ZT Insights # 9 - M arch 2015 A Publication no.: 94762-PA [ i 0 A Practitioner's Perspective on Disaster Risk Management inLtno ei ath Caribbean Disaster Risk Financing in Panama: Protecting People, Economy and International Markets "This National Strategic Framework for Disaster Risk Financing and Insurance provides a model of best practice for the financial management of disaster risk, reflecting Panama's commitment to improve its resilience to natural hazards. It has the potential to encourage similar developments in other countries and regions." - Dulcidio de la Guardia, Minister of Economy and Finance of Panama Challenge In December 2010, Panama declared a national emergency because of tor- rential rainfall that lasted over 17 hours, eventually leading to the third clos- ing of the Panama Canal since its opening in 1914, but the first time due to flooding. This physical and economic shock to the country impacted ev- The expansion of the Panama Canal is the largest construction project in the world. ery sector, particularly affecting vulnerable populations outside the capital city. International markets and transportation networks were also disrupted, Intervention largely due to the fact that a significant portion of global trade (five percent') comes through the canal each year, and further, because Panama City is Given the importance of the financial services sector and the thriving investment considered the financial capital for Central America and an important trans- climate, the Government of Panama took a proactive role in 2010 by leverag- portation hub for Latin America. ing its knowledge to assess and strengthen its approach to DRM. To improve the country's financial protection, the Ministry of Finance partnered with the World Over the last decade, Panama observed some of the highest rates of Bank's Urban and Disaster Risk Management Unit and others to facilitate techni- growth primarily due to large amounts of foreign direct investment; growth cal dialogues, conduct analyses of public investments in DRM, and develop new in its services sector (50% of GDP growth); physical investments in trans- risk management instruments to build financial resilience. The team also received portation, communications, and construction for new housing and tour- support through the Disaster Risk Financing and Insurance (DRFI) Program a ism developments; and the multi-billion dollar expansion of the Panama joint initiative of the World Bank's Finance and Markets Global Practice and the Canal.2 As a result of this rapid growth, Panama's financial system and Global Facility for Disaster Reduction and Recovery (GFDRR).6 economic assets are increasingly at risk to natural hazards such as ex- treme weather events and seismic activity. Many investments and much of 1. Public Investments in DRM the population are concentrated in urban areas, where trade and financial To mitigate the physical and economic impacts from adverse natural events, services account for 43% of GDP and over 80% of the country's total ex- the Ministry of Finance increased allocations for DRM in prevention, mit- ports.' In 2005, Panama ranked the 14th-highest for economic risk expo- igation and emergency response over time. The technical team assessed sure to multiple hazards4. the national budget, which demonstrated that the most significant invest- ments were implemented through the Ministry of Public Works, the Office Building upon decades of experience and knowledge of disaster risk man- of the President's National Aid Program, and the Ministry of Agriculture and agement (DRM), the Government of Panama sought to further understand Livestock Development. These public investments in DRM included: its current and projected level of disaster and financial risk. As one of the more proactive countries in Central America in addressing disaster risk, Physical infrastructure and mitigation works, representing 43% of the country's being the first country to develop a National Framework for Disaster Risk annual DRM investments, mainly for river dredging and realigning in orderto Reduction in 2005, Panama's concerns about potential adverse impacts reduce flood risk during the rainy season. The Ministry of Public Works also to its services sector are of utmost importance due to the dynamism of the prepared technical studies to prioritize road and bridge mitigation efforts. economy in recent years and high public-sector investments - most nota- bly from the Panama Canal expansion and metro system - valuing 15-20% Emergency response activities, approximately 22% of Panama's annual of current GDP5 DRM investments, were earmarked in the budget for The Office of the President's National Aid Program (PAN). Recognizing the need to build long-term financial resilience, the paramount chal- lenge for the Ministry of Finance of Panama was to develop and implement disas- 11. Risk Retention Mechanisms & Low-impact Hazards ter risk financing instruments that can minimize financial shocks caused by nat- Panama, like many countries, primarily managed budget shocks caused by ural hazard events. frequent but less-severe natural hazards, by reallocating funds to emergency www.worldGbank.org/icrdrm/insights in sig h ft inDl M A Practitioner's Perspective on Disaster Risk Management In Latin America &te Caribbean "Insurance of private housing is now mandatory, which reduces the fiscal vul- nerability of the Panamanian government, thus permitting more resources for the most vulnerable populations. Risk transfer (Insurance of public assets is also mandatory for all government agencies, annthrough a coinsurance scheme managed by ASSA. "Oil SSings Fund, Poa-casama crexresditeetidiiigthaibenCtatoh Risk Insurance Facility (CCRIF) as an efficient source of catastrophe insur- Sonce, providing for liquidity in the aftermath of a natural disaster. Emergency Fund/budget reallocation orSince November 17, 2014, Panama extraordinaryis now the first country in the world .0 to enact a law adopting a national MnrMl Strategic Framework for the FinancialStaeiFrmwk Minor eerMajor frteFnnilMngmn Management of Disaster Risk' (click ofDsstrRs Layered financing strategy in Panama, including risk retention and risk transfer image). This Framework is the culmina- mechanisms for different natural hazard severities (see table top to bottom) tion of consistent efforts by the govern- ment through collaboration, public re- response and recovery activities. Recognizing that this practice can negative- form, consultations and technical studies ly affect ongoing investments and poverty reduction programs, the Ministry of conducted in recent years, which will be Finance and the World Bank introduced new financial instruments or risk reten- implemented through a five-year oper- tion mechanisms, such as contingency lines of credit and disaster reserve funds, ational plan. The Strategic Framework to better manage the financial risk of low-impact hazards at a national level. establishes a strong legal mandate for financial management, sets a path to Click on image to view the newly In 2011, the country's first DRM Development Policy Loan (DPL) with Catastrophe pursue evidence-driven DRM that main- launched DRF1 framework in Draw Down Option (CAT DDO) was launched and served as a financial risk tains growth and keeps poverty reduc- Panama.' tool to provide immediate funds to the government in the case of a na- tion programs intact to mitigate neg- tional emergency. ative impacts on poverty, inequality and malnutrition that often result from adverse natural hazards such as heavy rains, floods and seismic activity. The government also operated a contingency loan for agricultural and live- stock producers affected by natural hazards, accounting for 16% of the The Framework also reflects the country's leadership and commitment to national DRM budget on average over a five year period (2005 - 2010). financial management of disaster risk, and showcases a model for other countries to develop similar Disaster Risk Finance and Insurance (DRFI) strat- The Panamanian Housing Assistance Fund, managed by the Ministry of egies that strengthen financial resilience to external shocks caused by natural Housing, earmarks funds to address disaster recovery, mainly human- hazards. This Strategic Framework will allow Panama to improve its budget itarian aid and housing needs, for people affected by natural hazard planning and secure public investments by implementing disaster risk financ- impacts. ing instruments (risk retention and risk transfer) to ensure macroeconom- ic stabilization. And as a member of CEPREDENAC ', which defines strate- The team also recognized Panama's forward-thinking law in 2005 that gic guidelines around the five priorities of the Hyogo Framework for Action, states the National Civil Protection System (SINAPROC) is authorized to Panama further has an opportunity to share its increasing knowledge of DRFI request financial and technical support from public agencies involved in with other countries in Latin America, as well as globally. DRM. This enables the government to more easily reallocate DRM budget resources to perform rehabilitation and recovery activities, as well emer- Endnotes gency preparedness and response. 1 http://www.ibtimes.com/panamc-canal-cnniversary.2014-world-changing-economc. -impact-canal.1I 656834 Ill. Risk Transfer Mechanism & High-Impact Hazards 2 Panama's international service sectar rests an five main activities including the Panama Canal In comparison to risk retention mechanisms for less severe hazards events aperatians, parts and lagistics, taurism, re- exparts af the Cal6n Free Zane, and financial that are managed by national funding allocations, the Ministry of Finance, intermdation. the World Bank and its partners discussed potential scenarios of low prob- ability events with high impact. Through shared learning and exchange, the rds-.aragm Ministry of finance assessed and selected additional financial instruments, -dprogrn or risk transfer mechanisms, that insure public assets and mitigate the fi- 4 http://wm.forges/dac ile anama _ nancial shock from more severe, but less frequent natural hazard events. 5 htip://www.frr.o/saespancian (See table above.)6 htp:/ w .fr.r/istrrs-i nc g- disu ne (Se tale bov.)7 https://wwm.gfdrr.org/sites/gtdrr/files/publication/Pancama-Strategic-Fromework-for-the- - Fi nancia I Management- of-Disaster-Risk.pef The Ministry of Commerce and Industry established the Manual of Insurance 8 The Central American Integration System far Natsral Disasters Preventian (Centro de Coordinaci6n Premiums Applicable to the State in order to insure government assets and para Ia Prevenci6n de las Desastres Naturales en Am6rica Central, CEPREDENAC) is a specialized operations through a coinsurance scheme. bady that helps to pramte oRM palicy and gsidelines among its member cauntries. Contacts Armando Guzman -S RM Specialist -Urban and DRM Unit -Social, Urban, Rural & Resilience Global Practice - World Bank Group (aguzm in3gworldbank.org) Jose Angel Villalobos -Sr. Insurance Specialist -RFI Program - Finance & Markets Global Practice and GFDRR - World Bank Group fivillalobos@worldbank.org) Hars Sanahuja -Sr. DRM Consultant - Urban and DRM Unit - Social, Urban, Rural & Resilience Global Practice - World Bank Group hsanahuia@worldbank.org) ance, pro g fORLDyNaR Worldatr A 41-( GFDRRP Bankan www.worldbank.org/icrdrm/insigehs