May 2017 Disaster Risk Finance Country Note: Georgia World Bank Europe and Central Asia Disaster Risk Management World Bank Disaster Risk Financing and Insurance Program Disaster Risk Finance Country Note: Georgia World Bank Europe and Central Asia Disaster Risk Management World Bank Disaster Risk Financing and Insurance Program 02 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA Acknowledgements This note was prepared by a World Bank team composed of Vica Bogaerts, disaster risk management specialist, Benedikt Signer, disaster risk financing and insurance specialist, Tafadzwa Dube, disaster risk management Specialist, and Marija Bijelic and Natalia Kakabadze, consultants. The team gratefully acknowledges the data, information, and other invaluable contributions made by representatives of the government of Georgia. Without their skills 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 Global Facility for Disaster Reduction and Recovery (GFDRR), which enabled this project. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 03 Table of Contents 02 Acknowledgments 05 Abbreviations 06 Preface 07 Chapter 1: Introduction 10 Chapter 2: Economic Impact of Natural Disasters 12 Chapter 3: Overview of Institutional and Legal Arrangements for Disaster Risk Management and Financing 12 3.1. Legal Framework 13 3.2. Institutional Framework 15 Chapter 4: Public Financial Management of Natural Disasters 19 4.1. Ex Ante Disaster Risk Financing and Insurance Tools 20 4.2. Ex Post Instruments 23 4.3 Case Study: June 2015 Tbilisi Flood 23 4.4 Summary and Funding Gap 25 Chapter 5: Options for Consideration 26 Works Cited and Other Relevant Sources 04 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA FIGURES 16 Figure 1. Three-Tiered Risk Layering Strategy for Governments 24 Figure 2. Funding Gap for 2015 Tbilisi Flood Response (US$ thousand) TABLES 10 Table 1. Historical Disasters in Georgia, 1991–2015 11 Table 2. Tbilisi Floods of 2015: Damages, Losses, and Recovery Needs per Sector (US$ million) 17 Table 3. Sources of Funds Available for Disaster Response in Georgia 18 Table 4. Central Budget Funds Available for Disaster-Related Expenditures and Actual Annual Expenditures on Disasters (thousand GEL) 21 Table 5. International Donations Following Natural Disasters 22 Table 6. Disaster-Related Expenditures and Budget Revisions 23 Table 7. Sources of Financing for 2015 Tbilisi Floods MAPS 07 Map 1. Georgia DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 05 Abbreviations CAT DDO Catastrophe Deferred Drawdown Option DRFI disaster risk financing and insurance EIB European Investment Bank GDP gross domestic product GEL Georgian lari GFDRR Global Facility for Disaster Reduction and Recovery MAgri Ministry of Agriculture MoF Ministry of Finance MRDI Ministry of Regional Development and Infrastructure OCHA Office for the Coordination of Humanitarian Affairs (United Nations) RegFund Fund for the Projects Implemented in the Regions of Georgia UNDP United Nations Development Programme All monetary amounts are Georgian lari (GEL) or U.S. dollars, as indicated. US$1 = GEL 2.4 06 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA Preface This Disaster Risk Financing Country Note is the first activity of the World Bank’s support to the Government of Georgia on financial protection against natural disasters. It takes stock of existing mechanisms and instruments used to finance disaster response in Georgia and lays the foundation for the development of a comprehensive disaster risk financing strategy. Consultations on the findings of this analysis and on the options for next steps will be held in Tbilisi for relevant stakeholders from the government. This note was developed jointly by the World Bank’s Disaster Risk Management Team for the Europe and Central Asia Region and the Disaster Risk Financing and Insurance (DRFI) Program.The note builds on the operational framework for Disaster Risk Finance, which was developed by DRFIP drawing on collaboration with over 60 countries in strengthening their financial resilience to disasters and climate risks. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 07 Chapter 1: Introduction This Disaster Risk Financing Country Note for Georgia As of 2015, Georgia had a population of 3.7 million, with 53 provides an overview of the government’s current approach percent of its people living in urban areas. It is an upper- to financing the costs imposed by natural disasters. It looks middle-income country with a gross domestic product (GDP) at the relevant institutional and legal frameworks and at of US$13.965 billion1 and a GDP per capita of US$3,796.2 the disaster risk finance instruments currently available to the government. Between 2006 and 2014, following structural reforms that stimulated capital inflow and investments, Georgia Georgia is located in the South Caucasus region along the experienced strong GDP growth of about 5 percent per year dividing line separating Asia and Europe. It is bordered on average. This robust record was achieved despite the by the Black Sea to the west and the Caucasus Mountains to the north (map 1). About 80 percent of its territory is 1 World Bank, “Data: Georgia,” http://data.worldbank.org/country/georgia mountainous. (accessed September 2016). 2 World Bank, “GDP per Capita,” http://data.worldbank.org/indicator/ NY.GDP.PCAP.CD (accessed September 2016). 08 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA global financial crisis in 2009, which interrupted growth. Georgia is highly exposed to several natural hazards, In 2015, economic growth moderated to an estimated 2.5 including earthquakes, floods, mudflows, landslides, percent, due to a weaker external environment. avalanches, and droughts. The country is situated in one of the most seismically active regions in the Alpine-Himalayan Despite this strong economic performance, a substantial collision belt, and in the past earthquakes have caused part of the population is still living in poverty. Georgia significant damages to the country.6 For instance, the 1991 continues to have one of the highest poverty rates in the Racha-Imereti and 1992 Pasanauri- Barisakho earthquakes Europe and Central Asia region, even though poverty triggered around 20,000 landslides and rockfalls; these rates have fallen considerably since their peak in 2010. affected about 1,500 settlements, caused 100 deaths, As measured by the US$2.5/day poverty line, poverty in resulted in the loss of around 332,000 hectares of arable Georgia fell from 46.7 percent in 2010 to 32.3 percent in land, and landslides completely buried two villages (Khaiseti 2014; the drop was mainly the result of increased earnings in Sachkere district and Chordi in Oni district).7 for the already employed and increases in social assistance. Unemployment fell to 12.4 percent in 2014, though urban Floods, landslides, and avalanches occur regularly in and youth unemployment remained high at 22 and 31 Georgia, mostly in the mountainous regions and along percent, respectively. Rural households headed by women the major rivers, with recorded high water levels during with children are particularly vulnerable to poverty.3 By the spring and summer months, when snow starts to region, poverty is highest in Kakheti, Shida-Kartli, and melt. Almost all rivers in the country are prone to sudden Mtskheta-Mtianeti, and it is lowest in Tbilisi and Samtskhe increases of water. The rivers most at risk of flooding are Javakheti.4 those in Imereti, Samegrelo, Guria, and Mtskheta-Mtianeti, as well as the rivers of Mtkvari basin (including Alazani).8 The Georgian economy is characterized by high Through 1995, the average number of floods a year was three dollarization and significant fluctuations in the national to five; since 1995, the average number has been between 2 currency, the Georgia Lari (GEL). With a decline in external and 20.9 performance, the current account deficit has widened to 11 percent of GDP, and the GEL has lost 30 percent of its value Over 50 percent of the national territory—including since December 2014. over 100 settled areas—is prone to avalanches. The high level of precipitation, characteristic of the rivers in the Georgia’s public debt remains at moderate levels, standing foothills of the Caucasus, has a significant impact on river at 33.3 percent of GDP in 2014 (up from 32.2 percent of hydrology. Landslides are especially intense in mountainous GDP in 2013). About 80 percent of public debt in 2014 was regions and represent the main impetus for economic external; this external debt was dominated by long-term migration. In the period 1968–2009, approximately 70 multilateral debt (70 percent) and also included some percent of the country’s territory experienced geological bilateral debt (20 percent). Given the highly concessional and hydrometeorological hazards, and 65 percent of the nature of public debt, interest payments average at around 1 population was affected.10 Hail and drought in the eastern percent of GDP a year. Nearly 75 percent of external public part of the country cause especially big losses in Georgia’s debt is at fixed interest rates, thereby reducing interest rate agricultural sector, and the frequency and length of these risk. Domestic financing of Georgia’s deficit, which eases hazards have increased in recent years. The longest exchange market pressures, continued in 2015.5 drought—lasting six months—was recorded in 2000.11 6 UNDP 2014. 7 UNECE 2010. 8 Ministry of Environment and Natural Resources Protection 2011. 3 UNDP 2014. 9 Ibid. 4 World Bank and United Nations 2013. 10 Rukhadze, Vachiberidze, and Fandoevа 2014. 5 World Bank Group 2015. 11 Ibid. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 09 The remainder of this report is organized as follows: Chapter 2 summarizes the economic impacts of recent disasters. Chapter 3 reviews the current institutional and legal framework for disaster risk management and financing. Chapter 4 gives an overview of the public financial management of disasters in Georgia, including ex ante and ex post disaster risk financing and insurance (DRFI) instruments currently in use for budget mobilization, and it looks at the Tbilisi floods of 2015 in some detail. The chapter concludes with a summary of financial resources available and a look at the potential resource gaps. Possible options for a disaster risk financing strategy are given in the final chapter. 10 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA Chapter 2: Economic Impact of Natural Disasters Georgia suffers significant economic losses due to natural The following account of the June 2015 floods in the capital disasters. Over the last 40 years, 70 percent of the country city of Tbilisi provides an example of the financial impact has experienced disasters from hydrometeorological and disasters can have.15 geological hazards.12 Losses incurred between 1995 and 2013 as a result of landslides, floods, drought, storms, avalanches, On the night of June 13–14, 2015, following 10 days of and hail were calculated at GEL 2.7 billion.13 Landslides, continuous and heavy rainfall, intense rainfall over the debris flows, and mudslides have destroyed irrigation southeastern part of the Vere River drainage basin resulted systems, agricultural facilities, and road infrastructure. The in a flash flood, which affected the Vake and Saburtalo severe drought of 2000 affected almost 700,000 people, and neighborhoods of Tbilisi, as well as other areas along its adverse effect on agriculture and electricity generation the right bank of the Mtkvari (Kura) River and various by hydropower stations reduced GDP by 5.6 percent.14 places outside the city. Approximately 100 mm of rainfall fell over the Vere River drainage basin in only two hours, Data on historical damage and losses resulting from natural causing a flood whose peak flow was estimated at 468 disasters in Georgia are scarce. Table 1 summarizes disaster m3/s. In addition, a large landslide (of about 1 million m3) losses for 1991–2015 as recorded in the international EM- struck near the village of Akhaldaba (about 10 km west DAT database. of Tbilisi) and poured trees, rocks, soil, and other debris Table 1. Historical Disasters in Georgia, 1991–2015 Events People affected Total damage Disaster Time period (number) Total deaths (number) (US$ million) Flood 1995–2015 14 61 153,078 82a Earthquake 1991–2009 4 15 30,212 350 Storm 2001–2013 3 0 8,668 91 Drought 2000 1 — 696,000 200 Source: D. Guha-Sapir, R. Below, Ph. Hoyois, EM-DAT: The CRED/OFDA International Disaster Database, Université Catholique de Louvain, Brussels, www.emdat.be (accessed May 2016). Note: — = not available. a. A post-disaster needs assessment carried out for the 2015 Tbilisi floods (UNDP and World Bank 2015) calculated damages at US$24 million (as shown in the discussion of the 2015 Tbilisi flood below). This differs substantially from the EM-DAT figure of US$45million. 12 UNDP 2014. 13 Rukhadze, Vachiberidze, and Fandoevа 2014. 14 Ibid. 15 This account of the Tbilisi floods draws on UNDP and World Bank (2015). DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 11 down a hillside into the already overflowing Vere River, communications systems, and it destroyed much of Tbilisi’s transforming it into a massive torrent of mud and debris. zoo (killing most of its animals). According to the post- disaster needs assessment (UNDP and World Bank 2015), This disaster had devastating socioeconomic consequences economic impact was high: the flood caused GEL 55 million for Tbilisi. The lives of twenty-one people were lost, 67 (US$24.3 million) in physical damage and GEL 10 million families were displaced, and around 700 people were (US$4.37 million) in financial losses, with US$118 million directly affected. Indirectly, the disaster affected virtually needed for recovery (see table 2). Recovery needs were the entire urban population of Tbilisi because of the high relative to damage figures both because recovery was physical and psychological impact it had on daily life. planned to “build back better” and because the condition of The floods damaged around 40 roads, the properties infrastructure was poor before the disaster. of 67 families, and several urban infrastructure and Table 2. Tbilisi Floods of 2015: Damages, Losses, and Recovery Needs per Sector (US$ million) Sector Damages Losses Recovery needs Housing 6.9 0.77 21.0 Transport 14.8 3.0 33.5 Zoo 1.4 0.6 1.86 Water/sanitation 1.2 0.0 61.6 Total 24.3 4.37 117.96 Source: UNDP and World Bank 2015. 12 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA Chapter 3: Overview of Institutional and Legal Arrangements for Disaster Risk Management and Financing 3.1. Legal Framework There are several legal acts governing disaster risk The budget follows cash-based accounting principles, management and financing in Georgia: meaning that unspent funds “lapse” at the end of the year. The Law of Georgia on Civil Safety entered into force on Annual Laws on State Budget of Georgia define yearly June 12, 2014.16 It serves as an umbrella law for regulating budget allocations for different budget users and their the field of disaster management in Georgia and was annual programs. developed to bring Georgia closer to civil safety mechanisms of the European Union. The law defines measures for the The Organic Law of Georgia on Local Self-Government protection of population and territory and establishes regulates local finances and property, including funding rules for emergency prevention, readiness, reaction, and for eliminating the consequences of natural disasters. rehabilitation works. It also outlines responsibilities of It recognizes the concept of special transfers—that is, various ministries and agencies in managing and reducing financial aid rendered between the state budget, the budget disaster risk.17 of an autonomous republic, and the budget of a self- governing unit.19 According to the law, a special transfer The Budget Code of Georgia creates the overall legal may be requested only if the reserve fund of the respective framework for finance, including disaster risk financing.18 municipal budget is not sufficient to finance post- disaster activities. 16 The Civil Safety Law replaced the Law on Protection of the Population and Territory from Natural and Man-made Emergency Situations. 17 UNDP 2014. 18 Budget Code of Georgia, http://www.mof.ge/images/File/budget_ 19 Organic Law of Georgia Local Self-Government Code, legislation/BUDGET_CODE_OF_GEORGIA_ENG.pdf. https://matsne.gov.ge/en/document/download/2244429/15/en/pdf. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 13 3.2. Institutional Framework The Ministry of Regional Development and Infrastructure (MRDI), the Ministry of Agriculture (MAgri), or the A number of institutions are involved in disaster risk Ministry of Health acts as a mediator between local management and financing in Georgia:20 governments and MoF. The relevant ministry—determined by the type of damage sustained—requests an allocation The Ministry of Finance (MoF) is in charge of overall of additional funds (a transfer) to a disaster-affected disaster risk financing in the country. According to the municipality when the local budget reserve fund is not Civil Safety Law, MoF supports the funding of civil security sufficient. measures from budgets at the national, autonomous republic, and municipal levels, as well as other sources The Natural Disaster Prevention and Rapid Response allowed by Georgian legislation. The ministry does not have Unit (established in 2014 under MRDI) is mandated to a dedicated fiscal risk department. The Macroeconomic integrate disaster prevention, early warning, response, Analysis and Forecasting Department and Budget and post-disaster recovery in infrastructure planning and Department look at disaster risk financing from the development. It is also involved in preparation of requests standpoint of their respective activities. The Public Debt to allocate funds for disaster relief activities from the and External Financing Department are responsible for state budget. implementing any post-disaster borrowing, if necessary. The Social Service Agency administers a number of social The Emergency Management Agency within the Ministry and health protection programs aimed at supporting the of Internal Affairs coordinates the roles of responsible most vulnerable groups and improving the quality of ministries or agencies, as defined in the National Response services available to citizens. Disaster-related indicators Plan for Natural and Technological Emergency Situations. are not taken into account by social assistance programs It focuses on prevention of, preparedness for, and response for vulnerable families (for example, poor families who to both natural and man-made disasters. The International live in particularly hazard-prone areas do not receive any Relations Department of the Ministry of Internal Affairs additional support).21 However, under the State Budget Law ensures the establishment of relations with donor states and of 2012, the Social Service Agency became responsible for organizations, relevant agencies of foreign countries, and providing the population with medical services in cases of international organizations. natural disasters, catastrophes, and other emergencies. In addition, after the Tbilisi floods of 2012, the agency was The Ministry of Environment and Natural Resources directed to issue cash compensation to disaster-affected Protection is in charge (among other things) of disaster individuals and households.22 risk reduction strategies and policies, planning of disaster risk reduction activities, establishment of a disaster risk The affected municipality has primary financial reduction database, and capacity development related to responsibility for remedying the effects of disasters and for early warning systems, as well as monitoring of ongoing protecting the population and the territory from emergency hydrometeorological, geodynamic, and geological events. situations.23 Nonetheless, Georgian law allows for other sources of funds to be mobilized in an emergency, including The State Security and Crisis Management Council the state budget of Georgia, budgets of the Autonomous was established in December 2013 and is under the prime Republics of Achara and Abkhazia, local budgets, insurance minister’s office. It coordinates and manages any kind of funds, and some other sources. According to the Article national-level crisis response. It also manages the Crisis 67 of the Budget Code of Georgia, a special fund can be Operations Centre. created within budget of local governments for unexpected 20 The descriptions here draw on UNECE (2015) and the Statute of the 21 UNDP 2014. Ministry of Internal Affairs of Georgia, http://police.ge/files/debuleba/ 22 World Bank and UN 2013. Statute%20of%20the%20Ministry%20of%20Internal%20Affairs%20 23 Budget Code of Georgia, 2009, http://www.mof.ge/images/File/ of%20Georgia.pdf. budget_legislation/BUDGET_CODE_OF_GEORGIA_ENG.pdf. 14 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA expenses. The volume of this fund cannot exceed 2% of the annual budget allocation. In practice, when a natural disaster occurs, the affected areas is visited by a commission made up of officials from the municipality’s sectoral departments (i.e., agriculture, construction, health), the line ministry, and the Emergency Management Agency. Using current market prices, the commission calculates an estimation of the losses. The local self-government requests support from the national government only if needed funds are higher than those available in the local contingency reserve. The required funding can be provided from the reserve funds of the government or president, from the Fund for the Projects Implemented in the Regions of Georgia (RegFund), or from line ministry budgets, depending on the character of damage sustained. Local reserve funds serve as a primary source of liquidity for financing of response activities, given that they can be mobilized immediately and that obtaining any additional financing (via special transfers) from the national level requires some time. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 15 Chapter 4: Public Financial Management of Natural Disasters The ability of the government to rapidly mobilize funding 1. Retention, in which the government decides to assume for an effective response to a disaster depends largely and manage disaster losses through its budgetary on the financial instruments it puts in place beforehand. resources¾for example, through the creation of A comprehensive approach to risk financing can help a budgetary reserves, funds, or post-disaster budget government become an active risk manager rather than reallocations, or through contingent financing an emergency borrower. This chapter reviews the existing or borrowing financial arrangements available to the government of Georgia to meet post-disaster expenditures. 2. Transfer, in which the government transfers potential future disaster losses to financial or insurance markets by Disaster risk finance aims to increase the capacity of paying a premium, such as through traditional insurance, national and local governments to provide immediate alternative risk transfer products, or contingent emergency funding as well as long-term funding for financing mechanisms reconstruction and development. In addition to ensuring the availability of sufficient resources, disaster risk finance Combining different instruments to protect against events must also set up systems, mechanisms, and procedures of different frequency and severity is known as risk layering for effectively allocating and disbursing the necessary (figure 1). A bottom‐up approach is recommended: the funds in the aftermath of a disaster. Once the government government first secures funds for recurring disaster events has a good understanding of the risk it faces, a financial and then increases its post-disaster financial capacity to risk management strategy can be designed and financing finance less frequent but more severe events. Such risk mechanisms can be implemented. layering ensures that cheaper sources of money are used first, with the most expensive instruments used only in International experience has shown that a government exceptional circumstances. For example, insurance ideally combines different instruments to protect cost- effectively against events of different frequency and severity. Financing mechanisms can be grouped into two main categories: 16 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA Figure 1. Three-Tiered Risk Layering Strategy for Governments Source: World Bank and GFDRR 2014. can provide cover against extreme events, but it is not historically supported the population with one-time appropriate for protecting against low-intensity events that financial compensations, food, and fertilizers.24 recur regularly. For this lowest layer of risk, the government could consider setting up a dedicated contingency fund. Table 3 summarizes available financing sources and amounts for the different levels of disaster risk. It shows how much Georgia currently does not have an explicit strategy or is potentially available for disasters, assuming that all policy in place to systematically manage the financial contingency reserves can be used for remedying disaster impact of natural disasters. The government has established consequences. First, the local-level funds are mobilized. If contingent budgetary lines at both local and national levels, those funds are not sufficient, local governments turn to as well as several other financing instruments. However, the national government (a line ministry such as MRDI or the government remains very exposed to more extreme MAgri, based on the nature of the damage), which through events, relying heavily on ex post mechanisms such as MoF then transfers additional funds from one or more budget reallocations or international donor assistance for of the available national funds or from ministry budget response and recovery. Catastrophe insurance penetration allocations. The source again depends on the nature of is very low. According to the “National Progress Report damage, as well as the degree. on the Implementation of the Hyogo Framework for Action,” reallocations are one of the primary sources of compensations for high-impact disasters in Georgia. In the aftermath of natural disasters the government has 24 Ministry of Environment and Natural Resources Protection 2015. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 17 Table 3. Sources of Funds Available for Disaster Response in Georgia Disaster risks Financial source available Amount of funds available Donor assistance Unpredictable and unreliable—e.g., US$15.8 million 2000–2015; in 2015 GEL 496,000 / US$220,000 for High-risk layer Tbilisi floods (e.g., major floods, major Sovereign risk transfer Not in use earthquakes) Insurance of public assets Scarcely in use Tax policy No reported use, but legally possible Emergency borrowing Used only for Tbilisi floods (€50 million from European Investment Bank). Unpredictable. Fiscal space exists. Emergency budget/budget Can be used to complement reserve funds in case reallocation emergency budget is activated. Unpredictable amounts. Medium-risk layer (e.g., regional No more than 2 percent of annual budget allocation floods, minor cumulatively with Fund of Government Reserve Fund of the President earthquakes) (in 2016, GEL 2.8 million / US$1.2 million) Reserve Fund of the Government No more than 2 percent of annual budget allocation cumulatively with Fund of the President (in 2016, GEL 61 million / US$26 million) RegFund In 2016, GEL 269 million / US$ 115 million  Financing for damage rehabilitation based on nature Budgets of line ministries Low-risk layer of damage. Unpredictable (e.g., localized Reserve funds of autonomous floods, droughts, No more than 2 percent of annual budget allocation republics landslides) Reserve funds of local No more than 2 percent of annual budget allocation governments (in 2016, GEL 12.4 million / US$6.3 million) Source: Figures are based on discussions with government officials and publicly available information. In practice, however, contingency reserves are not down by source of funding, for the period 2010–2015. We exclusively earmarked for disaster-related expenditures; can conclude that even in the years when major natural they can be accessed for financing other expenditures disasters occurred—such as 2015, the year of the Tbilisi that have not been budgeted for elsewhere. Table 4 shows floods—not all budgeted funds were used for remedying annual budget allocations and executions for various budget disaster consequences. lines, as well as annual expenditures on disasters, broken 18 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA Table 4. Central Budget Funds Available for Disaster-Related Expenditures and Actual Annual Expenditures on Disasters (thousand GEL) Reserve Reserve Ministry Total Fund of Fund of MRDI MAgri of Health (thousand Fund President Government RegFund budget budget budget Other Total US$) Budget plan 54,563 54,011 240,825 728,221 38,680 1,611,004 2,727,304 1,538,416 Actual budget 2010 54,315 53,236 238,252 716,705 30,640 1,605,041   2,698,189 1,521,993 execution Annual expenditure — — — 14,700 0 —   14,700 8,292 on disasters Budget plan 49,290 54,516 359,205 854,485 86,242 1,677,135   3,080,873 1,844,502 actual budget 2011 49,023 54,207 356,931 834,568 85,112 1,665,948   3,045,789 1,823,498 execution Annual expenditure 50 50 10,007 17,733 0 —   27,840 16,668 on disasters Budget plan 49,800 67,238 387,439 767,980 241,601 1,823,155   3,337,213 2,014 Actual budget 2012 48,780 65,268 378,950 655,075 228,360 1,793,863   3,170,296 1,913,621 execution Annual expenditure 0 93 6,315 7,700 0 —   14,108 8,516 on disasters Budget plan 9,996 102,765 448,328 1,003,600 241,500 2,345,000   4,151,189 2,390,825 Actual budget 2013 9,944 97,971 355,321 798,595 227,430 2,126,457   3,615,718 2,082,427 execution Annual expenditure 0 0 38,931 7,400 0 —   46,331 26,684 on disasters Budget plan 3,708 88,006 317,701 935,735 272,115 2,632,649   4,249,914 2,292,154 Actual budget 2014 3,672 82,741 307,567 904,963 265,756 2,642,784   4,207,483 2,257,718 execution Annual expenditure 0 14 41,316 10,200 11,800 —   63,330 33,982 on disasters Budget plan 4,977 170,013 404,842 880,149 311,106 2,882,780 12,150 4,666,017 1,922,808 Actual budget 2015 4,692 167,944 399,584 898,398 314,332 2,906,169 9,904 4,701,023 1,962,931 execution Annual expenditure 200 4,945 71,060 6,900 1,947 — 3 85,055 35,515 on disasters Source: Data for 2011–2015 provided by MoF. Before 2011, the data on the expenditure of funds on disaster were not produced. Note: — = not available. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 19 4.1 Ex Ante Disaster Risk the damage sustained, the budgets of various line ministries (typically MAgri, MRDI, or Ministry of Health) can be used Financing and Insurance Tools to finance disaster-related expenditure. 4.1.1. Budget Reserves Under the Budget Code of Georgia, the cumulative size of the Reserve Fund of the President of Georgia and the Reserve Budget contingencies together with reserves are the Fund of the Government of Georgia cannot exceed 2 percent cheapest source of ex ante risk financing and are generally of the total annual budget allocation. Resources from these used to cover recurrent losses. In 2016, the amount two funds are used for expenditures not already included allocated for addressing natural disasters was GEL 39.6 in the budget; the Budget Code of Georgia specifies that million. This category includes local-level reserve funds, they are for contingencies of national significance such contingent credit, and disaster insurance. as natural and man-made disasters.26 Decisions on use of these reserve funds are taken by the president and the Local-level reserve funds. As the primary carriers of financial government, respectively, in accordance with the amounts responsibility, local authorities create reserve funds to provided for in the national budget and executed by the finance their contingent liabilities. The Budget Code of MoF. As table 4 shows, the cumulative amount of funds has Georgia and Local Self-Government Code stipulate that the been steady over the past years, but an increasing portion size of such reserve funds should not exceed 2 percent of of resources has recently been allocated to the government total annual budget allocations. Local reserve funds are not fund. In the period 2010–2014, only a small portion of these exclusively earmarked for natural disasters, but are available funds was required and used to finance disaster-related for all unforeseen (and not budgeted for) expenditures. expenditures. In 2015, the Tbilisi floods triggered the need Final decisions about allocation depend on mayors or to mobilize both these funds, though only to a limited municipal governors. In 2016, the total amount of reserve extent: GEL 200,000 (US$80,000) was used from Fund for funds in municipalities was GEL 15 million (approx. US$6.3 the President, and GEL 5 million (US$2.065 million) was million). Some municipalities also have small amounts in used from the Fund for the Government. The 2016 budget their social protection budget available for financing social provides GEL 2.8 million (US$1.2 million) for the former issues or to support vulnerable populations in case of fire, and GEL 60.9 million (US$26 million) for the latter. storms, or other small events. The Fund for the Projects Implemented in the Regions of Reserve funds of autonomous republics. Like municipalities, Georgia is set up in the central budget and managed by the provincial governments are also required to reserve 2 MoF based on the decision made by the government of percent of their annual budget for unforeseen expenditures, Georgia. According to the “National Progress Report on which include natural disasters. These funds are allocated the Implementation of the Hyogo Framework for Action,” by the relevant financial agency based on decisions of the the RegFund covers three areas, one of which is disaster chairmen of the governments of the autonomous republics.25 response and humanitarian aid.27 This fund represents a very significant source of disaster-related financing, as table National level. There is no special budget item for disaster 4 shows. Its contribution was most evident in 2013 and financing in Georgia’s central budget, but there are three 2014, when over US$22 million a year was allocated from funds from which financing is allocated if there is a need: the RegFund for disasters. Likewise, after the Tbilisi floods the Reserve Fund of the President of Georgia, the Reserve of 2015, the largest source of government financing was Fund of the Government of Georgia, and the Fund for the the RegFund, which contributed GEL 71.1 million (US$30 Projects Implemented in the Regions of Georgia; these are million). The 2016 state budget designated GEL 269 million described below. In addition, depending on the character of (or approximately US$115 million) to the RegFund. 26 Ibid. 25 Budget Code of Georgia, 2009 27 Ministry of Environment and Natural Resources Protection 2015. 20 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 4.1.2 Contingent Credit the insurance premium from the state budget; each insurer of a land parcel can receive 70 percent of co-financing for For the middle risk layer, the budget reserves of the each crop envisaged under the program (50 percent for government would not be sufficient; this was the case in vine crops).28 In 2014 and 2015, the state budget allocated the Tbilisi floods of 2015. So far, Georgia does not have any 10 million GEL and in 2016 9 million GEL for the insurance contingent credit arrangements linked to natural disasters. subsidy program under the Ministry of Agriculture. To facilitate more rapid access to potentially significant financing sources, international partners such as the World Bank offer contingent credit for disaster recovery and reconstruction purposes. Georgia, as a middle-income 4.2 Ex Post Instruments country, is eligible for the Development Policy Loan with a Catastrophe Deferred Drawdown Option (CAT DDO) 4.2.1 Budget Reallocations offered by the World Bank. The CAT DDO offers the government access to immediate liquidity through an active For small-scale damage, the 2 percent of reserve funds but undisbursed line of credit. found in municipal budgets is used to finance disaster recovery activities. However, in the event of a larger 4.1.3 Disaster Insurance disaster, these reserve funds are not sufficient, and a special transfer from the national level is often requested. A special Property catastrophe risk insurance aims to protect transfer may be requested only if the reserve fund of the homeowners and small and medium enterprises against respective municipal budget is not sufficient to finance the loss arising from property damage. Disaster risk insurance activities. The request is submitted through a line ministry is available in Georgia, but it is underutilized; the insurance (typically MRDI, MAgri, or Ministry of Health), depending market in general has very low penetration, leaving the on the nature of damage, and the line ministry acts as a government with potentially large fiscal exposure. There is mediator recommending that MoF allocate additional funds no compulsory private property insurance against natural to the disaster-affected municipality.29 disasters, and commercial banks issuing mortgage loans do not require their customers to purchase such insurance. Moreover, with the approval of the minister of finance, each Nor is there disaster-related insurance in the construction ministry has the right to reallocate a set amount—up to 5 sphere. A major part of the population has limited knowledge percent of the allotments envisaged by the annual budget and understanding of the role of catastrophe insurance. for the ministry—from one budget line to another. Implicitly, households have high expectations that the government will pay for damages. These expectations work Likewise, local authorities can reallocate their budgets so against demand for insurance, even though insurance could as to shift available funding between different programs. A reduce the fiscal impact of disasters by transferring a portion municipality may, within its powers, use its own receipts, of the financial burden to insurers. including transfers, at its discretion, according to the Law on Local Self-Government. Georgia has no compulsory insurance for public assets and no insurance strategy on the government level. According to 28 The program’s beneficiaries are owners of small land plots (up to 5 hectares of land or up to 30 hectares for cereals). Cooperatives government officials, some public assets are insured, while are the subject of the insurance. The program is implemented by a others are not. noncommercial legal entity, the Agricultural Project Management Agency. The agency enters into contracts with several insurance companies, which then cover damage resulting from hail, excess rainfall, storm, and autumn frost (for citrus crops for the period September 1– On the other hand, crop and land insurance is growing. In November 30). 2014, the government introduced an agro-insurance program 29 If international roads are damaged, the needed amount is allocated from the 25 01 10 account of the MRDI Roads Department. The for small land owners against hail, excess rainfall, storm, and Roads Department constructs and (in case of disasters) repairs the international and municipal roads and bridges; within disaster autumn frost. The government subsidizes the largest share of prevention activities, it implements fortification works for international and municipal roads. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 21 Table 5. International Donations Following Natural Disasters Emergency / date Amount committed / contributed (US$) Drought—August 2000 10,341,843 Drought—February 2002 834,654 Earthquake—April 2002 3,375,511 Floods—April 2005 1,327,943 Earthquake—September 2009 14,388 TOTAL 15,894,339 Source: UN OCHA Financial Tracking Service, https://fts.unocha.org/pageloader.aspx?page=emerg-emergencyCountryDetails&cc=geo (accessed September 2016). 4.2.2 Donor Aid 4.2.3 Emergency Borrowing Currently, several international cooperation partners Georgia’s public debt in 2013 was 32.2 percent of GDP, provide funding through various programs, projects, and increasing to 33.3 percent in 2014; these figures imply that initiatives at national and local levels. A Donor Coordination fiscal space exists for emergency borrowing in the event of Council was recently established under the prime minister’s a natural disaster. According to government officials, the office to strengthen donor coordination. only time borrowing was used for post-disaster financing was in the aftermath of Tbilisi 2015 floods, when the According to the Financial Tracking Service of the UN European Investment Bank (EIB) approved a €100 million Office for the Coordination of Humanitarian Affairs loan, split into two €50 million components (one of which (OCHA), international donor assistance of almost US$16 was for disaster-related reconstruction). Loan proceeds million was contributed for recovery after natural disasters are being used to address the needs resulting from the in the period from 2000 to 2009 (table 5). More recent data damage inflicted by the floods and to rebuild and upgrade were not available. infrastructure in selected municipalities across the country.31 The World Bank and United Nations report that following the Tbilisi floods in 2012 and 2015, international partners and donors supported the needs assessments and provided immediate funds for relief and recovery.30 During the events, special treasury accounts were created within the Tbilisi Municipality for donations in lari and within the Ministry of Finance for donations from abroad. Georgia will likely continue to look to donor support in the event of a major catastrophe. But it cannot expect donor assistance in response to less severe but frequently recurring events. In any case, donor financing is highly unpredictable and does not allow the government to plan financing for a fast disaster response. In addition, disaster assistance may decline in the future as Georgia becomes 31 European Investment Bank, “Georgia: EIB Supports Urban more economically prosperous. Reconstruction and Highway Upgrading with EUR 150m,” February 11, 2016, http://www.eib.org/infocentre/press/releases/all/2016/2016-037- georgia-eib-supports-urban-reconstruction-and-highway-upgrade- 30 See World Bank and UN (2013); UNDP and World Bank (2015). with-eur-150m.htm. 22 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA Table 6. Disaster-Related Expenditures and Budget Revisions Fiscal year Amount allocated for addressing Share in the central Number of budget natural disasters (GEL) budget (%) revisions during the year 2011 10,106,887 0.14 3 2012 167,393,865 2.14 2 2013 40,085,369 0.49 0 2014 34,702,415 0.39 0 2015 81,680,715 0.84 2 Source: Authors with information from Ministry of Finance. 4.2.4 Tax Policy 4.2.4 Emergency Budgets Tax policy has not been used in Georgia as an instrument The Budget Code of Georgia (articles 32, 70, and 93) to raise additional revenue following disasters. Nor have provides for emergency budgets at different levels (national, tax deductions been offered as incentives to assist with municipal, and autonomous republic).33 These can be financing the cost of disasters. However, under Georgia’s adopted for targeted financing of events connected with Budget System Law, Parliament is allowed to finance emergency or military situations. increased expenditures relating to a state of emergency by enacting taxes, fees, or other obligatory payments, as In years during which significant natural disasters occurred, proposed by the government with the agreement of the such as 2012 and 2015, a number of revisions were made to president.32 Even though this can be a relatively easy way for the state budget. Conversely, in 2013 and 2014, no revisions the government to collect the necessary funds, it may not of the state budget took place (table 6). The implication be the most effective method, especially if large parts of the is that in years without a significant natural disaster, population are directly or indirectly affected by a disaster. budget funds were adequate to cover disaster-related expenditures—around GEL 39 million (US$22.4 million) was allocated from the RegFund in 2013 and around GEL 41 million (US$22.2 million) in 2014. In those years other funds were drawn as well: in 2013, GEL 7.4 million (US$4.26 million) came from MRDI’s budget, and in 2014 GEL 10.2 million (US$5.5 million) came MRDI’s budget and GEL 11.8 million (US$6.3) from MAgri’s. 32 Budget System Law, 2004, http://www1.worldbank.org/publicsector/pe/ 33 Budget Code of Georgia, http://www.mof.ge/images/File/budget_ BudgetLaws/Georgia5JUNE06.pdf. legislation/BUDGET_CODE_OF_GEORGIA_ENG.pdf. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 23 4.3 Case Study: Treasury accounts were created within the Tbilisi Municipality for donations in lari and within the Ministry June 2015 Tbilisi Flood of Finance for donations from abroad. The immediate response was financed through the Tbilisi City Hall and On June 14, 2015, the day the Tbilisi flood occurred, the Tbilisi budget as well as some transfers from budgets Georgia’s president ordered establishment of an on-site of other local governments, with the largest share coming Emergency Coordination Group, chaired by the prime from the state budget. Donations from many large minister and comprising members of the Ministry of companies—including commercial banks and insurance Internal Affairs, the Ministry of Finance, the Ministry and pharmaceutical companies—represented the second- of Defense, the Ministry of Regional Development and largest source of financing. While there was no borrowing Infrastructure, and other line ministries. The Emergency immediately after the disaster, MoF for the first time asked Coordination Group coordinated a national emergency donors for disaster-related financial support. Insurance relief response. companies paid out GEL 4.6 million (slightly under US$2 million) to policyholders. Half of the claims were paid for On July 26, the Ministry of Finance formally asked the corporate property. United Nations, the World Bank, and other international partners to offer support by conducting a joint assessment International donations, private insurance, and domestic of the impacts of the disaster and related recovery and donors’ charity support represented a significant portion of reconstruction requirements. The assessment estimated the secured funding (see table 7). Together with the budget financial requirements for recovery at GEL 268 million allocations, funding was sufficient to cover damages and (US$118 million) (UNDP and World Bank 2015). Recovery losses and reinstate economic activity. However, given the needs refer to the financing required to help affected people recovery needs assessment of GEL 268 million (US$118 recover their pre-disaster level of household income, to million), the €50 million EIB loan, extended in February restore the supply of and access to basic services (health 2016, was necessary to at least partially finance the gap, care, education, water and sanitation, etc.), and to ensure though a funding gap of GEL 62.5 million (US$36 million) recovery of production in sectors such as agriculture, for full recovery remains unbridged. industry, commerce, and tourism. Table 7. Sources of Financing for 2015 Tbilisi Floods Sources of financing GEL thousand US$ thousand EIB loan EUR 50million 130,000 54,000 State Budget 34,881 14,564 Tbilisi Municipality budget 3,179 1,327 Transfers between local budgets 41 17 Charity 23,837 9,953 Donors 496 207 Private Insurance 4,639 1,937 Total 197,073 82,006 Source: Authors with information from Ministry of Finance. 24 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 4.4 Summary and Funding Gap Public as well as private assets remain largely uninsured, and alternative risk transfer instruments do not exist. In The current financing available for disaster response previous disasters, costs that were not covered by public is insufficient to cover larger events, as the case of the funds were partially financed by donor assistance, which is 2015 Tbilisi floods demonstrated: public funds made up a often unpredictable, or reallocated from existing projects. significant portion of post-flood financing, but a substantial Georgia has no strategy or policy framework in place to funding gap remained (figure 2). The lack of sufficient actively manage the financial impact of natural disasters. It funds represents a significant risk; the government remains is important that all levels of government understand the exposed to more extreme events and relies heavily on current financing requirements and take the appropriate domestic and international donor assistance for relief, fiscal preparedness measures. recovery, and reconstruction. In its review of the disaster risk financing and insurance instruments available in Georgia, this chapter indicates that the number of instruments available is limited, and that the government currently relies largely on budgetary reserves and ex post instruments such as budget reallocations and borrowing to meet post-disaster needs. Figure 2. Funding Gap for 2015 Tbilisi Flood Response (US$ thousand) $120,000 Resource gap $100,000 $35,994 Funding received $80,000 $60,000 $82,006 $40,000 $20,000 0 $118,000 Funding needed, USD thousand Source: Ministry of Finance. DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA 25 Chapter 5: Options for Consideration Drawing on information compiled in this note and Recommendation 2: Explore the option of using consultations with all relevant stakeholders, the government contingent credit as a complementary budget resource may want to elaborate its priorities for strengthening for rapid liquidity to sustain emergency response. As an financial resilience in a comprehensive DRFI strategy. This economically stable middle- income country, Georgia is initial assessment has identified the following key gaps: eligible for a contingency development policy loan from the World Bank (CAT DDO). This loan would make resources • It is unclear how much of the government budget has available immediately after a disaster to serve as bridge to be set aside for immediate disaster response, and for financing until other domestic funds can be reallocated or long-term recovery in particular. international aid is received. • While current disaster funds seem sufficient to cover Recommendation 3: Strengthen insurance penetration recurrent losses, the government remains exposed to and explore insurance of public assets. The government more extreme events, relying heavily on international may wish to consider promoting a culture of insurance and donor assistance for response, relief, and recovery. help develop private catastrophe risk insurance markets. The government could also consider developing a program • The World Bank has obtained limited information on for insuring public assets (such as public buildings and the total exposure of public assets, and the government bridges) and critical infrastructure (such as power plants). probably lacks complete information as well. This approach could also serve as an incentive to invest in better risk assessment and risk reduction activities (such The government may want to consider the following options as retrofitting) to reduce losses and lower the cost of for consideration, which are based on the above findings: insurance Recommendation 1: Establish policy priorities for DRFI to be defined by the government, and strengthen financial planning for disasters at all levels. This step will lead the way in helping the national government to develop a DRFI policy note, and to move toward implementing an optimal combination of DRFI instruments, using a risk layering strategy. Furthermore, local governments could consider preparing action plans for disaster risk finance, based on the national DRFI policy documents. 26 DISASTER RISK FINANCE COUNTRY NOTE: GEORGIA Works Cited and Other Relevant Sources Government of Georgia. 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