Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD2917 INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT PAPER ON A PROPOSED ADDITIONAL GRANT IN THE AMOUNT OF SDR 1.8 MILLION (US$2.5 MILLION EQUIVALENT) AND RESTRUCTURING TO THE REPUBLIC OF THE MARSHALL ISLANDS FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM September 6, 2018 Social, Urban, Rural And Resilience Global Practice East Asia And Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective Jul 31, 2018) Currency Unit = US$ US$ 1.40487 = SDR 1 FISCAL YEAR October 1 - September 30 ABBREVIATIONS AND ACRONYMS AF Additional Financing DIDA Division of the International Development Assistance GDP Gross Domestic Product GRS Grievance Redress Service IDA International Development Association MOF Ministry of Finance OF Original Financing PCRAFI Pacific Catastrophe Risk Assessment and Financing Initiative PCRIC Pacific Catastrophe Risk Insurance Company PDO Project Development Objective PICs Pacific Island Countries PREP Pacific Resilience Program PPSD Project Procurement Strategy for Development RAC Regional Advisory Committee RMI Republic of the Marshall Islands Regional Vice President: Victoria Kwakwa Country Director: Michel Kerf Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Manager: Abhas Kumar Jha Task Team Leader(s): Artessa Saldivar-Sali, Samantha Jane Cook The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) BASIC INFORMATION – PARENT (PACIFIC RESILIENCE PROJECT UNDER PACIFIC RESILIENCE PROGRAM - P155257) Country Product Line Team Leader(s) Marshall Islands IBRD/IDA Artessa Saldivar-Sali Project ID Financing Instrument Resp CC Req CC Practice Area (Lead) P155257 Investment Project GSU08 (9349) EACNF (6680) Social, Urban, Rural and Financing Resilience Global Practice Implementing Agency: Ministry of Finance ADD FIN TBL1 Is this a regionally tagged project? No Bank/IFC Collaboration No Original Environmental Approval Date Closing Date Current EA Category Assessment Category 19-Jun-2015 30-Nov-2020 Partial Assessment (B) Partial Assessment (B) Financing & Implementation Modalities Parent [ ] Multiphase Programmatic Approach [MPA] [ ] Contingent Emergency Response Component (CERC) [✓] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-Linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a Non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made disaster [ ] Alternate Procurement Arrangements (APA) Jul 15, 2018 Page 1 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) Development Objective(s) To strengthen the financial protection of the Republic of Marshall Islands. Ratings (from Parent ISR) RATING_DRAFT_ NO Implementation Latest ISR 09-Dec-2016 16-Jun-2017 20-Oct-2017 26-Mar-2018 24-Jul-2018 07-Aug-2018 Progress towards achievement of S S S S S S PDO Overall Implementation S S S S S S Progress (IP) Overall Safeguards Rating Overall Risk S S S M M M BASIC INFORMATION – ADDITIONAL FINANCING (ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM - P166974) ADDFIN_TABLE Urgent Need or Capacity Project ID Project Name Additional Financing Type Constraints P166974 ADDITIONAL FINANCING Restructuring, Scale Up No FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM Financing instrument Product line Approval Date Investment Project IBRD/IDA 27-Sep-2018 Financing Projected Date of Full Bank/IFC Collaboration Jul 15, 2018 Page 2 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) Disbursement 31-Dec-2022 No Is this a regionally tagged project? No Financing & Implementation Modalities Child [✓] Series of Projects (SOP) [ ] Fragile State(s) [ ] Disbursement-Linked Indicators (DLIs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a Non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made disaster [ ] Alternate Procurement Arrangements (APA) [ ] Contingent Emergency Response Component (CERC) Disbursement Summary (from Parent ISR) Net Source of Funds Total Disbursed Remaining Balance Disbursed Commitments IBRD % IDA 1.50 1.50 0.03 98 % Grants % PROJECT FINANCING DATA – ADDITIONAL FINANCING (ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM - P166974) PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFi n1 SUMMARY (Total Financing) Proposed Additional Total Proposed Current Financing Financing Financing Jul 15, 2018 Page 3 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) Total Project Cost 1.65 2.90 4.55 Total Financing 1.65 2.90 4.55 of which IBRD/IDA 1.50 2.50 4.00 Financing Gap 0.00 0.00 0.00 DETAILS - Additional Financing NewFinEnh1 World Bank Group Financing International Development Association (IDA) 2.50 IDA Grant 2.50 Non-World Bank Group Financing Counterpart Funding 0.40 Borrower 0.40 IDA Resources (in US$, Millions) Credit Amount Grant Amount Total Amount National PBA 0.00 0.83 0.83 Regional 0.00 1.67 1.67 Total 0.00 2.50 2.50 COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [ ✔ ] No Does the project require any other Policy waiver(s)? [ ] Yes [ ✔ ] No Jul 15, 2018 Page 4 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) INSTITUTIONAL DATA Practice Area (Lead) Social, Urban, Rural and Resilience Global Practice Contributing Practice Areas Climate Change Environment & Natural Resources Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF No b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment No c. Include Indicators in results framework to monitor outcomes from actions identified in (b) No PROJECT TEAM Bank Staff Name Role Specialization Unit Team Leader (ADM Artessa Saldivar-Sali GSU08 Responsible) Samantha Jane Cook Team Leader GFCCR Procurement Specialist (ADM Dominic Reyes Aumentado GGOPG Responsible) Cristiano Costa e Silva Procurement Specialist GGOPG Nunes Jul 15, 2018 Page 5 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) Financial Management Stephen Paul Hartung GGOEP Specialist Chau-Ching Shen Team Member WFACS Duangrat Laohapakakul Counsel LEGES Georgina Elizabeth Team Member LEGES McArthur Nathan Hale Team Member EACNF Environmental Safeguards Nicholas John Valentine GEN2A Specialist Penelope Ruth Ferguson Social Safeguards Specialist GENDR Ross James Butler Social Safeguards Specialist GSU02 Satish Kumar Shivakumar Team Member WFACS Simone Lillian Esler Team Member GSU08 Environmental Safeguards Wolfhart Pohl GEN2A Specialist Extended Team Name Title Organization Location Jul 15, 2018 Page 6 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) MARSHALL ISLANDS RESTRUCTURING AND ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM TABLE OF CONTENTS I. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING ........................................ 8 II. DESCRIPTION OF ADDITIONAL FINANCING .................................................................... 12 III. KEY RISKS ..................................................................................................................... 14 IV. APPRAISAL SUMMARY .................................................................................................. 15 V. WORLD BANK GRIEVANCE REDRESS .............................................................................. 18 VI. SUMMARY TABLE OF CHANGES .................................................................................... 19 VII. DETAILED CHANGE(S).................................................................................................... 19 VIII. RESULTS FRAMEWORK AND MONITORING ................................................................... 23 Jul 15, 2018 Page 7 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) I. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING A. Background 1. This Project Paper seeks the approval of the Executive Directors to provide an additional IDA grant in the amount of SDR 1.8 million (equivalent to US$2.5 million1) to the Pacific Resilience Project (P155257) in the Republic of the Marshall Islands (RMI) under the Pacific Resilience Program. The proposed Additional Financing will scale up activities conducted under the parent project. 2. The project will also require a Level II restructuring to revise the: (i) Project Development Objective as further described in paragraph 9, and (ii) regional institutional arrangements, as further described in paragraph 28. 3. Country context. The Republic of the Marshall Islands is one of the world’s smallest, most isolated and vulnerable nations. The country consists of 29 atolls (24 of which are inhabited) and five isolated islands with a total land mass of 181km2, dispersed across an ocean area of over 1.9 million km2. RMI’s population is estimated at about 53,000, of which over half reside in the capital city of Majuro. 4. RMI is a lower middle-income country with a GDP of US$179.4 million (2015), and a per capita GDP of US$3,326. GDP has grown at an average rate of around one percent per annum, in real per capita terms, since 1979. The size and remoteness of RMI increase the cost of economic activity and make it difficult to achieve economies of scale. Remoteness also imposes transport expenses that increase the costs of trade, and fundamentally constrain the competitiveness of exports of goods and services internationally. These same factors also push up the cost and complexity of providing public services and fulfilling the basic functions of Government. Exports are low, and the shallow domestic economy has brought high dependence on imports, which are funded largely by the sale of offshore fishing rights and high levels of foreign aid. Foreign aid funds a very large public sector that dominates the economy. 5. RMI is exposed to a variety of disaster risks, including tropical storms, typhoons (cyclones), earthquakes/tsunami, in addition to recurrent droughts, and coastal hazards (e.g. wave-induced erosion and flooding linked to king tides and storm surge). The Average Annual Loss related to typhoons and earthquakes is 1.7 percent of GDP. Catastrophe risk modelling indicates that RMI is expected to incur, on a long-term average, US$3 million per year in losses due to typhoons and earthquakes. In the next 50 years, RMI has a 50 percent chance of experiencing a loss exceeding US$53 million, and a 10 percent chance of experiencing a loss exceeding US$160 million.2 6. Summary information on the Pacific Resilience Program. The Pacific Resilience Program (PREP) is a ‘Series of Projects’, with a regional approach to assisting Pacific Island Countries (PICs) to: (i) strengthen early warning and preparedness (Component 1); (ii) make prioritized investments in resilience and retrofitting of key public assets (Component 2); and (iii) improve the post-disaster response capacity 1 Comprising US$1.67 million in regional IDA and US$0.83 million of National IDA. 2 PCRAFI Country Risk Profiles, September 2011 Jul 15, 2018 Page 8 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) of the countries through disaster risk financing (Component 3). Under the parent project, RMI is participating in the first phase of the PREP together with Samoa, Tonga, and Vanuatu. These countries have all participated in the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), on which the third component of PREP builds. PCRAFI successfully piloted a regional, market-based parametric catastrophe risk insurance pool to increase financial resilience against natural hazards and provide immediate liquidity when a major disaster hits a participating country. The PCRAFI insurance program is currently being offered by the Pacific Catastrophe Risk Insurance Company (PCRIC), which was established by the PICs in October 2015 as a legally independent entity to provide disaster and climate risk insurance to the region. 7. Under the second phase of the Program (P160096), RMI is undertaking activities contributing to Component 1 (integrating governance of disaster and climate change management, and institutional strengthening; improving early warning communication systems for outer islands; and developing a roadmap and implementing priority improvements to modernize the National Disaster Management Office’s facilities), Component 2 (improving and expanding the coastal vulnerability assessment for Ebeye and Majuro; and priority coastal protection works investments including investigations, design, and construction supervision), and Component 3 (contingency emergency response). 8. Original Project. Under the original project, RMI is participating in PREP for the Disaster Risk Financing component (Component 3) only, providing a mechanism by which catastrophe risk insurance premiums are financed to enable RMI to participate in a regional catastrophe risk insurance program offered by an eligible insurer (currently PCRIC). The PCRAFI pilot (2013-2015) provided US$600,000 to RMI to purchase catastrophe risk insurance for 2013 and 2014, and additional financing of US$250,000 for 2015. To ensure that there would be no gap after the PCRAFI pilot, US$1.5 million financing to RMI for continued coverage for 2016, 2017 and 2018 was included in the original Project (IDA Grant Number D079-MH, of which 98 percent is disbursed). The Project was approved on June 19, 2015, became effective on September 25, 2015, and has a closing date of November 30, 2020. 9. The Project Development Objective (PDO) is “to strengthen the financial protection of the Republic of the Marshall Islands”, and the project is designed to finance part of the Government of RMI’s insurance premia for catastrophe risk insurance products. To clarify the scope of the Project, the PDO is proposed to be modified as follows: “to strengthen the financial protection of the Republic of the Marshall Islands from natural disasters”, which is more specifically aligned with the objectives of the broader Pacific Resilience Program. 10. RMI’s continued participation in the regional insurance pool has resulted in significant cost savings in insurance premia for all four countries. The original project was financing US$0.5 million/year of the annual premia cost for three years, to secure insurance coverage against tropical cyclones (until October 31, 2018), with an increasing contribution from the national budget of RMI each year. It was anticipated that future insurance premiums would not be financed by the World Bank. However, on August 23, 2018, the Government requested additional financing for the Project, to continue the payment of premia for catastrophe insurance coverage for an additional five years. Jul 15, 2018 Page 9 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) 11. In accordance with a request from the Government of RMI (dated May 5, 2017), the Project was restructured on October 24, 2017 to have the Government procure the insurance premium contract from an eligible insurer, i.e., the PCRIC or any other authorized catastrophe risk insurance provider, rather than the World Bank Treasury entering into contracts on behalf of the Government. 12. Project performance. Progress towards achieving the development objective and implementation progress have both been rated Satisfactory since November 2015, and the PDO is expected to be achieved. The PDO-level indicator for the program (i.e., that “Participating PICs have received payment within a month of the occurrence of a covered (insured) event”) has been achieved, as shown in the table below. As an intermediate outcome, the regional catastrophe insurance pool has achieved premiums lower than the simulated price for a comparable coverage purchased individually in the market. Country Event / Amount Time to Payout Phase Tonga (2014) Tropical Cyclone Ian (US$ 1.3 million) 10 days PCRAFI pilot Vanuatu (2015) Tropical Cyclone Pam (US$ 1.9 million) 7 days PCRAFI pilot Tonga (2018) Tropical Cyclone Gita (US$ 3.5 million) 7 days PREP (Phase I) 13. The project is in compliance with the legal covenants, fiduciary and safeguard policies. There are currently no overdue audit reports. Prior to the October 2017 restructure, the previous arrangements for the flow of funds did not require audits, so there are no audits to date. Following the restructure audits are now required, and the first audit following the restructure for the year ended 30 September 2018 is not due until 30 June 2019. 14. The overall risk was downgraded to Moderate in March 2018, from a consistent rating of Substantial since November 2015 (as further described in paragraph 36). B. Rationale for Additional Financing 15. The proposed additional grant would finance part of the costs associated with scale-up of activities under Part 1 (Premiums Financing) of the Project, enhancing its impact by covering the payment for the disaster insurance premiums for an additional five years, to provide insurance cover until October 2023. This will ensure that RMI continues to have access to catastrophe risk insurance as part of strengthening financial protection against natural disasters. 16. RMI is exposed to a range of hydro-meteorological and geohazards, including tropical cyclone, which is currently covered by the catastrophe risk insurance program. The likelihood that a hazardous event will have a significant impact on the Marshall Islands is rising with the increasing levels of population and assets in the urban areas of Majuro and Ebeye. The low-lying atolls are at risk from tsunamis (and storm surge), which can cause damage to roads, houses, and other infrastructure on the low-lying atolls. Tropical cyclones are expected to become more frequent with climate change. 17. Catastrophe risk modeling under PCRAFI indicated that the country is expected to incur, on a long- term average, annual losses of US$3 million due to tropical cyclones and earthquakes. In the next 50 Jul 15, 2018 Page 10 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) years, RMI has a 50 percent chance of experiencing a loss exceeding US$53 million, and a 10 percent chance of experiencing a loss exceeding US$160 million3. 18. The government has a contingency budget and access to the Disaster Assistance Emergency Fund; however, the immediate cash available through the former is only US$200,000 and through the latter only US$100,000. As a result, the government has relied heavily on donor support to fund post-disaster expenditures, and historical damage from tropical cyclones has far exceeded the funding available from the two sources. In 1997, for example, Typhoon Paka caused US$80 million of damage to crops and affected 70 percent of houses on Ailinglaplap Atoll. During a 20-year period, cyclones in the Marshall Islands caused on average US$63 million per cyclone; Typhoons Zelda, Axel, and Gay caused significant damage and loss within the span of one year (1991–1992).4 19. Funding support through the Project will be fundamental to strengthening RMI’s financial protection from natural disasters, even as the country’s own contribution grows (reflecting an increase in counterpart funding as a proportion of the total cost of premiums). Continuous access to catastrophe insurance coverage enables the transfer of the country’s risk from cyclones, in view of RMI’s vulnerability and its limited financial capacity to prepare for and respond to the associated impacts. For the current season (November 1, 2017 – October 31, 2018), the premium paid was US$560,000, providing a maximum possible payout of US$10,200,666 for tropical cyclones (although RMI may elect to avail of earthquake insurance coverage in subsequent seasons). The 2017-2018 policy covered the risk layer associated with 1-in-10 year up to 1-in-50 year levels of loss from tropical cyclones. 20. Higher-level objectives to which the Project contributes. This project scale-up is consistent with the World Bank Group’s Pacific Islands - Regional Partnership Framework (FY17-FY21) (Report 120479) covering nine Pacific island countries: Kiribati, the Republic of the Marshall Islands, Federated States of Micronesia, Republic of Nauru, Republic of Palau, Independent State of Samoa, Kingdom of Tonga, Tuvalu, and Vanuatu. In particular, it is in line with Focus Area 3: Protecting incomes and livelihoods, through its contribution to the achievement of Objective 3.1: Strengthened resilience to natural disasters and climate change. The Regional Partnership Framework states that the World Bank will contribute to this objective by enabling RMI to access parametric insurance coverage, as a source of immediate liquidity following a major tropical cyclone, to help the government launch early recovery efforts. 21. Contribution to poverty reduction. The Pacific Island Countries are some of the most disaster- affected countries in the world. In RMI, average annualized losses from tropical cyclones, earthquakes, and tsunami are estimated to amount to 2.0 percent of GDP. While disasters impact whole societies, when they strike, the poor and vulnerable (including women, children and the elderly) are hit the hardest. Natural disasters and climate shocks not only hit the poorest and vulnerable harder, but they also induce and exacerbate poverty. 22. The proposed AF supports the World Bank Group’s twin goals of ending extreme poverty and boosting shared prosperity. Poorer people are typically disproportionately affected for several reasons: 3 PCRAFI Country Risk Profiles, September 2011 4 Country Note: Marshall Islands – Disaster Risk Financing and Insurance, February 2015 Jul 15, 2018 Page 11 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) (i) the poor and “bottom 40 percent” typically have inadequate financial means to deal with disaster events, (ii) poorer people have less access to insurance, cash reserves and alternative income sources that provide the mechanisms to recover quickly, (iii) in the face of more ‘immediate’ challenges (access to food, water, or livelihood) poor people may be inclined to underestimate the risks incurred by living in hazard prone areas, and (iv) people just above the poverty line and vulnerable populations (children, women, elderly) can be pushed into transient poverty when a disaster hits. Accordingly, the project scale-up will benefit the most vulnerable and impoverished communities by strengthening the financial capacity of the government to respond and recover in a timely manner following a disaster, thus allowing poorer communities to recommence their livelihood activities sooner. 23. Rationale for the use of Regional IDA. The Project meets the regional funding eligibility criteria as follows: (i) PREP currently includes four countries (Phase I) and more countries are envisioned to participate in future phases; and (ii) PREP generates significant cross-boundary benefits through a regional catastrophe risk insurance pool. II. DESCRIPTION OF ADDITIONAL FINANCING 24. The Pacific Resilience Program as a whole includes: Component 1 - Strengthening Early Warning and Preparedness, Component 2 - Risk Reduction and Resilient Investments, Component 3 - Disaster Risk Financing, and Component 4 - Project Management. Under the original Project, RMI is participating only in Component 3 of PREP. The proposed additional financing in the amount of US$ 2.5 million will consist of national IDA of US$ 0.83 million and regional IDA of US$1.67 million (both on a grant basis) to fund disaster insurance premium payments for an additional five years of coverage, and total project financing of US$4.0 million. There will also be counterpart funding of US$0.4 million in increasing contributions from the government of RMI over the next five years, in addition to US$0.15 million counterpart funding for the original project, taking total project costs to US$4.55 million. 25. As was the case for the November 1, 2017 – October 31, 2018 coverage, the disaster insurance contracts will be procured by the Government from an eligible insurer, i.e., the PCRIC or any other authorized catastrophe risk insurance provider. As implementing agency, the Ministry of Finance (MOF) would enter into annual insurance contracts by September 30 each year to ensure coverage from November 1, to be funded as follows: Year IDA financing through PREP Counterpart Funding 2018-2019 US$ 0.50 million US$ 0.06 million 2019-2020 US$ 0.50 million US$ 0.07 million 2020-2021 US$ 0.50 million US$ 0.08 million 2021-2022 US$ 0.50 million US$ 0.09 million 2022-2023 US$ 0.50 million US$ 0.10 million Jul 15, 2018 Page 12 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) 26. Proposed change to the PDO. For greater specificity, the PDO will be modified to more explicitly refer to natural disasters, as follows: “To strengthen the financial protection of the Republic of the Marshall Islands from natural disasters”. 27. Retroactive Financing. The proposed additional grant may be used to retroactively finance up to an aggregate amount not to exceed SDR 360,000, for premium payments made on or after September 1, 2018, under World Bank policies and procedures. 28. Implementation Arrangements. Under the additional financing, the Ministry of Finance will continue to ensure proper and efficient implementation of the Project on behalf of the Recipient. At the regional level, the name of the Regional Steering Committee will be revised to Regional Advisory Committee (RAC). RMI is required to take all necessary measures on its part to ensure that the RAC, which oversees PREP, will remain in place until the OF closing date of November 30, 2020. After November 30, 2020, activities under the project will not be subject to an oversight by the RAC or its successor committee, if any. 29. Beneficiaries. Beneficiaries of the additional financing will continue to include communities in RMI that are particularly vulnerable to climate and disaster risk, as well as government agencies in charge of disaster response and risk financing. 30. Climate Change and Disaster Risk. RMI is highly exposed to several natural hazards, including cyclones, earthquakes, tsunamis, as well as storm surges, coastal and river flooding and landslides. Accordingly, the project is strengthening financial resilience through enabling continued access to disaster risk insurance for tropical cyclones (and potentially for earthquakes, should the government choose such coverage in subsequent seasons). 31. Climate Co-Benefits. The climate adaptation and mitigation co-benefits for this project are to be calculated using the joint-MDB Climate Finance Tracking Methodology5 following Board approval. 32. Lessons learned. The project will draw on lessons from implementation of the original financing and PCRAFI as a regional catastrophe insurance mechanism, as well as other countries’ approach to disaster risk management using a combination of financial protection mechanisms. x While PCRAFI insurance coverage is designed for high-impact, low-frequency events, there have been certain disasters (for instance, Vanuatu, Tropical Cyclone Hola in March 2018) that had a significant impact but did not trigger any payouts. This highlights the need to continuously refine the insurance product design and the parameters that influence the level of impact at which an insurance payout will be triggered. x IDA countries are not only extremely vulnerable to natural disasters (cyclones/hurricanes, earthquakes, floods, droughts, and tsunamis), but the shocks to their economies are often significantly higher than the impacts on IBRD countries.6 In January 2017, the Executive Directors 5 2015 Joint Report on Multilateral Development Bank’s Climate Finance, August 2016 6For example, damages and losses from Tropical Cyclone Pam amounted to 64.1 percent of Vanuatu’s GDP in 2015, while Typhoon Haiyan’s (the strongest recorded tropical cyclone ever to make landfall) were Jul 15, 2018 Page 13 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) of IDA approved the introduction of a new policy instrument to specifically address this gap: the Disaster Risk Management Development Policy Operation with a Catastrophe-Deferred Drawdown Option (CAT-DDO), accessible to IDA countries as of July 1, 2017. This instrument provides immediate liquidity after natural disasters (with significantly higher flexibility on when to draw down resources, as the instrument is based on a soft/qualitative trigger). Importantly, it also provides a direct platform to promote policy reform to strengthen countries’ resilience and provide targeted support to enhance the capacity for ex-ante disaster risk reduction. x The CAT-DDO has been utilized by countries like the Philippines as part of its strategy to mobilize complementary solutions to different layers of disaster risk. When combined with a CAT-DDO, catastrophe insurance could be designed to cover only the least frequent, highest impact disasters (e.g., 1-in-30 year loss levels), enabling reduced (and potentially more sustainable) premium costs. Access to CAT-DDO financing has been used to reduce the negative impact of non-payout for an event in which the government might have expected a payout. The CAT-DDO has also supported vital policy reforms for longer term risk reduction and climate change adaptation, and provides coverage for hazards not covered by catastrophe insurance. 33. Closing dates. There is no proposed change to the closing date of the original grant (November 30, 2020). The proposed closing date of the additional financing is October 31, 2023, in line with the additional five years of insurance coverage, the premiums of which are expected to be paid by the 4 th quarter of calendar year 2022. This will result in a total project implementation period of eight years. 34. Procurement. To date, procurement activities under the project financed by the original financing was carried out in accordance with the Bank’s “Guidelines: Procurement of Goods, Works and Non- consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers,” dated January 2011, and revised July 2014 (“Procurement Guidelines”), and “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” dated January 2011 and revised July 2014 (“Consultant Guidelines”). Moving forward, it is proposed for procurement under the project, regardless of whether the activities will be funded by the original financing or the AF, to follow procurement procedures specified in the World Bank Procurement Regulations for IPF Borrowers (July 2016, revised in November 2017) and the provisions stipulated in the Financing Agreement. III. KEY RISKS 35. Overall Risk Rating. The overall risk for this project is rated Moderate based on: (i) Low Technical Design, Environmental, and Social risk ratings, (ii) Moderate Political & Governance, Macroeconomic, Sector Strategies & Policies, Stakeholder, and Fiduciary risk ratings, and (iii) a Substantial rating for Institutional Capacity for Implementation and Sustainability. 36. Fiduciary risk was lowered from Substantial to Moderate in view of the establishment by the Ministry of Finance of the Division of the International Development Assistance (DIDA), which provides estimated at 0.9 percent of the Philippines’ GDP in 2013. Jul 15, 2018 Page 14 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) fiduciary support for all projects implemented through government ministries. Staff include a qualified accountant and a procurement specialist, in addition to support staff. The stability offered through DIDA has provided more confidence and less uncertainty on the capacity of the Government of the Republic of the Marshall Islands to meet the fiduciary requirements of this project. IV. APPRAISAL SUMMARY A. Economic and Financial Analysis 37. Disasters resulting from natural hazards represent a significant contingent liability for RMI, and are often associated with large fiscal consequences. The Government serves as a (re)insurer of last resort. Sovereign disaster risk financing and insurance can protect against sudden macroeconomic shocks that negatively impact fiscal performance and a country’s long-term economic development. Catastrophe risk pooling, at the regional level, aggregates risk into larger, more diversified portfolios, with participants benefitting from cost savings and access to international markets. The cost of risk transfer to international markets depends on many factors, including the risk level of the portfolio as a fraction of the size of the portfolio. The pooling of risks generates diversification benefits that are reflected in reduced insurance premiums. The real price of insurance coverage (insurance premium rate) accessed under the project through the PCRAFI insurance program has resulted in 50 percent savings on average, compared to the simulated market price that RMI would have been able to obtain if it had secured disaster insurance individually. 38. Analysis of a range of scenarios7 allows estimation of the expected return for disaster risk insurance coverage under the regional pool, over any given 5-year coverage period. Depending on the scenario, the EIRR can range from 133 percent if exactly one severe disaster occurs over the five-year period (with 16 percent probability, based on catastrophe risk models) to 226 percent or more if at least one extreme disaster occurs during the five-year period (10 percent probability). If no triggering disaster event occurs during a given five-year period there will be no payout (59 percent probability). On a long- term average basis, the economic internal rate of return (EIRR) is estimated at 23 percent. Assuming a 10 percent discount rate, an aggregate US$ 3 million premium contribution over a five-year period has a net present value of US$ 0.1 million on average (ranging from US$ -2.3 million if no disaster occurs, to US$9.4 million if one extreme disaster occurs). B. Technical 39. This project scale-up will use the successful mechanisms established through PCRAFI, under which market-based catastrophe risk insurance transactions have been successfully implemented for 7 This analysis considers five consecutive years of coverage, with no changes in coverage selection over that period. Jul 15, 2018 Page 15 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) participating countries over the past six years, based on fully probabilistic country risk profiles for the major perils affecting the region. C. Financial Management 40. The original financial management assessment conducted for the Pacific Resilience Program was carried out in accordance with the “Financial Management Practices in World Bank-Financed Investment Operations”, issued by the Financial Management Sector Board on November 3, 2005 and further rationalized in the “Principles Based Financial Management Practice Manual” issued by the Board on March 1, 2010. Under the Bank’s OP/BP10.00 with respect to projects financed by the Bank, the borrower and implementing agency are required to maintain financial management systems – including accounting, financial reporting, and auditing systems adequate to ensure they can provide the Bank with accurate and timely information regarding the project resources and expenditures. 41. The government will need to ensure that clear responsibilities are in place for: (i) making contractual payments to the eligible insurer, and (ii) ensuring the proper recording, reporting, and audit of the annual financial statements of the Project in accordance with the legal agreements. Due to the anticipated single transaction per year, interim financial reports will not be required. Audited annual financial statements for the project will need to be prepared and submitted to the Bank within 9 months of the end of each fiscal year of the recipient. The Republic of the Marshall Islands Office of the Auditor- General is responsible for the audit of all government funds and, should there be any costs for performing the audit, these will be covered by the Government of RMI. D. Procurement 42. It is proposed for new procurement activities, regardless of whether the activities will be funded by the original financing or the AF, to be carried out under this project to follow procurement procedures specified in the World Bank Procurement Regulations for IPF Borrowers (July 2016, revised in November 2017) and the provisions stipulated in the Financing Agreement. 43. The MOF has prepared a Project Procurement Strategy for Development (PPSD). As the main procurement activity to be carried out will be the procurement of catastrophe risk insurance, the main risk is the suitability of the insurance contract. This risk will be mitigated by the Bank’s prior review of the contract, and the fact that a Bank technical expert will establish the suitability of this contractual document. For the November 1, 2017 – October 31, 2018 coverage, the Ministry of Finance chose to directly select the Pacific Catastrophe Risk Insurance Company to provide the insurance, based on uniqueness of the non-consulting services needed. Paragraph 6.9(d) of the Procurement Regulations allows for direct selection on exceptional cases. 44. MOF’s updated procurement plan has five procurement activities amounting to US$2.9 million (see table below for details). Category Estimated Amount No. of Procurement Activities (US$) Jul 15, 2018 Page 16 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) Premia 560,000 1 570,000 1 580,000 1 590,000 1 600,000 1 Grand Total 2,900,000 5 45. Procurement Supervision. It is expected that the procurement supervision will be done by prior review of procurement transactions. E. Social (including Safeguards) 46. The regional Pacific Resilience Program has been classified as Environmental Category B, given the expected limited environmental and social impacts. The overall social impact of both the original project and the additional financing is expected to be highly positive, as they manage residual risk and strengthen the capacity of the Government to respond to and recover from disasters. As such, mitigation of the social impacts created by natural disasters and climate change underlies the purpose of the project. An Environmental and Social Management Framework was prepared for the PREP and disclosed locally in Samoa, Tonga and Fiji, as well as via the World Bank InfoShop on March 5, 2015, prior to the Appraisal of the original Program. As the activities financed under the original project in RMI did not trigger any safeguard policies, disclosure did not occur in country. 47. Under both the parent project and the additional financing, RMI is not carrying out any activities under Component 1 (Strengthening Early Warning and Preparedness) or Component 2 (Risk Reduction and Resilient Investments). It is envisioned that project activities will remain limited to providing funding for payment of disaster risk insurance premiums under Component 3 (Disaster Risk Financing). As such, there are no safeguard issues or impacts associated with the proposed additional financing. 48. Citizen Engagement. It will not be possible to include citizen engagement mechanisms under the Project: (i) the Project is funding premia to be paid to a third-party provider which, if an insurable disaster occurs, will provide an insurance payment to the Government over which the Bank would have no influence in terms of expenditure, (ii) the location of a disaster-affected population that may be beneficiaries of Government intervention potentially funded by a disaster insurance payout cannot be known in advance, and (iii) the potential beneficiaries are not identifiable. 49. Gender. Gender and women’s socio-economic status impact mortality risk during disasters.8 Experience from the East Asia and Pacific region has shown that disaster fatality rates are much higher for women than for men, due to gendered differences in capacity to cope with such events and insufficient access to information and early warnings. The ability of the Government to access catastrophe risk insurance through this project will enable more timely response to disasters through an injection of 8 World Bank. 2010-2012. Guidance Note 1: Making Women’s Voices Count - Addressing Gender Issues in Disaster Risk Management in East Asia and the Pacific. World Bank: Washington DC. Jul 15, 2018 Page 17 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) liquidity into the national budget; however, the specific project activities (payment of insurance premia) will not be gender-informed. F. Environment (including Safeguards) 50. The overall environmental impact of the PREP is expected to be positive. For both the original project in RMI and the proposed additional financing, there are no environmental or social interactions, therefore no safeguard policies are being triggered. There are no salient physical characteristics relevant to safeguard analysis, as the project only finances the payment of insurance premia. V. WORLD BANK GRIEVANCE REDRESS 51. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org Jul 15, 2018 Page 18 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) VI. SUMMARY TABLE OF CHANGES Changed Not Changed Project's Development Objectives ✔ Components and Cost ✔ Legal Covenants ✔ Procurement ✔ Implementing Agency ✔ Results Framework ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Safeguard Policies Triggered ✔ EA category ✔ Financial Management ✔ APA Reliance ✔ Other Change(s) ✔ VII. DETAILED CHANGE(S) PROJECT DEVELOPMENT OBJECTIVE Current PDO To strengthen the financial protection of the Republic of Marshall Islands. Jul 15, 2018 Page 19 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) Proposed New PDO To strengthen the financial protection of the Republic of the Marshall Islands from natural disasters. COMPONENTS Current Component Name Current Cost Action Proposed Component Proposed Cost (US$, (US$, millions) Name millions) Component 1: 0.00 Component 1: 0.00 Strengthening Early Warning Strengthening Early and Preparedness Warning and Preparedness Component 2: Risk 0.00 Component 2: Risk 0.00 Reduction and Resilient Reduction and Resilient Investments Investments Component 3: Disaster Risk 1.50 Revised Component 3: Disaster 4.00 Financing Risk Financing Component 4: Project and 0.00 Component 4: Project 0.00 Program Management and Program Management TOTAL 1.50 4.00 Expected Disbursements (in US$) DISBURSTBL Fiscal Year Annual Cumulative 2015 0.00 0.00 2016 500,000.00 500,000.00 2017 500,000.00 1,000,000.00 2018 500,000.00 1,500,000.00 2019 500,000.00 2,000,000.00 2020 500,000.00 2,500,000.00 2021 500,000.00 3,000,000.00 2022 500,000.00 3,500,000.00 2023 500,000.00 4,000,000.00 Jul 15, 2018 Page 20 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Latest ISR Rating Current Rating Political and Governance z Moderate z Moderate Macroeconomic z Moderate z Moderate Sector Strategies and Policies z Moderate z Moderate Technical Design of Project or Program z Low z Low Institutional Capacity for Implementation and z Substantial z Substantial Sustainability Fiduciary z Moderate z Moderate Environment and Social z Low z Low Stakeholders z Moderate z Moderate Other z Moderate z Moderate Overall z Moderate z Moderate LEGAL COVENANTS1 LEGAL COVENANTS – PACIFIC RESILIENCE PROJECT UNDER PACIFIC RESILIENCE PROGRAM (P155257) Loan/Credit/TF LEGAL TBL1 Description Status Action IDA-D0790 In carrying out activities under the Complied with No Change Project, the Recipient shall enter into an Insurance Contract with an Eligible Insurer under terms and conditions acceptable to the Association. IDA-D0790 The Recipient shall, in collaboration with Expected soon New SPC, PIFS and the other Participating Countries, take all necessary measures on its part to ensure that the Regional Advisory Committee is maintained within PIFS from the Effective Date to November 30, 2020, with a mandate, adequate resources and composition satisfactory to the Association. LEGAL COVENANTS2 LEGAL COVENANTS – ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) Sections and Description Without limitation to the provisions of Section 5.03 of the General Conditions, the Recipient shall provide its counterpart funding to partially finance the Premia under the Project on an annual basis in the amounts and Jul 15, 2018 Page 21 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) timeline specified in Section IV.1 of Schedule 2 to the Financing Agreement. Conditions Jul 15, 2018 Page 22 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) VIII. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: Marshall Islands ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM Project Development Objective(s) To strengthen the financial protection of the Republic of the Marshall Islands from natural disasters. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_T BL_ PD O Indicator Name DLI Baseline End Target 2019 2021 To strengthen the financial protection of the Republic of Marshall Islands from natural disasters. (Action: This Objective is New) Participating PICs have received payment within a month of the occurrence of a covered (insured) event. (Percentage) 0.00 100.00 PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline End Target 2019 2021 Component 3: Disaster Risk Financing (Action: This Component is New) The premiums are lower than the simulated price for a No Yes comparable coverage purchased individually in the market. Jul 15, 2018 Page 23 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) RESULT_FRAME_T BL_ IO Indicator Name DLI Baseline End Target 2019 2021 (Yes/No) IO Table SPACE Monitoring & Evaluation Plan: PDO Indicators Mapped Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Participating PICs have received payment Reporting on Insurance within a month of the occurrence of a payout. covered (insured) event. ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Mapped Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Ministry of Finance will work with the PCRAFI The premiums are lower than the team to analyze whether simulated price for a comparable the premium.is lower coverage purchased individually in the than when purchased market. individually in the market. ME IO Table SPACE Jul 15, 2018 Page 24 of 25 The World Bank ADDITIONAL FINANCING FOR THE PACIFIC RESILIENCE PROJECT UNDER THE PACIFIC RESILIENCE PROGRAM (P166974) Jul 15, 2018 Page 25 of 25