BRIEF NOTE ON THE IDA DPC with Cat DDO
                                          March 2017

Vulnerability of Bhutan
Located at the foothills of the seismically active Himalayan mountain range between India and China,
Bhutan is highly exposed to tectonic as well as hydro-meteorological hazards. In addition to some of the
major disasters that Bhutan faced in the last few years which include the 1994 Glacier Lake Outburst
Flood, the 2009 and 2011 earthquakes (M6.1 and M6.9 respectively), and the 2009 cyclone Aila, the
country faces severe flooding and landslides with every monsoon.1

As per the Indian Seismic Code, Bhutan lies in seismic zones IV and V, which are the most active zones.
Considering the location and as proven by past earthquakes, earthquakes are one of the most imminent
hazards in Bhutan.2 Recent research shows that Bhutan could experience a destructive earthquake of
magnitude over M8, potentially bigger than the major earthquake of M7.5-8.5 in 1714.

Rapid urbanization is another challenge the country faces. The growth rate of Bhutan’s urban population
is the highest among the eight South Asian countries, at 5.7 percent per year from 2000-20103. The urban
growth that provides new opportunities at the same time poses challenges to disaster preparedness in
view of mushrooming of residential and commercial buildings.

Rationale to introduce IDA DPC with a Cat DDO
The Royal Government of Bhutan (RGOB) recognizes the need to enhance its preparedness and response
capacity, firstly to reduce loss of lives and livelihoods and secondly to maintain and build on its
development gains and economic reforms. In line with this priority, the RGOB is investing at all levels to
enhance its preparedness and response capacity. However, financial resources remain a constraint,
especially if the country is hit by a catastrophe resulting from an adverse natural event.

While the general understanding as per the Disaster Management Act, rules and regulations that are in
place is to reprioritize from planned activities to finance needs in the aftermath of a major disaster, there
is no specific tool to be utilized in such a scenario, which may lead to delays in responding to critical needs
and adequate planning of recovery and reconstruction.

The IDA Development Policy Credit with a Catastrophe Deferred Drawdown Option (DPC with Cat DDO)
can support the RGOB’s efforts to be better prepared to face the financial challenges in the case of a major
disaster by providing immediate liquidity and complementing existing resources, without distracting
ongoing development plans.

Key Features of the IDA DPC with Cat DDO
The IDA DPC with Cat DDO is a contingent financing line of credit that provides immediate liquidity to
countries to address shocks related to natural disasters, including health-related events. It serves as early
financing while funds from other sources such as bilateral aid or reconstruction loans are being mobilized.

1
  The cyclone Aila and an earthquake in 2009 in total resulted in damages of approximately 5.7% of the GDP in
2009; the earthquake of 2011 resulted in damages of about 1.4% of the GDP in 2011. The recent monsoon flooding
in the southern parts of the country in 2016 resulted in damages of about 0.6% of its GDP.
2
  http://www.adrc.asia/nationinformation.php?NationCode=64&Lang=en&NationNum=33
3
  http://www.worldbank.org/en/country/bhutan/brief/leveraging-urbanization-bhutan
Pre-approval criteria: In order to gain access to the Cat DDO, the recipient must (i) have an adequate
macroeconomic policy framework at approval and renewal, but not necessarily for drawdown; and (ii) be
preparing, or already have, a satisfactory disaster risk management program, which the World Bank will
monitor on a periodic basis during the life of the drawdown period.

Country limit: The country limit is set at a maximum of US$250 million or 0.5 percent of GDP, whichever
is lower. Based on this, IDA clients with limits below US$20 million may request a DPC with Cat DDO up
to a maximum of US$20 million, which is the case of Bhutan.

Drawdown trigger: Funds become available for partial or total disbursement after the pre-specified
drawdown trigger is met, typically the member country’s declaration of a state of emergency, in
accordance with its legislation.

Drawdown period: Cat DDOs were introduced under the IDA 18 onwards so once the funds are committed
for the Cat DDO, the initial drawdown period is three years, which may be renewed once for a maximum
of six years in total. Should the country decide to close the Cat DDO after three years or if it expires after
six years with partial or total undisbursed balance, the funds can be recommitted so the country won’t
lose the funds.

Source of funding: A country can fund the DPC with Cat DDO through its concessional core IDA allocation
envelope. Of the amount requested, 50 percent will be funded by the country’s concessional core IDA
allocation, with the balance financed by IDA’s overall resources4. Upon drawdown, IDA concessional rates
will apply.

Pricing: No commitment fee; front end fee is waived, and renewal fee is currently set at zero.

Proposed next steps
       (i)     MoF and DDM to discuss the operatonalization of the CatDDO in the Bhutan context at the
               approriate forums within the government.
       (ii)    Based on request from the Ministry of Finance, the Bank team mobilizes a team to work with
               the relevant agencies in the Royal Government of Bhutan to initiate the project design.
       (iii)   Discussions on scope, prior actions and triggers with the Ministry of Finance and other
               relevant agencies.
       (iv)    Agreement on DPC with Cat DDO project preparation timeline and implementation modalities
               with the client.




4
    This only applies to the Concessional Core IDA Allocation option, and not the other two options.