DISASTER RISK FINANCE COUNTRY NOTE: SERBIA APRIL 2016 World Bank Disaster Risk Financing and Insurance Program World Bank Europe and Central Asia Disaster Risk Management Schweizerische Eidgenossenschaft Confédération suisse Confederazione Svizzera Confederaziun svizra Swiss Confederation Federal Department of Economic Affairs, Education and Research EAER State Secretariat for Economic Affairs SECO DISASTER RISK FINANCE COUNTRY NOTE: SERBIA APRIL 2016 World Bank Disaster Risk Financing and Insurance Program World Bank Europe and Central Asia Disaster Risk Management Schweizerische Eidgenossenschaft Confédération suisse Confederazione Svizzera Confederaziun svizra Swiss Confederation Federal Department of Economic Affairs, Education and Research EAER State Secretariat for Economic Affairs SECO DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Table of Contents 03 Preface 04 Acknowledgments 05 Abbreviations 07 Introduction 09 Economic Impact of Natural Disasters 13 Overview of Institutional Arrangements for Disaster Risk Management and Financing 15 Public Financial Management of Natural Disasters 16 Ex Ante Disaster Risk Financing and Insurance Tools 20 Ex Post Instruments 21 Case Study: May 2014 Floods 22 Summary and Fiscal Resources Gap 24 Options for Consideration 26 References DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Figures 11 Figure 2.1: Schedule for Recovery and Reconstruction Requirements: Serbia, 2014–16 12 Figure 2.2: Timing of Needs and Execution of Financial Instruments 16 Figure 4.1: Three-Tiered Risk Layering Strategy for Governments 22 Figure 4.2: Recovery and Reconstruction Resource Needs, Funding Sources, and Gap: Serbia, Post–May 2014 23 Figure 4.3: Recovery and Reconstruction Sources of Financing: Serbia, Post–May 2014 Map 10 Map 2.1: Serbian Municipalities Affected by May 2014 Floods Tables 09 Table 2.1: Number of People Affected and Total Damage from Major Disasters, by Type of Hazard: Serbia, 2000–2013 17 Table 4.1: Amount of Funds Available for Disaster Response, Serbia DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 3 Preface Following the catastrophic floods in 2014, The workshop was attended by 40 participants the government of Serbia began an ambitious from the government of Serbia, including transformation of its disaster management the Ministry of Finance, Public Investment system from one of response to one of Management Office, Ministry of Interior, Fiscal prevention and mitigation. However, even with Council, and international partners, including a robust disaster risk management approach, the Swiss State Secretariat for Economic Affairs the country will remain exposed to budget (SECO), the International Monetary Fund, and shocks caused by major natural disasters. The the United Nations Development Programme. World Bank is providing advisory services to support the government in developing a This note was developed under a partnership comprehensive financial protection strategy and between SECO and the World Bank’s Disaster in considering the establishment of a fiscal risk Risk Financing and Insurance Program unit in the Ministry of Finance. (DRFIP) to support middle-income countries in building their financial resilience. The This Disaster Risk Financing Country Note program provides tailored advisory services and is the first activity to take stock of existing institutional capacity building on the public mechanisms and instruments to finance disaster financial management of natural disasters. The response and to lay the foundation for the engagement in Serbia is jointly implemented development of a comprehensive disaster risk between DRFIP and the Disaster Risk financing strategy. Management Team for the Europe and Central Asia Region. A workshop to discuss the findings of this analysis and consult on the options for next steps was held in Belgrade, Serbia, March 29–30. 4 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Acknowledgments This note was prepared by a team composed government of Serbia, and in particular of of Benedikt Signer, disaster risk financing and the Public Investment Management Office, insurance specialist; Vica Bogaerts, disaster which implemented the relief and recovery risk management specialist; and Marija Bijelic, coordination following the 2014 floods and consultant. have been the driving force behind the shift to a comprehensive and proactive disaster The findings of this note were presented and risk management approach in Serbia. Without discussed during a workshop held in Belgrade, their skills and expertise, the compilation of Serbia, March 29–30, hosted by the minister this note would not have been possible. Sabra of finance and with the participation of 40 Ledent edited the report. officials from the government of Serbia and development partners. The note benefited The team is grateful for the financial support greatly from the technical expertise of the received from the government of Switzerland, participants, and the options for consideration which enabled this project. to inform a financial protection strategy are a reflection of the discussions at the workshop. The team gratefully acknowledges the data, information, and other invaluable contributions made by representatives of the DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 5 Abbreviations CAT DDO Catastrophe Deferred Drawdown Option DPL Development Policy Loan DRCM Disaster Risk and Crisis Management DRFI Disaster Risk Financing and Insurance DRM Disaster Risk Management EU European Union GDP Gross Domestic Product GFDRR Global Facility for Disaster Reduction and Recovery IMF International Monetary Fund MoF Ministry of Finance OCHA Office for the Coordination of Humanitarian Affairs (United Nations) PDNA Postdisaster Needs Assessment RSD Serbian Dinar UNDP United Nations Development Programme All dollar amounts are U.S. dollars unless otherwise indicated. US$1 = RSD 110; €1 = RSD 120 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 7 Introduction This Disaster Risk Financing Country Note government of Serbia adopted an ambitious for Serbia provides an overview of the way fiscal consolidation and structural reform its government currently finances the costs program to halt the rise in public debt and imposed by natural disasters. send it on a downward trajectory by 2017. CHAPTER This program is supported by a three-year 1 Serbia, which is situated in the southeast stand-by arrangement from the International of Europe, has a population of 7.1 million Monetary Fund (IMF). Growth in Serbia for (2014) and a total land area of 87,460 square 2015 was projected to be 0.5 percent, a small kilometres. The country has undergone but important recovery of the economy after dramatic changes over the last 15 years. In the severe impact of the 2014 floods, which led January 2014, Serbia opened membership talks to a decline in the economy of 1.8 percent in with the European Union (EU). That year, 2014. More robust growth rates of 2–3 percent Serbia’s per capita gross domestic product are forecast for the medium term. (GDP) was approximately $6,181.1 Its economy had been significantly affected by the impact of Serbia is exposed to multiple types of the international financial crisis and the many natural hazards, including floods, droughts, rounds of elections that had slowed down the earthquakes, and landslides. In recent years, the country’s necessary structural reforms. The country has been severely affected by disasters result was a loose fiscal policy until 2014. The and has suffered widespread damage from level of real GDP in 2014 remained at 1.9 percent earthquakes, in particular in 1999 and 2010. An below its 2008 value. estimated 30 percent of the country is at risk of landslides. The total damage from drought is Although the 2009 recession mainly stemmed estimated at $500 million per year (1.4 percent from the severe impacts of the international of current GDP), and flooding is a recurring financial crisis, recessions in 2012 and 2014 event across the country (WMO 2012). were primarily caused by natural disasters—a drought in 2012 and severe floods in 2014. The losses from these disasters have high Reflecting the deteriorating fiscal balances, immediate and long-lasting impacts on people, Serbia’s public debt, including guarantees, livelihoods, local and national economies, more than doubled, from 32.4 percent of as well as the government’s budget. Because GDP in 2008 to over 70 percent at the end of the growing frequency and severity of of 2014. Meanwhile, poverty deepened after disasters, the government has faced the rising the financial crisis and during the recessions costs of responding to disasters as well as the of 2012 and 2014, mainly because of losses challenges of financing emergency response in employment and labor income. In an and reconstruction costs. Having sufficient effort to overcome its fiscal challenges, the access to financial instruments and resources 8 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA in order to respond to disasters is crucial for financing. Chapter 4 is a review of the public building the financial resilience of the country financial management of disasters in Serbia, and minimizing the negative impact of natural including ex ante and ex post disaster risk disasters on Serbia’s economic growth. financing and insurance (DRFI) instruments currently in use for budget mobilization, and In this report, chapter 2 provides the it looks at the 2014 floods in more detail. The background and country context, including the chapter concludes with a summary of financial recent economic impacts of disasters. Chapter resources available and a look at the potential 3 reviews the current institutional and legal resource gaps. Options for consideration are framework for disaster risk management and given in the final chapter. ENDNOTES 1 World Bank, http://www.worldbank.org/en/country/serbia/overview. DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 9 Economic Impact of Natural Disasters Serbia is exposed to various natural hazards, Table 2.1 provides a summary of the number of including floods, landslides, earthquakes, people affected by and the total damage from CHAPTER 2 storms, hail, and droughts. Beyond the human recent major disasters in Serbia, as recorded in impact of such disasters, this exposure has led the Desinventar database. to significant financial and economic costs. Table 2.1: Number of People Affected and Total Damage from Major Disasters, by Type of Hazard: Serbia, 2000–2013 No. of people Type of hazard No. of events No. of deaths affected Total losses (RSD) Contamination 4 0 2,650 0 Drought 45 0 9,100 90,084,246 Earthquake 1 3,106 9,164 10,900,000 Epidemic 12 0 2,230 0 Explosion 21 4 15,353 218,110 Fire 261 228 1,536 1,755,753 Flash flood 6 188 6,986 240,322 Flood 234 2 122,151 2,556,320,236 Forest fire 490 0 1,947 48,758,957 Frost 13 0 0 356,853 Hailstorm 134 0 46,652 74,949,701 Landslide 42 50 1,502 21,345,545 Leak 12 0 100 0 Snowstorm 106 12 140,275 3,455,169,637 Storm 24 0 101,953 1,071,405 Other 16 0 5,950 6,500 TOTAL 1,421 3,590 467,549 6,261,177,265 Source: Desinventar database, http://www.desinventar.net/index_www.html. Note: The Desinventar database contains only information up to 2013. These figures do not include the catastrophic 2014 floods. RSD = Serbian dinar. 10 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Map 2.1: Serbian Municipalities Affected by May 2014 Floods Source: Government of the Republic of Serbia 2014b. As a result of extraordinary rains in May 2014, This assessment focused on estimating the Serbia was affected by the most severe flooding damages and losses caused by the event, as in 120 years (see map 2.1). The disaster well as the financial needs related to recovery affected 1.6 million people (22 percent of the and reconstruction. The total value of the total population), in more than two-thirds of effects of the disaster was estimated at €1.7 the country’s municipalities. The floodwaters billion, which was equivalent to 4.8 percent destroyed and damaged property, crops, and of Serbia’s gross domestic product (GDP)— national and local infrastructure (including see Government of the Republic of Serbia schools, hospitals, roads, bridges, and water (2014b). As a result of the ensuing recession, management infrastructure). In the immediate the Serbian economy contracted by 1.8 percent aftermath of the disaster, the government in 2014 rather than growing by 0.5 percent as conducted a postdisaster needs assessment previously projected. (PDNA) with support from the European Union, the United Nations Development According to the PDNA, the energy and mining Programme (UNDP), and the World Bank. sector received the most extensive damage, DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 11 accounting for €494 million or 32 percent of the lost their jobs because of the interruption in total disaster effects—110,000 customers faced production activities. Fortunately, the damage interruptions in their electricity supply and two- to education facilities was not extensive, and thirds of Serbia’s coal production was lost when because the disaster occurred at the end of the open-pit mines were flooded. This damage school year, the disruption in the education was accompanied by impacts on housing sector was limited. In the health sector, a (€231 million, or 15 percent of total disaster number of clinics were partially destroyed, and effects), agriculture (€228 million, 15 percent), medical equipment and supplies were damaged, trade (€225 million, 15 percent), and transport but no increase in morbidity rates due to flood- (€167 million, 11 percent). After the floods, an related disease has been observed. estimated 125,000 people fell below the poverty line, an increase of almost 7 percent compared The financial requirements for recovery and with the level of the previous year. The Human reconstruction were estimated for all sectors Development Index also fell, pushing Serbia of social and economic activities in both the back to 2012 levels (Government of the Republic public and private domains. Postdisaster needs of Serbia 2014a). were valued at €1,346 million, of which €403 million (30 percent of the total) was needed The concentration of disaster effects on the for recovery2 activities and €943 million (70 productive activities of energy and agriculture percent) for reconstruction requirements.3 and the damage to housing have impaired The needs assessment report indicated that economic growth, with a corresponding the country does not have the capacity to subsequent impact on livelihoods, income, carry out reconstruction in a single calendar and employment, plus a significant decline year (Government of the Republic of Serbia in the living conditions of the population. 2014b). Financing needs for recovery and Furthermore, the vast destruction in the mining reconstruction were estimated to spread into sector has required alternative sources of 2016 at least (figure 2.1) but will have to be energy and electricity. As a direct consequence extended because of slower than expected of the floods, about 51,800 people temporarily implementation. Figure 2.1: Schedule for Recovery and Reconstruction Requirements: Serbia, 2014–16 800 593 600 €, millions 400 291 236 146 200 21 60 0 2014 2015 2016 Recovery Reconstruction Source: Government of the Republic of Serbia 2014b. 12 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Such a time distribution reflects that while it not all funds are needed at the same time. is critical to have rapid access to the required Figure 2.2 shows the usual timing of resource resources for response and early recovery, requirements. Figure 2.2: Timing of Needs and Execution of Financial Instruments Resource requirements (US$) Relief Recovery Reconstruction Time Source: World Bank 2014. ENDNOTES 2 “Recovery needs” refers to the financing required to help affected people recover their predisaster level of household income, to restore the supply and access to basic services—health, education, water, sanitation, and so forth; and to ensure recovery of production in sectors such as agriculture, industry, commerce, and tourism. 3 “Reconstruction requirements” refers to the financial resources needed to repair and rebuild destroyed or damaged assets and infrastructure under disaster-resilient standards and conditions. DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 13 Overview of Institutional Arrangements for Disaster Risk Management and Financing CHAPTER In Serbia, the Ministry of Finance (MoF) is responsible for designing financing strategies technical body to conduct all work related to the coordination of aid and financing, 3 to optimize the allocation of government funds reconstruction, and rehabilitation. Two and and resources. a half months after being founded, the office became completely operational and began The MoF does not currently have a strategy in coordinating and implementing 17 sectoral place to meet the financial costs imposed by National Recovery Programs passed by the disasters. A major problem with collecting any government. The programs were designed substantial amounts for disaster risk financing to ensure the predictability of financing, as and insurance (DRFI)—and in general for well as to balance overwhelming social needs disaster risk management (DRM) activities— with infrastructure needs, thereby ensuring lies in the current budgetary accounting system proportional allocation of limited resources of Serbia. The Budget System Law does not across sectors. The office had relatively modest allow for the accumulation of resources over a budgetary resources and was used primarily multiyear period. Based on the cash accounting to coordinate reconstruction efforts and principle, all the funds not spent during one channel international and domestic grant funds year elapse at its end and therefore cannot be that were placed in a dedicated government rolled over to the next period and accumulated. account. In addition, the current lack of fiscal space resulting from ongoing fiscal consolidation In recent years, Serbia has taken important efforts pursued by the government means it is steps toward moving from an emergency difficult to set aside considerable amounts of response to proactively managing and budgetary resources for contingencies. reducing the risk from disasters. The country is enhancing its legal and institutional In addition to sustaining a budget shock from DRM framework, focusing on actions to the May 2014 floods, Serbia was caught without build resilience in the context of the Hyogo an adequate system in place to respond to the Framework for Action 2005–2015 and the overwhelming social and infrastructure needs in Sendai Framework for Disaster Risk Reduction a coordinated fashion. In May 2014, immediately 2015–2030. During the recovery process after after the floods, the government established the May 2014 floods, the government began to the Government Office for Reconstruction develop a systemic approach toward prevention and Flood Relief as an ad hoc operational and and disaster risk management. The first step 14 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA was to extend the mandate of the Government law (a strategic and institutional framework Office for Reconstruction and Flood Relief for natural disaster risk management) as to cover prevention in addition to recovery. soon as possible (Nedeljkovic et al. 2015). In December 2014, the government approved Consequently, the office led the preparation of establishment of the National Disaster Risk two new pieces of legislation: the Disaster Risk Management Program, a comprehensive and Crisis Management Law and the Law on program for disaster resilience, intended to be Reconstruction Following Natural and Other used as an umbrella framework to coordinate, Hazards, with support from United Nations channel funds, and implement activities related Development Programme (UNDP) and the to reducing and managing risks in Serbia. World Bank. The specific purposes of the program are to The Law on Reconstruction was passed in build a national disaster risk management December 2015.4 It established a permanent system with clear responsibilities and the body within the government as the legal capacity needed to reduce the existing risks, successor to the Government Office for to avoid the creation of future risks, and to Reconstruction and Flood Relief. The mandate respond more efficiently to disasters. The action of the Public Investment Management Office plan for implementation of the national DRM includes, among other things, all future program, currently under development, is in full postdisaster reconstruction activities. accordance with the Sendai Framework’s four priorities for action. Component 5 of the DRM The Law on Disaster Risk and Crisis program deals specifically with disaster risk Management (DRCM) is likely to be adopted financing and insurance solutions. Activities in 2016, after the elections scheduled for April within this component include technical 2016. The law envisages establishment of a studies to understand contingency liabilities; new national authority, the Department of capacity building for the Ministry of Finance on Risk and Emergency Management, to perform disaster risk financing; support for the potential public administration activities in the area of establishment of a fiscal risk unit to analyze natural and other hazard risk reduction and administrative, legislative, and operational emergency management (and other activities mechanisms in postdisaster phases; and laid down by the law). With the help of these development of a risk financing strategy that laws and the DRM action plan, Serbia aims to includes financial instruments for sovereign be one of the first countries in the world with financial protection and further development of a DRM legislative framework fully aligned risk transfer mechanisms such as insurance. with the Sendai Framework for Disaster Risk Reduction. The Government Office for Reconstruction and Flood Relief was established for one year and Finally, apart from the normative and extended until the end of 2015. Lessons learned institutional shortcomings, a lack of funding during the 2014 floods led the government to and inadequate allocation of what is available identify some important gaps in the system, were recognized as an important gap for such as a need to design and pass a framework improved management of this process. ENDNOTES 4 Law on Reconstruction Following Natural and Other Hazards, Official Gazette No. 112/15, effective as of December 31, 2015. DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 15 Public Financial Management of Natural Disasters CHAPTER 4 The ability of the government to rapidly mobilize example, through the creation of budgetary a budget for an effective response to a disaster reserves or funds or through postdisaster largely depends on the financial instruments budget reallocations or borrowing. it puts in place beforehand. A comprehensive, proactive approach to risk financing can help ƒ Transfer, in which the government transfers a government become an active risk manager potential future disaster losses to financial rather than an emergency borrower. This chapter or insurance markets by paying a premium. reviews the existing financial arrangements Traditional insurance, alternative risk available to the government of Serbia to meet transfer products, and contingent financing postdisaster expenditures. mechanisms are all available. International experience has shown that Combining different instruments to protect governments ideally combine different against events of different frequency and severity instruments to protect against events of is known as risk layering (figure 4.1). A bottom- different frequency and severity. Sovereign up approach is recommended: the government disaster risk financing aims to increase the first secures funds for recurring disaster events capacity of national and local governments to and then increases its postdisaster financial provide immediate emergency funding as well capacity to finance less frequent but more severe as long-term funding for reconstruction and events. Such risk layering ensures that cheaper development. It requires setting up systems, sources of money are used first, with the most mechanisms, and procedures for effectively expensive instruments used only in exceptional allocating and disbursing the necessary circumstances. For example, insurance can funds in the aftermath of disasters. Once the provide cover against extreme events, but it is government has a good understanding of not appropriate to protect against low-intensity the risk it faces, a financial risk management events that recur regularly. In such a case, strategy can be designed and financing the government could consider setting up a mechanisms can be implemented. dedicated contingency fund to retain this lowest layer of risk. Financing mechanisms can be grouped into two main categories: Serbia currently does not have an explicit strategy or policy in place to systematically ƒ Retention, in which the government decides manage the financial impact of natural to assume and manage disaster losses disasters. The government has established through its budgetary resources—for contingent budgetary reserves and several 16 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Figure 4.1: Three-Tiered Risk Layering Strategy for Governments International Assistance Low frequency/ High severity Risk transfer Sovereign risk transfer (e.g. CAT bond/CAT swap, (re)insurance) Insurance of public assets Contingent credit lines Post disaster credit Risk retention High frequency/ Low severity Government reserves, contingency budget/funds Emergency funding Reconstruction Source: World Bank and GFDRR 2014. other mechanisms. However, the current Ex Ante Disaster disaster funds seem insufficient to cover even smaller recurrent losses, and the government Risk Financing and remains even more exposed to more extreme Insurance Tools events, relying heavily on ex post mechanisms such as budget reallocations or international Data on budget expenditures on disaster donor assistance for response and recovery. responses are difficult to report because the Before establishment of the Government budget appropriations for these purposes are Office for Reconstruction and Flood Relief disclosed in several aggregate expenditure after the May 2014 floods, there was a lack items, making it hard to compute precisely the of coordinated information on the overall amount of these expenditures.5 In addition, resources received for postdisaster assistance. the data on the structure of these expenditures Consequently, the only reliable data exist (by beneficiary, project, and so forth) are for the floods of May 2014. The Ministry not published in the government’s standard of Finance (MoF) and the government’s budgetary document. Committee for Natural Disasters do not maintain accessible historical information on Budget Reserves the amount of financing directed at disaster- related uses. Table 4.1 summarizes the Budget contingencies together with reserves resources available to government for disaster are the cheapest source of ex ante risk response. financing and will generally be used to cover DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 17 Table 4.1: Amount of Funds Available for Disaster Response, Serbia Disaster risk Financing source available Amount of funds available Unpredictable and unreliable (e.g., Donor assistance in 2014 the total commitment was €235 million, often in kind) High-risk layer (e.g., major floods, Unpredictable (e.g., €227.5 million major earthquakes) Emergency borrowing drawn from World Bank for 2014 floods emergency recovery) Insurance of public assets Unclear but very low Medium-risk layer Not currently available ($100 million (e.g., regional floods, Contingent financing CAT DDO is in early preparation) minor earthquakes) €17,000 (originally budgeted, Budget funds: Permanent increased one-off by 2014 Budgetary Reserve supplementary budget to almost €20 million) €700,000 (originally budgeted, Low-risk layer Budget funds: Compensation for increased one-off by 2014 (e.g., localized floods, Damage Caused by the Natural supplementary budget to droughts, landslides) Disasters (account 484) approximately €1.5 million) Unclear (10 percent of each appropriation available immediately; Budget reallocation higher if supplementary budget is passed) Note: These figures are based on discussions with government officials and publicly available information. CAT DDO = Catastrophe Deferred Drawdown Option minor recurrent losses. A contingency reserve, months after the major floods devastated 24 budgeted every year under the MoF (recorded Serbian municipalities, the Serbian Parliament as the Permanent Budgetary Reserve), is used adopted a supplementary budget for 2014, to finance emergency situations. As a result and the Permanent Budgetary Reserve was of missing legal provisioning that guarantees increased in a one-off manner from RSD 2 a minimum level of contingency reserve, the million (approximately €17,000) to RSD 2.3 Permanent Budgetary Reserve in the Serbian billion (close to €20 million), with the aim budget has more of a symbolic function of financially supporting local governments than a substantive function. Historically, it and public enterprises in the reconstruction has been only RSD 2 million (equivalent to phase. The reliance on supplementary budgets €15,000–20,000), which is insufficient to cover leads to delays in the availability of funds even the emergency cost of the majority of (five months in 2014), comes with a high disasters. The common practice in Serbia is to opportunity cost because of the reallocation pass a supplemental budget to reallocate funds of already planned expenditures, and is if needed postdisaster. In October 2014, five uncertain. 18 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Compensation for Damage Caused by the available funds and extent of the damage, Natural Disasters (account 484)6 is another as there is no legal definition of the central type of reserve. Different institutions can government’s obligations arising from have this budget line (Ministry of Agriculture, contingent liabilities. Ministry of Labor, and Government Office for Reconstruction and Flood Relief ), but Local self-governments most often do not historically almost all funds were centralized designate any contingency reserve for natural under the Ministry of Finance. In its use, disasters because there are no legal provisions this reserve is quite similar to the Permanent requiring them to do so. Possessing a high Budgetary Reserve. Before the May 2014 degree of flexibility and a relatively simple floods, it was at the level of RSD 80 million procedure to change their budget during (almost €700,000), but after the floods (2014 the year (typical municipalities have three supplementary budget and 2015 budget) it to four supplementary budgets during the more than doubled, to RSD 200 million (€1.5 year), most of them rely on postdisaster million). budget reallocations. The historical practice (not established by law) of financial support The purpose of the contingency budgetary from central government’s contingency funds reserve in Serbia, both the Permanent further discourages local self-governments Budgetary Reserve and the Compensation for from having contingency reserves that would Damage Caused by the Natural Disasters, is be financially adequate for a quick response to quite restrictive—only to provide a first layer a disaster. of financial support for postdisaster relief and reconstruction that is relatively small scale. Contingent Credit Contingency reserve funds are distributed to the local level based on an assessment of the For the middle-risk layer, the budget reserves damage, or to public enterprises based on their of the government would not be sufficient. financial needs linked to the postdisaster relief So far, Serbia does not have any contingent or reconstruction. Because there is no legal credit arrangements linked to natural framework to regulate the financial obligations disasters. The World Bank has developed of the government (that is, contingent liabilities a Development Policy Loan (DPL) with a related to natural disasters are implicit), the Catastrophe Deferred Drawdown Option (CAT decision for distribution of funds is made only DDO), and the government of Serbia recently by the government after the disaster, based expressed an interest in its implementation, on a recommendation of the Government as was stipulated in the recent Country Committee for Natural Disasters or the Partnership Framework. The CAT DDO offers Government Office for Reconstruction and the government access to immediate liquidity Flood Relief. through an active but undisbursed line of credit of up to the smaller of 0.25% of GDP or This financial shield is adequate only in years $500 million. in which only local damage is caused by small-scale hazards (minor floods, droughts, Insurance wildfires, or earthquakes). But even in those cases, municipalities are often not fully Disaster risk insurance is available, but it is compensated for the cost of damage. Final underutilized in Serbia; the insurance market assessment of transfers depends on the in general has very low penetration, leaving DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 19 the government with potentially large fiscal their property, choosing instead to rely on exposures. Implicitly, households have high the implicit commitment of the government expectations that the government will pay for to step in and (at least partially) cover the damages. These expectations are a very strong damage. disincentive for strengthening the presence of insurance, regardless of the fact that insurance Serbian law does not require mandatory could reduce the fiscal impact of disasters by insurance of government assets. In practice, transferring a portion of the financial burden to insurance is decentralized, and every institution insurers. chooses if and what type of insurance coverage to obtain. Most commonly, government insures Property catastrophe risk insurance aims to workers, property, vehicles, and cash. Even protect homeowners and small and medium when institutions buy property insurance, it enterprises against loss arising from property often does not cover natural disaster risks damage. It is with this objective in mind (for example, it would cover fire but not that in 2012 the governments of Serbia, earthquake and floods). Local self-governments Albania, and the former Yugoslav Republic of are responsible for the maintenance costs Macedonia established Europa Re, a Swiss- of schools and health institutions, including based catastrophe reinsurance company property insurance. However, most of them focusing on natural disaster risks in these three do not purchase any insurance, citing lack of countries. Supported through a World Bank financial resources. project (Southeast Europe and the Caucasus [SEEC] Catastrophe Risk Insurance Facility The National Bank of Serbia has reported [CRIF]), Europa Re was created to help address that, in response to the May 2014 floods, until the very low levels of catastrophe and weather December 31, 2014, only €16.9 million was paid risk insurance penetration in southeastern out by insurance companies, and the total post– Europe. Europa Re offers reinsurance support flood insurance claims amounted to only €38.8 to local insurance companies and enables them million (less than 2.5 percent of total damages to provide homeowners, farmers, enterprises, and losses and less than 2.9 percent of recovery and government organizations with affordable needs).7 insurance coverage against natural risks. It began operations in Serbia only in late 2014 Catastrophe (CAT) Bonds when cooperation with the first Serbian insurance company was signed and the first CAT bonds are a relatively new financial policy against earthquake and flood sold. market product. They are risk-linked securities Regardless of the recent start, so far insurance that transfer a specified set of disaster risks companies, businesses, and households have from an issuer to investors. There is no track not shown a great deal of interest in this type record of CAT bond issuance in the region. of insurance, and it cannot be expected that Government and (re)insurance companies market penetration will significantly increase showed no interest in this instrument in the near future. An annual insurance because the Serbian financial market is still premium of €30–60 remains unaffordable for underdeveloped, especially the corporate many of the poorest households that have bond market, and the penetration of natural the highest exposure to natural disaster risks. disaster insurance is quite low. Even though Also, many farmers and small businesses that this product is increasingly used by Europe’s face persistent liquidity issues do not insure largest reinsurance companies, it remains a 20 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA relatively expensive and advanced risk transfer agriculture sectors, repairing damaged flood mechanism for developing countries. control infrastructure, and helping the country better respond to natural disasters in the Ex Post Instruments future. Specifically, the loan helped to close the financing gap for energy purchases (following In the near absence of reserve funds, Serbia’s the damage to the coal mines) and ensured a Ministry of Finance is predominantly using ex stable power supply during the heating season. post instruments such as budget reallocation, It also helped to finance the critical power international aid, and debt financing, all of sector infrastructure and to finance investments which require time to become available. in energy efficiency. In the agriculture sector, the project allowed budget support for direct Donations subsidies to the farmers in flood-affected areas. This provided farmers with the income security As a candidate county for membership in they needed to invest in their farms. The project the European Union (EU) and a developing was also intended to help improve resilience to country, Serbia will likely continue to look to disasters by financing repairs to critical flood donor support in the event of a major catastro- prevention infrastructure. phe, especially from the EU and its Solidarity Fund. However, donor assistance usually does Budget Reallocation not support a government response to less catastrophic but frequently recurring events. This postdisaster instrument is used by most Moreover, donor financing is highly unpredict- countries in cases in which a natural disaster able and does not allow the government to plan causes significant damage that must be covered for a fast disaster response. In addition, disas- by the government. Serbia’s legal framework ter assistance may decline in the future as the provides some flexibility in terms of quick country advances along its EU accession path budget reallocation. All institutions can transfer and becomes more economically prosperous. up to 10 percent of any budget appropriation to any other budget line.8 This change requires Following the May 2014 floods, coordination only the approval of the Ministry of Finance, between government institutions and and it can be implemented in a few days. donors was successfully implemented by However, larger-scale reallocation of funds the Government Office for Reconstruction requires a supplementary budget and regular and Flood Relief. A total of €234.6 million in parliamentary approval. This takes more donations was raised for disaster relief and time and is likely to be too late to provide the reconstruction. The largest donor was the immediate resources needed during and just European Union (through its Solidarity Fund after a disaster. and Instrument for Pre-Accession Assistance). After the May 2014 floods, more than Emergency Borrowing five months passed before approval of a supplementary budget that envisioned In October 2014, Serbia and the World Bank additional funds for postdisaster recovery signed a loan agreement for €227.5 million and reconstruction. The government ($300 million) for the Floods Emergency managed to cover a portion of the funding Recovery Project. The key areas of the project gap using international and domestic grants were addressing the recovery of the power and and borrowing. In the future, it would be DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 21 beneficial if the MoF, together with the other reconstruction, and recovery: a combination ministries, would play a more active role in of government funds, private sector prompt budget reallocation, especially in the resources (including personal and enterprise postdisaster relief phase. Timely availability contributions, family remittances from abroad, of funds in the aftermath of a natural disaster and limited insurance proceeds), as well as cash can prevent more extensive damage. grants and donations from the international community and fresh and rescheduled loans Additional Taxation from international financial institutions. The total funding raised to implement recovery and Serbia did not change its tax policy after reconstruction activities over the period May the floods in 2014, despite the fact that 2014–October 2015 was €514.4 million. many types of additional solidarity taxes were introduced in other countries (such Until the end of 2014, only €16.9 million was as Republika Srpska within Bosnia and paid out by insurance companies, whereas the Hercegovina in 2014) to generate funds for total postflood insurance claims amounted postdisaster expenses. to only €38.8 million (less than 2.5 percent of the total damages and losses and less than 2.9 Any introduction of new taxes, especially in a percent of the recovery needs), as reported by period in which large parts of the population the National Bank of Serbia.9 are directly or indirectly affected by a disaster, is not popular. Even though it can be During the months after the floods, a relatively easy way for the government to predominantly through the use of donor collect the necessary funds, it is not the most aid and loans, Serbia invested considerable effective one. The current taxation system resources in the reconstruction of transport in Serbia is already quite complex, and the infrastructure, public buildings, and power tax administration has serious challenges production and distribution facilities, as well in implementing and enforcing the existing as in the reconstruction and strengthening laws. For that reason, additional taxation, of flood protection infrastructure. The even in the case of disasters, should be Government Office for Reconstruction imposed only when it is absolutely necessary. and Flood Relief played a central role in coordinating international aid, which was an important source of the funds provided to Case Study: May 2014 Serbia (figure 4.2). Government aid was also Floods provided to nearly 21,000 families for the reconstruction of their damaged or destroyed The government of Serbia launched a homes, as well as to thousands of small and significant response and reconstruction medium-size businesses and farmers. operation following the devastating May 2014 floods, with extraordinary support from the Figure 4.3 shows the total needs for international community. reconstruction and recovery and the financing secured from different sources for the effort. Total damages and losses amounted to €1.7 It also shows that, even with the tremendous billion, and the postdisaster needs were response from the donor community, an valued at €1.346 billion. Different sources overwhelming need for further funding is still were used to finance the emergency response, present. As of October 2015, the funding gap for 22 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Figure 4.2: Recovery and Reconstruction Resource Needs, Funding Sources, and Gap: Serbia, Post–May 2014 (€, millions) Government budget: 4.2 Individual donations– 0% government-executed: 41.6 3% International borrowing: 227.5 Funding gap: 831.6 17% 62% Bilateral international donations: 39.5 3% EU funds: 192.6 14% Private foundations: 9.0 1% Source: Government Office for Reconstruction and Flood Relief. recovery and reconstruction efforts amounted The government remains exposed to more to over €830 million. extreme events, relying heavily on international donor assistance for relief, recovery, and reconstruction. For post–May 2014 flood Summary and Fiscal activities, only a fraction of financing came from Resources Gap public funds; the majority were from donations and emergency loans, but a significant funding In summary, this review of the disaster risk gap remained, as shown in figure 4.2. financing and insurance (DRFI) instruments available in Serbia indicates that the number Public as well as private assets remain largely of instruments available is limited, and that uninsured, and there is no strategy or policy the government currently relies largely on ex framework in place to actively manage the post instruments such as budget reallocation, financial impact of natural disasters. It is emergency borrowing, and donor financing. important that all levels of government The current financing available for disaster understand the current financing requirements response is insufficient even to cover recurrent and take the appropriate fiscal preparedness losses, representing a significant resource gap. measures. DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 23 Figure 4.3: Recovery and Reconstruction Sources of Financing: Serbia, Post–May 2014 (€, millions) 1,600 1,400 1,200 1,000 €, millions 800 600 400 200 0 Funding gap Donors' contribution Government borrowing and contingency reserves Source: Government Office for Reconstruction and Flood Relief. ENDNOTES 5 Information in this chapter on disaster funds was obtained from meetings held with a number of government departments and a desk review of existing reports. 6 In 2014 all of the social assistance provided to the flood-affected households in Serbia by the Government Office for Reconstruction and Flood Relief was budgeted as Compensation for Damage Caused by the Natural Disasters. It is important to note that the source of those specific funds in 2014 was individual donations provided by domestic and foreign entities and paid into a special disaster relief government account rather than budget contingency funds. 7 Public Investment Management Office, Government of Serbia. 8 Until 2015, it was only 5 percent. 9 Figure cited in letter from the National Bank of Serbia to the Public Investment Management Office (Former Floods office). 24 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA Options for Consideration A workshop to discuss the findings of this Recommendation 1: Strengthen financial CHAPTER analysis and consult on the options for next planning for disasters at all levels. All local 5 steps was held in Belgrade, Serbia, March self-governments could consider preparing 29–30, 2016. The workshop was attended by 40 action plans for disaster risk finance, based on participants from the government of Serbia, the national DRFI strategy. including the Ministry of Finance, Public Investment Management Office, Ministry Budget mobilization of Interior, Fiscal Council, and international partners, including the Swiss State Secretariat Recommendation 2: Reconsider both the for Economic Affairs (SECO), the International size and the use of contingency funds. The Monetary Fund, and the United Nations Ministry of Finance could re-evaluate the Development Programme. Participants arrived size of its contingency budgets and reserves at a list of policy priorities to strengthen for a natural disaster response, with the financial resilience to inform a national financial ultimate goal of being able to meet annual protection strategy. expected losses from disasters through these mechanisms, and could look into establishing The workshop concluded that a comprehensive clear rules and procedures for accessing disasters risk financing and insurance (DRFI) these resources for response, recovery, and strategy should be developed as a key step reconstruction. toward advancing proactive financial risk management from natural disasters. Such a Recommendation 3: Utilize contingent strategy with priorities could be developed by credit to access rapid liquidity following the Ministry of Finance in close coordination disaster shocks. With the adoption of the with the Public Investment Management Office National Disaster Risk Management Program and other key stakeholders. This strategy in December 2014, Serbia became eligible for a could clarify institutional coordination for contingency credit from the World Bank (CAT strengthening financial resilience and identify DDO). For Serbia, this would mean that up to options for the provision of sustainable access $100 million would be available immediately to immediate liquidity and adequate resources after a disaster to serve as bridge financing until for longer-term reconstruction and could other domestic funds can be reallocated or identify which instruments could be integrated international aid is received. into the risk financing strategy. Recommendation 4: Explore innovative risk Participants agreed on the following transfer to provide municipal governments recommendations that the government may with immediate liquidity. The government wish to consider: could explore innovative risk transfer DISASTER RISK FINANCE COUNTRY NOTE: SERBIA 25 mechanisms for strengthening the financial consider promoting a culture of insurance and resilience of local self-governments by providing help develop private catastrophe risk insurance access to critical funds following disasters. markets. This could include public awareness campaigns and the compulsory insurance for Budget execution all subsidies from the budget (agricultural, mortgage, small and medium enterprise Recommendation 5: Create clear rules loans). The government could also consider and guidelines for the financing of disaster developing a program for insuring public assets response through budgetary means. The (such as public buildings and bridges) and government could consider developing clear critical infrastructure (such as power plants). guidelines for postdisaster budget reallocation This could also serve as an incentive to invest and transparency of the budgetary expenditures in better risk assessment and risk reduction on disasters, and could explore options for activities (such as retrofitting) to reduce losses taking into account emergency funding in fiscal and lower the cost of insurance. rules (escape clauses). To promote individual insurance against natural Recommendation 6: Explore the disasters, the government might consider establishment of a national disaster fund. The giving tax-exemption status to insurance government may wish to explore the possibility against floods and earthquake, as it does of establishing a national disaster fund in for private pension insurance and private order to channel funds for the full disaster risk health insurance.10 In this way, citizens may management cycle through one budgetary tool. be motivated to purchase insurance through The fund resources could accrue over time, their employers, and corporations could be subject to budgetary system constraints and used as vehicles for promoting and selling estimation of the opportunity costs and benefits insurance policies. The government would not of such an accrual. Such a fund could also lose significant fiscal income through the tax finance prevention measures to reduce damage exemption in view of the relatively low prices from future disasters. of such insurance premiums, as well as the extremely limited current penetration of such Reducing the government’s products. contingent liability Recommendation 7: Strengthen insurance penetration. The government may wish to ENDNOTES 10 Since February 1, 2014, the tax relief on voluntary pension fund contributions has been increased from RSD 5,214 to RSD 5,329 (approximately €50). Employers’ monthly contributions to voluntary pension funds up to RSD 5,329 per employee are exempt from the personal income tax and compulsory social contributions. The same amount of contribution by direct debit from salary is also tax-exempt. Since May 2013, tax relief for voluntary health insurance premiums has been included in the total income tax relief. 26 DISASTER RISK FINANCE COUNTRY NOTE: SERBIA References Government of the Republic of Serbia. World Bank and GFDRR (Global Facility for 2014a. National Program for Disaster Risk Disaster Reduction and Recovery). 2014. Management, Regulation 05 No. 217-16233/ Financial Protection against Natural Disasters: 2014-1. Belgrade. An Operational Framework for Disaster Risk Financing and Insurance. Washington, DC: _____ . 2014b. Serbia Floods 2014. Belgrade. World Bank. Nedeljkovic, S., et al. 2015. “The Role of WMO (World Meteorological Organization). Government in Disaster Risk Management.” 2012. Strengthening Multi-Hazard Early Warning Faculty of Economics, University of Belgrade. Systems and Risk Assessment in the Western Balkans and Turkey: Assessment of Capacities, World Bank. 2014. “Financial Protection against Gaps and Needs. Geneva: WMO. Disasters: An Operational Framework for Disaster Risk Financing and Insurance. Working paper 94988, World Bank, Washington, DC.