of the events were recorded only by Earthquake specific line ministries and sectorial institutions; and (iii) there is no guarantee of consistency across the damage and Armenia faces particularly high risk from earthquakes, loss assessment methodologies employed. whose impacts can far exceed the losses from floods, droughts, and other extreme weather events. For example, This means that the only official data set on disaster events the 1988 Spitak earthquake caused an estimated US$15–20 and their impacts is not reliable in its current state and billion in economic damage (Pusch 2004), by some hence is not a suitable tool to inform financial decision estimates destroying over 40 percent of the country’s making by the government. manufacturing capacity and halting operations of 170 industrial enterprises (World Bank 2009). While the challenges of disaster data availability can be seen as a matter of structural database management, they This event killed 25,000 people, injured 15,000, left 517,000 may also reflect the current institutional arrangements that homeless, and caused significant damage to several cities.3 govern disaster data collection routines and protocols in the It led to AMD 5,467 billion in direct economic damage, country. equivalent to approximately US$ 14 billion (at the December 2011 exchange rate). The current legal framework is contained in Decree no. 1582-N, 2011. It stipulates that following a disaster, the Based on this preliminary analysis of historical disaster Ministry of Emergency Situations, the heads of marzes losses, we calculate that the damage and losses caused by (regions), and the heads of local communities are all this rare event amounted to about 10 times the impacts involved in disaster damage and loss assessments through caused by other hazards since then. The main implication commissions that function on a permanent basis and are of such discrepancy is that the economic and fiscal risks also responsible for keeping the records of the assessed associated with earthquakes in Armenia are in a class by damage and losses. themselves; hence optimal management of earthquake risk will differ from management of the risk associated with The damage and loss assessment procedure depends on more frequent, less severe events and will require the use of the extension and severity of the natural disaster and on its specific financial mechanisms. impacts on the affected population. Depending on the scope of the event, the commission at the relevant level would be involved. Typically, the damage and loss assessment acts prepared by the local commissions are presented to the 3.3 The Challenges of Disaster regional commission for approval and then to the republican Data Management in Armenia commission for final approval. The republican commission is the body responsible for summarizing and publishing the An important implication of the discussion above is that no assessed impacts arising from the emergency situation. official or comprehensive data set on disaster occurrence and damages and losses is available. According to interviews The Ministry of Emergency Situations, the marz held with government representatives, a tentative data administrations, and the local self-governance bodies have set covering the 1996–2010 period was prepared but had overall responsibility for keeping records on the impacts significant limitations: (i) for the vast majority of cases, of disasters. The damage and losses are recorded with the the damage and losses are only qualitatively presented, and purpose of understanding and eliminating their drivers as there is no estimate of the monetary value of the impacts; well as planning risk reduction measures. 3. United Nations Development Programme, “UNDP Project Document—Armenia: Strengthening National Disaster Risk Reduction Capacities (2013–2015). 16 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA The overall guidelines for the damage and loss assessment Beyond these general instructions, however, there are stipulate that no officially approved damage and loss assessment methodologies to which the commissions are required to 1. The list of damaged property is to indicate the property’s adhere when producing their estimates. This leaves room type and location and include a brief description for inconsistency across events, regions, types of hazards, 2. The damaged property is to be examined and its and sectors. condition to be assessed Within this context, part of the current agenda of the 3. The amount of the loss to the property is to be assessed Ministry of Emergency Situations is to prepare and approve damage and loss assessment acts in order to (i) establish a The damage and loss assessment should consider common approach to be used by all institutions involved the following: in disaster impact assessments, and (ii) strengthen the management of the information collected at different levels. 1. Agricultural damage and losses Efforts to improve the damage and loss assessment 2. Damage and losses to the population’s property protocols are relevant to disaster risk financing because the 3. Damages to infrastructure local and regional authorities base their funding requests for disaster response on these assessments, and because greater 4. Possible medical-sanitary losses efficiency in allocating disaster response resources requires For the purpose of covering all the relevant sectors, reliable information on the impacts of disasters among the commissions are supposed to include experts in different areas and sectors. emergency situations, health care, agriculture, transport Thus from the perspective of the institutions responsible and communication, and civil construction; these experts for public financial management, it is important that examine, record, and assess the situation and possible ongoing discussions about disaster damage assessments threats in each sector. and any resulting reforms take into account the importance of disaster damage data as inputs to an effective financial protection strategy against natural hazards. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 17 4. Fiscal Management of Natural Disasters in Armenia under the scope of this study. Table 4 summarizes the 4.1 Sources of Funding main findings regarding the sources of funding for disaster response typically used in Armenia. The Republic of Armenia does not have a disaster risk financing strategy that sets out a comprehensive approach 4.1.1 Ex Ante Sources of Funding to meeting the financial impact of disasters. The main Cabinet Contingency Fund sources of financing to fund disaster response and reconstruction are the Cabinet Contingency Fund and the The Law on the Budgetary System of the Republic of Armenia contingency funds of community budgets. In addition, (article 19) provides for the allocation of funds to the Cabinet resources for the Emergency Storage Facility are allocated Contingency Fund to cover expenditures that are not regularly, and donations from the international community included in the annual state budget, which includes public are also commonly used. Budget reallocations are allowed spending related to natural disasters response. According to but limited by law, and their regular use was not detected government representatives interviewed for this study, after a Table 4. Summary of Instruments for Disaster Risk Financing in Armenia Disaster risk Financing source Amount of funds available available High-risk layer (e.g., major Donor assistance Unpredictable and unreliable (from 2000 to 2015 floods, major earthquakes) approximately US$40 million) Emergency borrowing Unpredictable (difficult to track even after extensive research) Sovereign risk transfer Not currently in use Medium-risk layer Contingent financing Not currently in use (e.g., regional floods, minor Budget relocation Up to 3% of the budgeted program expenditures could be earthquakes) relocated between different programs Low-risk layer Budget funds: Cabinet Up to 5% of the total budget appropriations, but these are not (e.g., localized floods, Contingency Fund dedicated to natural disasters. The annual average was US$90.3 droughts, landslides) million from 2010 to 2015 (usually 5%). Disaster spending as % of the total varied from 74% (in 2009) to 5% (in 2011) Budget funds: Up to 30% of total revenue expectations programmed in the Contingency funds of communities’ administrative budget (estimates not available) community budgets Catastrophe insurance Very low (total insurance penetration rate was 0.62% in 2014) Source: World Bank team desk-based review and interviews with government representatives. 18 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA natural disaster the government of Armenia typically prepares from the Cabinet Contingency Fund), but typically these decrees on the amounts of compensation for the damage and steps are taken fast. Once the cabinet decree is issued, losses; the source of financing is the Cabinet Contingency disbursement of resources takes approximately one week. Fund of the state budget. A review of the overall process from the occurrence of According to article 19 of the law, the Cabinet Contingency an emergency to the disbursement of funds from the Fund is the source of finance for unforeseen expenditures Cabinet Contingency Fund is presented in figure 4. and liabilities from budget guarantees, which means that Based on Decree no. 1582-N of 2011, it was possible to it is not a disaster response facility only. Disbursements identify a set of procedures that could be strengthened from the Cabinet Contingency Fund are defined by to improve the efficiency of the Cabinet Contingency cabinet decisions,4 which should make the fund a flexible Fund disbursement process. For example, there are no platform for disaster response. However, the Cabinet objective criteria for defining the level of the relevant loss Contingency Fund cannot exceed 5 percent of the total assessment commission, and no official deadline by which budget appropriations and is the source of funding for the republican commission must submit the approved Loss other contingencies as well, which in practice means that in Assessment Act to the government or to the prime minister. any given year there is a limit to the resources that can be Nor is there any official or uniform methodology to estimate allocated to disaster response through the fund. damage and loss amounts. As previously mentioned, the amounts and allocations of Moreover, if the resources available are insufficient to resources are based on the damage and loss assessments meet all the requests for funding, there is no guidance presented by the regional commissions, which are on how to prioritize among sectors, regions, and responsible for consolidating the assessments prepared by communities. Following the disbursement of funds, there the community commissions. There are no specific legal is no protocol for controlling and auditing the damage and guidelines on the timing of the process (from the damage loss assessment. and loss assessments to the disbursement of resources 4. Law of the Republic of Armenia on the Budgetary System of the Republic of Armenia (1997), http://www1.worldbank.org/publicsector/pe/BudgetLaws/ ArmeniaBudgetLaw1997.pdf. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 19 Figure 4. Damage and Loss Assessment and Reporting Procedure Identified weakness – There Occurrence of an is no guidance which ESs emergency situation (ES) are to be reported for further actions Identified weakness – No Formation of a relevant criteria is defined for Loss assessment helping in decision making commission (LAC) about the relevant level LAC Losses to individuals and legal entities due to ESs are registered Depending on the territory, for studying and eliminating the nature and impact of the ESs causes, which led to those losses, LACs are organized based on as well as for taking measures for decisions of: reducing risks from ESs. 1. RA Prime Minister, 2. Heads of Marzes (Regions), 3. Heads of local communities. LACs may be permanent or for an ES. Identified weakness – We contacted and made The overall registration of enquires to the MOES for such losses is done by MOES, obtaining aggregated and Marzs’ (Regions’) and Local classified information on Communities’ Administrations losses due to ESs, but have and by direction of the respective Republican, Regional and Local not provided been, as there governing bodies of the Republic community LACs operate to was no such an up to date of Armenia. assess losses in the following comprehensive database. directions: 1. Agriculture 2. Property of population 3. Infrastructure 4. Medical sanitary LACs members include specialists in: 1. Emergency situations 4. Transport and communication 2. Healthcare 5. Urban development 3. Agriculture 6. Representatives from specialized bodies Continued on next page 20 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA Figure 4. Damage and Loss Assessment and Reporting Procedure (continued) Identified weakness 1. Preparation of the list of – “brief description” damaged property: type, in general format location and brief description. would not be sufficient for accurate loss assessment. A special 2. Examination of the methodology, Loss assessment: damaged property and including clear costs assessment of its condition. attached to damage methodology, with a checklist including key technical parameters in an Loss assessment act (LAA) by approved form local community LACs 3. Assessment of the loss amount. would be more appropriate. Identified weakness – Local LAA by discussion and community heads approve their approval or rejection by loss assessment procedures for Regional LACs their LACs. This creates a risk of conflict of interest LAA approved by the Identified weakness – The Republican LAC’s decision “discussions” with Regional LACs headed by the Minister of ES are not formalized and defined. may be presented to the GoA The decision making process is Prime Minister or GoA very subjective. Identified weakness – The timing of submitting the LAA to the GoA makes decision on Prime Minister or GoA is not compensation of assessed defined. losses and allocates funds from Cabinet Contingency Fund Identified weakness – There is no guidance for GoA for prioritizing its decisions in case of insufficient resources in the Cabinet Contingency Fund. The information from LAAs is to be summarized and published by the Republican LAC Identified weakness – There is no guidance on who gets the funds and how. Identified weakness – There is no control or auditing of the damage/loss reports. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 21 Contingency funds of community budgets and premises that are part of the property insurance.7 At present, the operating insurance companies have Besides the Cabinet Contingency Fund, the contingency licenses for property insurance, but no company provides funds of community budgets are another potential source of agricultural insurance. post-disaster funding at the local level. Article 29 of the Law on the Budgetary System of the Republic of Armenia defines 4.1.2 Ex Post Sources of Funding the contingency funds of community budgets,5 which are not to exceed 30 percent of total revenue expectations Budget reallocations programmed in the community’s administrative budget for The Law on the Budgetary System of the Republic of the given fiscal year. Disbursements from the contingency Armenia (article 23) also refers to the implementation of fund, for financing of the expenditures not programmed the state budget; regarding the reallocation of funds, the law in the community budget, are carried out by the local states that the heads of corresponding state government council’s decision. agencies may reallocate funds for each program by an Emergency Storage Facility amount not exceeding 15 percent of the funding initially allocated for that program, between the budget lines of The law of Armenia established the National Reserves economic classification. In addition, it stipulates that the Agency within the Ministry of Emergency Situations to government of Armenia may reallocate up to 3 percent establish a storage facility that would accumulate “material of the budgeted program expenditures between different values in the state reserve.”6 programs. The Ministry of Finance tracks reports of these reallocations. Contingent credit At the local level (community budget), the law states that For disasters that exceed the budget reserves capacity, “the mayor may reallocate funds between the budget lines, contingent credit could cover the financing gap. So far, if these reallocations do not conflict with the decision of the government of Armenia does not have any contingent the local council on adoption of the community budget. The credit arrangement linked to natural disasters with any reallocation between the budget lines shall not exceed the international financial institutions. limits of annual budget appropriations” (article 33). Insurance Within this context and based only on the legal framework for budget reallocations, it is possible to conclude that The insurance market in Armenia has a very low penetration budget reallocations as a source of funding for disaster (total insurance penetration rate was 0.62 percent in response would likely be very limited—unless the programs 2014), leaving the government with potentially large fiscal approved in the state budget are broad enough to be used exposures. However, the draft National Strategy on Disaster as budget lines for disaster response initiatives. With Risk Management indicates that the disaster insurance access only to publicly available data, it was not possible to system will be introduced by the year 2020. The Ministry of investigate the use of regular programs in disaster response, Emergency Situations and the Central Bank of Armenia are and the fiscal indicators presented below did not capture the implementing agencies for this activity. a systematic use of reallocation during the period being The current insurance legislation in Armenia enables considered. the introduction of the following agricultural insurance lines: insurance of harvest, animals, industrial buildings, 5. The provisions on amount of allocations to these funds may contradict those in the Budget Law of Armenia (as of 1997) and the Law of the Republic of Armenia on Local Self-Government, a point to be discussed with the Ministry of Finance. 6. Article 7 of “Approving Statutes and Structure of the Agency of State Reserves of the RA MES.” See UNDP (2009). United Nations Development Programme, “Assessment of Legal and Institutional Framework for Disaster Management and Disaster Risk Information Systems in Armenia,” Yerevan, September 2009, http://www.un.am/up/library/Assessment%20of%20Legal_Inst_Framework%20for%20DM_eng.pdf. 7. Articles 7.2.8 and 7.2.9 of the RA Law on Insurance and Insurance Activity 22 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA At the local level, another issue that could be further 4.2 Disaster Response Fiscal investigated is the potential use of retained budgetary funds for funding contingencies (as mentioned in the Law of the Indicators Republic of Armenia on Local Self-Government). Under the scope of this study, however, local-level fiscal data were not Keeping track of disaster-related public spending is a collected, so that the relevance of reallocations within the complex task. Most public accounting methodologies and community budget could not be assessed. systems are not equipped with the tools to label disaster- Donor assistance related spending in a way that allows easy analysis of relevant disaster-related fiscal indicators. It is common Armenia has been on the receiving end of international practice to use proxies that are country-specific and chosen development aid for at least the past 15 years. Between to make the best use of the available information in a 2000 and 2015, the donor commitments to Armenia totaled feasible manner. more than US$58 million.8 Among these commitments, nearly US$40 million was directed at various response and For this study, a few options for quantifying disaster reconstruction activities.9 The main donors for the country response–related public spending were considered. This are the European Commission, the Russian Federation, section presents the results of two approaches and proposes a Switzerland, and United States. hybrid approach to be used at least as a first approximation of the actual fiscal burden of disasters in Armenia. Donor support to Armenia was significant following the Spitak earthquake, for example: in 1988 the country received Given the relevance of the public spending related to the about US$500 million in international aid from 113 countries Spitak earthquake even in the recent past, the discussion (Parks 1989). The Soviet Union sent building teams and presents both Spitak Earthquake and non-Spitak Earthquake constructed nearly 4,000 apartments in the affected zone. It indicators whenever possible. Keeping track of these two planned on constructing more, but after the Soviet Union’s large categories of disaster spending separately is particularly collapse the project slowed down significantly. important for the funding gap analysis (section 4.3). Borrowing 4.2.1 Fiscal Indicators Based on the Armenian State Budget No comprehensive database or systematic reporting on the use of borrowing specifically for post-disaster funding allocations was identified. Even a detailed manual review of The first attempt to measure the fiscal burden associated with the borrowing operations in the recent past made it possible disaster response in Armenia was based on a review of the to identify with certainty only one instance of borrowing— Armenian state budget through the use of relevant keywords US$20.1 million for earthquake zone reconstruction in 1994. and the analysis of program designations, with the goal of identifying budget lines relevant to the study of government Taxation spending on disaster response. This is shown in table 5. There has been no reported use of tax policy in Armenia The main issue with the fiscal indicators based on the state as an instrument to raise additional revenue following budget (figure 5) is that disaster response spending not disasters, or to offer tax deductions to help the affected related to the Spitak earthquake is not detected in most years. population. However, Armenian tax policy provides for Even when non-Spitak spending is potentially detected, it is possible tax privileges under article 13 of the Law of the not always possible to accurately separate prevention from Republic of Armenia on Taxes (as of 1997). response because expenditures are aggregated. 8. United Nations Office for the Coordination of Humanitarian Affairs, “Financial Tracking Service: Tracking Global Humanitarian Aid Flows,” https://fts.unocha. org/pageloader.aspx?page=AboutFTS-Introduction. 9. Ibid. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 23 Figure 5. Disaster Response Fiscal Indicators Based on the Armenian State Budget 90,000 120% 80,000 100% 100% 96% Disaster response: Thousand US$ (current values) 100% 70,000 Earthquakes 60,000 80% 50,000 Disaster response: 60% non-Earthquakes 40,000 30,000 40% Disaster response: 20,000 23% Total 20% 10,000 0% 0% % spent on 0 Earthquakes 0% 2010 2011 2012 2013 2014 2015 Source: World Bank estimates. Note: Amounts refer to allocations. Municipal budgets are not considered. Table 5. Disaster-Related Expenditures under Armenian State Budget, 2010–2015 (billion AMD) 2010 2011 2012 2013 2014 2015 Allocated from the government's contingency fund for 0.00 0.00 17.40 a 0.0 1.00 0.00 solving a number of urgent problems in the regions Reallocations from budget line items 0.00 0.00 0.00 0.00 5.00b 0.00 Heavy hail in Armavir Province 0.00 0.00 0.00 0.12 c 0.00 0.00 Housing construction for affected families in the 25.30 25.80 0.29 0.64 0.00 0.00 earthquake disaster area (Gyumri and surrounding) Housing support programs for affected families in the 0.00 0.75 4.80 2.60 0.00 0.00 earthquake disaster area (Gyumri and surrounding) Construction of anti-hail stations in the provinces 0.00 0.00 0.00 0.00 0.11 0.00 Expenditures for forming and maintaining the state 0.00 0.00 0.03 0.03 0.01 0.01 material reserves Emergency medical services program 0.00 0.00 0.00 0.00 0.01 0.01 Total disaster-related expenditures 25.30 26.55 22.52 3.39 6.12 0.03 Official exchange rate (AMD per US$, period average) 373.66 372.50 401.76 409.63 415.92 477.92 Total disaster-related expenditures, in million US$ 67.70 71.30 56.00 8.30 14.70 0.10 a. This funding was primarily aimed at repairing and reconstructing educational facilities (including preschools), cultural facilities, health care facilities, community centres, roads, roofs, water supply, gas supply, and irrigation networks in residential areas. b. This amount was mainly for construction of schools and roads and for urgent problems requiring immediate measures. More specifically, the provinces of Aragatsotn, Ararat, Armavir, Kotayk, Syunik, and Vayots Dzor had been provided AMD 526,897,000 to assist farmers affected by freezing; farmers’ entire land tax (amounting to AMD 160,750,000) was paid, as well as half of their irrigation water costs (AMD 366,147,000). c. The government implemented a special program to support the rehabilitation of certain affected farmers. Assistance was provided to 630 farmers, while 1,411 persons were provided with temporary employment for about three months. Note: Numbers were rounded to the nearest 100th 24 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA Table 6. Cabinet Contingency Fund of the Armenian State Budget, 2010–2015 2010 2011 2012 2013 2014 2015 Total Cabinet Contingency Fund (billion AMD) 21.60 36.80 41.90 43.20 47.00 29.90 Portion of current expenses (billion AMD) 10.90 12.70 20.60 29.60 32.80 21.80 Portion of nonfinancial assets (billion AMD) 10.70 24.10 21.30 13.70 14.20 8.10 Official exchange rate (AMD per US$, period average) 373.66 372.50 401.76 409.63 415.92 477.92 Total Cabinet Contingency Fund (million US$) 57.80 98.80 104.30 105.50 113.00 62.60 4.2.2 Fiscal Indicators Based on the Cabinet the fund. Amounts allocated to disaster response were Contingency Fund Decrees identified from the qualitative information contained in those documents. Even this case-by-case approach, Given the difficulty of separating Spitak- and non- however, was not able to extinguish measurement errors. Spitak-related funding, and considering that the Cabinet For example, the description for some budget lines was Contingency Fund is the main source of funding for disaster not detailed enough to indicate whether a certain disaster- response, a set of fiscal indicators based on the Cabinet related expenditure referred to response or prevention. Contingency Fund was produced. The total allocations to the Cabinet Contingency Fund are presented in table 6 This methodology allowed for improved analysis of non- and figure 6. As the Cabinet Contingency Fund is not used Spitak-related spending. It showed that disaster response exclusively for disaster response, the totals are not the best over the course of seven years corresponded to at most 26 proxy for government spending on disaster response, as percent of the total allocations to the Cabinet Contingency they would overestimate the funds available. Fund, indicating that besides the overall cap to the fund (5 percent of total budget appropriations in the state budget), Cabinet Contingency Fund decrees were analyzed manually there might be competition between disaster response and to identify the disaster response–related spending within other needs also managed within the fund (figure 7). Figure 6. Disaster Response Fiscal Indicators Based on the Cabinet Contingency Fund, 2009–2015 (decrees) 90,000 80% 73.8% 80,000 70% Disaster response: Thousand US$ (current values) 70,000 Spitak 60% 60,000 50% 50,000 Disaster response: 40% non-Spitak 40,000 23.4% 26.2% 30% 30,000 Disaster response: 17.3% Total 20,000 20% 8.9% 10,000 6.8% 10% 4.5% total expenditure 0 as % o cabinet 0% 2009 2010 2011 2012 2013 2014 2015 contingency und Source: World Bank estimates. Note: Amounts refer to allocations. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 25 Figure 7. Disaster Response Fiscal Indicators: Disbursements within the Cabinet Contingency Fund, 2009–2015 90,000 101% 100% 80,000 100% 99% 99% 99% 99% Thousand US$ (current values) Disaster response: 70,000 99% actual 60,000 98% 97% 50,000 97% Disaster response: allocations 40,000 96% 95% 30,000 95% Disaster response: 20,000 actual/allocations 94% 10,000 93% 0 92% 2009 2010 2011 2012 2013 2014 2015 Source: World Bank estimates. Figure 8. Central Government Disaster Response Fiscal Indicators, 2009–2015 90,000 120% 80,000 99% 94% 96% 100% Thousand US$ (current values) Disaster response: 70,000 Spitak Earthquake 60,000 80% 50,000 Disaster response: 60% non-Spitak Earthquake 40,000 30,000 32% 40% Disaster response: 23% total 20,000 16% 20% 10,000 2% % spent on 0 0% Earthquakes 2009 2010 2011 2012 2013 2014 2015 Source: World Bank estimates. Note: Amounts refer to allocations. Community budgets were not considered. Data from both the state budget and the Cabinet Contingency fund were considered except in 2013, when state budget data only were considered. Another relevant aspect of the financial management of disaster While the indicators based on the Cabinet Contingency response is performance in terms of disbursement. Often, Fund decrees are informative and allow for relevant besides the difficulties in raising funds, there is difficulty in insights, as a measure of the funds available to disaster disbursing funds due to weak technical capacity or institutional response in the recent past they might be biased downward. bottlenecks at the disbursement stages. In Armenia, however, Both the method based on the state budget and the method the disbursement of disaster response expenditures seems to based on the Cabinet Contingency Fund seem to miss have confronted few problems in the recent past. relevant information. Another option for quantifying 26 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA disaster response–related public spending in Armenia 4.3 Funding Gap Analysis was to combine both data sets in a way that does not allow for double counting of expenses detected by both 4.3.1 Central Government (Non-Spitak methodologies. A case-by-case approach was employed Earthquake) Funding Gap Analysis and, for each year, a relevant set of budget lines was defined using both sources (see figure 8). One of the main goals of an optimally designed strategy for financial protection against natural hazards is to guarantee The consolidated data confirm that Spitak-related public that the public institutions involved in disaster response spending still accounts for a very significant share of have timely access to the funds needed to protect citizens disaster response spending, but that non-Spitak public and reconstruct key public assets, while still preserving expenditures have increased in the recent past: the rise has the country’s overall fiscal balance. In order to identify not been regular, but the 2012–2015 annual average is much any potential shortfall of funds faced by the government, higher than the annual average for the 2009–2011 period. the following section provides a funding gap analysis, where funding gap is defined as the difference between the This study is a first attempt to quantify the fiscal burden amounts of resources needed for disaster response and the caused by natural hazards in the country, and not a precise funds available to meet those needs. The analysis compares metric of disaster-related public spending. The methods the government liabilities generated by historical disasters employed involved a significant manual review of official to the overall amount of financing available. records and case-by-case considerations, which means that they are not well suited for routine record keeping. For Armenia, the estimated disaster damage and loss data Nevertheless, they are an initial step toward understanding set presented earlier was combined with the set of fiscal any potential funding gap faced by the government, an issue indicators of disaster response discussed above. Because no explored in greater detail below. detailed information is available on the share of the total Figure 9. Central Government (Non-Spitak Earthquake) Funding Gap Analysis, 2009–2015 (recurrent disasters excluding earthquakes) Funding Gaps recurrent events 500,000,000 Damage and losses 433,896,126 400,000,000 300,000,000 US$ (2015 values) 260,337,676 200,000,000 Financial needs range 130,168,838 100,000,000 Disaster response 110,916,461 spending 0 # ( Funding gap -19,252,377 -100,000,000 -200,000,000 -149,421,214 2009 – 2015 Recurrent disasters* Source: World Bank estimates. Note: The analysis considers recurrent disasters, excludes earthquakes, and is scenario based. Disaster response public spending is based on state budget and Cabinet Contingency Funds decrees. Local level spending is not considered. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 27 damage and losses financed by the government, a scenario- It is important to remember that tracking government based approach was adopted. spending was difficult under the current public accounting framework, so that additional spending on disaster response Figure 9 shows the results for different scenarios based on might not be reflected in this analysis. the consolidated set of fiscal indicators obtained using data from both the state budget and the Cabinet Contingency Moreover, the numbers above do not consider the impacts Fund decrees. The idea is that in case these indicators of earthquakes or any Spitak-related spending. Because overestimate the disaster response funds available in the earthquakes and their impacts in Armenia are known to be recent past, then the estimates of the funding gaps would be potentially much higher than those associated with more conservative—that is, would not mistakenly identify a gap frequent events, the funding gaps for earthquake response that did not exist. are considered separately in the next section. The different scenarios considerer different shares of However, since there is no fiscal data on disaster available the total damage and losses converted into government for the period when significant resources were channelled to liabilities each year. Disasters can be seen as a contingent post-earthquake reconstruction, it is not currently possible liability on the government because they impact to carry out a retrospective funding gap analysis for the government finances through additional, unplanned Spitak earthquake. Still, the very fact that almost 20 years spending for relief and reconstruction and through declines later significant reconstruction efforts are being detected in expected revenues. A disaster’s local impact can also is an indicator that the financial response to the damages spread to the national economy, as insolvencies and loan and losses caused by that event has entailed significant defaults create a domino effect. However, the government is challenges. never responsible for meeting all disaster-related damages and losses. 4.3.2 Central Government (Earthquake) Potential Funding Gap Analysis Given that no information regarding actual government liabilities was derived from the data on historical disaster A preliminary assessment of the potential fiscal impacts impacts in Armenia, for the purpose of the funding gap of rare earthquakes in Armenia can be carried out with the analysis we considered the fiscal burden arising under help of a country risk profile developed by the World Bank different scenarios with a share ranging from 30 percent to as part of a study covering the Europe and Central Asia 60 percent of the total damage and losses translating into region. This earthquake risk assessment is based on global government liabilities. models. As a result, it does not offer as much accuracy as a country-specific risk assessment and should not be taken as Figure 9 shows the funding gap estimates for the 2009–2015 a substitute for a full and detailed probabilistic modelling period, when total damages and losses caused by recurrent exercise. As a first indicator of the country’s risk profile, disasters came to approximately US$434 million (at 2015 however, it can provide important technical information to values). Assuming that the government liabilities arising help decision makers define their priorities in disaster risk from the economic impacts are between 30 percent management. and 60 percent of the total, then from 2009 to 2015 the government’s disaster-related liabilities were between US$130 million and US$260 million. During the same Based on the Armenia earthquake risk profile, it is possible period, cumulative government spending on recurrent to carry out a scenario-based analysis of the government disasters was approximately US$94 million, meaning that liabilities potentially arising from earthquakes of different the disaster response funding gap was between US$36 return periods. As shown in figure 10, assuming that 30 million and US$166 million. percent of the total damage and losses translate into government liabilities, a 10-year return period event would 28 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA Figure 10. Potential Government Liability from Earthquakes in Armenia (scenario-based analysis) 6,000,000 5,000,000 Thousand US$ (current values) 4,000,000 3,000,000 2,000,000 Potential government liability: 60% o total damage and losses 1,000,000 Potential government liability: 0 30% o total damage and losses AAL 10 Years 50 Years 100 Years 500 Years Source: World Bank estimates. Note: AAL = average annual loss. require government response costing US$110 million or a 100-year earthquake could amount to US$1.3 billion or more. However, if the government were liable for 60 percent more. Between 2009 and 2015 the government was able of the total damage and losses, response would cost at least to spend approximately US$270 million on earthquake US$220 million. So the above estimates can be interpreted reconstruction. Taking the spending observed in the last six as a range for the funding needs potentially arising from years as a proxy for the government’s current earthquake events with different frequency and severity. response capacity, we find that the funding gap for a 100- year earthquake could be higher than US$1 billion. Based on the above estimates, it is possible to carry out an analysis of the potential funding gaps from earthquakes Considering the central government’s fiscal response in Armenia. Figure 11 presents the potential funding gaps capacity observed in the recent past, specifically as under an intermediate scenario in which the government measured by the Spitak-related budget allocations from is liable for 40 percent of the total damage and losses. 2009 to 2015, it is possible to conclude that even relatively Under this assumption, the government liabilities from more frequent earthquakes could generate a fiscal burden DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 29 Figure 11. Potential Funding Gaps from Earthquakes in Armenia 1,400,000 1,200,000 100-year event Potential Funding Gap: Thousand US$ (2015 values) 1,307,705 1,036,982 1,000,000 800,000 50-year event 891,701 600,000 400,000 200,000 270,723 10-year event, 147,253 AAL, 83,020 0 Potential government Total earthquake response liabilities spending observed (2009–2015) Source: World Bank estimates. Note: AAL = average annual loss. The analysis is based on a scenario of 40 percent government liability. Estimates of disaster response public spending are based on state budget and Cabinet Contingency Fund decrees. Local level spending is not considered. above the current fiscal capacity of the country. Considering In the case of another earthquake as severe as the 1988 the total Spitak-related spending from 2009 to 2015 Spitak event, the public sector would need several years (US$270 million, at 2015 values), even an event that occurs to meet the response needs under current financial on average every 10 years would exceed the government’s protection arrangements. financial response capacity. For example, an earthquake that occurs on average every 100 years would imply a funding gap of US$1 billion (or more); the funding gap for the most severe events could be at least US$3 billion. 30 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 31 5. Key Findings Based on the disaster data currently available and the country’s fiscal response capacity in most cases. Contingent preliminary analysis, the government of Armenia faces credit could play an important role in disaster response funding gaps for both recurrent disasters and rarer but by providing critical bridge financing until additional larger-scale events. international resources can be mobilized. In the medium to longer term, the government may consider promoting The magnitude of the funding gaps estimated for recurrent insurance to reduce its own liability. events indicates that improved management of the budgetary mechanisms, such as contingent budgets, The quantitative assessments discussed above, however, combined with contingent credit could be used to manage have limitations. Information on historical disaster damage the low-risk layer. Strengthening the management of and losses and disaster-related government spending was disaster reserve funds in Armenia could also improve limited, and tracking of spending was challenging even after the country’s immediate response capacity during the an extensive review of government decrees. As an important emergency stages following rare earthquakes. short-term step toward improved fiscal management of disasters, the government could consider improvements to its The government liabilities potentially arising from the current system of damage and loss assessment and recording, impact of more severe earthquakes would surpass the which directly feeds into post-disaster resource allocation. 32 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 33 6. Options for Consideration Based on the information compiled in this note and • Option 2: Improve efficiency in the use of the Cabinet consultations with relevant stakeholders, the government Contingency Fund and other budget mechanisms may want to consider the following options for further for disaster-related expenditures. Reviewing and work to increase its immediate financial response capacity improving processes related to the Cabinet Contingency against natural disasters and better protect its fiscal balance. Fund, which is the main mechanism currently used by Specifically, there are seven options spread across shorter, the government for disaster response, could lead to medium and longer-term activities, depending on the length significant efficiency gains. For example, this step could of time required to achieve results (table 7). accelerate the process for requesting and allocating disaster-related resources or help to establish clear Short to medium term options include the following: guidelines on the amounts to be allocated. This option • Option 1: Develop a disaster risk financing and could also include exploration of other options to insurance strategy to make the financial management improve the efficiency of budgetary resources, such as of disasters more effective. A comprehensive strategy pre-determining a percentage of each budget line that could clearly establish policy priorities for financial could be reallocated in case of an emergency with the protection of the government, help communicate these least disruption of planned spending. priorities across all relevant stakeholders, and align • Option 3: Improve tracking of disaster-related resources and efforts toward the main priorities as expenditures and conduct more in-depth analysis. To identified by the Ministry of Finance. make more informed decisions and maximize allocative efficiency of its resources, the government may want Table 7: Options for a National Disaster Risk Financing Strategy in Armenia Time frame Options Policy and Analytical work Short term Develop a disaster risk financing and insurance strategy to make the financial management of disasters more effective Short to medium term Improve efficiency in the use of the Cabinet Contingency Fund and other budget mechanisms for disaster-related expenditures Medium term Improve tracking of disaster-related expenditures and conduct more in-depth analysis. Longer term Explore establishment of a national disaster reserve facility to improve efficiency in disaster-related spending Longer term Improve damage and loss data collection and reporting Leveraging contingent financing Short to medium term Explore the use of contingent credit facilities, such as a CAT DDO (Catastrophe Deferred Drawdown Option), to secure funds in advance of a disaster Leveraging private sector Longer term Strengthen catastrophe insurance penetration 34 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA to improve its understanding of total disaster-related • Option 6: Improve damage and loss data collection and expenditures currently coming from the budget. This reporting to inform efficient post-disaster resource work could build on previous public expenditure reviews allocation. Armenia currently relies on an extensive and the World Bank BOOST analysis to better track system for post-disaster damage and loss reporting, disaster-related expenditures. Looking to the future, aggregating disaster impact upward from the community this option could include investigating establishment to the national level. This reporting directly determines of a dedicated system for tracking disaster-related the allocation of financial resources for disaster response expenditures in the budget. from the Cabinet Contingency Fund. There are a number of inefficiencies in the current system that, if addressed, • Option 4: Explore the use of contingent credit could fundamentally transform disaster financing in facilities, such as a CAT DDO (Catastrophe Deferred Armenia. The government could review the current Drawdown Option), to secure funds in advance of a process for bottlenecks and upgrade the current paper- disaster. Since the funds can be available immediately based system with a modern IT infrastructure. An IT- in case of emergency, such a line of credit could serve as based system could automate the aggregation of damage bridge financing to provide the government additional reporting, inform resource allocation, and provide the protection against more severe events until other government with detailed, disaggregated information on domestic funds can be reallocated or international aid damage and losses from disasters. An approved official is received. Armenia is potentially eligible for such a methodology for damage assessment would also help financial mechanism, with a total sum of up to 0.25 to allocate the funds for post-disaster expenditures percent of its GDP. across regions. Longer-term options include the following: • Option 7: Strengthen catastrophe insurance • Option 5: Explore establishment of a national disaster penetration. The government may wish to consider reserve facility to improve efficiency in disaster- promoting a culture of insurance and help develop related spending. As a longer-term step toward more private catastrophe risk insurance markets. This effective and efficient use of budgetary resources option could include public awareness campaigns and for disaster response, the government could explore compulsory insurance for all assets receiving subsidies channelling disaster-related expenditures through from the budget (that is, through agricultural, mortgage, one dedicated budgetary tool. This could be an annual or small and medium enterprise loans). The government dedicated budget line or a separate reserve facility that could also consider developing a program for insuring could accrue resources over time (subject to an enabling public assets (such as public buildings and bridges) legal framework). Such a mechanism could also serve and critical infrastructure (such as power plants). This as a transparent, predictable, and effective framework step could also serve as an incentive to invest in better to receive post-disaster donations by the diaspora or risk assessment and risk reduction activities (such international partners. Such a step would not only as retrofitting) to reduce losses and lower the cost improve the availability of funds in the aftermath of a of insurance. disaster; by setting up dedicated processes it could also tackle inefficiencies in resource execution. DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 35 7. References Armenian Red Cross Society. 2007. “Contingency Planning Process: Final Document.” Pusch, Christoph. 2004. “Preventable Losses: Saving Lives and Property through Hazard Risk Management—A Comprehensive Risk Management Framework for Europe and Central Asia.” Disaster Risk Management Working Paper no. 9, World Bank, Washington, DC. Republic of Armenia. 2015. Armenia’s Third National Communication on Climate Change. Yerevan: Lusabats Publishing House. UNDP (United Nations Development Programme). 2009. “Assessment of Legal and Institutional Framework for Disaster Management and Disaster Risk Information Systems in Armenia.” Yerevan. September. http://www. un.am/up/library/Assessment%20of%20Legal_Inst_ Framework%20for%20DM_eng.pdf. ———. 2013. “Final Report on Country Situation Review in the Context of National Disaster Risk Assessment and Management in Armenia.” World Bank. 2009. “Disaster Risk Reduction and Emergency Management in Armenia.” October. http://documents. worldbank.org/curated/en/987411468005434115/ pdf/686590ESW0P1100Emergency0Management.pdf. 36 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 37 Annex 1. Recorded Natural Disasters in Armenia by Hazard Type, 2010–2015   2010 2011 2012 2013 2014 2015 Strong wind, storm, hurricane, tornado, dust storm 45 29 38 48 114 95 Thunderstorm, lightning 3 4 9 4 3 9 Hail storm 32 53 41 33 44 24 Heavy rain 19 17 15 7 12 6 Landslide 19 12 6 6 7 3 Downpour 13 10 4 2 0 1 Snowfall, snowstorm 19 41 81 77 64 39 Ice slick 0 0 1 4 96 76 Forest fire 21 5 26 3 17 15 River flood and deluge 29 39 4 8 7 10 Landfall 15 8 2 9 11 8 Rockslide 11 5 19 32 48 52 Earthquake 150 222 179 72 76 82 Increased groundwater 7 0 1 0 0 0 Total 383 445 426 305 499 420 Source: National Statistical Service of the Republic of Armenia, “Socio-Economic Situation of RA,” January–December 2010, 2011, 2012, 2013, 2014, 2015, http://www.armstat.am/en/?nid=82&id=1890. 38 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA 39 Annex 2. Recorded Natural Disasters in Armenia by Region, 2010–2015   2010 2011 2012 2013 2014 2015 Yerevan 5 10 10 18 47 35 Aragatsotn 22 26 49 47 53 40 Ararat 13 12 10 4 15 11 Armavir 4 4 5 6 12 11 Gegharkunik 19 16 31 23 67 47 Lori 53 52 49 24 52 51 Kotayk 11 13 12 20 32 25 Shirak 21 15 28 19 23 20 Syunik 40 18 24 33 62 48 Vayots Dzor 29 41 20 32 30 34 Tavush 16 16 9 7 30 16 Total 233 223 247 233 423 338 Source: National Statistical Service of the Republic of Armenia, “Socio-Economic Situation of RA,” January–December 2010, 2011, 2012, 2013, 2014, 2015, http://www.armstat.am/en/?nid=82&id=1890. 40 DISASTER RISK FINANCE COUNTRY NOTE: ARMENIA