© 2021 International Bank for Reconstruction and Development / International Development Association or The World Bank, 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org March 2021 Disclaimers This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washing- ton, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. 3 | Financial Protection of Critical Infrastructure Services Acknowledgments This technical report has been prepared by the World Thu Hang Vu and the external reviewers including Bank Group under the disaster risk-financing and Roger Fairclough, Chair of New Zealand Lifelines insurance agenda of the 2020 Asia-Pacific Economic Council. Cooperation (APEC) Finance Ministers’ Meeting under the presidency of Malaysia. The report was prepared during the period of February to November 2020 as a part of the activities of APEC The World Bank Group’s team was composed of Working Group on Regional Disaster Risk Financing Nicola Ranger, Lit Ping Low, and Benedikt Lukas and Insurance Solutions. This report has benefited Signer of the World Bank Disaster Risk Financing from the support of the Japan-World Bank Program and Insurance Program (DRFIP), with inputs from for Mainstreaming Disaster Risk Management in Simon Hagemann, Shoko Takemoto, Hideaki Hamada, Developing Countries, which is financed by the Beatrice Cassottana, and Matthew Foote - all from the Government of Japan and managed by the Global DRFIP of the World Bank’s Finance, Competitiveness, Facility for Disaster Reduction and Recovery (GFDRR) and Innovation Global Practice and under the overall through the Tokyo Disaster Risk Management Hub. guidance of Olivier Mahul. The team gratefully acknowledges inputs and Editorial services by Publications Professionals LLC. comments from both the World Bank Group’s peer Design and layout by X-Tempo Communications. reviewers Catiana Garcia-Kilroy, Leopold Sedogo, and 4 | Financial Protection of Critical Infrastructure Services Contents Executive Summary 5 1. Introduction 14 2. Planning Financial Protection and Critical Infrastructure Services 21 3. Combining Financial and Operational Preparedness to Ensure Continuity of Critical Services 33 4. Integrating Critical Infrastructure in Government Financial Protection Strategies 47 5. Understanding Financial Preparedness, Critical Services, and Pandemics 56 6. Next Steps 62 Annex I. Critical National Infrastructure: APEC Resilience Strategies 64 Annex II. New Zealand Lifelines Utilities: Integrating Operational and Financial Preparedness 66 Annex III. Japan: Improving Disaster Preparedness and Restoring Critical Infrastructure Services after Disasters through Partnership with the Private Sector 70 Annex IV. Sint Maarten: Reconstruction of Sint Maarten Airport after Hurricane Irma 73 Annex V. United States: Disaster Recovery in Privately Owned Electric Utilities 75 Annex VI. The CARILEC Disaster Assistance Program 79 Annex VII. Australia: Defining Risk Ownership for Rapid Recovery 83 Abbreviations 86 References 88 5 | Financial Protection of Critical Infrastructure Services Executive Summary APEC member economies are among those most the underpinning assets. The report focuses mainly on exposed to disasters globally; Asia-Pacific alone faces disruptions related to natural hazards, such as storms estimated annual economic losses caused by disasters or floods, but also on pandemics; however, disruptions of US$675 billion.1 Disaster losses can have a sizable can sometimes result from manmade shocks, such as fiscal impact on those economies most vulnerable to terrorism and cyber attacks. disasters, often setting back economic growth and poverty alleviation. In response, financial protection Critical infrastructure is defined as assets, systems, against disasters has gained significant traction globally, and networks that provide essential services for the to reduce the fiscal impacts of disasters and ensure security of a nation, its economic prosperity, and that finance is available for a speedy recovery. Ensuring the health and safety of its citizens. Those services, high-quality, reliable, sustainable, and resilient critical such as energy, transport, and water, constitute the infrastructure services when faced with such shocks is backbone of modern interconnected societies. A service a growing priority and a part of many countries’ core requires a complete critical infrastructure system: (a) national security planning. one or multiple physical assets connected in a network (e.g., roads, hospitals, power plants), (b) people, and Disruption to critical infrastructure can cause major (c) inputs (e.g., raw materials, fuel, electricity). This adverse economic effects and significant harm to report uses the term critical infrastructure to refer to the well-being of citizens - especially the poor and all those aspects required to deliver the critical services vulnerable. The economic and social impacts from (transport, health care, energy). Six sectors are widely disruption to critical infrastructure come primarily classified as being critical: energy, transport, water, from the loss of the service they provide, not from the information and communications technologies (ICT), cost of physical damages to the assets themselves. health, and finance. Some countries further include For example, direct damages from disasters to the education and the critical economic and manufacturing power generation and transport infrastructure are sectors within their definition.3 estimated at US$18 billion a year in low- and middle- income countries globally. But the estimated cost of the Ensuring the continuity of critical services in the associated disruption to services (energy and transport) aftermath of a disaster should be one key objective ranges from US$391 billion to US$647 billion (at least of financial protection of critical infrastructure. The 20 times larger).2 Disruption to services can emerge not costs associated with disruptions to critical services just from physical damages but also from disruptions to can strain budgets, reduce productivity, and stall people, inputs, or even shocks to demand. For example, investment, along with having knock-on impacts for COVID-19 strained water utilities through increased growth and well-being. Reducing the risk of disruption demand, disruptions to supply chains and essential - whether through physical resilience, by ensuring good workers, and falling revenues, which ultimately will maintenance, repair, and service continuity planning, or negatively impact the government’s balance sheets if both - can significantly reduce the costs of disasters. For the disruptions require public support. For this reason, critical infrastructure services, ensuring the resilience the focus of this report is vital because it is about of the system as a whole is as important as the physical protecting critical infrastructure services rather than just resilience of individual assets. This approach means 1 UN-ESCAP (United Nations Economic and Social Commission), The Disaster Riskscape across Asia-Pacific (Bangkok: UN-ESCAP, 2019), https://www.unescap.org/sites/default/files/APDRR%20_draft_15%20August%202019_latest%20Delhi.pdf 2 Stéphane Hallegatte, Jun Rentschler, and Julie Rozenberg, Lifelines: The Resilient Infrastructure Opportunity (Washington, DC: World Bank, 2019). 3 OECD (Organisation for Economic Co-operation and Development), Good Governance for Critical Infrastructure Resilience: OECD Reviews of Risk Management Policies (Paris: OECD Publishing, 2019), https://doi.org/10.1787/02f0e5a0-en For example, the critical manufacturing sector can include those involved in manufacturing chemicals needed for clean water. 6 | Financial Protection of Critical Infrastructure Services building in redundancy and ensuring that mechanisms • Costs for maintaining and reinstating critical are in place to deal quickly with any disruptions and to services. This liability includes government restore services when needed. Financial preparedness is expenditures related to providing services during a critical part of this approach, both to ensure adequate emergencies. For example, Typhoon Haiyan heavily funding for more frequent repair and maintenance after disrupted education and health care in affected small events and to implement contingency plans for areas in the Philippines in 2013. The government rapid recovery after more infrequent, larger disasters. had to provide temporary health and education services to thousands of citizens, in addition to In addition to ensuring that finance is available to rebuilding hospitals and schools. This cost can also minimize disruptions, financial protection of critical include government expenditures for maintaining infrastructure should manage the fiscal impact from critical services disrupted by pandemics such as any shock. An increasing number of APEC economies COVID-19, rather than physical damages to assets. account for the potential cost of damage to public A pandemic can have a major fiscal impact; for assets within public finance frameworks. But the example, in Brazil, the losses to state-owned potential fiscal impact from disruptions to critical enterprises (SOEs) in the water sector caused services is often not fully quantified and recognized. by COVID-19 have been estimated at more than Two sources of contingent liability are associated with US$100 million. critical services beyond the cost of the physical assets and are in addition to the potential loss of revenues from the economic disruption: More than 2500 public schools were damaged or destroyed as a result of Typhoon Haiyan 7 | Financial Protection of Critical Infrastructure Services • Costs of implicit contingent liabilities. Although in mobilize action in the event of a shock, thereby many countries a large part of critical infrastructure either ensuring continuity or reducing the severity is owned or operated by the private sector, the and duration of any disruptions to critical services. government may still act as the insurer of last This report proposes an operational framework resort. For example, the government may end up for the financial protection of critical services by paying the costs of recovery after a large disaster bringing together good practice from risk financing because the service is so critical to the population. and infrastructure planning. It introduces case studies This implicit contingent liability on the government from the Caribbean, Japan, and the United States. is often not recognized and not managed. Such unexpected expenditures can have a sizeable 3. A national financial protection strategy that impact on government budgets. Clarifying in integrates critical infrastructure to efficiently advance who owns the risk (who is responsible manage the contingent liabilities related to such after a disruption) is important for managing this shock-responsive systems. Here the focus is on contingent liability. A lack of clarity can also create (a) reducing any financial shock to government poor incentives for resilience and can lead to delays balance sheets that might arise from the costs of in recovery contingent liability. A lack of clarity can recovering and reinstating critical services post- also create poor incentives for resilience and lead disasters and (b) ensuring that timely, predictable, to delays in recovery. and cost-effective finance is available in emergencies so the government can quickly restore Bringing those aspects together creates an services when needed. Several APEC economies operational framework for financial protection of already have a national financial protection strategy critical infrastructure that should combine three in place. This report considers how to appropriately interconnected parts (as illustrated in figure ES.1). include critical infrastructure within such a national financial protection strategy. It includes case studies 1. Financial protection of physical assets. This from Australia and the United Kingdom. protection means having finance and plans in place to rehabilitate or reconstruct critical assets after a disaster. Protection could include, for example, public assets insurance or budgetary mechanisms such as disaster funds. In 2018, APEC and the World Bank collaborated on an operational framework for catastrophe insurance programs for public assets, which drew on the experience of Australia, Colombia, Japan, Mexico, and New Zealand. 2. Shock-responsive systems that link financial and operational preparedness to ensure rapid recovery of critical services. Such preparedness means having plans, finance, and systems in place to rapidly 8 | Financial Protection of Critical Infrastructure Services Figure ES.1. Interaction Of Financial Resilience Of Assets, Services, And Countries Source: World Bank staff. Note: a. The schematic shows the links among critical infrastructure assets (dark blue), services (light blue), wider economic and social resilience (grey), and macro- fiscal and financial resilience (orange). The left-hand side of the schematic summarizes the three components of financial protection of critical infrastructure services and shows how they contribute to financial preparedness and resilience as well as how they link to resilience at the different levels on the right-hand side. b. This report focuses on the additional aspects of financial preparedness related to critical infrastructure services in light blue and on the links to national financial protection strategies to strengthen macro-fiscal resilience to disasters and to safeguard the continuity of services post-disaster. Previous reports such as the following have covered aspects of infrastructure assets resilience: (1) World Bank, “Catastrophe Infrastructure Warranty against Climate and Disaster Shocks,” Draft Technical Proposal for discussion at 2019 APEC Finance Ministers Meeting and 2019 Investor Forum, 2019. http://mddb.apec.org/Documents/2019/MM/FMM/19_fmm_007.pdf (2) World Bank, Catastrophe Insurance Programs for Public Assets: Operational Framework (Washington, DC: World Bank, 2020). https://openknowledge.worldbank.org/bitstream/handle/10986/34440/Catastrophe-Insurance-Programs-for-Public-Assets-Operational-Framework. pdf?sequence=1&isAllowed=y 9 | Financial Protection of Critical Infrastructure Services Approaches to strengthen financial protection of including many developed by APEC economies in critical infrastructure services should be integrated collaboration with the World Bank. in already ongoing work to strengthen resilience. This integration includes particularly (a) efforts to enhance Combining Financial and the physical resilience of critical infrastructure systems Operational Preparedness to and of social and economic resilience4 and (b) the use of existing good practice for resilience within public- Ensure Continuity of Critical private partnerships in infrastructure.5,6 Services Effective financial protection of critical infrastructure Enhanced financial protection can deliver significant services requires the integration of operational benefits for wider resilience. Putting in place rules that preparedness and financial preparedness in shock- determine who pays for what damages in the event of responsive systems. Strengthening response and a disaster not only helps to manage the risks to public recovery capabilities requires both components to finances but also creates incentives for infrastructure be in place pre-disaster (figure ES.2): owners and operators to invest more in building long- term resilience. There is also growing evidence that • Operational preparedness. The right plans, strengthening preparedness for disasters can support standard operating protocols, and capabilities building back better. (e.g., people, equipment, resources) must be in place to quickly restore critical services. This report proposes an operational framework for strengthening the financial preparedness of critical • Financial preparedness. A mechanism or a plan to infrastructure through shock-responsive systems that ensure adequate and timely financing is available are embedded in strong national risk management to implement those overall plans that can be and financial preparedness. It builds on existing accessed effectively. principles and approaches to disaster risk financing, In February 2021, as a result of record snowfall and the lowest temperatures in more than 30 years in Texas, USA, 4.5m Texan households were cut off from power and major electricity firms are facing risks of bankruptcy. 4 Stéphane Hallegatte, Jun Rentschler, and Julie Rozenberg, Adaptation Principles: A Guide for Designing Strategies for Climate Change Adaptation and Resilience (Washington, DC: World Bank, 2020). 5 World Bank, Technical Brief on Resilient Infrastructure Public-Private Partnerships: Policy, Contracting, and Finance (Washington, DC: World Bank, 2019). 6 World Bank, Resilient Infrastructure Public-Private Partnerships: Contracts and Procurement - The Case of Japan (Washington, DC: World Bank, 2017). 10 | Financial Protection of Critical Infrastructure Services Figure ES.2. Three Components for Shock Responsive Systems (center) to Protect Critical Infrastructure Services and the Relationship to National Risk Financing and Infrastructure Policies (top) Source: World Bank staff. Financial preparedness can be further broken down on each country’s specific context, institutions, laws, into two aspects: mobilizing and delivering funding. and policies. First, it requires the right financial engineering to ensure cost-efficient access to sufficient funding The term shock-responsive systems means for shocks of different severity, alongside sufficient infrastructure operators know they have the funding for regular operations and maintenance financing to put in place as they implement the plans, (O&M). Second, it requires the right public finance equipment, and agreements necessary to ensure mechanism to ensure effective flow of funds. For rapid recovery. It also means financial planners have example, an O&M fund can be established with comfort that any allocation of funding can be executed standard operating procedures for quick approval of quickly and in line with agreed objectives. Experiences emergency expenditures to implementing agencies. from the Caribbean, Japan, and the United States are This fund can then be backstopped by insurance or examples of where such financing has reduced service other financial instruments to ensure that it has enough disruptions. Systems should be underpinned by data resources to meet needs after catastrophic events. and analytics to assess probable impacts, to prioritize Such financial preparedness can be centralized for planning, to trigger early action, and to guide recovery the government as a whole or decentralized (e.g., interventions. by sector or region). The best approach will depend 11 | Financial Protection of Critical Infrastructure Services Example: In Japan, local governments establish Both assessing and managing disaster-related agreements with private companies in advance to contingent liabilities from critical infrastructure in initiate relief and recovery work immediately following public finance frameworks are important for efficient a disaster. Following the Great East Japan Earthquake, public financial management of disasters. Such an damaged major motorways were repaired within the approach can support more efficient management first week through such pre-arranged contracts. of disaster risk in three ways: (a) it supports planning for adequate financial arrangements to cushion the Example: In the Caribbean and the United States, impact of disasters on the government’s balance private energy infrastructure operators have established sheet, (b) it ensures that timely finance is available mutual assistance agreements, which are backed by for recovery across all sectors, and (c) it can inform pre-arranged finance. When Hurricane Sandy left 8.5 policy and regulation to clarify risk ownership (who is million customers without power in New York and New responsible to pay) and can create positive incentives Jersey, electric utilities executed mutual assistance for risk management. agreements to deploy more than 70,000 workers to the affected areas and enabled air transportation of Clarifying risk ownership is particularly important 229 power-restoration vehicles and 487 personnel to for critical infrastructure, because a large portion of restore power.7 critical infrastructure will often be owned or operated by SOEs or the private sector. This lack of clarity can Integrating Critical lead to problems over who is responsible to pay after Infrastructure in National a shock, and can pose implicit contingent liabilities on government. Clarifying (and enforcing) risk ownership Financial Protection Strategies and cost-sharing requirements can reduce the overall National financial protection strategies-usually disaster-related contingent liabilities over time. This championed by Ministries of Finance-set out the clarity of role is also necessary to create the right policies and financial instruments to increase incentives on infrastructure owners and operators countries’ financial resilience to shocks and to ensure (public or private sector) to invest in resilience and to that finance is available for a speedy recovery. As both avoid delays in recovery that may result from lengthy financiers and conveners, the Ministries of Finance negotiations over who pays. Making contingent are well positioned to take an integrated, national liabilities explicit can create a foundation for stronger perspective about the financial risk management of risk governance across government and enhanced critical infrastructure and also to use public finance societal resilience. frameworks for aligning incentives across government and the private sector in order to strengthen resilience Example: The United Kingdom has taken major steps at a national level. This role should balance two pillars: to implement a framework to assess and manage (a) protect the government’s balance sheet through contingent liabilities to better manage fiscal risks efficient management of contingent liabilities and and improve both integrated risk governance and (b) protect society by ensuring continuity of services proactive risk management across government. The in line with national critical infrastructure strategies. steps include assessing potential implicit contingent liabilities related to shocks. International Monetary Fund (IMF) research found that implicit contingent 7 FEMA (Federal Emergency Management Agency), “Hurricane Sandy FEMA After-Action Report” (U.S. Department of Homeland Security, Washington, DC, 2013), https://www.alnap.org/help-library/hurricane-sandy-fema-after-action-report 12 | Financial Protection of Critical Infrastructure Services liabilities from shocks such as financial crises, natural Examining Financial disasters, and pandemics create some of the largest Preparedness, Critical fiscal risks to government balance sheets. Infrastructure Services, and Through policy, regulation, and procurement Pandemics practices the government can encourage adequate The COVID-19 pandemic has highlighted the threat financial protection by critical infrastructure owners to critical infrastructure services from many different and operators. Moreover, infrastructure owners and sources of risk and has underscored the need for operators bear the primary responsibility for protecting more holistic planning across risks. Pandemics do not their assets and maintaining the continuity of services damage physical assets but can severely disrupt services they provide. But priorities and levels of risk tolerance through the impact on people, inputs, and demand. will often be different between the public and private During the current pandemic, health services have sector. As a policy maker, financier, and regulator, the been most directly impacted, but education, finance, government often plays a key role to set required levels water, energy, and transport have also been severely of preparedness that will ensure acceptable levels of affected. Such disruptions can have a sizeable fiscal risk for citizens and national security.8 This approach impact, both through losses of revenue and increases can involve (a) setting minimum requirements for risk in expenditure. The negative fiscal impact is direct management and risk-transfer arrangements through in the case of state-owned enterprises, for example regulation, (b) making cost-sharing arrangements critical services in the water or energy sectors have within public-private partnerships (PPPs), (c) requiring been heavily affected by COVID-19. disclosure of information about risks, or (d) using performance-based contracts that incentivize service Other risks may affect critical services in the future (for continuity. Requiring operators to have some form of example, cyber risks). Such a risk can be a significant insurance in place can also put a price tag on risk and contingent liability that is often underestimated or not can require proper O&M as a condition of payout - all assessed at all. A national financial protection strategy of which further incentivize resilience. can be a mechanism to support comprehensive financial risk management, which is integrated in broader fiscal Example: Cost-sharing arrangements between levels risk management. of government in Australia and Mexico, as well as requirements to purchase minimum levels of insurance Governments around the world are starting to on private infrastructure operators in New Zealand, explore new ways to better manage such liabilities. have built incentives to invest in wider resilience. In For example, the United Kingdom and the United Japan and the United States, regulation clearly defines States are exploring new financial arrangements to who - government or utilities companies-is responsible better manage such contingent liabilities in the future for recovery from different sizes of disasters. This so the governments can avert major fiscal impacts from regulation has formed the basis of shock-responsive pandemics, including through PPPs to strengthen the systems in the transport and energy sectors. market for pandemic insurance. Disaster risk finance and insurance could also support measures to manage such risks to the continuity of critical services. Public interventions should ensure that infrastructure owners 8 OECD, Good Governance. 13 | Financial Protection of Critical Infrastructure Services and operators assess and disclose risks and put in place Although such projects are at an early stage, lessons adequate financial protection. are beginning to emerge. For example, the absence of asset-level data is a key constraint to understanding Investing in financial resilience is critical to enable risk and to designing strategies, particularly in lower- stronger preparedness across society, especially for income countries and economies, as well as the lack of new and unexpected risks. Global experiences show data about interdependencies of assets and services that the benefits of good financial risk management are and the lack of modeling of the resulting systemic risks. not just in the early, predictable finance received after The World Bank and others are exploring ways to close an event, but are also in the greater understanding of such data gaps by using new technologies, satellite risk, the discipline of pre-planning for disasters, and the data, and risk models, as well as by using risk analytics use of decision-making systems that can enable wider for systemic infrastructure risks. Early work suggests resilience. For governments to be better prepared for that even where there are constraints, significant future shocks, strengthening financial preparedness opportunities exist to strengthen financial preparedness. should be a core part of post-COVID-19 recovery.9 A key challenge is linking financial preparedness to Financial protection of critical infrastructure is even more operational preparedness that will execute funds important in a post-COVID-19 context when countries effectively following a shock. face fiscal constraints and when households and firms are less economically secure. APEC finance ministers could promote priority policy actions to strengthen financial resilience of critical Looking Forward infrastructure services against shocks. Specifically, APEC finance ministers could promote activities in the This report presents a preliminary operational following areas: (a) assess the potential fiscal impact framework for economies to improve financial from disruptions to critical services, (b) strengthen the resilience of critical infrastructure services. It integration of operational and financial preparedness complements ongoing World Bank work with APEC planning, (c) integrate the contingent liability from economies to improve financial protection of public critical service interruptions in national risk-financing assets (for example, with Indonesia, Mexico, Peru, the frameworks, and (d) consider ways to promote Philippines, and Vietnam). This framework is intended comprehensive risk management during recovery from as a first step to advance discussion. Furthermore, it is the COVID-19 pandemic. a new area, and no complete international benchmarks exist. The framework aims to synthesize learning, to Support from international partners is available highlight the importance of this agenda, and to provide to further strengthen financial resilience of critical a basis for further development. It can act as a diagnostic services. For example, the Japan-World Bank Program for and checklist to assist countries in identifying priority Mainstreaming Disaster Risk Management in Developing actions that will strengthen resilience. APEC could play Countries helps bring Japanese and global lessons to an important role in this endeavor through facilitating vulnerable countries around the world. The Global Risk further knowledge exchanges across the region. Financing Facility (GRiF) with more than US$200 million in financial support from Germany and the United Kingdom The World Bank is exploring projects to embed provides large grants to pilot shock responsive systems financial protection against disasters that affect that are integrated in World Bank projects. critical infrastructure investment in high-risk countries. 9 Olivier Mahul and Benedikt Signer, “The Perfect Storm: How to Prepare against Climate Risk and Disaster Shocks in the Time of COVID-19,” One Earth 2, No. 6 (2020): 500–502. 14 | Financial Protection of Critical Infrastructure Services 1. Introduction APEC member economies are among those the most Box 1.1. Examples of Impacts of Critical Infrastructure exposed to disasters globally; Asia-Pacific alone faces Disruptions Caused by Disasters in APEC Economies estimated annual economic losses caused by disasters of US$675 billion.10 Many APEC member economies • The 2011 Great East Japan Earthquake and Tsunami have experienced losses from earthquakes, floods, and significantly affected the energy sector in Japan.15 typhoons of 1 percent to 10 percent of GDP over the The subsequent shutdown of nuclear power plants past 20 years.11 Disaster losses can have a sizeable fiscal throughout the country led to a 50 percent reduction impact on economies and can even set back long-term in electricity production, thereby causing substantial economic growth and poverty alleviation. Climate change disruptions to the energy supply across the country. will exacerbate such risks; recent research by the World Bank estimates that losses of 7.3 percent of GDP could • The 2012 Superstorm Sandy affected the East Coast be seen by the end of this century across the region, with of the United States, flooding key roads and tunnels member economies near the equator likely to experience that connect Brooklyn and Manhattan as well as the largest economic losses.12,13 flooding train and subway lines in the greater New York-New Jersey metropolitan area.16 As a result, Disruption to critical infrastructure can cause major 5.4 million commuters were stranded without a adverse economic effects and significant harm to the means of transportation, thereby disrupting business well-being of citizens, especially the poor and vulnerable. continuity more widely than did the hurricane itself. This issue affects all APEC member economies (box 1.1). In addition, an estimated 8.5 million households For example, the 2011 Great East Japan Earthquake led to suffered from electricity shortages. a 50 percent reduction in electricity production, thereby causing substantial energy disruptions across the country and damaged roads. The Wellington earthquake in New Zealand disrupted supply chains for months, which means that investments strengthening the resilience of critical infrastructure are an especially good value for money. Returns on the investment in resilience are estimated to be more than four dollars for every one dollar invested.14 The importance of weather-related events was particularly clear in middle- or high-income countries, whereas in the lowest-income countries, poor maintenance tended to be the largest driver of disruptions. Such investments can become even more important and cost-effective in a changing climate; even today, weather-related damage is one of the largest drivers of disruptions to critical infrastructure. 10 UN-ESCAP, Disaster Riskscape. 11 Alessandro Cantelmo, Giovanni Melina, and Chris Papageorgiou, “Macroeconomic Outcomes in Disaster-Prone Countries,” IMF Working Paper 19/217, International Monetary Fund, Washington, DC, 2019. 12 World Bank, Climate Change in APEC: Assessing Risks, Preparing Financial Markets, and Mobilizing Institutional Investors (Washington, DC: World Bank, 2020), https://openknowledge.worldbank.org/handle/10986/33423 13 Stéphane Hallegatte et al., Shock Waves: Managing the Impacts of Climate Change on Poverty (Washington, DC: World Bank, 2016). 14 Hallegatte, Rentschler, and Rozenberg, Lifelines. 15 OECD, Good Governance, box 1.1. | 16 Ibid. 15 | Financial Protection of Critical Infrastructure Services The flooded South Ferry Subway Station in New York shuttered after Superstorm Sandy. • The 2010 earthquake in Chile caused major restoration of service was approximately 10 days disruptions to transport and telecommunication for telecommunications, 25-75 days for water, 40-95 systems.17 Of the US$30 billion worth of damages days for electricity, 60-80 days for gas networks, and (18 percent of GDP), US$21 billion was due to more than 100 days for some roads, thus leading to infrastructure damage. The total decline in national a major disruption affecting both people and the economic activity that resulted from the damages economy.19,20,21 was assessed at 5 percent in March 2010 (one month after the earthquake). Economic disruption continued Critical infrastructure is defined as those assets, systems, for more than three months. and networks that provide essential services for the security of a nation, its economic prosperity, and the • The 2013 power outage in the northeastern United health and safety of its citizens. The services such as States and Canada was caused by trees falling on energy, transport, and water constitute the backbone of a high-voltage power line in Ohio, thus triggering modern interconnected societies (box 1.2).22 The delivery cascading failures in southeastern Canada and the of a service requires a complete infrastructure system: (a) northeastern United States.18 The outage affected 50 one or multiple physical assets connected in a network million people in both the United States and Canada (e.g., roads, hospitals, power plants), (b) people, and (c) at an estimated cost of US$6 billion. inputs (e.g., raw materials, fuel, electricity). • Following a rupture of the Wellington Fault in New Zealand, the time to get to 90 percent 17 Ibid. | 18 Ibid. 19 WELG (Wellington Engineering Lifelines Group), “Restoring Wellington’s Transport Links after a Major Earthquake,” WELG Project Report, Wellington, 2013. 20 Zorn, Conrad, and Asaad Shamseldin, “Post-disaster Infrastructure Restoration: A Comparison of Events for Future Planning,” International Journal of Disaster Risk Reduction, Vol. 13. (2015). WELG 2012. 21 WELG, “Lifeline Utilities Restoration Times for Metropolitan Wellington Following a Wellington Fault Earthquake,” A Report to the Wellington CDEM Group Joint Committee, Wellington Engineering Lifelines Group, 2012. 22 OECD, Good Governance. Terminologies and definitions vary, but these are also known as lifelines, critical infrastructure, or nationally significant infrastructure. 16 | Financial Protection of Critical Infrastructure Services Box 1.2. What Is Critical Infrastructure? According to a survey of 34 countries, six sectors are widely classified as being critical: energy, finance, health, information and communication, transport, and water and sanitation.23 Other sectors that are also often prioritized include education, emergency services, justice systems, chemicals manufacturing, and fast-moving consumer goods (such as food supply). Of the countries surveyed, 90 percent have designated specific infrastructure sectors as critical. Additionally, within a sector, some types of infrastructure assets - either because of their function, location, or connectivity - are recognized as being more important than others. For example, a telecommunications cabinet (or cables) that services a small number of connections is likely to be considered less critical than is a major telecommunications exchange point that services a much wider area. A large portion of critical infrastructure is typically owned or operated by the private sector or through PPPs. For example, in the United States, around 85 percent is privately owned.24 In emerging and developing economies, state-owned enterprises often play an important role, particularly in the water and sanitation sector. 23 OECD, Assessing Global Progress in the Governance of Critical Risks: OECD Reviews of Risk Management Policies (Paris: OECD Publishing, 2018), https://dx.doi.org/10.1787/9789264309272-en 24 US Chamber of Commerce, “Critical Infrastructure Protection, Information Sharing, and Cyber Security,” https://www.uschamber.com/issue-brief/critical-infrastructure-protection-information-sharing-and-cyber-security 17 | Financial Protection of Critical Infrastructure Services This report uses the term critical infrastructure to invest US$1.7 trillion per year between 2016 and refer to all the aspects required to deliver the critical 2030 to support growth and to reduce poverty.28 The services (e.g., transport, health care, energy). Six rapid construction of infrastructure; the increase in sectors are widely classified as being critical: energy, economic interconnectedness; the concentration of transport, water, information and communications people and assets in cities; the growth in reliance on technologies, health care, and finance. Some global supply chains and telecommunications, on new economies include education and critical economic technologies, and on changes to ways of working; and and manufacturing sectors within their definitions.25 climate change, mean that social, economic, and fiscal vulnerabilities related to critical services are growing.29 Importantly, the economic and social impacts from disruption to the critical infrastructure come The focus of this report is on the financial protection of primarily from the loss of the service they provide critical infrastructure services. This focus complements rather than from the cost of repairing damage to the existing, well-documented evidence and frameworks, assets themselves. For example, direct damages from including evidence collated by the World Bank30, disasters to power generation and to the transport about the operational and physical protection and infrastructure are estimated at US$18 billion a year the resilience of critical infrastructure assets, and in low- and middle-income countries globally; yet about best practice in incorporating resilience within the estimated cost of the associated disruption to PPPs in infrastructure.31,32 The financial aspects of services (energy and transport) ranges from US$391 resilience of critical infrastructure services are not widely billion to US$647 billion (at least 20 times larger).26 discussed in the existing literature, yet this is a critical Beyond the human impacts, such costs can also strain component of overall resilience. A 2014 publication government budgets by reducing revenues and by the Organisation for Economic Co-operation and increasing expenditures; the costs can stall investment Development (OECD) titled Recommendations on in the economy, with knock-on impacts for long-term Managing Critical Risks emphasized the role of financial growth and well-being. This conclusion underscores preparedness in managing critical infrastructure risks the need to move away from a focus on the resilience to protect public finances and the fiscal position of a of assets toward a focus on delivering critical services country. The 2018 and 2019 APEC Joint Ministerial that are resilient. Statements explicitly highlight the importance of quality and resilience, of the infrastructure’s strengths Ensuring reliable and resilient critical infrastructure against climate and disasters, and of the role of financial services is a growing priority and a core part of protection in this context. Figure 1.1 illustrates the many countries’ national security planning.27 A interdependence of resilient infrastructure assets, massive investment in new critical infrastructure is services, people, economies, and wider financial expected during the coming decade. For example, resilience of the country.33 the Asian Development Bank estimated that developing economies in Asia alone will need to 25 OECD, Good Governance. Critical manufacturing sector can include those involved in manufacturing chemicals needed for clean water, for example. 26 Hallegatte, Rentschler, and Rozenberg, Lifelines. 27 OECD, Assessing Global Progress. 28 Sungsup Ra and Zhigang Li, “Closing the Financing Gap in Asian Infrastructure,” ADB South Asia Working Paper 57, Asian Development Bank, 2018, http://dx.doi.org/10.22617/WPS189402-2 29 OECD, “Recommendations of the Council on the Governance of Critical Risks,” Meeting of the OECD Council at Ministerial Level, Paris, May 6-7, 2014. 30 Hallegatte, Rentschler, and Rozenberg, Lifelines. 31 World Bank, Technical Brief on Resilient Infrastructure Public-Private Partnerships. 32 World Bank, Resilient Infrastructure Public-Private Partnerships. 33 OECD and World Bank, Fiscal Resilience to Natural Disasters: Lessons from Country Experiences (Paris: OECD Publishing, 2019). 18 | Financial Protection of Critical Infrastructure Services Figure 1.1. Interdependence of Resilient Infrastructure Assets, Services, People, and Economies, Plus Wider Macro-fiscal and Financial Resilience of the Country Source: World Bank staff, building on Stéphane Hallegatte, Jun Rentschler, and Julie Rozenberg, Lifelines: The Resilient Infrastructure Opportunity (Washington, DC: World Bank, 2019). 19 | Financial Protection of Critical Infrastructure Services There are two key reasons that financial protection is of those assets can be particularly large where insurance important for critical infrastructure services. First, disasters coverage is low. Recent work by the IMF 38 highlights the can have a significant impact on public finances, affecting significant and often unreported contribution of public both sides of the balance sheet. On the expenditure side, assets to a country’s overall balance sheet. governments often bear a significant part of the costs of response and recovery. On the revenue side, negative Box 1.3. Contingent Liabilities from Disasters impacts on the productivity of firms, household incomes, The costs that disasters impose on governments - and and economic output can dent tax revenues. Second, a lack ultimately on taxpayers-should be considered contingent of financial preparedness can slow recovery and thus can liabilities or, when disasters lead to reductions in public increase the social and economic impacts of disasters.34 revenues, contingent revenue losses. Explicit disaster- related contingent liabilities are payment obligations Infrequent but severe disasters, such as large earthquakes, that are based on government contracts, laws, or clear can create significant macro-economic shocks and can policy commitments that could fall due in the event of even lower sovereign ratings in some cases.35 For example, disaster. Implicit disaster-related contingent liabilities are the Great East Japan Earthquake in 2011 is estimated expenditures that the government makes in response to have caused losses of around 4 percent of GDP; the to a disaster without prior formal commitments. The 2011 floods in Thailand led to economic losses, which expectation for such payments might arise from political were equivalent to more than 10 percent of GDP; and or moral pressure to speed up recovery in order to stimulate both Vietnam and Philippines have experienced events growth. with losses of more than 3 percent of GDP in the past 20 years.36 A recent assessment by the IMF 37 shows that those Given the critical importance of service continuity to macroeconomic impacts can create a vicious cycle that citizens, even where the government does not own lowers growth and increases debt. Frequent and smaller or operate the assets, the public sector can be left disruptions can reduce productivity of the real economy with an implicit contingent liability if those assets are and can slowly drain government budgets for repairs and underinsured. The government acts as the de facto insurer maintenance. of last resort. Often, those costs are not accounted for, so a country’s balance sheet likely underestimates the damage. Critical infrastructure is one of the largest contributors A lack of clarity over risk ownership can also lead to poor to government losses following disasters, especially in incentives for resilience. middle- and high-income countries. Where governments own critical infrastructure assets (i.e., public assets such When faced with significant costs, governments will often as schools, hospitals, and roads) or have other legal draw-down on reserves (or contingency funds) and will arrangements in place with the private sector such as look for opportunities to re-allocate budgets or to raise guarantees or cost-sharing arrangements, there is an new debt. Arranging finance for response and recovery explicit contingent liability (see box 1.3) on the government after the disaster in this way can be slower, more expensive, for the costs of recovery and reconstruction. Recovery costs and unpredictable. For example, budget reallocations come 34 Ibid. 35 Standard & Poor’s, “Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness,” S&P Global Ratings, New York, 2015, https://www.spglobal.com/ratings/en/research/articles/150910-storm-alert-natural-disasters-can-damage-sovereign-creditworthiness-9327571 36 World Bank, “Cluster 6: The Economics of Disaster Risk, Risk Management, and Risk Financing,” Knowledge Note 6-3, World Bank, Washington, DC, 2012, http://documents1.worldbank.org/curated/en/175611468044671950/pdf/793950BRI0drm000Box377374B00Public0.pdf 37 IMF (International Monetary Fund), “Building Resilience in Countries Vulnerable to Natural Disasters,” presentation to IMF Executive Board, November 12, 2018. 38 Vitor Gaspar, Jason Harris, and Alexander Tieman, “The Wealth of Nations: Governments Can Better Manage What They Own and Owe,” IMFBlog, October 10, 2018, https://blogs.imf.org/2018/10/09/the-wealth-of-nations-governments-can-better-manage-what-they-own-and-owe/ 20 | Financial Protection of Critical Infrastructure Services with an opportunity cost in terms of diverging resources The financial protection of critical infrastructure services from planned productive uses. Raising new debt from requires a modified approach when compared to the creditors can be more expensive and unpredictable and financial protection of physical public assets. Chapter often comes with a delay. Delays in financing recovery 2 in this report describes those key differences and and reconstruction of critical infrastructure prolongs their implications for a financial protection strategy. the disruption to critical services and so amplifies the This report also proposes an operational framework indirect cost to the economy. for strengthening the financial preparedness of critical infrastructure through shock-responsive systems that Financial protection is achieved when such risks to are embedded in strong national risk management government balance sheets are proactively managed and financial preparedness. The components of this and when the government is financially prepared operational framework are described in detail in chapters to ensure that rapid, targeted finance is available 3 and 4. The report builds on existing principles and in emergencies. The process of putting in place such approaches to disaster risk finance 44, including many mechanisms defines disaster risk finance. Financial developed and implemented by APEC member protection is a core mandate of ministries of finance. economies in collaboration with the World Bank, as Moreover, ministries of finance are increasingly well as global experience and recommendations about integrating those risks into their wider macro-fiscal managing critical infrastructure risks.45 Chapter 5 reviews framework, including dedicated efforts for fiscal risk the emerging evidence about the impacts of COVID-19 management to better manage fiscal shocks from on critical systems, and it draws initial conclusions for disasters.39 In 2019, the G20 recognized that disaster including pandemics and other risks within an operational risk finance and insurance can be critical ingredients framework. Chapter 6 then discusses the potential next for quality infrastructure investment.40 APEC Finance steps. Examples are drawn throughout the text and are Ministers have focused on disaster risk finance for public detailed as case studies in the annexes. The framework assets and infrastructure over several years and have also learns from experience in working to implement committed to continued cooperation and knowledge financial protection for critical infrastructure in lower- exchange on this topic. For example, in 2016, APEC and middle-income countries. For some, particularly Finance Ministers called for the establishment of the APEC lower-income countries, the capacities, data availability, Working Group on Disaster Risk Finance and Insurance and resources will be more constrained. As such, the in their Joint Finance Ministerial Statement.41,42,43 framework aims to draws out actions and good practices relevant to all contexts so it can strengthen both financial protection and ideal standards. 39 OECD and World Bank, Fiscal Resilience to Natural Disasters. 40 Ministry of Finance, Japan, “Communiqué, G20 Finance Ministers and Central Bank Governors Meeting, Fukuoka, June 8-9, 2019,” https://www.mof.go.jp/english/international_policy/convention/g20/communique.htm 41 APEC (Asia-Pacific Economic Cooperation), “Joint Ministerial Statement,” APEC Finance Ministers’ Meeting, Port Moresby, October 17, 2018, https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-Meetings/Finance/2018_finance#:~:text=1.%20We%2C%20the%20Finance%20Ministers%20 of%20the%20economies,Papua%20New%20Guinea.%20Global%20and%20Regional%20Economy%202 42 APEC, “Joint Ministerial Statement,” APEC Finance Ministers’ Meeting, Santiago, October 15, 2019, https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-Meetings/Finance/2019_finance 43 APEC, “Joint Ministerial Statement,” APEC Finance Ministers’ Meeting, Lima, October 15, 2016, https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-Meetings/Finance/2016_finance.aspx 44 World Bank, Financial Protection against Natural Disasters: An Operational Framework for Disaster Risk Financing and Insurance (Washington, DC: World Bank, 2014), https://www.gfdrr.org/sites/default/files/documents/Financial%20Protection.pdf 45 For example, see the case studies (in annexes) and OECD, “Recommendation of the Council on the Governance of Critical Risks.” 21 | Financial Protection of Critical Infrastructure Services 2. Planning Financial Protection and Critical Infrastructure Services Financial protection against disasters has gained and economic prosperity of its citizens, even where significant traction to reduce the negative fiscal impacts of the critical infrastructure is owned and operated by disasters and to ensure that finance is available to speed the private sector. recovery. Finance Ministries of APEC member economies have long been leaders in financial protection.46 For 3. The contingent liabilities associated with critical example, many economies across the APEC region - such infrastructure services will be larger than those related as the Philippines, Mexico, Peru, and Indonesia-already to the underlying public assets alone and need to be have some form of national financial protection strategy in quantified and managed proactively. place.47 Financial protection of public assets, which is one type of infrastructure, is also advanced across the region. Those three key differences are described in detail next, with For example, of the 12 APEC economies surveyed in 2019, examples from APEC countries. We analyze the differences all have rules in place that clarify risk ownership related on the basis of the evidence gathered, and we draw out key to public asset damages across government, and all use lessons for financial protection. This chapter concludes with insurance to protect public assets (to a greater or lesser a summary of the implications for a financial protection extent).48 Such frameworks typically focus on the financial strategy. arrangement to enable the efficient repair, recovery, replacement, or reconstruction of assets such as schools Principle 1. Financial protection or roads after a disaster. In 2018, APEC and the World Bank of critical infrastructure services collaborated on an operational framework for catastrophe insurance programs for public assets; that framework drew means looking at the continuity on the deep experience of Australia, Colombia, Japan, of services not just the repair and Mexico, and New Zealand, among others.49 replacement of assets, such as power plants and roads. The financial protection of critical infrastructure services Ensuring the continuity of critical services in the aftermath - the focus of this report - is broader in scope than public of a disaster is a central objective of critical infrastructure assets and requires a different approach. According to resilience. Reducing the risk of disruption can significantly evidence gathered for this report, three important issues reduce the costs of disasters on firms, households, and must be considered in this new context: government balance sheets. Any disruption to critical services, such as energy or water, can affect households 1. Financial protection of critical infrastructure services and firms in many ways, both directly and indirectly (box means looking at the continuity of services not just 2.1). For example, if roads are damaged by an earthquake, the repair and replacement of assets such as power then people cannot get to work, and supply chains for firms plants and roads. will be affected. If electricity is disrupted by wind damage to overhead transmission lines, then that disruption can 2. Governments often bear responsibility for ensuring force businesses to close. the continuity of critical services for the safety, security, 46 World Bank, “Financial Risk Management of Public Assets against Natural Disasters in APEC Economies,” World Bank Technical Contribution to the APEC Finance Ministers’ Process, APEC Finance Ministers’ Meeting, Hoi An, Vietnam, October 2, 2017, http://mddb.apec.org/Documents/2017/MM/FMM/17_fmm_009.pdf 47 OECD and World Bank, Fiscal Resilience to Natural Disasters. 48 World Bank, “Financial Risk Management.” | 49 World Bank, Catastrophe Insurance Programs for Public Assets: Operational Framework (Washington, DC: World Bank, 2020), https://openknowledge.worldbank.org/handle/10986/34440 22 | Financial Protection of Critical Infrastructure Services Box 2.1. Impact of Critical Infrastructure Service Disruptions to Economic Activity Critical infrastructure services can be disrupted in multiple ways, from socio-political, to natural and man made disasters, and to long-term climate change. Those events can lead to disruptions of (a) infrastructure assets, (b) supply of inputs, (c) support of infrastructure networks, and (d) availability of staff members and other human resources. The failure of infrastructure services then will further affect economic activity through three key channels. Some channels act over the short-term while others have longer-lasting impacts. • First, direct impacts are the most visible and immediate consequences. For example, workers are unable to go to their workplace, a firm has to close its operations because it cannot operate without power or telecommunications (internet, phones), or customers are not able to access the products and services. Infrastructure owners and operators - in some cases through the involvement of governments - incur urgent repair and restoration costs. • Second, firms and individuals absorb indirect coping costs to manage the impacts. For example, a firm has to purchase or incur costs for a backup power generator, which reduces its profits or limits its ability to invest in alternative and more productive investments. Individuals may lose income and livelihoods, and governments may need to provide financial support. • Third, individuals, firms, and governments become more constrained on their investments and savings, either in the short- or long-term. For example, firms have less confidence to automate productions in regions with frequent electricity disruptions. In addition, foreign direct investment may be affected, with investors diverting their finances to more resilient economies. Box figure 2.1.1 illustrates in a simplified way of how an initial shock can cascade from an infrastructure services disruption to individuals, firms, and governments. Interdependencies of some infrastructure can compound such risks. 23 | Financial Protection of Critical Infrastructure Services Box Figure 2.1.1. Illustrative Pathways of Impacts of Service Disruption to Critical Infrastructure on Firms Potential causes of disruption > Sociopolitical Slow onset climate Natural disasters Manmade (e.g. epidemics, change (e.g. water (e.g. floods, (e.g. cyberattacks, civil unrests) scarity) earthquakes) vandalism, terrorism) Disruption on service inputs > Assets and Supporting Human resources Material inputs equipment infrastructure Disruption on infrastructure services > For Example Loss of access Water supply Power supply (transport) failure failure Direct and indirect impacts on households, firms, and governments (simplified and illustrative) > Household Firm level (economic) impacts Macro-fiscal impacts (social) impacts Non- Contingent Direct Loss of access Loss of cleaning Use of operations liability: asset for workers and sanitation backup of electrical repair and services generators equipment restoration Compromised Higher Contingent Reduced hygiene capital and liability: Indirect utilization and health operating business (coping levels standards costs interruptions costs and financial impacts) Reduced revenues and Reduced tax Loss of income profits revenues and livelihoods for workers Indirect (investment Higher social impacts) Reduced Reduced investment welfare savings level captial spending Source: World Bank staff. 24 | Financial Protection of Critical Infrastructure Services Disruptions to critical services can generate significant In September 2017, the Sint Maarten Airport in the indirect economic impacts and production losses.50 Caribbean was devastated by Hurricane Irma, a Importantly, service disruptions can manifest well Category 5 hurricane, which was rapidly followed by beyond the geographical area that is directly impacted Hurricanes Jose and Maria. The airport’s damage has by the shock, thus affecting multiple sectors. Those severely affected tourism, which is the key sector for disruptions can quickly lead to large economic and the economy and which contributed 73 percent to the social impacts that can persist over a longer duration. country’s total income from foreign exchange. Delays For example, damages to power lines in one area can in financing the reconstruction slowed the recovery disrupt the energy supply over a wide geographical significantly and had knock-on tourism effects that area, but those damages can also affect other critical were costly for the economy. infrastructure systems such as transport, health, education, and even financial services (figure 2.1).51 This approach can have a major and long-lived impact on people and the economy. Figure 2.1. Illustration of Utility and Network Interdependencies 50 Hallegatte, Rentschler, and Rozenberg, Lifelines. 51 Institute of Public Utilities, “Utility and Network Interdependencies: What State Regulators Need to Know,” Technical Assistance Brief on Critical Infrastructure Protection, US National Association of Regulatory Utility Commissioners, Washington, DC, April 2005. 25 | Financial Protection of Critical Infrastructure Services Importantly, disruption to critical services can of disaster through physical resilience of individual emerge not only from physical damages but also infrastructure assets. from disruptions to people, inputs, or even shocks to demand. For example, pandemics such as COVID-19 2. Redundancy - the ability to keep operating and to can have a significant impact on critical services without provide services through substitute or redundant damaging assets. COVID-19 has strained water utilities systems that can be activated or used if something through increased demand, disruptions to supply important should break down or stop working. chains and essential workers, and falling revenues (see chapter 5). This strain can negatively impact the 3. Recovery Capacity (preparedness) - the capacity government’s balance sheets if fixing the effects will to get back to normal as quickly as possible and require public support. A focus on assets alone can to minimize disruptions through effective and mean missing important sectors such as financial fast decision-making. It involves getting the right services, which are often classed as critical services and people, resources, and finances to the right places are vulnerable to exogenous shocks such as disasters rapidly for repairing and recovering critical services. and pandemics. Shocks to financial services and critical economic sectors can create a large contingent liability 4. Adaptability - the ability to absorb lessons from on the government. catastrophes and to adapt designs and plans. It involves revising plans, modifying procedures, and Investments, policies, instruments, and actions that introducing new tools and technologies needed to reduce the chance, duration, or severity of disruption improve robustness, resourcefulness, and recovery to critical services can achieve major reductions in capabilities. economic and welfare impacts of disasters. Estimates by the World Bank show that if the average recovery The appropriate balance among those qualities will and reconstruction speed is reduced by two-thirds, depend on the case. For example, in some cases, it may then global well-being losses from disasters could be be less cost-effective (or not possible) to build highly reduced by 14 percent - equivalent to increasing global resistant infrastructure up front but more effective to consumption by more than US$75 billion per year.52 build an infrastructure that can be repaired quickly (e.g., small rural roads).56 In other cases such as major bridges Securing resilient critical infrastructure services and energy generation assets, it is likely to be cost- requires four qualities for infrastructure systems. effective (and necessary, given safety requirements) to It involves maintaining physical resilience of assets, build an infrastructure that is strong enough to sustain having good maintenance, activating repair, building a foreseeable shock, including design of a physical in redundancy, and ensuring that mechanisms are infrastructure to withstand low-probability but high- in place to quickly deal with any disruptions and to consequence events such as natural catastrophes. restore services when needed:53,54,55 Some assets will be more critical to service provision than others, so the right balance will vary by asset. 1. Robustness (resistance and reliability) - the ability Importantly, it is impossible to avoid all damages; so to keep operating or to remain standing in the face all four qualities are important. 52 Stéphane Hallegatte, Jun Rentschler, and Brian Walsh, Building Back Better: Achieving Resilience through Stronger, Faster, and More Inclusive Post-Disaster Reconstruction (Washington, DC: World Bank, 2018), https://openknowledge.worldbank.org/handle/10986/29867 It assumes no compromises in the quality of reconstruction. 53 OECD, Future Global Shocks: Improving Risk Governance: OECD Reviews of Risk Management Policies (Paris: OECD Publishing, 2011), https://dx.doi.org/10.1787/9789264114586-en 54 OECD, “Recommendation of the Council on the Governance of Critical Risks.” | 55 OECD, Good Governance. 56 Julie Rozenberg et al., “From a Rocky Road to Smooth Sailing: Building Transport Resilience to Natural Disasters,” background paper for Lifelines, World Bank, Washington, DC, 2019, https://openknowledge.worldbank.org/handle/10986/31913 26 | Financial Protection of Critical Infrastructure Services In most cases, the ability to recover both assets Lesson 1. A key objective of financial protection of and services quickly after a disaster is a vital critical infrastructure should be ensuring the continuity part of overall resilience; this is where financial of critical services in the aftermath of a disaster. preparedness plays an important role alongside good contingency planning and operational Lesson 2. A focus on assets alone could risk missing preparedness. A successful result depends on important threats, such as pandemics, that affect critical people and effective planning before disasters to services rather than damaging assets. That focus could control damages, to mitigate impacts, and to put also mean missing important sectors. Ministries of plans and resources (people, equipment) rapidly into Finance should consider if and how those sectors action for a speedy recovery. Financial preparedness should be included in a financial protection strategy. is necessary both to ensure adequate funding for more frequent repair and maintenance after small Lesson 3. Assessments of risk should consider the events and to implement contingency plans for rapid criticality of services in terms of their effects on recovery after more infrequent and larger disasters. households and firms - not just on asset values - when planning resilience, response, and recovery strategies. For example, Vietnam is highly exposed to natural hazards that threaten the ongoing provision of critical Principle 2. Governments often infrastructure services. For example, more than one- bear responsibility for ensuring third of Vietnam’s transmission grid is situated in forested areas and so is susceptible to falling trees and the continuity of critical services branches during storms. The average annual damages for the safety, security, and to energy infrastructure are estimated to be US$330 economic prosperity of its million. Flooding in 2014 caused electricity outages citizens, even where the critical totaling US$670 million in lost sales for Vietnamese infrastructure is owned and firms, while the outages halted production and lowered equipment-use rates causing a further US$30 million operated by the private sector. in damages. Research by the World Bank stressed A large proportion of critical infrastructure is often the importance of investing in resilience and in risk- owned or operated by the private sector. In many informed development strategies to reduce risk and to countries, infrastructure ownership is moving from avoid future disasters, but the research recognized that direct government ownership (i.e., public assets) disaster risk can never be fully eliminated and so stressed toward state-owned enterprises and privatization. the importance of systemic disaster preparedness to This change decreases governments’ direct control ensure continuity of critical infrastructure services such over the resilience of infrastructure assets and service as energy. This research includes having early-warning provision and requires much greater participation systems, doing emergency planning, and establishing of the private sector. The use of PPPs has matured a national financial protection strategy.57 significantly in parallel with well-established good practices to incentivize operational preparedness and By using this analysis, we can draw three lessons for infrastructure resilience.58,59 financial protection of critical infrastructure services: 57 Jun Rentschler et al., Resilient Shores: Vietnam’s Coastal Development Between Opportunity and Disaster Risk (Washington, DC: World Bank, 2020), https://openknowledge.worldbank.org/handle/10986/34639 58 World Bank, “PPP Best Practice,” APEC Transportation Working Group, World Bank, Washington, DC, 2016. 59 World Bank, Technical Brief on Resilient Infrastructure Public-Private Partnerships. 27 | Financial Protection of Critical Infrastructure Services The role of the public sector varies between countries service roughly 16 percent of all US electric customers. and across sectors. For example, in many countries, Finally, cooperatives (or co-ops) are not-for-profit, health care and education infrastructure are owned member-owned utilities. Co-ops exist in 47 states, and operated mainly by the public sector. In some serving a total of 12 percent of US customers. cases, the infrastructure may be owned by government but operated and maintained by the private sector. The World Bank’s Private Participation in Infrastructure In many countries, the ports, the airports, and the Database tracked US$96.7 billion of private sector rail infrastructure are publicly owned, but they are investments across 409 projects in 2019. With those maintained and operated by the private sector (for investments, around 62 percent of financing originates example, through traditional public procurement, from private sources. Commercial lenders provide for concessions,60 or PPPs). In other cases, particularly in nearly half (46 percent) of infrastructure finance.62 higher income countries, both the service operation and the assets themselves may be fully privatized, and Strengthening financial preparedness of critical the government will play the role of regulator and infrastructure will therefore often involve bringing user. There are also many hybrid forms of ownership. multiple stakeholders to the table and considering For example, state-owned enterprises play some role the roles of regulation, legislation, financing, and in most countries61 and are particularly important in public policy. The varying models of ownership and many emerging economies - particularly in sectors operation for critical infrastructure services bring added such as water and sanitation. It is also important to complexity to financial preparedness when compared consider the relative roles of central (federal), regional to, for example, public assets. The form of the legal (including state, provincial, and municipal), and local arrangement of ownership and operation of critical governments. For example, the local governments infrastructure by the public and private sector affects often play a key role in managing local roads plus how the government can directly influence critical water and sanitation services. service provision and resilience, as well as the explicit contingent liabilities on the government for costs In the United States, electricity is generated and associated with disasters.63 Strengthening financial delivered by nearly 3,000 utilities that consist of preparedness and service continuity therefore requires three main categories based on ownership type: working with a wider community of stakeholders and investor-owned utilities, publicly owned utilities, and a wider range of policy and regulatory tools than has cooperatives. As of 2017, 168 investor-owned utilities been the case for financial protection of public assets. were serving roughly 72 percent of all US electric Risk ownership that is clear, credible, and enforced is customers. Publicly owned utilities include federally a necessary foundation to financial resilience. run, state-run, and municipally run utilities, and they 60 A service concession, for example, is an arrangement whereby a government or other public sector body contracts with a private operator to develop, operate, and maintain the grantor’s infrastructure assets such as roads, bridges, tunnels, airports, energy distribution networks, prisons, or hospitals. The grantor controls or regulates what services the operator must provide using the assets, to whom, and at what price, and it also controls any significant residual interest in the assets at the end of the term of the arrangement. 61 OECD, “OECD Dataset on the Size and Composition of National State-Owned Enterprise Sectors,” https://www.oecd.org/corporate/oecd-dataset-size-composition-soe-sectors.htm 62 World Bank, “Private Participation in Infrastructure (PPI) 2019 Annual Report,” World Bank, Washington, DC, 2019, https://ppi.worldbank.org/en/ppi 63 OECD, Good Governance. 28 | Financial Protection of Critical Infrastructure Services Governments often bear some responsibility for be different between the public and private sector. ensuring the continuity of critical services for As a policy maker, financier, and regulator, the the safety, security, and economic prosperity of government often plays a key role to set required its citizens, even where the critical infrastructure levels of preparedness that will ensure acceptable is owned and operated by the private sector. levels of risk for citizens and national security.50 Figure Infrastructure owners and operators bear the primary 2.2 illustrates the relationships between different responsibility for protecting their assets and for stakeholders and the role of public policy, public maintaining the continuity of services they provide. finance frameworks, regulation, and procurement. But priorities and levels of risk tolerance will often Figure 2.2. Relationships between Ministries of Finance and Critical Infrastructure Owners and Operators 29 | Financial Protection of Critical Infrastructure Services In summary, the key lessons for a financial protection expenditures related to providing services in strategy concerning the critical infrastructure include emergencies. the following: For example, in 2013, Typhoon Haiyan heavily Lesson 4. Ensuring continuity of services, as well disrupted education and health care in affected as wider resilience, requires having clarity over risk areas of the Philippines, and the government ownership between central and local governments provided temporary health and education services and the private sector. Risk allocation that is clear, to thousands of citizens, in addition to rebuilding credible, and enforced provides a strong and necessary hospitals and schools. foundation to resilience. • The insurer of last resort for privately owned Lesson 5. Financial protection of critical infrastructure and operated critical infrastructure systems. and services requires bringing multiple stakeholders to Although in many countries a large part of critical the table and adopting legislation, policies, regulations, infrastructure is owned or operated by the private and financing arrangements that encourage and ensure sector, the government may still act as the insurer good risk management by the private sector and across of last resort. For example, the government may levels of government. end up paying the costs of recovery after a large disaster because that service is so critical to the Principle 3. The contingent population. This implicit contingent liability on liabilities associated with critical the government is often not accounted for. Such infrastructure services will be unexpected expenditures can have a sizeable impact on government budgets. larger than those related to the underlying public assets alone In the United States, electric utilities are responsible and need to be quantified and for all costs associated with service continuity and managed proactively. restoration in disasters under normal circumstances. During president-declared emergencies, however, In addition to ensuring that finance is available to public utilities (which serve around 16 percent of minimize disruptions, financial protection of critical consumers in the United States) can receive financial infrastructure should manage the fiscal impact from assistance from the federal government. Investor- any shock. Many APEC economies have made advances owned utilities can receive other forms of federal in financial protection of public assets. But the potential assistance, such as tax deductions, low-interest long- fiscal impact from disruptions to critical services is term loans, and allocations to offset expenses to restore often probably not fully quantified, accounted for, power. The state and federal government can also step or mitigated within public finance frameworks. Two in during extreme events. Following Hurricane Sandy in additional sources of contingent liability are associated 2012, the Federal Disaster Management Agency (FEMA) with critical services, in addition to the fiscal impacts approved a 100 percent cost-share for emergency associated with loss of revenues caused by disruptions: power restoration work by state, local, and tribal governments and US$800 million for debris removal • The costs for maintaining and reinstating and infrastructure restoration. Similar responses were critical services. This source includes government 30 | Financial Protection of Critical Infrastructure Services seen following Hurricanes Harvey and Maria in 2017. insurance programs for public assets and the World After Hurricane Irma, which hit the southeastern United Bank-SEADRIF knowledge series about financial States in 2017, FEMA spent more than US$1 billion on protection of public assets).64,65 infrastructure restoration including US$43 million for repairs to electric and water utilities at a 90 percent 2. Shock-responsive systems that link financial and cost-share. operational preparedness to ensure rapid recovery of critical services. This system includes having plans, Key lessons for a financial protection strategy for finances, and systems in place to rapidly mobilize critical infrastructure include the following: action in the event of a shock to ensure continuity or Lesson 6. Contingent liabilities and fiscal risks that reduce the severity and duration of any disruptions are on the government and are associated with critical to critical services. This report proposes a framework infrastructure services will be larger than those related that brings together good practice from risk financing to damages to the underlying public assets alone. Not and infrastructure planning. More discussion on this incorporating them within public finance frameworks can framework is covered in chapter 3. mean understating risks and financing gaps. 3. A national financial protection strategy that integrates Lesson 7. Public finance frameworks need to account critical infrastructure to efficiently manage the for the contingent liabilities associated with the recovery contingent liabilities related to such shock-responsive of critical infrastructure services, as well as creating good systems. Here the focus is on reducing any financial incentives for investment in resilience. shock that negatively affects government balance sheets and that arises from the costs of recovering Conclusions for a Financial and reinstating critical services post-disasters. The Protection of Critical focus is also on ensuring that timely, predictable, and cost-effective finance is available in emergencies to Infrastructure Services quickly restore services when needed. Several APEC Bringing the principles and lessons together in an economies already have a national financial protection operational framework for financial protection of critical strategy in place. This report considers how to include infrastructure should combine three interconnected critical infrastructure appropriately within such a parts (as illustrated in figure 2.3). strategy, as well as linkages to wider approaches for managing critical risks across government. Discussions 1. Financial protection of (physical) public assets. This on such a strategy is covered in chapter 4. protection means having finances and plans in place to rehabilitate or reconstruct critical assets after a This conclusion should complement investments in quality disaster. This approach could include, for example, infrastructure, risk reduction, and adequate maintenance. public assets insurance or budgetary mechanisms such as disaster funds. Such protection is not covered in Figure 2.4 provides a decision tree to assist readers this report because it is well documented in previous in assessing whether financial protection of critical reports by the World Bank and APEC (for example, infrastructure services is relevant to their own context the 2020 operational framework for catastrophe and the potential next steps. 64 World Bank, Catastrophe Insurance Programs for Public Assets. 65 World Bank, “Financial Protection of Public Assets,” SEADRIF Knowledge Series: Financial Protection of Public Assets, World Bank, Washington, DC, 2020, https://www.financialprotectionforum.org/seadrift-knowledge-series-financial-protection-of-public-assets 31 | Financial Protection of Critical Infrastructure Services Figure 2.3. Interaction of Financial Resilience of Assets, Services, and Countries Note: a. The schematic shows the links among critical infrastructure assets (dark blue), services (light blue), wider economic and social resilience (grey), and macro- fiscal and financial resilience (orange). The left-hand side of the schematic summarizes the three components of financial protection of critical infrastructure services and shows how they contribute to financial preparedness and resilience as well as how they link to resilience at the different levels on the right-hand side. b. This report focuses on the additional aspects of financial preparedness related to critical infrastructure services in light blue and on the links to national financial protection strategies to strengthen macro-fiscal resilience to disasters and to safeguard the continuity of services post-disaster. Previous reports such as the following have covered aspects of infrastructure assets resilience: (1) World Bank, “Catastrophe Infrastructure Warranty against Climate and Disaster Shocks,” Draft Technical Proposal for discussion at 2019 APEC Finance Ministers Meeting and 2019 Investor Forum, 2019. http://mddb.apec.org/Documents/2019/MM/FMM/19_fmm_007.pdf (2) World Bank, Catastrophe Insurance Programs for Public Assets: Operational Framework (Washington, DC: World Bank, 2020). https://openknowledge.worldbank.org/bitstream/handle/10986/34440/Catastrophe-Insurance-Programs-for-Public-Assets-Operational-Framework.pdf?se- quence=1&isAllowed=y 32 | Financial Protection of Critical Infrastructure Services Figure 2.4. Process to support decision makers on actions to promote financial protection of critical infrastructure services Conduct preliminary Do disasters or other shocks lead to prolonged I don't know diagnostic of disruptions to critical services that can have financial risks Results important economic, financial, or social No, the impacts are not sizeable or the disasters are not associated with impacts? a major driver of disruption. critical infrastructure Yes I don't know and potential What types of impact? financing gaps and Results operational issues. This diagnosis starts with an analysis of historical Operational (short Financial records of disruptions, Fiscal (government term): Delays in the (infrastructure level): Economic (long term): disaster impacts, level): Reallocations of recovery of critical Delays exist in access to Reduced maintenance and costs. budgets or increased services are caused finance or insufficient and investment in future borrowing exist to by issues such finance to support years exist following fund recovery and as manpower or the recovery of critical the shock. reconstruction. equipment shortages. services. Yes (to any) No (to any) Are all of the following in place? Determine and prioritize specific gaps to address in Adequate contingency the short-term, Policies, cost-sharing plans and procedures Defined operational medium-term, and There are predictable rules, or contractual by infrastructure and financial long-term at different and cost-effective pre- arrangements clarify owners and operators responsibilities exist for levels of government arranged financing and and manage the ensure service the continuity or and for different plans to fund rapid explict and implict continuity backed by recovery of services infrastructure systems recovery of services, as contingent liabilities of pre-arranged finance, and rehabilitation or (see Section 3 and 4). well as reconstruction the costs of recovery of and protocols or the reconstruction of of the most critical services and the contracts are in place critical assets after assets. rehabilitation of critical to ensure that funds disasters or shocks. assets after shocks. Resulting are executed rapidly. priorities No, insufficient Do I have sufficient information to identify Yes appropriate and cost-effective solutions? information Conduct risk Conduct engineering Yes assessment of assessment of Define a set of cost-effective short-term Resulting potential use of Are there priorities the levels of (0-3 years) and long-term (3-10 years) risk-financing potential and operational solutions to address priorities. instruments. significiant More preparedness. information benefits to needed Yes enhance the Are these solutions a priority for government Conduct a cost-benefit analysis of status quo? action now given their benefits versus other prioritized actions and strategies vs. priorities of the government and constraints? No other priorities. Yes Detail a strategy for addressing the priorities. No Do I understand the short-term actions required to implement solutions? Yes No Define a short-to medium-term action plan priorities No for the next 0-5 years to implement identified strategy and objectives. Do I have all the information, capacities, No partnerships, and resources needed to implement this strategy? Yes Maintain Status Quo and Referesh Approach Begin Implementation Seek Additional Support with New Risks or Technologies • For a ministry of finance or governmental organization, this approach could be across a whole country of a defined region; for infrastructure owners or operators, this would be focused on infrastructure assets or services within their area of responsibility. • Diagnostics should be proportionate to the level of risk and financial impacts. costly and long diagnostics can be inefficient. it is typically good practice to start simple and then move to in-depth if such a change is found to be necessary and cost-effective. 33 | Financial Protection of Critical Infrastructure Services 3. Combining Financial and Operational Preparedness to Ensure Continuity of Critical Services Financial preparedness is a critical part of ensuring operational preparedness and financial preparedness service continuity, both to ensure adequate funding (figure 3.1): for more frequent repair and maintenance after smaller, more frequent events and to implement • Operational preparedness. The right plans, contingency plans for rapid recovery after more standard operating protocols, and capabilities infrequent, larger disasters. This chapter draws on the (e.g., people, equipment, spare parts) are in place best practice principles of disaster risk financing, as to enable quick restoration of critical services. well as on global experience in the maintenance and recovery of critical services. It proposes a framework • Financial preparedness. The right mechanisms to to strengthen the financial preparedness of critical provide and access effectively adequate and timely infrastructure systems that will enhance service financing is available to implement those plans. continuity. Importantly, effective financial protection of critical infrastructure services requires the integration of Figure 3.1. Three Components for Shock Responsive Systems to Protect Critical Infrastructure Services Source: World Bank staff. 34 | Financial Protection of Critical Infrastructure Services Good operational preparedness for emergencies pre- to put in place and implement the plans, equipment, disaster - alongside good operations and maintenance and agreements necessary for ensuring rapid recovery. and investments in physical resilience of infrastructure The approach also means financial planners have systems - can reduce disruptions to critical services.66 comfort that any allocation of funding can be executed Yet, even the best service continuity plans and good quickly and in line with agreed objectives. The roles of operational preparedness cannot ensure that services government in implementing operational and financial are restored rapidly if the required funding for labor, preparedness at each stage will depend on who owns spare parts, or contracts is delayed or not available. and operates the critical infrastructure assets and services. In a case of full government ownership, each of Financial preparedness can be further broken down the actions would be the responsibility of government. into two aspects: For a fully privatized critical infrastructure sector, the actions will be the responsibility of the private sector, • Mobilizing (access to) funding. Having the right though the government may set standards through financial instruments (such as contingency budgets regulation, may provide incentives, and may provide and insurance) in place will ensure cost-efficient public goods (e.g., early warning systems, coordination access to sufficient funding for shocks of different fora). The roles of Ministries of Finance are discussed severity, alongside sufficient funding for regular in chapter 4. operations and maintenance (O&M). Although this report focuses mainly on financial • Delivering funding. Having the right funding preparedness, it is important to recognize that mechanisms in place will ensure an effective flow operational factors can often be a major constraint of funds. The mechanisms include, for example, to rapid recovery, particularly lower-income ways to transfer funds between government countries. Financial preparedness is necessary but departments and efficient procedures to request, not sufficient. Delays to recovery can stem, for example, approve, and disburse funding. This aspect is from a lack of ability to monitor the system for quickly critical because experience shows such a lack can identifying (a) the source of a service failure; (b) a lack be a major barrier to fast action. of contingency planning; or (c) a lack of people, spare parts, or other equipment. There can also be physical Both components - operational and financial reasons that recovery is delayed (for example, debris preparedness - need to be informed by appropriate removal after a disaster or challenges in accessing risk data and analytics. Through well-informed risk damaged infrastructure caused by blocked roads). If data analytics, governments and infrastructure owners governments are to strengthen resilience of critical and operators can assess probable impacts, to prioritize services, the first step is to assess the potential sources planning, to trigger early action, and to guide recovery of bottlenecks, how often both operational and financial interventions. preparedness will need to be enhanced in parallel, and how recoveries will be closely interlinked. We This integrated approach can be described as a refer the reader to the substantial literature about shock-responsive system. With such systems in place, operational preparedness and resilience for detailed infrastructure operators know they have the financing insights beyond the scope of this report.67 66 Hallegatte, Rentschler, and Rozenberg, Lifelines. 67 Ibid. 35 | Financial Protection of Critical Infrastructure Services Experiences from Japan and the United States are such as issuing bonds to pay for response costs, cost described herein, and other examples from the deferrals, or cost trackers, as well as approved charges Caribbean and New Zealand are detailed throughout on consumers). this report. They show how financial and operational preparedness can work together to reduce service In Japan, local governments have specific mechanisms disruptions. The range of examples aims to illustrate to a speedy recovery for a publicly owned infrastructure. how shock-responsive systems can work under In terms of financial preparedness, local governments different types of arrangements between the public report their infrastructure damage to the line ministries and private sector, as well as the variety of roles that and request a national subsidy for recovery works the government can play to ensure resilience. within days. As part of operational preparedness, they can arrange pre-disaster agreements with private In the United States, operational and financial companies or local industry associations to initiate preparedness for disasters in the energy sector are recovery work in the immediate aftermath of disasters. closely interlinked. All states are presumed to have legal The agreement covers information sharing, emergency authority over emergencies, with service continuity inspections, debris removal, and disaster recovery. and recovery efforts falling under the purview of Those companies are required to begin activities upon utilities and network coordinators. States use pre- request even before a contract is costed. Immediately agreed emergency and disaster plans that are based after the Great East Japan Earthquake, this approach on a National Response Framework to clearly define contributed to the rapid recovery of heavily damaged responsibilities among different actors. Electric utilities motorways and roads. Pre-disaster arrangements with are also required to design their own emergency private companies were activated to support recovery response plans, which are submitted periodically to services. Assessment of priority routes were determined the state public utility for approval. Multiple financial almost immediately, and recovery efforts began (figure and regulatory instruments are available to electric 3.2 and annex III). utilities to deal with the costs of response and recovery, including ex ante financing instruments (e.g., reserve accounts) and ex post instruments (e.g., securitization Figure 3.2. Great East Japan Earthquake - Transport Infrastructure Recovery Sources: Ministry of Land, Infrastructure, Transport, and Tourism; Federica Ranghieri and Mikio Ishiwatari, Learning from Megadisasters: Lessons from the Great East Japan Earthquake (Washington, DC: World Bank, 2014). 36 | Financial Protection of Critical Infrastructure Services Actions toward operational and financial practice principles of disaster risk finance (box 3.1): preparedness can be considered at each stage of see (a) data and analytics; (b) financial preparedness the process from (a) pre-disaster planning and to ensure timeliness of financing; (c) financial risk- policy making, (b) early warning and early action, layering to ensure efficiency of financing different (c) response and early recovery, and finally (d) post- response, recovery, and reconstruction actions; and disaster reconstruction (see Figure 3.3). The actions are (d) disbursement of funds, which ensures that funds grouped into four components, which are shown on the are approved, disbursed, and put into use efficiently left-hand side of the diagram, following the four good to fund action. Figure 3.3. Components of Operational and Financial Preparedness of Critical Infrastructure Systems for Rapid Recovery Source: World Bank staff. Note: The categories on the left reflect the core principles of disaster risk financing and are used here to show the linkage to the overarching operational framework for financial protection. They are not sequential. See also the next chapter and figure 3.1. 37 | Financial Protection of Critical Infrastructure Services Box 3.1. Good Practice in the Design of Financial Protection Strategies against Disasters Core principles for effective disaster risk finance are based on a decade of global experience68. This framework can be used as the basis of a government (for example, centralized versus diagnostic to identify priorities for strengthening decentralized approaches) will depend on the political shock-responsive systems. Often, many countries economy and situation of the country. There are and infrastructure systems will already have some advantages to ensuring that finances, protocols, and or many of the components in place. In some cases, policies are as close to individual infrastructure sectors components may be missing or could benefit from as possible (for example, contingency plans and funds strengthening. For example, many countries have public held by individual government ministries, state-owned finance mechanisms in place to allow line ministries to enterprises, or agencies). Yet it is also important to take access additional finance in emergencies either through a national perspective given the interconnectedness reallocating budgets or by requesting additional of different infrastructure sectors and risks, to assess budget allocations from the Ministry of Finance. This the linkages to national-level security and resilience approach can work well but often can lead to delays in priorities, and to protect national government budgets. financing recovery and to funds being redirected from The appropriate balance will depend on country other planned maintenance or investments, thereby circumstances. reducing resilience and growth over the long-term. This framework can be used alongside data collection about The following subsections describe each component past disruptions and interviews with key stakeholders of figure 3.3 and, in turn, give examples from country to assess the critical bottlenecks-identification of which experiences. This framework represents the ideal that could help speed recovery and display priority actions. is based on good practice across several countries. For countries where capacities may be constrained, small Choices over the balance of policies, institutional enhancements to the status quo could lead to major processes, and finance at different levels of improvements in service continuity. Not everything 68 World Bank, Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers - World Bank Technical Contribution to the 2019 G20 Finance Ministers’ and Central Bank Governors’ Meeting (Washington, DC: World Bank, 2019). 38 | Financial Protection of Critical Infrastructure Services is necessary to do at once. The next section draws granularity of earth observation data, including hazard out what those initial steps could look like, as well as information (flooding and tropical cyclone), as well as outlining the latest innovations and good practices. building information. This improvement can support both planning and recovery efforts about critical Data and Analytics infrastructure services, as well as damage assessment, for the purpose of insurance claims or restoration Accurate information and analytics are critical planning. Machine learning and artificial intelligence to inform decisions at each step from planning are making data collation less resource intensive, and in to triggering action to implementation. This some instances real-time data can be captured without process applies equally to operational and financial human presence, which can be critical during severe preparedness and requires in equal measure of disaster events. Open data sources and platforms engineering data, risk data (including early warnings), about risk and socio-economic data can also help to and financial data. map assets’ exposure. Collaboration with the private sector can even yield important data. Such initiatives are Availability of data can be a challenge, especially in already emerging in advanced economies and mature low- and middle-income countries. The availability insurance market players. For example, a partnership of adequate asset-level data has proven to be one of between Sompo Japan, Mainmark SC, and PASCO aims the most significant challenges in assessing risks to to provide risk-management services for infrastructure critical infrastructure systems and services. Data are to strengthen resilience against disasters and post- required about the detailed locations of assets and disaster insurance coverages by using advanced sensors their interconnectedness, resilience, and vulnerability to to identify signs of infrastructure damage before a shocks, as well as about recovery costs. There is growing disaster occurs.71 experience across the APEC region in building such databases that can be drawn on.69 Although improving If one is to understand the risks to critical infrastructure the data is an important step toward enhancing financial services, it is important to gather data about which protection, progress can be made incrementally, and infrastructure is most critical and about points of this process should not be a barrier to taking steps potential failure within infrastructure systems. This to advance financial protection. Other important data gathering and analysis process is known as initial information includes historical records about criticality analysis, which considers, for example, the damages and disruptions to critical infrastructure assets service’s dependency on particular assets, inputs, or and services, as well as information about historical networks. Different parts of the system will be exposed expenditures for recovery and reconstruction. to different disaster or weather impacts. Vulnerability assessments and stress-testing can identify weak points Innovation in satellite technology and in data where potential failures are likely to happen and where science is helping to make risk data more available the potential financial impacts might occur. This type and accessible in previously data-scarce regions.70 of analysis is typically completed by technical experts This innovation opens up the potential for significant in consultation with local stakeholders and can involve advancements in understanding risks to critical intensive data collection on the ground. More recently, infrastructure systems and strengthened preparedness there have been innovations in the use of models and and resilience. For example, more refined and satellite data to analyze criticality and risks, with such lower-cost satellite technologies are improving the tools becoming more openly available. 69 World Bank, “Improving Public Assets and Insurance Data for Disaster Risk Financing and Insurance Solutions,” World Bank Technical Contribution to the APEC Finance Ministers’ Process, APEC Finance Ministers’ Meeting, Hoi An, Vietnam, October 2017. 70 See, for example, various articles on the Spatial Finance Initiative website, https://spatialfinanceinitiative.com/ 71 Sompo-Japan Media Release (in Japanese), 2021, https://www.sompo-japan.co.jp/~/media/SJNK/files/news/2020/20210105_2.pdf 39 | Financial Protection of Critical Infrastructure Services In Vietnam , the World Bank worked with the US$2.6 million per day. The government’s contingent government to conduct criticality analyses to help liability losses that are related to public assets alone inform strategies that would strengthen the resilience are estimated to be about US$278 million. A tool was of transport networks.72,73 Vietnam, a country of around developed to help design and prioritize resilience 96 million people, has estimated the annual average strategies that are based on this assessment. The tool loss from disasters equivalent to 1.5 percent of GDP. used detailed asset data and additional information The economic prosperity and livelihoods of a growing about the economic value of services they provide; then and rapidly urbanizing population depend on reliable it modeled the interconnectedness between assets. transport, energy, and water systems. The analysis This same tool can be used to identify the residual estimated that failures of critical road networks can risks to be managed through financial and operational result in losses of up to US$1.9 million per day, and preparedness. critical railway failures can result in losses as high as Flooded roads in Da Nang, Vietnam in 2018. Catastrophe risk models are beginning to be adapted information about the risks to individual assets, but to include estimates of the financial impacts of the models do not consider the interconnectedness disruptions to services and the costs associated with between those assets. By linking catastrophe risk service continuity, but this development is a new area models with criticality analysis as described earlier, of innovation. Traditional catastrophe models provide one can estimate the probability of different levels of 72 Jung Eun Oh et al., Addressing Climate Change in Transport: Volume 2: Pathway to Resilient Transport (Washington, DC: World Bank, September 2019), http://documents.worldbank.org/curated/en/438551568123119419/Volume-2-Pathway-to-Resilient-Transport 73 Rentschler, et al., Resilient Shores. 40 | Financial Protection of Critical Infrastructure Services service disruptions and recovery costs. The outputs mechanism to disburse it. Pre-arranged funding could of these analyses can be used to structure a financial include budgetary mechanisms, such as contingency risk-management strategy. funds and reserves, contingent credit instruments, and financial instruments. The protocols for timely approval, The World Bank is currently piloting this approach allocation, and transfer of funds within government are of connecting catastrophe risk models and criticality equally important. In some contexts, the lack of such analyses as part of Myanmar’s investments in national protocols pose a major constraint to rapid recovery. electrification. The model will help inform both financial Simple steps can be followed to put in place timely and operational preparedness, as well as longer-term financing mechanisms. resilience investments. This work estimates the potential direct damages to generation infrastructure and the First, dedicated institutional and budgetary powerline and distribution network in Myanmar from arrangements can help to ensure timely approval and flood, typhoons, and earthquakes; it estimates numbers allocations of funds. A first step involves well-defined of people affected in instances of systems failure. rules on public financial management, including pre- The information is used to estimate the financial risks agreed rules and processes for approving, allocating, associated with damage and disruption, as well as the and transferring funds between ministries of finance, recovery costs to help prioritize risk mitigation. This line ministries, and subnational governments that type of assessment can inform strategies for reducing are involved in overseeing or operating critical and managing financial risks. infrastructure systems.74 The financing mechanism itself could include, for example, a national disaster Development of this type of analytics is relatively fund, an O&M fund, or a contingency budget line with nascent, particularly outside high-income countries. pre-agreed rules in place for triggering funds and Further investment is required to develop approaches protocols to ensure rapid disbursement. An O&M fund that are scalable and useable in lower-income countries can be established with standard operating procedures and that deal with greater data constraints. Work to for quick approval of emergency expenditures develop prototype tools and analytics is underway, to implementing agencies. This fund can then be including at a regional scale across Southeast Asia by backstopped with financial instruments to ensure it has the World Bank. enough resources to meet the needs after a disaster. As noted earlier, decisions about where funds should Timely and Reliable Finance sit - centrally or locally - will depend on the political economy and public financial management processes Appropriate financing mechanisms, if put in place of the country. before any disaster strikes, can provide timely and reliable finance when needed in emergencies. The Second, financial instruments can be designed to amount of financing required for immediate recovery quickly release finance in emergencies that are based is typically small compared to reconstruction finance, on pre-agreed triggers or rules.75 This design can but speed and predictability can make a big difference include instruments with soft-triggers, which are pre- to ensuring service continuity. arranged with a clear threshold for release, but payouts are subject to a government’s request. This approach Securing timely and reliable finance has two could include contingent credit from development components: (a) the funding itself and (b) the 74 World Bank, “Disaster Response: A Public Financial Management Review Toolkit,” World Bank, Washington, DC, November 2019, https://www.pefa.org/resources/disaster-response-public-financial-management-review-toolkit 75 For more information on financial instruments, see World Bank, Financial Protection against Natural Disasters. 41 | Financial Protection of Critical Infrastructure Services partners (such as the World Bank’s Cat DDO) where of the business; in the long term, it helps to ensure the rules are pre-determined for the release of funds, sustainability of the sector. such as the declaration of an emergency. However, actual disbursement requires the government’s Although most electricity utilities in the United decision to draw down the instrument. Instruments States are privately owned, the government plays with hard-triggers determine payouts by an objective an essential and enabling role when it clearly sets observation, such as windspeed or earthquake intensity regulatory requirements for service provision by the or modeled loss estimates. An example is parametric utilities, as well as when it has pre-agreed rules that insurance, where premiums are paid in advance and govern what risks are covered by the utilities and where finance is released automatically when triggered. the government will step in. In many countries, risk Being automatic, finance is typically faster and earlier allocation is similarly and clearly defined by law or than, for example, indemnity insurance products. For regulation (see chapter 4 for a more detailed discussion critical infrastructure, parametric insurance can help about risk ownership and allocation). to overcome the difficulties in insuring horizontal infrastructure such as electricity transmission lines, Risk Layering which are vulnerable to weather but are difficult to insure cost-efficiently because of challenges in risk Different financial instruments can be combined modeling. to help governments ensure cost-efficient and predictable access to funding for recovery of critical The Caribbean regional risk pool, CCRIF SPC (Caribbean services during bad disaster years. This combination Catastrophe Risk Insurance Facility), provides ensures that the overall financing mechanism can parametric insurance coverage for tropical cyclones, deliver the right amount of financing at the right earthquakes, excess rainfall, and the fisheries sector to time, without delays and without costly emergency 19 governments in the Caribbean and 3 governments in fund raising. It also helps reduce the risk of critical Central America. In October 2020, CCRIF SPC launched infrastructure failures, as well as reducing the implicit its newest parametric insurance product for electric contingent liability on the government’s balance sheet utilities in the Caribbean. That product was first (see also chapter 4). purchased by the Anguilla Electricity Company Limited and included ongoing work with electric utilities that A variety of instruments can be used to target would extend it to other Caribbean countries. different scales and types of disaster risks (figure 3.4). Dedicated instruments that manage (or retain) risk as part of the budget (risk retention) such as contingency Finally, clarity of risk ownership (including between budgets or disaster funds can respond to small and levels of government or with the private sector) - medium impacts and can manage funding needs for that is, for defining who pays in an emergency - is regular rehabilitation as a matter of standard financial also essential. This need is particularly true for critical planning. Financial instruments that transfer risk, such infrastructure where many stakeholders are often as insurance, can provide an additional injection of involved in the ownership of assets and operation liquidity or targeted reconstruction financing for of services. A clear risk-allocation mechanism and low-frequency high-impact events. For the largest the ability to compensate infrastructure operators, catastrophes, governments typically step in to provide particularly for larger-scale events, are important unplanned financial support after the event - even in particularly within privately run sectors. In the short well-managed systems. term, this approach helps maintain financial continuity 42 | Financial Protection of Critical Infrastructure Services Figure 3.4. Combination of Financial Instruments to Cover Cost of Service Recovery Source: World Bank staff. Importantly, predictable and adequate O&M financing • For concessional and privately owned critical should be the bedrock of a financing strategy for infrastructure in many countries, regulatory and critical infrastructure. Proper O&M financing helps financing mechanisms (e.g., as part of PPPs) have maintain asset resilience to the level for which that included elements to incentivize continual O&M. financing is designed. O&M can also respond well to Several common themes of good practices are smaller-scale disruptions. Without proper O&M, the emerging, including (a) development of a strong quality of assets deteriorates over time, which makes capability within government to prepare, plan, assets more vulnerable to disruptions from disaster manage, and govern PPP projects; (b) clear and shocks and harder to repair. transparent procurement processes, including allocation of risks and responsibilities that cover Sustainable funding of regular O&M remains a types of risks; (c) creation of appropriate incentive challenge for many infrastructure operators. There (and penalty) structures for active management of are often trade-offs between regular O&M funding, different types of risks; and (d) close collaboration rates faced by consumers (e.g., the price of water), and, among the stakeholders, the regulators, and the for example, other investments to extend services. associated supervisory agencies, private sector operators, and supporting services including insurance provision.76,77 76 World Bank, “PPP Best Practice.” 77 World Bank, Technical Brief on Resilient Infrastructure Public-Private Partnerships. 43 | Financial Protection of Critical Infrastructure Services In the United Kingdom, regulators impose penalties • Publicly owned infrastructure requires recurrent for failure of services on private rail operators, thus budget allocations for O&M that are based on encouraging rail operators to invest in adequate O&M tax revenue.78 As a result, the allocations are not and to put in place effective systems that manage risks prioritized by governments in some countries, associated with poor weather. In the water sector, the because the benefits of good O&M are less England and Wales water regulator, Water Services noticeable for policy makers and citizens than Regulation Authority (OFWAT) requires privatized water would be the establishment of a new infrastructure. and waste water companies to develop and report The World Bank and APEC have been exploring about the price, investment, expenditure, and service how financial instruments can deliver an integrated package they deliver. One important regulatory service solution for countries by combining finance for requirement covers the scale of water leakages - an O&M with support for continuity of critical services. easily defined indicator of resilience. Poorly maintained Under the 2019 APEC agenda, the World Bank pipes are more likely to burst during extreme weather proposed exploring a Catastrophe Warranty, which events, and rapid repairs can limit the negative impacts would be a new financial structure that would caused by disruption in the localized water supply. integrate both financing for recovery of services In response, water companies have made significant and regular O&M financing in one instrument to fill progress in reducing leaks through better maintenance two common financing gaps that are experienced and quicker repairs, and leakage is reduced by about by countries. The design was structured so it could a third from its 1994-1995 high. be financed by governments, private investors, international financial institutions, or bilateral donors (box 3.2). England's aging underground water mains pipe are prone to leakages without regular maintenance, making pipe leakages a priority for the water regulator Ofwat. This is particularly the case for a nontariff infrastructure such as non-toll roads and bridges (which do not generate revenue) or buildings such as schools 78 and clinics for service delivery. 44 | Financial Protection of Critical Infrastructure Services Box 3.2. Innovation in Financial Protection for Infrastructure Owners and Operators - the CAT Warranty Proposal The proposed catastrophe (CAT) infrastructure warranty79 is a financial package that combines adequate O&M funding with pre-arranged finance for the restoration of critical infrastructure service after disasters. This package allows some cohesion between the processes for funding day-to-day service continuation under normal conditions and for financing the reinstatement and continuation of services during and after a disaster. The financial package aims to support adequate upkeep of assets during normal times and rapidly to reinstate critical services of public infrastructure, even after a disaster. The CAT infrastructure warranty could be developed for different sectors, assets, and owners. The specific warranty design and covered hazards could vary, thus reflecting different factors such as asset types, risk owners, accounting system, and revenues of infrastructure services. The following are examples of the design of the warranty. • O&M service providers’ warranty. Governments could purchase disaster recovery services from O&M providers by paying upfront or recurrent fees in addition to the regular O&M fees. For example, performance- based contracts, which link contracting payment to service providers’ performance metrics, could include responsibility for disaster recovery as part of the key performance indicators (KPIs). Those KPIs would require, in exchange for fees, that the service providers ensure some degree of service continuity even after severe disasters (for example, providing temporary barge service after the collapse of a bridge). To provide such service, service providers should transfer disaster-related financial risks to insurance or capital markets at their own expenses in order to ensure that they can fulfil their commitment after a disaster. Box figure 3.2.1. O&M service providers’ warranty • Shock-Responsive O&M: A risk-financing product could be embedded into an existing O&M fund so that insurance payout can be used by the O&M fund to transfer additional resources to the same or other service providers for the reinstatement of the asset’s services. Insurance products can be tailored by governments or state-owned enterprises to specific infrastructure assets, even for multiple years, to transfer disaster risks to insurance or capital markets. This approach could also be arranged by financing O&M through recurrent budget and by linking with contingent credit or risk-transfer instruments. 79 World Bank, “Catastrophe Infrastructure Warranty against Climate and Disaster Shocks.” 45 | Financial Protection of Critical Infrastructure Services Box figure 3.2.2. Shock-Responsive O&M fund In both cases, the CAT infrastructure warranty would Prearranged contracting of recovery services can ensure that finance is available for rapid recovery help to strengthen operational preparedness, to and would also incentivize governments to invest in speed up recovery, and to promote preparedness. risk reduction and preparedness. It could involve, for example, putting in place any required service level agreements, memoranda of Disbursement of Funds - understanding, and mutual assistance agreements Linking Finance to Operational with external stakeholders to ensure that appropriate services and equipment are secured in an emergency. Plans The example of prearranged contracting for Japan Delays to the disbursement and execution of funds noted earlier provides a good practice case. The can also create major delays to disaster recovery. following examples provide further good practice This delay can be partly about procurement of services about where the integration of financial and operational but also about operational readiness to respond. plans has led to demonstrable success in reducing There are various ways to address such bottlenecks, disruptions to services. including public financial management rules for disasters, emergency accounting rules, and emergency One hybrid financial and operational preparedness procurement rules. instrument that is available to private electric utilities in the United States is a mutual assistance Pre-agreed emergency procurement procedures played agreement. Such mutual assistance agreements allow a critical role in ensuring continuity of services during a utility quickly to obtain equipment and personnel the 2009 Victoria Black Saturday bushfires in Australia. in emergencies and to facilitate rapid recovery. This The Victorian Bushfire Reconstruction and Recovery process is backed up by clear arrangements on the Authority (VBRRA) was established and given powers process to recoup any costs. When Hurricane Sandy left to fast-track procurement. The VBRRA was able to 8.5 million customers without power in New York and make the decision to undertake the cleanup at the New Jersey, electric utilities executed mutual assistance government’s expense, and a contract was signed agreements to deploy more than 70,000 workers to with a provider within days. the affected areas, and those utilities enabled air 46 | Financial Protection of Critical Infrastructure Services transportation of 229 power-restoration vehicles and Next Steps 487 personnel to restore power.80 The actions described in this section are essential to minimize disruptions to critical services from The Caribbean Electric Utility Services Corporation individual infrastructure systems. Governments (CARILEC), which is a regional association of electric should also take a national perspective to consider energy solutions providers, operates the CARILEC preparedness mechanisms in the wider public finance Disaster Assistance Program (CDAP) to enable mutual frameworks, to take a holistic view of cross-government assistance (mainly human resources) for post-disaster financial-risk management of critical infrastructure, and power restoration between member utilities. Such to cushion the fiscal impacts of service disruption. This disaster restoration assistance through the CDAP is process is described in detail in the following chapter. financed by the CARILEC Disaster Fund, which is a mutual fund that receives annual contributions from member utilities and that ensures timely reimbursement to the assisting utilities. Pre-disaster, CARILEC supports utilities with preparedness planning and facilitates knowledge sharing. When a threat is imminent (early warning stage), CARILEC alerts the assisting utilities. Then during response stage, CARILEC coordinates with utilities to ensure that assistance is delivered efficiently. Currently, 27 member utilities subscribe to CDAP and, therefore, make contributions to the Disaster Fund. 80 FEMA, “Hurricane Sandy FEMA After-Action Report.” 47 | Financial Protection of Critical Infrastructure Services 4. Integrating Critical Infrastructure in Government Financial Protection Strategies Financial protection strategies for the government - The inclusion of critical infrastructure services should usually championed by Finance Ministries - set out stress two priorities: the policies and financial instruments to increase • Enhance the financial preparedness of the the countries’ financial resilience. The purpose is to government, both to ensure that financial reduce the financial shock of disasters on a government’s arrangements are in place to cushion the fiscal balance sheet and to ensure that predictable, timely, impacts related to disruption of critical services and and cost-effective finance is available in emergencies. to ensure that timely finance is available for recovery. Such a strategy should look at ways to build financial resilience for shocks across the whole of government, • Protect society by ensuring continuity of services as well as more broadly across society. Such financial by critical infrastructure owners and operators in protection strategies should ultimately include the line with national critical infrastructure strategies, contingent liabilities arising from disruptions to critical including through policy, regulation, and financing infrastructure services. But frequently this inclusion is not arrangements that align incentives among explicitly acknowledged and quantified, which can leave infrastructure owners and operators. governments exposed. Establishing shock-responsive systems (as outlined in chapter 3) turns an implicit liability The proposed key actions to develop and implement into an explicit liability that the government can properly a national financial protection strategy for critical manage by integrating it into a national strategy of infrastructure services are summarized in figure 4.1. financial protection. This summary includes five action points for defining a set of short-, medium-, and long-term objectives Ministries of Finance play the key role to advance and action plan (left-hand side) and a 9-point action the integration of critical infrastructure services in checklist to advance financial protection against the financial planning for disasters. As both financiers above mentioned two priorities. Earlier publications and conveners across the government, Ministries of set out more information about the steps and the Finance are well positioned to take an integrated, national particular budgetary and financial instruments, perspective about the financial risk management of including the World Bank’s Financial Protection against critical infrastructure. Moreover, they can use public Natural Disasters: An Operational Framework for finance frameworks and regulations to align incentives Disaster Risk Financing and Insurance,81 the 2020 across government and the private sector to strengthen World Bank and APEC’s Operational Framework for resilience. This chapter proposes practical steps that Catastrophe Insurance Programs for Public Assets, finance ministries can take toward integrating critical and the 2020 World Bank and SEADRIF’s knowledge infrastructure within a national financial protection series about the financial protection of public assets.82 strategy. 81 World Bank, Financial Protection against Natural Disasters. 82 World Bank, “Financial Protection of Public Assets.” 48 | Financial Protection of Critical Infrastructure Services Figure 4.1. Summary of Key Steps in Financial Protection of Critical Infrastructure Systems and Checklist A. Assessing risks, identifying C. Government actions to protect society bottlenecks and setting B. Government actions to enhance financial by ensuring continuity of services by objectives preparedness of the state critical infrastructure owners and operators 1. Identify critical 1. Clarify and enforce risk ownership 1. Establish requirements for data infrastructure assets. Legally establish the states’ liabilities for the sharing and disclosure of risk costs of recovery and reconstruction as far as information. Assess risks against national 2. Determine what contingent possible, including defining cost-sharing rules risk tolerances. Support may also include liabilities the government across national and sub-national government public provision of data, such as hazard holds for the costs of recovery authorities, infrastructure owners and operators information. of critical infrastructure services. and users. This can be implicit or explicit. 2. Establish regulatory/contractual 2. Develop and implement a national disaster requirements and/or incentives 3. Understand risks and risk financing strategy that incorporates critical that ensure minimum financial drivers and assess contingent infrastructure services, and link this to broader preparedness, including e.g. minimum liabilities. This includes fiscal and critical risk management frameworks. standards for insurance and contingency understanding the drivers of Securing: budgets as appropriate. historical disruptions to services and identifying key bottlenecks • Immediate liquidity for budget support 3. Establish regulatory/contractual to be resolved. to ensure speedy recovery of critical requirements and/or incentives services in emergencies, including layering concerning operational preparedness 4. Identify financing gaps. budgetary and financial instruments such for shocks, including minimum Clarify current financing as reserves, contingency budgets and risk requirements for contingency planning arrangements and map transfer, and ensuring these are linked and coordination in pre-disaster planning contingent liabilities against to plans and protocols to ensure rapid and emergency response and recovery, or these to identify gaps. disbursement and execution of funds. fees or penalties for disruptions to critical services as appropriate. 5. Define a set of short, • Longer-term reconstruction financing, medium and long-term such as contingent credit arrangements or a 4. Enabling provision of market- objectives and a strategy. public assets insurance programme. based mechanisms for financial Prioritize problems to resolve protection, including e.g. supporting and create a short-term action 3. Timely, effective post-disaster budget the development of robust domestic plan (0 - 5 years). execution mechanisms so funds are approved, insurance markets or legislation to allow allocated, transferred and used effectively. risk pooling. 4. Ensure pre-disaster contingency planning 5. Ensure policy and regulation builds and protocols are in place for rapid in positive incentives for long-term risk disbursement of funds, including emergency management. procurement procedures and pre-arranged contracts for recovery services as appropriate, and capture opportunities to build back better through building this into plans and finance in advance. Source: World Bank staff, building on World Bank, Financial Protection against Natural Disasters: An Operational Framework for Disaster Risk Financing and Insurance (Washington, DC: World Bank, 2014) 49 | Financial Protection of Critical Infrastructure Services It is important to start small and quickly with practical of disasters on the government’s balance sheet and steps that can show tangible results. Not all governments to ensure that timely finance is available for recovery. have the capacity, data, and resources to develop all Importantly, the contingent liabilities and fiscal risks actions to a comprehensive level. But taking small steps associated with disruption to critical services are likely and defining incremental, achievable policy priorities can to be larger than the sum of damage to individual public lead to major improvements in financial resilience and assets from disasters. Those additional liabilities can be service continuity. In some instances, it may be appropriate related to added government expenditures to recover to focus on specific priority infrastructure sectors and then critical services post-disaster but can also be related to to expand to broader sectors over time. In others, a more implicit contingent liabilities (see chapter 2). Such fiscal cross-cutting approach led centrally will be appropriate. risks and contingent liabilities are currently not widely or Different actions may be undertaken by different ministries; fully captured within fiscal risk frameworks. for example, in figure 4.1, B is often within the mandate of the ministries of finance, whereas C is often led by line Assessing the fiscal risks associated with service ministries or other government authorities. disruptions requires additional information compared to understanding risks to physical assets alone. It is important Ministries will also need to consider the appropriate level to assess contingent liabilities related to the recovery of at which to implement different actions. For example, services. But such costs may not be recorded separately in should contingency budgets be managed across levels historical disaster records or as part of regular accounting of government, or should the purchase of insurance be by line ministries involved in infrastructure operations managed centrally? The answers will depend on the political and maintenance. Models are beginning to be used to economy of the country and on the economies of scale and assess such contingent liabilities, but this assessment is scope associated with rolling out a plan across multiple relatively nascent (see chapter 3). As far as possible, it is infrastructure assets and systems. also important to assess risks across all critical infrastructure services in an integrated and consistent way, given the There are three key areas where a different approach is interconnected nature of different infrastructure systems. required for managing the contingent liabilities from This assessment includes those services with partial or critical infrastructure systems. These key areas, which full ownership by the private sector, especially given the are described in detail in this chapter, are: strategic importance of those critical systems. To this end, governance mechanisms will often require risk assessment, • Assess risks and quantify contingent liabilities. disclosure, or information-sharing between government • Clarify and enforce risk ownership. and infrastructure owners or operators. The government • Set requirements on infrastructure owners and has an important role to play in managing such data, operators. including historical loss records. Assess Risks and Quantify Financial decision-making tools used in public finance Contingent Liabilities should take account of those risks and full costs, as well as potential losses in revenue caused by business Assessing and managing disaster-related contingent interruptions. Once the government has a better liabilities from critical infrastructure in public finance understanding of the potential costs incurred from such frameworks is necessary both to cushion the impact service disruptions, that knowledge can inform fiscal 50 | Financial Protection of Critical Infrastructure Services planning at the central level. Such risks should be assessed assessments can quantify probable losses to the against the government’s and society’s tolerances for government. This risk assessment brings together the disruptions, which can then inform adequate resource liabilities from all individual programs and sectors (e.g., allocation to prevent or manage service interruptions in energy, health, ICT, and transport) and considering line with government policy objectives. both the costs for each program individually and the cascading costs and impacts to the larger economy. This work to assess risk will take place mostly in individual This assessment can be approached either through line ministries but the Ministry of Finance plays an analysis of historical disaster data or through modeling important role to assess risk in a consistent and integrated (see, for example, the discussion about analytics in way across the whole of government and to incorporate chapter 3). this role into wider fiscal risk management. The steps 5. Identify financing gaps. Ministries of Finance can include the following: then map contingent liabilities for different possible events against current financing arrangements and 1. Identify critical infrastructure assets. Many countries can identify any financing gaps. have defined critical infrastructure sectors and have established an inventory of assets.83 The most critical Understanding the fiscal risks from critical infrastructure assets can be identified by using a set of transparent services can be the basis to strong risk governance and criteria (e.g., economic damages or public safety can create incentives to promote and invest in reliable, implications). The identification can be based on high-quality, and resilient infrastructure.85 For example, simple scenario analyses, on consultations with sectoral by quantifying implicit contingent liabilities and making experts, or through more complex risk engineering84 them explicit, Ministries of Finance can encourage more and model-based criticality analyses. proactive approaches to defining how such risks will 2. Define risk ownership. The government should aim be managed, including through explicit cost-sharing. to clarify as much as possible who is responsible Such approaches will also make it more important for for covering the costs of service restoration and governments to create incentives for infrastructure owners rehabilitation of infrastructure systems. This and operators to reduce risks.86 In this way, progress in clarification begins with clearly understanding financial risk management can complement national current risk ownership and cost sharing. Provisions in programs to strengthen resilience.87 government policy, regulation of private operators, and contract wording are critical to this end. New Zealand provides a strong example of where critical risks and fiscal risk-management frameworks are joined 3. Identify contingent liabilities of the government. up. For example, New Zealand drew its 2018 fiscal stress- This process aims to identify the government’s explicit testing scenarios directly from the national risk registers that commitments to disaster-related costs and to analyze support public risk-management and planning processes, potential implicit commitments liabilities. including scenarios representing a severe Wellington . earthquake.88 The Public Finance Act requires disclosing 4. Assess risks and quantify contingent liabilities. all government decisions and all other circumstances that Once liabilities are established as far as possible, risk may have a material effect on the economic and fiscal 83 OECD, Assessing Global Progress. 84 Risk engineering refers to the application of engineering skills and methodologies to the management of risk. It involves hazard identification, risk analysis, risk evaluation, and risk treatment. Within infrastructure risk management, risk-engineering analyses and solutions include helping infrastructure owners and operators manage loss control, mitigate risk, improve safety, and reduce insurance claims. They must also look at risks before, during, and after an event. 85 G20 Japan, “G20 Principles for Quality Infrastructure Investment,” https://www.mof.go.jp/english/international_policy/convention/g20/annex6_1.pdf 86 Ronnie Downes, “Budgeting for Contingent Liabilities,” presentation at the Annual Meeting of OECD Senior Budget Officials, Paris, June 3-4, 2013. 87 OECD, Assessing Global Progress. 88 OECD, “Best Practices for Managing Fiscal Risks: Lessons from Case Studies of Selected OECD Countries and Next Steps Post COVID-19,” OECD, Paris, June 2020. 51 | Financial Protection of Critical Infrastructure Services outlook. The OECD in 2020 concluded that New Zealand Cost-sharing rules for compensating losses is the only country reviewed where there is a clear link should be spelled out at all levels in advance of between critical risks and stress tests of public finances, emergencies to the extent feasible. In some cases, and the OECD recommended that governments enhance such arrangements may be defined as part of a national such efforts going forward. critical infrastructure strategy or through sector-level policies. Such mechanisms need to consider issues The United Kingdom has taken steps to implement a such as (a) procedures to trigger and obtain funding framework to assess and manage contingent liabilities from the central government, (b) processes for so it can better manage fiscal risks and improve damage assessment, (c) proposed cost-sharing ratio both integrated risk governance and proactive risk of rehabilitation works, and (d) criteria about types management across government. This move includes and scales of disasters that influence the cost-sharing. assessing potential and implicit contingent liabilities that are related to shocks. In the United Kingdom, In the electric utilities sector of the United States, for line ministries are required to go through an approval example, risk and responsibilities for disaster response process with the HM Treasury to take on new contingent are shared among multiple stakeholders, including liabilities. This process enables the HM Treasury to the electric utilities themselves, network coordinators actively monitor, manage, and mitigate contingent (Regional Transmission Organization and Independent liabilities across the government.89,90,91 For example, in System Operators), states, and the federal government. accepting a contingent liability, the HM Treasury can set Events of low severity (level 1 or level 2 events on a requirements on line ministries and these requirements 4-level scale) are usually handled by utilities and by flow down to individual infrastructure owners and network coordinators, while level 3 and level 4 events operators. In only a few years, this approach has already often necessitate more active involvement from the triggered decisions about mitigation approaches for state government and, in extreme circumstances, the a wide range of fiscal risks. federal government. US state regulators determine how the costs associated with disaster recovery efforts Clarify and Enforce Risk may be passed on to consumers in the form of higher tariffs, and how much will be borne by the utility and Ownership its investors. The wide variety of ex ante and ex post Clarifying risk ownership is particularly important financial mechanisms available to electric utilities in for critical infrastructure because a large portion the United States to cope with disasters is credited is often owned or operated by SOEs or the private with reducing the contingent liabilities on the federal sector. A lack of clarity over who is responsible to government as well as helping to ensure the continuity pay after a shock can cause delays in response and of critical services in emergencies. recovery, as well as lead to implicit contingent liabilities on government. It also reduces incentives to invest in In Japan, risk sharing in PPPs varies depending on the quality infrastructure in the first place and in adequate types of project and their risk exposure; for example, maintenance over the life of the assets. Clarifying road projects that have low profitability and high (and enforcing) risk ownership and cost-sharing public good nature tend to place stronger financial requirements can reduce the overall disaster-related risks on governments than will airports with high contingent liabilities over time. operational profitability. Global evidence shows that 89 UK Office for Budget Responsibility, “Fiscal Sustainability Analytical Paper: Public Sector Balance Sheet,” UK Office for Budget Responsibility, London, July 2016, https://obr.uk/docs/dlm_uploads/FSAP_July_2016_public_sector_balance_sheet_.pdf 90 HM Treasury, “Government as an Insurer of Last Resort: Managing Contingent Liabilities in the Public Sector,” HM Treasury, London, March 2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/871660/06022020_Government_as_Insurer_of_Last_Re- sort_report__Final_clean_.pdf 91 HM Treasury, “Contingent Liability Approval Framework: Guidance.” HM Treasury, London, July 2017, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/635939/contingent_liability_approval_framework_guidance.pdf 52 | Financial Protection of Critical Infrastructure Services well-designed and performance-based contracts can also Set Requirements on improve the focus on governance and risk sharing, as well Infrastructure Owners and as incentivize more consistent and better service. Those contracts can provide more certainty about costs that will Operators enable long-term fiscal planning. Nevertheless, in practice, Through policy, regulation, and procurement the application of performance-based contracts has had practices, the government also has an important role mixed impacts. For example, reviews for road maintenance to encourage adequate financial protection by all critical suggest that the use of performance-based contracting infrastructure owners and operators. There is substantial needs to be supported by strong fiscal management and existing literature, good practice, and evidence in this by clearer expectations of the risk-transfer arrangements, as area. As discussed in chapter 2, infrastructure owners and well as by consistent training and capacity building within operators bear the primary responsibility for protecting the operator to maintain quality over time92,93. Good data their assets and maintaining the continuity of services are necessary for the contractor to manage the risks and they provide. Yet, the government will often have a for the performance to be monitored. responsibility to citizens to ensure that a minimum level of service is sustained and may bear some implicit contingent liability if services are disrupted. Although While risk allocation to private operators can be hard- all assets owners have a strong interest to protect their coded through contractual obligations or regulations, capital asset and maintain the continuity of services to it is also important to define cost-sharing rules across avoid revenue losses, the priorities and levels of risk levels of government. Knowing the definition and rules tolerance will often be different between the public can avoid delays in financing recovery that would result and private sector. The nature of risks, ownership, and from negotiating cost-sharing post-disaster. Nine of returns on investment also varies across the infrastructure twelve APEC member economies surveyed in 2017 have lifecycle and from design to construction, operation, explicit post-disaster cost-sharing arrangements in place and disposal. This variance can create market failures between central and local government levels.94 Cost- and may imply a rationale for government intervention. sharing arrangements should aim to address the potential for moral hazard by ensuring incentives to invest in longer- The interconnectedness of critical infrastructure and term resilience. the difference in who owns and who benefits from infrastructure also means a role for government in In Australia, the Natural Disaster Relief and Recovery correcting market failures. There is a risk to the continuity Arrangements (NDRRA) provides the legal framework of critical infrastructure services if minimum standards for cost-sharing and financial support to subnational for risk tolerance and management are not in place. As governments for post-disaster relief and recovery. For a policy maker, financier, and regulator, the government subnational governments, the central government plays a key role to set required levels of preparedness and reimburses up to 75 percent of eligible expenditures on to ensure acceptable levels of risk for citizens and national relief and recovery payments. The exact percentage of the security95. This role can involve, for example, the following:96 reimbursement depends on the size of the disaster-related costs that the subnational government has incurred in a • Require disclosure of information on risks. given year. • Ensure business continuity planning and requirements for cooperation with government entities. 92 PPIAF (Public-Private Infrastructure Advisory Facility), “Lessons Learned in Output and Performance-Based Road Maintenance Contracts,” Issue Brief, PPIAF, October 2014. 93 Ben Gericke, Theuns Henning, and Ian Greewood, Review of Performance Based Contracting in the Road Sector (Washington, DC: World Bank, 2014). 94 World Bank, “Financial Risk Management of Public Assets against Natural Disasters in APEC Economies.” 95 OECD, Getting Infrastructure Right: A Framework for Better Governance (Paris: OECD Publishing, 2017), https://dx.doi.org/10.1787/9789264272453-en 96 OECD, Good Governance. 53 | Financial Protection of Critical Infrastructure Services • Define risk ownership through legislation or regulation, in disaster risk management, emergency recovery, and or as part of PPPs. reconstruction and about how costs are shared, as well as • Use performance-based contracts that incentivize explicit requirements for insurance, emergency recovery, service continuity. and reconstruction to encourage operators to manage • Set minimum requirements for insurance or the disaster risks in their projects. Clear definition and contingency budgets through regulations. understanding between the roles and responsibilities of the private and public stakeholders, the incentives, and Many examples exist from other APEC member economies: the requirements within the contract for operators have been found effective in ensuring service continuity. Australia, Mexico, Peru, the Philippines, and Vietnam require owners and operators of government assets to Importantly, such regulations and arrangements need purchase a minimum level of insurance. This requirement to carefully balance the financial sustainability of private aims to minimize the exposure of fiscal budgets to costs sector owners and operators with the fairness and for reconstructing the public infrastructure. Insurance can affordability of costs to consumers and to long-term also put a price tag on risk and can require proper O&M resilience. There can be a trade-off between providing as a condition of coverage, further incentivizing resilience. the most affordable services for consumers and allowing investments in infrastructure that are necessary for In New Zealand, the Civil Defence Emergency Management resilience, including financial resilience such as setting aside Act of 2002 incorporates legislation to ensure continuity of disaster funds to ensure service continuity in emergencies. services for lifeline utilities. It sets out that the main duty of For example, after a disaster, regulators will often need to lifeline utilities during and after an emergency is to deliver balance the need to allow utility companies to increase rates services to the fullest extent possible. Public and private to recoup costs of repairs to infrastructure with demands utilities are required to analyze risks, to identify critical assets, from consumers for affordable services. Most regulators and to conduct business continuity planning, including will have in place processes to review and approve budgets. outlining response and recovery arrangements such as pre- arranged contracts with key suppliers for spare parts and The public sector can also support financial protection expertise. Lifeline utilities regularly review their financial risk for privately owned infrastructure owners and operators tolerance and put in place financial mechanisms to absorb through enhancing the development of private risk- the costs of disasters and to ensure access to liquidity; such transfer markets. A lack of availability of affordable mechanisms can include contingency funds, letters of credit, risk-transfer options can be a major barrier to financial and insurance. For critical infrastructure procured under protection. The public sector can support the development public-private partnerships (PPPs) in New Zealand, the of insurance and other risk-transfer markets through, for government requires private partners to procure prescribed example, providing open data and models to support risk insurance coverage.97 The New Zealand Lifelines Council pricing, as well as ensuring a strong regulatory and legal brings together lifeline utilities to coordinate and enhance environment for stable and efficient markets to grow (e.g., resilience. enabling parametric insurance products). For PPPs in Japan, during the procurement process, tender specifications and evaluation criteria include explicit requirements about the respective responsibilities 97 Following the Canterbury earthquake sequence, insurance pricing was volatile and the government held that if the cost of that insurance exceeded a specified indexed cost, then the New Zealand government would contribute to the premium cost. 54 | Financial Protection of Critical Infrastructure Services Links to Wider Disaster Risk emergencies and so will have little incentive to invest themselves in better managing their risks. Management and Critical Infrastructure Strategies In New Zealand, local governments are obligated Although this report focuses on financial resilience, to develop long-term plans and financial strategies enhanced financial protection of critical infrastructure for infrastructure, including to meet both the current can also deliver significant benefits for wider and future needs of its communities. Thus, the plans resilience. Global experience shows that the benefits create incentives for stronger up-front investments in of financial protection are not just in the early, resilience. Linking planning for financial, physical, and predictable finance received after an event, but also social resilience in this way and providing clarity about in the greater understanding of risk, the discipline of who owns the risk are important to encourage risk pre-planning for disasters, and the decision-making owners to invest in reducing risks over the long term. systems that can enable wider resilience.98 Insurance pricing and conditions can create explicit incentives and A growing body of evidence shows that strengthened requirements for infrastructure owners and operators financial and operational preparedness for to reduce risks through investing in preparedness and emergencies can support building back better, which long-term resilience and by putting in place adequate is crucial for reducing impacts from disasters and O&M. adapting to climate change. Yet, in practice, there are many reasons that building back better does not happen For Mexico, research shows that the Natural Disaster in all cases, particularly in emerging and developing Fund (FONDEN) delivers significant benefits for economies. Reasons can include, financial constraints, resilience. Those benefits are beyond just financial lack of information, or pressures to reconstruct critical protection and actually increase the local GDP post- infrastructure quickly so services are up and running disaster by 2 percent to 4 percent, with a benefit- as quickly as possible after a disaster.99 As shown by cost ratio that is estimated conservatively between Japan’s experience,100 a financial protection mechanism, 1.52 and 2.89. FONDEN was designed and based when coupled with requirements for pre-disaster on insurance principles that support the rapid and recovery planning, can deliver stronger opportunities targeted disbursement of funds for rehabilitation of to build back better after disasters: public infrastructure. Research showed that the benefits In Japan, build back better is enforced even before were partly achieved through the processes put in the disaster happens. Essential systems to facilitate place by FONDEN. The processes promoted improved recovery are proactively put in place prior to a disaster. planning and preparedness pre-event and clarified The government undertakes regular assessments, risk ownership, thereby helping to speed recovery. mitigation, and improvements. The government also performs failure analysis after every disaster to inform Putting in place rules that determine who pays for and facilitate immediate improvements in both social what damages in the event of a disaster not only helps and physical infrastructures. Once the underlying to manage the risks to public finances but also creates causes of failures are identified, a significant amount incentives so infrastructure owners and operators of investment is put in place to correct failure and to will invest more in building long-term resilience to promote improved resilience. disasters. Without this clarity, infrastructure operators may rely on having public sector step in during 98 World Bank, Financial Protection against Natural Disasters. 99 Hallegatte, Rentschler, and Walsh, Building Back Better. 100 For more examples, refer to chapter 6 in World Bank, Catastrophe Insurance Programs for Public Assets. 55 | Financial Protection of Critical Infrastructure Services Next Steps Integrating critical infrastructure risks into National Financial Protection Strategies is a new area with limited experiences and analytical tools to quantify the contingent liabilities. This important area needs further work to assess the potential scale of the risks and therefore to assess the implications for financial protection strategies. Further knowledge-sharing across APEC member economies can support the sharing of best practices in this area and the strengthening of approaches to risk assessment. Many of the components needed for enhancing financial protection of critical infrastructure systems are in place across APEC member economies. A gap exists for linking those aspects together as part of a whole of government approach to risk management, as well as linking policies related to critical infrastructure management to those concerning fiscal risk management and wider disaster risk management. This is an important next step in strengthening financial protection. Chapter 5 provides a focus on the financial protection of critical services paths and the way to considering protection against other types of risk, beyond climate and disasters, including pandemics. 56 | Financial Protection of Critical Infrastructure Services 5. Understanding Financial Preparedness, Critical Services, and Pandemics The COVID-19 pandemic has highlighted the threat In Singapore, overall electricity generation and to critical infrastructure services from many different consumption in the period of April to July 2020 sources of risk, and it underscores the need for more dropped because of the closure of factories, malls, holistic planning. COVID-19 has been unprecedented and offices as part of the COVID-19 lockdowns. but raises many important lessons about how risk is Conversely, because the majority of the population managed by societies and about the importance of worked from home, household electricity consumption financial preparedness for shocks. This chapter draws has increased, reaching a peak in June 2020 of 8.791 lessons from COVID-19 toward a more integrated and MWh (compared to an average of around 7.5MWh over whole of government approach to financial protection the previous 5 years). This shift in patterns of demand and preparedness. has had implications for the energy mix (specifically a shift in the energy mix from fossil fuels toward more Pandemics do not damage physical assets but can renewables) and affected the sector’s profitability.103 severely disrupt services through their impact on This has been a common trend in many countries that people, inputs, and demand. Recently, health services imposed severe movement restrictions. have been most directly impacted, but the pandemic has also affected education, finance, water, energy, and In the United States, the energy utilities sector (which transport systems. School closures in many countries includes public and private utilities) has been impacted were a shock to education services.101 Transport through changes in both revenues and costs. The systems have been interrupted, thereby negatively significant reduction in demand from the industrial impacting supply chains and critical economic sectors, and commercial sectors (the US Energy Information particularly tourism and critical manufacturing that Administration forecasts a total decline in US electric rely on international supply chains. Demand for power generation of 6.5 percent for those sectors and 5 telecommunications, energy, water, and sanitation has percent overall) is damaging to financial performance as increased. Health care systems are overstretched. The rates (prices) are higher in the sectors. Dozens of states pandemic impacts not only the quality of the service, have also enacted a moratorium on disconnection of but also the revenues, investments, and expenses and residential utilities resulting from nonpayment during thus the long-term viability of utility companies. For COVID-19, with the resulting revenue losses absorbed example, an April 2020 survey of 305 chief financial by utilities. State utility regulators are putting in place officers of utility companies in the United States showed measures to reduce the mounting financial pressures; that the greatest concern from COVID-19 was the including (in Ohio) authorizing public utilities to obtain financial impact on operations, liquidity, and capital.102 federal loans. 101 Saavedra, Jaime, “COVID-19 and Education: A World Bank Perspective,” World Bank, Washington, DC, July 2020. 102 PwC, “COVID-19: What It Means for the Power and Utilities Industry,” https://www.pwc.com/us/en/library/covid-19/how-covid-19-is-impacting-power-and-utilities.html 103 Authors’ analyses based on information from the Singapore government’s Energy Market Authority, http://www.ema.gov.sg 57 | Financial Protection of Critical Infrastructure Services In Hong Kong, the volume of public transport In the United States, the critical nature of a wider passengers, including on buses and railways, decreased scope of infrastructure - including chemicals and other by 40 percent in April 2020 compared to the year critical manufacturing sectors (which are necessary, before.104 This decrease was a direct consequence of for example, to food production, health, and water social distancing, telecommuting, and having border purification sectors), food and agriculture, and control measures put in place by the authorities. To keep health services - is clearly reflected in the National its public transport system operational, Hong Kong Infrastructure Protection plan (figure 5.1). On March successfully implemented measures including fleet 22, 2020, the Secretary of the Treasury, released a sanitization, air purification, temperature screening, memorandum providing that the financial services and responsive operations to align with passenger sector is identified as Critical Infrastructure Sector demand and travel pattern changes. by the Department of Homeland Security. This identification means that despite the restrictions put COVID-19 has highlighted the importance of robust in place to slow the spread of COVID-19, essential and integrated operational and financial preparedness workers in the financial services sector had to maintain to ensure the continuity - and in places scaling up - of their operations and work schedules.107 critical services. For example, effective government emergency procurement has been essential in health care provision.105 The crisis has revealed many weaknesses in the preparedness of critical infrastructure to major shocks, from health equipment and care to a lack of digital technology to ensuring the continuity of education.106 In some cases, COVID-19 has led countries to redefine what is considered critical infrastructure (figure 5.1). The telecommunications sector has become even more critical to the economy under lockdown measures by (a) providing business-critical connectivity and resiliency, (b) facilitating work-from-home arrangements, and (c) keeping individuals and societies connected and informed. For example, the sector provides access to medical, financial, commercial, and other essential services during mandated social isolation. The financial sector is also now more widely considered a part of critical infrastructure. 104 Authors’ analyses based on http://www.data.gov.hk 105 For example, see New Zealand COVID-19 emergency procurement guidance. 106 OECD, “Public Procurement and Infrastructure Governance: Initial Policy Responses to the Coronavirus (COVID-19) Crisis,” Paris, OECD, July 30, 2020. 107 US Department of the Treasury, “Memorandum for the Financial Services Sector: Financial Services Sector Essential Critical Infrastructure Workers,” March 22, 2020, https://www.aba.com/-/media/documents/incident-response/Financial-Services-Sector-Essential-Critical-Infrastructure-Workers.pdf#_ ga=2.185734497.919837796.1585000202-2141545694.1585000202 58 | Financial Protection of Critical Infrastructure Services Figure 5.1. Critical Infrastructure Sectors Identified in the USA Guidance for Essential Workers during COVID-19 Source: US Cybersecurity and Infrastructure Security Agency, “ISA Guidance on Essential Critical Infrastructure Workforce,” https://www.cisa.gov/critical-infrastructure-sectors COVID-19 has highlighted the importance of financial Recent research suggests that some subnational protection of national and subnational budgets governments are concurrently affected by an against exogeneous shocks, including pandemics increased demand for critical services in health and disasters. Governments have had to spend more and social care and in public safety and order, and to maintain critical services to citizens. For example, lower tax revenues. On average, for subnational the medical response required opening additional governments, those sectors (health, public order, and temporary hospitals. Government-funded lines of social protection services) account for 34 percent of credit and guarantees to banks have helped to maintain overall expenditures.108 lending to businesses where financial services are threatened by the increased risk of nonperforming loans Where critical services are provided by state-owned and changing economic conditions. This experience enterprises, disruption to demand, to revenues, or to highlights that disruptions to critical infrastructure production can create a direct and substantial fiscal services caused by pandemics can have a sizeable fiscal risk on government. State-owned enterprises (SOEs) impact, both through losses of revenue and increases are prevalent in critical infrastructure sectors across in expenditure. countries at all income levels. 108 OECD, “COVID-19 and Fiscal Relations across Levels of Government,” July 31, 2020, https://read.oecd-ilibrary.org/view/?ref=129_129940-barx72laqm&title=COVID-19-and-Fiscal-Relations-across-Levels-of-Government 59 | Financial Protection of Critical Infrastructure Services Across Africa, SOEs account for a significant share of US$1.8 trillion.114 Those compounding impacts of shocks public sector balance sheets, with liabilities worth on on government balances are important to consider as average 20 percent of GDP and assets of 32 percent part of a financial protection strategy. GDP.109 In Africa, as in many other regions, COVID-19 posed three major challenges for water utilities (a) loss Other shocks, such as cyber risks, may affect critical of revenues (e.g., suspension of water billing in several services in the future in similar ways. For example, countries across Africa); (b) increased demand for water; airports rely on computing services. As the power grid and (c) reduced availability of inputs (chemicals, fuel) becomes more interconnected with communication and essential workers, including a deferment of critical systems, the chances of cyber-induced power outages investments (e.g., in O&M).110 increase. In Brazil, the estimated losses in terms of forgone In 2019–2020, the North American power grid was revenues and financial risks for SOEs in the water exposed to two major cyber events, which took several and sanitation sector (which serves almost 60 million days to resolve.115 In California, for example, a cyber households) are upward of US$100 million across the event lasted more than three days, with the risk of sector.111 potentially affecting the adequacy and reliability of the electric system.116 Such risks, particularly where they Increased expenditures and losses in revenues related directly impact a government-owned or government- to critical infrastructure came on top of stretched operated infrastructure, pose a significant contingent government budgets and a difficult short-term liability on the government that is often not assessed economic outlook for some countries. As of the end or understood. of October 2020, the IMF reported that governments (globally) had together spent US$12 trillion on A national financial protection strategy can be a COVID-19 response and recovery, of which around mechanism to support comprehensive financial half came from budgetary sources.112 For example, as of management of such risks. Most countries did not November 5, 2020, fiscal support measures to respond plan for the fiscal implications of a COVID-19-type to COVID amounted to US$100 billion in Singapore, pandemic. Some countries explicitly captured the US$50 billion (4.3 percent of GDP) in Indonesia, US$12 risk of a pandemic within national risk assessments billion (3.1 percent of GDP) in the Philippines.113 The and preparedness plans, yet such plans still did not APEC region contracted by 3.7 percent in the first six translate to financial preparedness. Governments, in months of 2020, a sharp reversal from the 3.4 percent effect, operated as insurers of last resort to limit the growth seen in the same period in 2019; the APEC long-term economic impact from the pandemic. Such region is expected to have contracted in 2020 by 2.5 implicit contingent liabilities are difficult to quantify percent, which is equivalent to an output loss of around but are a significant fiscal risk to the government. 109 Jason Harris et al., “Government Support to State-Owned Enterprises: Options for Sub-Saharan Africa,” IMF Fiscal Affairs Special Series on COVID-19, June 15, 2020. 110 World Bank, “Supporting Water Utilities during COVID-19,” June 30, 2020, https://www.worldbank.org/en/news/feature/2020/06/30/supporting-water-utilities-during-covid-19 111 Rafael Muñoz Moreno, “Keeping the Lights on, the Water Running and People Moving,” World Bank, Washington, DC, July 10, 2020, https://www.worldbank.org/en/news/opinion/2020/07/10/brazil-covid-19-coronavirus-pandemic-impact-water-utilities-transport-energy 112 Phillip Inman, “IMF Urges Government to Borrow to Fight Impact of Covid-19,” The Guardian, October 14, 2020, https://www.theguardian.com/business/2020/oct/14/imf-urges-governments-to-borrow-to-fight-impact-of-covid-19 113 IMF, “Policy Responses to COVID-19,” Policy Tracker, https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19 114 APEC, “APEC Regional Trends Analysis: New Virus, Old Challenges, and Rebuilding a Better Asia-Pacific; APEC Amid COVID-19: Navigating Risks and Op- portunities toward Resilience,” APEC, Singapore, November 2020, https://www.apec.org/Publications/2020/11/APEC-Regional-Trends-Analysis---November-2020 115 Authors’ analysis based on data about cyber-attacks obtained from http://www.eia.gov 116 North American Electric Reliability Corporation, “Lesson Learned: Risks Posed by Firewall Firmware Vulnerabilities,” NERC Lessons Learned, North American Electric Reliability Corporation, Atlanta, GA, 2019. 60 | Financial Protection of Critical Infrastructure Services Understanding past and potential future fiscal risks Although it is challenging to quantify all contingent (and contingent liabilities), as well as proactively liabilities associated with such risks, those contingent managing those risks within public finance frameworks, liabilities associated with disruptions (or scale-up) will be crucial for increasing the resilience of public to critical infrastructure services could be quantified finance and for creating incentives to reduce risks. and more proactively managed, thus easing pressure This understanding is even more important in a fiscally on government balance sheets and creating incentives constrained environment. for resilience. Potential contingent liabilities related to critical infrastructure services in many sectors are Pandemics were already considered in fiscal stress tests clearly defined (for example, those to SOEs in the in New Zealand.117 In 2006, New Zealand modeled the energy and water sectors). Where the private sector impact of a pandemic on the macroeconomy, and that is involved, public interventions such as regulation and model was used to inform the Treasury’s preparedness contracts could also ensure that infrastructure owners during the 2009 H1N1 crisis. and operators assess and disclose risks and put in place adequate financial protection. For other critical Recent work in the United Kingdom by the HM Treasury infrastructure sectors such as financial services, it is explicitly considered the role of the government as an more difficult to estimate the risks, yet core principles insurer of last resort.118 The rationale was outlined as of financial preparedness (chapter 4) still apply. For follows: “[The government] takes on risk that others example, the UK July 2020 OBR report concluded the cannot both to protect the population and provide following: It seems implausible that the financial sector stability when unforeseen events occur. By taking on could ever be totally resilient to extreme events such as these risks the government acts as insurer of last resort a major pandemic, so the need for the state to act as in a range of domains such as flood risk and supporting an ‘insurer of last resort’ will remain. The Government’s lending to small businesses. This can help improve future fiscal strategy will need to take account of this the market for insurance and provide protection risk.”97 A first step is to learn the lessons from COVID-19, against risks where the private sector is unable to including collecting data to help assess future liabilities. provide full insurance cover without some degree of government intervention.” This report in particular Governments around the world are starting to addressed implicit contingent liabilities where there is explore new ways to better manage such liabilities. no formal legal obligation for government to cover the For example, many countries including France, costs but where the risk adversely affects the general Germany, the United Kingdom, and the United public and is not covered by the private sector. The States are exploring new financial arrangements to July 2020 Fiscal Sustainability Report by the United better manage such contingent liabilities and to avert Kingdom’s Office of Budget Responsibility119 noted that future fiscal shocks from pandemics. This exploration Government opted to take on a large portion of the includes public-private partnerships to strengthen risk itself (valued at £142 billion in 2020–2021), because the market for pandemic insurance.120 Disaster risk had it not done so, an even larger and long-lasting finance and insurance could also support measures economic and social impact would have materialized. to manage such risks arising from the continuity of 117 OECD, “Best Practices.” 118 HM Treasury, “Government as an Insurer of Last Resort.” 119 UK Office for Budget Responsibility, Fiscal Sustainability Report (London: HM Stationery Office), July 2020,” https://obr.uk/fsr/fiscal-sustainability-report-july-2020/ 120 OECD, “Responding to the COVID-19 and Pandemic Protection Gap in Insurance,” September 9, 2020. https://read.oecd-ilibrary.org/view/?ref=133_133327-3tdsqdiu7y&title=Responding-to-the-COVID-19-and-pandemic-protection-gap-in-insurance 61 | Financial Protection of Critical Infrastructure Services critical services. The World Bank is supporting utilities in several countries (including Ethiopia, Ghana, and Zambia) with expertise and tools to assess their financial risks from the pandemic.121 In conclusion, investing in financial resilience is critical to enable stronger preparedness across society, especially for new and unexpected risks. To be better prepared for future shocks, strengthening financial preparedness should be a core part of post-COVID recovery.122 Financial protection of critical infrastructure is even more important in a post-COVID context when countries face fiscal constraints and when households and firms are less economically secure. 121 World Bank, “Supporting Water Utilities during COVID-19.” 122 Mahul and Signer, “The Perfect Storm.” 62 | Financial Protection of Critical Infrastructure Services 6. Next Steps This report proposes a preliminary operational preparedness is particularly important in a post-COVID framework to enhance financial resilience of critical context, when most countries face fiscal constraints infrastructure services. This framework complements and when households and firms are less economically ongoing World Bank work with APEC economies secure. A focus on critical services also provides an to improve financial protection of public assets (for opportunity to consider wider risks in a practical way, example, with Indonesia, Mexico, Peru, the Philippines, including risks from pandemics. and Vietnam). It aims to support countries to more proactively manage a larger portion of contingent Including critical infrastructure services as part of liabilities associated with disaster shocks. However, national financial protection strategies is an important this is a new area and few international benchmarks step for managing fiscal risks and protecting exist. The report puts forward initial thinking that is the economy and population. The fiscal risks and based on existing practice about the design of financial contingent liabilities related to critical service disruptions protection programs for critical infrastructure services, are currently not widely captured within fiscal-risk and it aims to highlight the importance of this agenda frameworks. Indeed, few research studies even quantify and to advance discussion. The report can serve as a those risks, and so there is a scarcity of evidence on the basis for policy design, diagnostic analyses, and strategy scale of the contingent liabilities and financing gaps. development. The World Bank is exploring new tools and analytics to close this gap, including through research as part of the Moreover, the report demonstrates that financial risk Japan-World Bank Program for Mainstreaming Disaster management plays an important role in ensuring Risk Management in Developing Countries. high-quality, reliable, and resilient services for critical infrastructures. Such services are vital for sustainable This more comprehensive approach to risk within economic growth. Global experiences clearly show that public finance frameworks could form an important the benefits of financial protection are not just in the part of a wider shift toward a whole-of-government early, predictable finance received after an event, but are integrated approach to risk management. Experience also in the greater understanding of risk, the discipline from COVID-19 has highlighted more strongly than ever of pre-planning for disasters, and the decision-making the need for such an integrated and forward-looking systems that can enable wider resilience.123 Together, approach to planning. Such an approach has been the recommendations of this report can help reduce adopted, for example, in Singapore to manage risks disruption to critical services from disasters and thus in an integrated manner.124 New Zealand is similarly can avoid the significant social and economic impacts moving toward an all-of-government risk-financing experienced today. strategy. The World Development Report 2014125 recommended that countries establish a national risk In this way, a national financial protection strategy can board to support coordination of management of be a lever for implementing the national infrastructure critical risks across government. In many countries, this security and the national risk management agendas. approach is already practiced to some extent, typically For example, it can help set risk tolerance levels through with cabinet offices or equivalent institutional bodies risk-management requirements for infrastructure holding responsibilities for monitoring and managing owners, including risk-transfer arrangements where national critical risks. A national risk board could bring it is appropriate to do so. Strengthening financial together a set of critical infrastructure objectives, a 123 World Bank, Financial Protection against Natural Disasters. 124 World Economic Forum, “Global Risks 2007: A Global Risk Network Report,” World Economic Forum, Geneva, January 2007, http://www3.weforum.org/docs/WEF_Global_Risks_Report_2007.pdf 125 World Bank, World Development Report 2014: Risk and Opportunity - Managing Risk for Development (Washington, DC: World Bank, 2013), https://openknowledge.worldbank.org/handle/10986/16092 63 | Financial Protection of Critical Infrastructure Services national risk assessment, a system of national financial strategies, particularly in lower-income countries. The protection planning, and a much wider and integrated World Bank and others are exploring ways to close way of fiscal risk management, thereby driving a whole- such data gaps by using new technologies, satellite of-government approach. data, and models. Early work suggests that even where there are constraints, significant opportunities exist to Existing practices can be further enhanced with more strengthen financial preparedness. A key challenge is explicit allocation of roles and resources. For example, the operational preparedness to execute those funds such practices can include assigning a dedicated senior effectively. official role and a risk-management team (similar to the chief risk officer roles in many corporate institutions). APEC Finance Ministers could consider the following The risk management team could have explicit and next steps: direct linkages to different line ministries and could • Organize further technical work and knowledge- provide consistent, coherent advice and guidance, as sharing about quantifying risks and contingent well as coordinate the risk dependencies and interfaces liabilities that are associated with critical across different ministries. Clear lines of risk-reporting infrastructure services and their inclusion within frameworks and escalation procedures, complemented public finance frameworks. This knowledge-sharing with regular long-term risk planning and scenario stress- should include reflecting on lessons learned from testing exercises, can all help to establish greater risk COVID-19 and should consider opportunities to awareness and a risk-management culture across incorporate risks beyond just disasters, including different government departments. Linking such an pandemics. entity to financial and fiscal risk management and focusing on critical risks (including critical infrastructure • Convene a knowledge exchange among APEC services) can significantly enhance risk management. member economies about financial and operational preparedness of critical infrastructure services to APEC finance ministers could promote priority policy promote resilience. The knowledge exchange needs actions to strengthen financial resilience of critical to draw on expertise from the private sector to infrastructure services against shocks as part of such explore opportunities for financial solutions. an integrated approach. Specifically, APEC finance • Highlight the benefits of whole-of-government ministers could promote activities in the following areas: integrated approaches to risk management, as (a) assess the potential fiscal impact from disruptions well as the linkages to public finance and critical to critical services, (b) strengthen the integration of infrastructure risks. Support continued knowledge operational and financial preparedness planning, (c) exchange and capability development, including integrate the contingent liability from critical service analyses, guidance, and training. interruptions in national risk-financing frameworks, (d) sharing of knowledge about incorporating such risks Support from international partners is available within public finance frameworks, and (e) promoting to further strengthen financial resilience of critical comprehensive risk management during recovery from services. For example, the Japan-World Bank Program the COVID-19 pandemic. for Mainstreaming Disaster Risk Management in Developing Countries helps bring Japanese and global The World Bank is exploring projects to embed financial lessons to vulnerable countries around the world. The protection against disasters into critical infrastructure Global Risk Financing Facility has more than US$200 investment in the highest risk countries. Although such million in financial support from Germany and the projects are at an early stage, lessons are beginning to United Kingdom, and it provides grants to pilot shock emerge. For example, the absence of asset-level data is responsive systems that are integrated in World Bank a key constraint to understanding risk and to designing projects. 64 | Financial Protection of Critical Infrastructure Services Annex I. Critical National Infrastructure: APEC Resilience Strategies Lead Institution Country Definition of Critical Infrastructure Resilience Strategy in Charge Jan 2017. Physical facilities, supply chains, Critical Infrastructure Attorney-General’s information technologies, and communication Resilience Strategy (2015) Department and Critical networks which, if destroyed, degraded, or https://cicentre.gov.au/ Infrastructure Centre rendered unavailable for an extended period, document/P50S010 would significantly impact the social or economic well being of the nation or affect Australia’s ability to conduct national defence and ensure national security. Australia Updated in Dec 2020. The Security Legislation Amendment (Critical Infrastructure) Bill 2020 sought to expand critical infrastructure entities in a wider range of sectors including: communications; financial services and markets; data storage or processing; defence industry; higher education and research; energy; food and grocery; health care and medical; space technology; transport; and water and sewerage. Critical infrastructure refers to processes, National Strategy for Critical Public Safety systems, facilities, technologies, networks, Infrastructure Canada assets and services essential to the health, www.publicsafety.gc.ca/ Canada safety, security or economic well-being of cnt/ntnl-scrt/crtcl-nfrstrctr/ Canadians and the effective functioning of index-en.aspx government. 65 | Financial Protection of Critical Infrastructure Services National infrastructure implies that the National Infrastructure Ministry of the Interior facilities are deemed necessary to be Protection Plan and Safety continuously managed to protect the national https://opengov.seoul.go.kr/ infrastructure, according to the following sanction/10812531 standards, 1. Ripple effects on other infrastructure, systems; 2. Necessity for at least two central South Korea administrative agencies to jointly respond to disasters; 3. The scale and scope of damage that is caused by any disaster to the national security, the economy, and the society; 4. The possibility that a disaster can occur and the easiness of recovering from such disaster Critical infrastructure, also referred to as The Thirty-Year New Zealand National Emergency nationally significant infrastructure, can be Infrastructure Plan 2015 Management Agency broadly defined as the systems, assets, facilities, and networks that provide essential services Civil Defence Emergency and are necessary for the national security, Management Act 2002 and New Zealand economic security, prosperity, and health and secondary legislations (e.g., safety of the nation. the National Civil Defence Emergency Management Plan Order 2015 and Guidance) Critical infrastructure represents systems and NIPP 2013: Partnering for Department of assets, whether physical or virtual, that are so Critical Infrastructure Security Homeland Security vital to the United States that the incapacity or and Resilience; also 2015 destruction of such systems and assets would Sector-Specific Plans, https:// United States have a debilitating impact on security, national www.dhs.gov/2015-sector- economic security, national public health or specific-plans safety, or any combination of those matters. Sources: Websites as listed; OECD, Good Governance for Critical Infrastructure Resilience: OECD Reviews of Risk Management Policies (Paris: OECD Publish- ing, 2019), https://doi.org/10.1787/02f0e5a0-en 66 | Financial Protection of Critical Infrastructure Services Annex II. New Zealand Lifelines Utilities: Integrating Operational and Financial Preparedness New Zealanders face regular, disruptive, and costly The Civil Defence Emergency Management (CDEM) natural hazards, including flooding, earthquakes, Act 2002 and supporting regulations form the key tsunamis, and volcanic eruptions. Climate change and legislative and policy backdrop to an integrated increasing urbanization are likely to exacerbate this risk approach to disaster risk management.i exposure over time, with potential for socio-economic losses resulting in critical damage and disruption, Key CDEM Act principles underlying the role of lifeline including from a lifeline infrastructure such as energy utilities are as follows: (electricity, gas, and petroleum), transportation (road, • Identify and understand the full range of hazards rail, ports, and airports), water and telecommunications, or risks, and implement reduction strategies. and broadcasting. Given the importance of lifeline services, managing the risk of failure of those services • Prioritize the continuity of operations and supply for any reason is incorporated into national strategic of services in accordance with response priorities risk-management systems through an underpinning set by the local controller, group controller, or 4 R’s framework (reduction, readiness, response, and national controller. recovery). • Plan co-operatively with local authorities, CDEM This case study summarizes the systems approach groups, emergency services, and other utilities. to natural-disaster risk management by lifelines and utilities in New Zealand. It covers (a) the relevant • Establish emergency procedures for central government governance and leadership, (b) communication with government agencies, CDEM the specific legislative and regulatory framework, and groups, emergency services, and other lifeline (c) the operational and financial practices used by utilities. utilities to prepare for and respond efficiently and effectively to natural disasters. • Develop common and effective approaches to the 4 Rs, including financial preparedness mechanisms. Central Government Governance, Legislative, and • Coordinate with other lifeline utilities to promote Regulatory Framework service restoration following an emergency. In New Zealand, there is a clear link between • Provide information about the status of networks governance of critical risks, central government fiscal to the Emergency Operations Centre and National risk management and sector-level policies, regulations Crisis Management Centre. and plans, as illustrated in figure AII.1. i The National Civil Defence Emergency Management Plan is available at https://www.civildefence.govt.nz/cdem-sector/plans-and-strategies/national-civil-defence-emergency-management-plan/ 67 | Financial Protection of Critical Infrastructure Services Financial and Operational account balancing the dependency on any single instrument, the relative cost of each layer, and the Preparedness of Individual capacity of risk-transfer markets to accept risk. Infrastructure Owners and Operators • Risk retention and risk transfer. Natural disaster Lifeline utility entities undertake several operational insurance is not cheap in New Zealand, especially preparedness activities designed (a) to comply with since the recent earthquake activity. Large, complex CDEM Act requirements and shareholder expectations organizations, such as lifeline utilities, have sought and (b) to mitigate the impacts on service delivery to mitigate the costs of the risk-financing program and to maintain a competitive advantage where they by balancing risk retention with risk transfer, operate in competitive markets. Key operational thereby accepting sizeable retentions (ranging preparedness activities commonly undertaken by from tens of millions to hundreds of millions of lifeline utilities can be categorized into three types: dollars). (a) planning and governance; (b) risk identification, analysis, and evaluation; and (c) risk treatments. • Annual budgets. At the project level, annual asset management budgets incorporate contingency General themes inherent in the financial preparedness finance, such as corporate and central government of lifeline utilities include these: budget contingencies. The costs and risk ownership • Risk layering. The risk-financing program is are allocated to the party best positioned to a mix of layered instruments and takes into manage it. A National Systemic Approach to Lifelines Disaster Risk Management GOVERNANCE RESPONSE Cabinet National Security Committee Strategic Risk & Officials Domestic & External Officials Domestic & External Resilience Panel Security Committee (ODESC) Security Committee (ODESC) DPMC (SRRP) DPMC (Chair) + 9 Agency Ces (incl. TSY, MFAT, MoD, Police, Solicitor General Watch Group(s) Leadership ODESC Secretariat: National Security Systems Directorate (NSSD) LEAD AGENCY The National Security System – Governance & 68 | Financial Protection of Critical Infrastructure Services Security & Intelligence Board (SIB) Hazard Risk Board (HRB) DPMC (Chair), GCSB, MFAT, DPMC (Chair), Police, MoH, MoD, Customs, NZDF, MPI, MoT, NZDF, MFAT, Police, NZSIS NEMA (MCDEM), NZFS Central Government Fiscal Management System level Policy, Legislation, Planning & Coordination Lifeline Note: Agencies are mandated (either National Civil Defence explicitly through Emergency 3 Waters National Roading Power Telecoms Emergency legislation or because Management Management of their specific Agency Local Act 2002 Central Telecomms expertise) to manage (NEMA) Government National Land Government as Development an emergency (as Lead Protection Transport Fund a stakeholder levy Agency) for National Civil Programme nominated hazards. Defence Central Funded by road/ Commercial Paid by service NEMA is allocated Emergency government fuel user levies. insurance as a providers to Lead Agency status for Management funds 60% of Contingency primary improve Natural Disaster Strategy restoration held for disaster mechanism, infrastructure hazards and costs. Local response. supported by a Public infrastructure failure. Planning & Coordination) National Civil government Exceptional central govt investment Defence funds the 40% Central Govt assistance in strategic Emergency balance (often package (case System Management (Policy, Legislation, Budget resilience Management using insurance) Allocation by case) as necessary Infrastructure Plan Significant upgrades events are investment afforded an exceptional,case by case budget allocation Disaster Risk Financing & Insurance Mandated Lifelines Roles (Energy, transport, water, telecommunications) Annual O&M Emergency Asset Roles & Operational Principles Budget Response Reconstruction Responsibilities Preparedness Management Costs Costs Reduction & Planning & Readiness Governance Lifelines Disaster Risk Management Risk ID, Response & Analysis & Recovery Evaluation 69 | Financial Protection of Critical Infrastructure Services Risk Treatments The electricity industry in New Zealand has four (4) main components: 1) Generation, Abbreviations: MoH – Min. of 2) Transmission, 3) Distribution, 4) Retail. DPMC – Dept of Health Prime Minister & MoT – Min. of Generation: Five (5) major generating companies make up in excess of 90% of the generating Cabinet Transport capacity. Three (3) of those companies have a mixed ownership model in which government holds a GCSB – Govt MPI – Min. for major stake. Two (2) are private Communications Primary Industries sector companies. Security Bureau NZDF – NZ MCDEM – Min. of Defence Transmission: Transpower, a State Owned Enterprise, has the monopoly remit to manage the Civil Defence & Force transmission network. Emergency Mgmt NZFS – NZ Fire MFAT – Min. of Service Distribution: Managed via twenty seven (27) electricity lines companies. These companies are trust Foreign Affairs & NZSIS – NZ owned or publicly registered companies. Trade Security Electricity Industry Structure MoD – Min. of Intelligence Retail: In New Zealand there is a high degree of vertical integration between generation and retail. Defence Service The five (5) main retail companies are also the main generating companies. DPMC TSY – The Treasury 70 | Financial Protection of Critical Infrastructure Services Annex III. Japan: Improving Disaster Preparedness and Restoring Critical Infrastructure Services after Disasters through Partnership with the Private Sector Japan is highly exposed to a range of natural disaster • Risk-transfer mechanisms that vary by project risks such as earthquakes, tsunamis, cyclones, floods, characteristics. In early public procurement and landslides, and volcanic eruptions. In the past decade, first-generation PPP projects across Japan, the Japan has been commissioning and operating costs of force majeure risks were largely borne by infrastructure through public-private partnership the public sector. Modern PPPs involve a transfer (PPP) arrangements. Japan offers useful lessons of reasonable disaster risks to the private sector about approaches to improve disaster resilience by learning through experiences, and now risk- in infrastructure under this context. Drawing on sharing considers the different characteristics of experience within a PPP framework, the Japanese have each project. For example, the local government used a number of approaches to incentivize disaster bears a higher proportion of financial risks in road resilience from the private infrastructure operators projects with low profitability and high public during the contracting and procurement process. The nature when compared to airport projects that approaches include these i,ii,iii : are likely to generate adequate revenue. Such risk tolerance of private operators is taken into account. • Clear definition of disaster subtypes, scale, and respective responsibilities. In Japan, PPP contracts • Procurement tender specifications and evaluation have a reasonably clear definition of natural criteria. There are explicit requirements in the disaster and a distinction between public and contracts for disaster risk management, insurance private responsibilities and risk sharing during a provisions, emergency recovery and reconstruction, natural disaster event-whether by type or the scale and in some cases resilience-linked payment of the disaster. By doing so, there is an alignment of mechanisms to encourage private operators to expectations and understanding and the avoidance manage the disaster risks in their projects. The of doubt and dispute when a disaster happens. bidders’ proposals for meeting those requirements This approach incentivizes private operators both are evaluated during a tender process. For example, to integrate disaster-resilience measures into the the private operator may be required to meet a operation and to improve response time. payment reduction mechanism that is based on i World Bank, Resilient Infrastructure Public-Private Partnerships. ii Masaaki Nagamura, “The Role of Insurance Industry to Strengthen Resilience of Infrastructure Assets - Experience in Japan,” APEC Document 2019/FMP/ DRFI/SEM/009, October 14, 2019. iii Federica Ranghieri and Mikio Ishiwatari, Learning from Megadisasters: Lessons from the Great East Japan Earthquake (Washington, DC: World Bank, 2014). 71 | Financial Protection of Critical Infrastructure Services performance and quality of the infrastructure in turn offered critical access for other emergency asset during both the construction and operation services to relief and recovery operations. Pre-disaster and maintenance (O&M) phases. Additional arrangements with private companies were activated requirements include preparation of business to support recovery services. Assessment of priority continuity plans (BCPs), disaster risk management routes were determined almost immediately, and plans, and additional insurance (see next point). recovery efforts began. An important element of the speed of mobilization also relates to the clarity of • Use of Insurance or Alternative Risk-Transfer who would bear the cost. In the case of Japan, the Measures. Approach varies about the use of cost of the reconstruction project is two-third funded financial risk-transfer mechanisms. In Japan, where by the national government, and much of the local there is a high risk of earthquakes, some private government’s share is covered by national tax revenues. operators may be required to add an earthquake The share of cost borne by the local government rider to the fire insurance for the O&M period. decreases as the severity of the disaster increases. In However, requirements to take out the earthquake the case of the GEJE, the severity of the impacts meant rider vary across regions and types of projects. that the local government share was minimal. Alternative risk-transfer methods, such as Cat bonds, weather derivatives, and use of captive Lessons Learned insurance companies, have yet to be popular for Appropriate disaster risk sharing between public PPP projects in Japan. and private has been developed by learning through experiences. Incentive and partnership mechanisms Local governments also have specific mechanisms to are built into contracts and procurement processes speedy recovery for a publicly owned infrastructure. For including use of financial risk-transfer solutions, and example, local governments report their infrastructure allocation of financial responsibilities between the damage to the line ministries, usually within 10 days infrastructure operator, local and central governments. of occurrence, and then the governments request To enhance the speed of service recovery of critical a national subsidy for recovery works.iv They can infrastructure systems after disasters, the private also arrange pre-disaster agreements with private sector can play a significant role. In Japan, for PPP companies or local industry associations to initiate infrastructures in which the private sector is responsible relief and recovery work in the immediate aftermath for the operation, the private operating entity will lead of disasters. The agreement covers information- the process of restoring the infrastructure services sharing, emergency inspections, debris removal, and with support from government entities. To enable disaster recovery. Those companies are required to quick service recovery, governments have found that begin relief or recovery activities upon request even the most-effective process is a clear definition and before a contract is costed. In return, their participation understanding of the roles and responsibilities between is positively evaluated during future evaluations of the private and public stakeholders, of incentives competitive procurement. and requirements within the contract for operators’ preparedness actions and investments (such as business Immediately after the Great East Japan Earthquake continuity plans), and of insurance or alternative risk- (GEJE), this approach contributed to the rapid recovery transfer measures. Governments need to consider the of heavily damaged motorways and roads, which type of infrastructure and the degree of risk exposure iv Ranghieri and Ishiwatari, Learning from Megadisasters. 72 | Financial Protection of Critical Infrastructure Services to set the level and form of their risk-sharing with preparatory and early recovery activities, coupled with the private sector so the risks are proportionate and financial mechanisms to ensure reimbursement, can commercially viable for the private sector to accept. significantly reduce the service disruption time of critical infrastructure systems such as arterial roads that Publicly owned and operated infrastructure systems need to be re-established for urgent response efforts. can enhance the speed of asset and associated service recovery by partnering with the private sector as first responders to post-disaster service recovery. Experience of Japan has shown that establishment of pre-arranged agreements with private firms to mobilize 73 | Financial Protection of Critical Infrastructure Services Annex IV. Sint Maarten: Reconstruction of Sint Maarten Airport after Hurricane Irma Princess Juliana International Airport Operating Company the airport. Bilateral aid came from the Dutch government N.V. (PJIAE) is a private corporation that operates the through the Sint Maarten Recovery, Reconstruction, and Princess Juliana International Airport, which is the major Resilience Trust Fund (SXM TF), which was established in commercial airport on the island of Sint Maarten/Saint April 2018 as a tripartite undertaking of the Government of Martin and serves as a hub for connecting traffic to nearby the Netherlands, the Government of Sint Maarten and the Caribbean islands. In September 2017, the airport was World Bank. In December 2019, the SXM TF provided the devastated by Hurricane Irma as a Category 5 hurricane, Government of Sint Maarten with a US$72 million grant for which was rapidly followed by Hurricanes Jose and Maria. the Sint Maarten Airport Terminal Reconstruction Project, The roof was blown off the terminal, the jetways were which aims to restore full service at the Princess Juliana damaged, and there was a significant amount of sand and International Airport. The project is a tripartite initiative that flooding on the runway. The airport’s damage has severely includes the US$72 million grant managed by the World affected tourism, which is the key sector for the economy Bank, US$50 million from the European Investment Bank, and which contributed 73 percent to the country’s total and US$7 million from the PIJAE. foreign exchange income. The significant delays to secure the required financing Because of damages to the airport, operations were is in part related to delayed insurance payouts. The limited mainly to nonscheduled flights for humanitarian airport holds a commercial all-risk insurance policy and and reconstruction purposes. The airport reopened for business interruption extension, which is handled by commercial flights on October 10, 2017, while using National General Insurance Corp N.V. (NAGICO), a major temporary facilities after a suspension of services of privately owned general and life insurance carrier in the more than a month. Commercial operations for airlines Caribbean. NAGICO is in turn backed by a suite of global were serviced from tents on the airfield for more than a major reinsurers including Swiss Re, Hannover Re, Munich year. Only in December 2018 were temporary arrival and Re, Partner Re, Peak Re, and a number of Lloyds’ Syndicates. departure facilities opened within the first level of the terminal building. The entire upper floor of the terminal and The airport filed a claim worth more than US$100 million the four jet-bridges remain temporarily out of commission. under its all-risk insurance policy and about US$10 million under its business interruption extension for 2017 alone. When basic services were resumed, efforts were also made NAGICO disputed the level of damage sustained by the to restore the airport. Those efforts were financed through a airport, which, it said, was based on estimates and not on range of sources. The government of Sint Maarten provided real invoices and tenders. Its own calculations estimated emergency financing cash transfers of US$5 million and that damages should be to the tune of US$37 million, an additional US$15 million for a fully committed facility including profit loss. NAGICO had paid out only US$25 to cover operating expenditures during reconstruction of million in advances, which led PJIA to file an injunction in 74 | Financial Protection of Critical Infrastructure Services May 2018. In a judgment of July 30, 2018, the Sint Maarten Although basic flight services were resumed rapidly and the Court of First Instance ordered NAGICO to pay Princess airport was able to operate close to full capacity over time, Juliana International Airport (PJIA) a further advance of the airport had endured prolonged periods of sourcing US$33 million to continue restoring the airport. Only in adequate reconstruction finance, which limited its speed August 2019 did the arbitration panel that had been set up of recovery. for the case rule for a payment of US$72 million (including advances already made) from NAGICO to PJIA. 75 | Financial Protection of Critical Infrastructure Services Annex V. United States: Disaster Recovery in Privately Owned Electric Utilities Overview of Operational Risk and Responsibility Response to Emergencies in the Allocation United States The National Association of State Energy Officials In the United States, all states have legal authority has a 4-level severity scale to classify disaster events. for general disasters, including any utility-related Depending on the severity, the risks and responsibilities emergencies.i The National Response Framework for disaster response are shared between the electric (NRF) provides guidelines to states (a) to create utilities, network coordinators such as Regional emergency and disaster plans that serve as blueprints Transmission Organizations (RTOs) and Independent for emergency response operations and (b) to define System Operators (ISOs), states, and the federal responsibilities among state agencies and state and government. Level 1 and 2 events are handled by local jurisdictions. The National Incident Management utilities and by network coordinators, while level 3 and System (NIMS) provides guidelines to electric utilities 4 events often necessitate more active involvement to design their own emergency response plans (ERPs), from the state and, in extreme circumstances, the which must be submitted periodically to state public federal government. utility commissions for approval. Both the NRF and NIMS establish common terminology and concepts to Utilities are responsible for monitoring potential facilitate communication and coordination, to define threats, planning for emergencies, and declaring and standardize the hierarchical structure of temporary utility-level emergencies (ERP events). They are also operational systemsii so they are active during a disaster responsible for alerting network coordinators and state response, and to implement standard procedures for authorities about the evolution of the disaster event, all responding organizations to use. Those measures as well as managing resources needed for disaster facilitate the sharing of resources and information, plus response. The utilities have financial and operational the integration of operational teams and maintenance responsibility for recovery and restoration efforts, and crew across utilities, local jurisdictions, and states.iii they play a major role with network coordinators to i In this report, we use the terms “disaster” and “emergency” interchangeably. This is done because different stakeholders involved in the response and recovery process prefer different terms: while utilities and system operators (RTOs/ISOs) prefer the term “emergency,” some mutual assistance groups and government agencies prefer the term “disaster.” By using both terms, we can better portray how different stakeholders describe these events. ii These include Incident Command System, Emergency Operations Center Structures, and Multiagency Coordination Groups. These systems, activated in case of a disaster, are staffed by regular employees of an organization, and remain active only for as long as the disaster response last. iii The definition of “disaster event” used in this report is adapted from the “State Energy Assurance Guidelines” issued by the National Association of State Energy Officials. Disaster events can be broadly divided into four groups: deliberate attacks caused by people (e.g., terrorists, criminals, hackers, delinquents, employees); natural disasters (e.g., hurricanes, tornadoes, floods, wildfires, earthquakes); accidents caused by technological failure (e.g., pipeline rupture, le- vee breaches, chemical spills, power outages, nuclear or biological contamination); and systemic disasters caused by the physical inability of energy delivery systems to meet demand. See NASEO (National Association of State Energy Officials), State Energy Assurance Guidelines (Arlington, VA: NASEO, December 2009), 9, https://www.naseo.org/Data/Sites/1/documents/energyassurance/eaguidelines/State_Energy_Assurance_Guidelines_Version_3.1.pdf 76 | Financial Protection of Critical Infrastructure Services ensure service continuity through restoration priority direct assistance to affected individuals and to certain guidelines and the identification of critical facilities private and public entities. The federal government before an emergency event. may support utilities’ recovery and restoration efforts through the Department of Energy, but its financial Network coordinators (RTOs and ISOs) help to assistance v does not extend to private, investor-owned monitor and detect a power situation that could limit utilities. Moreover, utilities still maintain operational or prevent the system from operating safely and control over restoration efforts. reliably under normal protocols. In such cases, it will declare a system emergency and will send notices to Financing Structures and Cost market participants and stakeholders such as state Recovery Instruments emergency response agencies. A system emergency is an operational procedure that allows RTOs and ISOs Multiple financial and regulatory instruments are to implement temporary measures such as limiting available to electric utilities to deal with cost recovery outside sales of power, increasing power imports, related to disaster response efforts. Those tools can be reducing voltage, asking some customers to reduce divided into pre-event instruments, hybrid instruments, their load, and implementing rotating interruptions during-event instruments, and post-event instruments: of service.iv Power generators would also respond by • Pre-event instruments. Reserve accounts are increasing generation. cash accounts or liquidity provisions that are earmarked for restoring service and rebuilding Individual states in the USA have legal authority the infrastructure following a weather event. over general emergencies by supporting utilities and network coordinators. States have no authority • Hybrid instruments. Mutual assistance agreements over RTO or ISOs, but state public utility commissions are between utilities and borrow or lend resources regulate individual utilities that are members of an such as equipment and trained personnel during RTO or ISO in terms of rates, cost recovery, and safety an emergency event. and reliability. State public utility commissions ensure that individual utilities comply with the requests from • During-event instruments. Charge cards are credit the RTO or ISO during a system emergency, and those cards given to employees and contractors during commissions regulate how the financial burden of an emergency event to pay for small-cost personal the disasters are shared, whether they are recouped gear, lodging, and meals without the need to go through higher tariffs, or if they are borne by the utility through the traditional authorization process. and its investors. • Post-event instruments. Securitization is the The federal government plays a limited role in most issuance of bonds by utilities to pay for the costs disaster-response emergencies as it monitors the of emergency response efforts. Cost trackers are situation and provides guidelines (such as the NRF special authorizations granted by state public utility and the NIMS) to standardize disaster response commissions that allow utilities to recover certain procedures and to facilitate cooperation. When the expenses through a per unit or fixed charge on US president declares a national emergency, the customers’ bills outside the period of regular rate federal government steps in to provide financial and review. Cost deferral is when a utility is allowed to iv RTOs and ISOs establish contractual arrangements with individual utilities to ensure that they are legally authorized to enact supply-side measures (such as discontinuing outside sales of power) during system emergencies. In addition, RTOs and ISOs work with state regulators to make sure they are allowed to pursue demand-side measures (such as asking select customers to reduce load or implementing rotating interruptions of service) during system emergen- cies as well. v The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) was signed into law November 23, 1988, as an amendment to the Disas- ter Relief Act of 1974. This act constitutes the statutory authority for most federal natural disaster-response activities, especially as they pertain to FEMA and the FEMA programs. 77 | Financial Protection of Critical Infrastructure Services defer a certain cost to its balance sheet, then can and the Northeast Mutual Assistance Group were recover the cost through base rates as a regulatory merged into the North Atlantic Mutual Assistance asset over multiple years like a capital investment. Group, which includes 21 companies across 13 states, 1 district, and 4 Canadian provinces,vi with an Lessons Learned improved ability to share resources more effectively during major events. The US experience offers the following six key lessons: • Standardize operational procedures for disaster • Use risk-layering and complementary instruments response across utilities. In the United States, the to increase flexibility and response effectiveness Incident Command System ensures that all utilities while reducing costs. US utilities use the principle operate with the same hierarchical structure and of risk-layering in their disaster response strategy; the same procedures during a disaster event. This they combine different instruments to protect approach increases the response effectiveness, against events of different frequency and severity. minimizes the potential for miscommunication, Utilities first access their own more liquid resources and facilitates the management of disaster (such as reserve accounts) and their partners’ response resources and the sharing of resources resources (through mutual assistance agreements) and information across utilities and jurisdictions. to fund the equipment and crew needed. More It is inexpensive yet highly effective, and it can be costly instruments, such as federal assistance implemented in all types of utilities. or cost trackers, are used only in more severe circumstances. Utilities also incorporate flexibility • Strengthen regional cooperation for risk and in their mutual assistance network arrangements. resource sharing. Mutual assistance agreements Depending on the event, a utility can choose to provide utilities with access to both expert crew request support from the more flexible regional assistance and specialized equipment during mutual assistance groups, or the standardized, emergencies without increasing their fixed national Emergency Management Assistance costs. Mutual assistance helps maximize the use Compact. Mutual assistance arrangements at of available resources across utilities, which is different levels (for example, flexible regional particularly important in countries with limited agreements and more standardized national disaster-response resources. This approach is mutual assistance schemes) can help increase effective in large countries (where disaster events overall responsiveness to different types of events. tend to negatively impact some but not all parts of a country) and in small neighboring nations (where • Adopt a multi-instrument approach to disaster regional cooperation is typically common). Mutual recovery to improve timeliness and effective assistance groups need a minimum viable size to be disbursement of funds. Utilities obtain immediate effective. During Hurricane Sandy, multiple small liquidity through reserve accounts for early Northeastern Regional Mutual Assistance Groups response operations, and they access other were affected at the same time and therefore were instruments such as cost trackers, cost deferrals, unable to share resources effectively. Following or securitization for larger expenses involving Sandy in September 2013, the Mid-Atlantic Mutual long-term disaster recovery. As a result of having Assistance, the New York Mutual Assistance Group, multiple instruments, the US government, states, EEI (Edison Electric Institute), “Understanding the Electric Power Industry’s Response and Restoration Process,” EEI, Washington, DC, 2016, 5, vi https://www.eei.org/issuesandpolicy/electricreliability/mutualassistance/Documents/MA_101FINAL.pdf 78 | Financial Protection of Critical Infrastructure Services and regulators do not face pressure for immediate • Real-time network data monitoring and analytics release of funds. Tax-payer money is spent or enables effective resource allocation and quick regulated tariffs are raised only when strictly response and recovery. Over the past decade, necessary. Utilities are expected to front those US utilities have made significant investments costs through available financing instruments, in technologies such as smart meters, which are rather than by being bailed out by government or now present in more than half of all US homes. by passing all those costs to consumers. This investment has helped improve disaster response by enabling utilities to monitor outages • All Instruments are Important; some are essential. continuously and by responding to them in real Reserve accounts and cost-trackers help US time and more effectively rather than relying utilities manage liquidity and cost recovery. on projections. Increased use of real-time Reserve accounts can be set up by any utility, data monitoring of disaster events may allow regardless of ownership structure, and they are governments and utilities to more effectively easy to implement because they rely only on allocate their limited response resources during internal funding. Regulatory frameworks that major disaster events. encourage the use of this instrument can help provide domestic utilities with immediate liquidity when dealing with the costs of disaster response and recovery. 79 | Financial Protection of Critical Infrastructure Services Annex VI. The CARILEC Disaster Assistance Program The Caribbean is the second most hazard-prone region Agency (CDERA) replaced PCDPPP. CDERA focused in the world. Most islands sit on a hurricane belt, and on intergovernmental cooperation in disaster- seismic activity is common in the area. A cumulative management arrangements and interagency average of six hurricanes per year hit the region cooperation in support of disaster preparedness and between 1966 and 2009.i More than 1,200 earthquakes response. CDERA recognized the link between disaster are recorded in the region each year.ii Annual disaster management and development, which placed risk losses in the region are estimated at US$3 billion.iii management in the broader context of decision-making Between 1950 and 2016, the economic cost of those in the region.vii disasters exceeded US$22 billion (2009 constant dollars).iv Against this context, disaster risk management In 1989, Caribbean Electric Utility Services Corporation is a key priority for Caribbean governments, and a (CARILEC) emerged as an association of power utilities, sum of more than US$60 million was directed toward Independent Power Producers (IPPs),viii and energy enhancing disaster-management policy and promoting solutions companiesix that were operating in the region. preparedness training between 2007 and 2012.v CARILEC has also become the largest platform for disaster response among utilities in the region.x The Most island nations have their respective national CARILEC Disaster Assistance Program (CDAP) was disaster-management agencies to set and established so that CARILEC utilities could provide joint operationalize disaster-management policy, but policy manpower assistance to each other after a disaster makers in different nation states have progressively event occurs. CDAP was also created to exchange adopted a collaborative approach. Regional platforms knowledge and best practices for managing disasters. have been invaluable in coordinating collaborative Assistance is based on the impact that a disaster has responses, including the establishment of the Pan on a member utility’s generation, transmission, and Caribbean Disaster Preparedness and Prevention distribution infrastructure.xi As a result of COVID-19, Project (PCDPPP) in 1981.vi The PCDPPP focused on CDAP is considering including pandemics as well, standardizing procedures, establishing early-warning though this inclusion is a long-term goal.xii systems, and creating emergency telecommunications. In 1991, the Caribbean Disaster Emergency Response i National Hurricane Center and Central Pacific Hurricane Center, “Tropical Cyclone Climatology,” https://www.nhc.noaa.gov/climo/#bac ii University of the West Indies, Seismic Research Center, “Earthquakes: Frequently Asked Questions,” http://uwiseismic.com/General.aspx?id=85 iii CDEMA (Central Defence Emergency Management Agency), “Regional Comprehensive Disaster Management (CDM) Strategy and Programming Frame- work, 2014–2024,” CDEMA, St. Michael, Barbados, 2014, https://www.preventionweb.net/publications/view/39126 iv IMF, “Bracing for the Storm.” v Jeremy Collymore, “Disaster Management in the Caribbean: Perspectives on Institutional Capacity Reform and Development,” Environmental Hazards 10, no. 1 (2011): 6–22, https://doi.org/10.3763/ehaz.2011.0002 vi Ibid. | vii Ibid. viii Member IPPs include EGEHAINA in Dominican Republic and Jamaica Energy Partners. ix Energy solutions companies include Aggreko and Marubeni. x CARILEC, “Members,” 2020, https://www.carilec.org/members/#associate-members xi Qualitative data collected during CARILEC interview with the World Bank. xii Qualitative data gathered with questionnaire sent by the World Bank. 80 | Financial Protection of Critical Infrastructure Services Since its launch in 1998, CDAP has provided joint crews to the affected utility to support service restoration assistance on more than 20 occasions and restoration works. has helped several utility members rebuild and repair damaged infrastructure. Currently, 26 out of the 33 Short-term liquidity assistance to most Caribbean CARILEC member utilities and 1 IPP subscribe to CDAP. nation states is provided by the Caribbean Catastrophe CDAP has two main components. The first component Risk Insurance Facility (CCRIF SPC), which is a segregated coordinates regional efforts to respond to requests portfolio company that provides earthquake, hurricane, for assistance from disaster-stricken member utilities. and excess rainfall catastrophe coverage at low pricing.xiv CARILEC has recently embarked on a partnership with The second component involves the management CCRIF to allow member utilities to take advantage of of CDAP’s disaster fund. Through CDAP, CARILEC their catastrophe risk insurance. coordinates regional disaster preparedness and response in the following three phases: • Risk and responsibility allocation. CARILEC and member utilities share responsibilities for • Preparedness planning (normal conditions.This disaster preparedness and response. In general, phase takes place when no disaster is imminent, CARILEC has management and coordination usually outside of the Atlantic Basin’s hurricane responsibilities throughout the three phases. season.xiii During this phase, CARILEC holds a Utilities are responsible for updating their own disaster round table to address the organization’s emergency response plans, maintaining emergency disaster management policy. CARILEC member inventories, and deploying assistance crews, among utilities also review and update the CARILEC others. When a threat is imminent, responsibilities Disaster Response and Restoration Manual, which of member utilities are divided into either affected is based on their previous experience preparing utilities - those likely to be impacted by disaster and responding to disasters. - or assisting utilities - those best placed to help the affected utility. In general, member utilities • Preparedness planning (when a threat is should be prepared to exchange responsibilities imminent). This phase takes place when a disaster in an event, if needed. at a member utility is imminent. During this phase, CARILEC maintains constant communication with • Financing structures and cost-recovery the utility that will likely be affected, and it alerts instruments: CDAP’s disaster fund. Member potential assisting utilities. utilities that are subscribed to CDAP make annual contributions to the disaster fund, which CARILEC • Restorations assistance (post-disaster). This phase uses to reimburse the general expenses that takes place after a disaster strikes a member utility. utilities incur while assisting the affected utility. During this phase, CARILEC forms a liaison with Any CARILEC member can subscribe to CDAP the utilities to ensure that assistance is provided and can benefit from the disaster fund. However, safely and efficiently. If requested, CARILEC will member utilities that do not subscribe to the also coordinate and deploy nonstandard assistance fund will not receive restoration assistance in the such as humanitarian aid, logistical support, event of being affected by a disaster. Currently, 27 heavy-duty equipment, and mobile diesel power member utilities subscribe to CDAP and, therefore, generators. In turn, the assisting utilities dispatch make contributions to the disaster fund. According to the US National Hurricane Center, the hurricane season for the Atlantic Basin takes place from June 1 to November 30. xiii CCRIF SPC, “Company Overview,” xiv https://www.ccrif.org/about-us 81 | Financial Protection of Critical Infrastructure Services • Emerging issues: Responding and recovering respond and recover more efficiently. Beyond from the COVID-19 pandemic. The pandemic did streamlining processes and approaches, those not trigger CDAP’s assistance, because triggers are platforms help foster regional knowledge impact driven and relate exclusively to damage to transfer and shared experiences between a member utility’s transmission and distribution sectors, which has numerous benefits for infrastructure. CDAP is considering including regional planning and sector development. pandemics in its framework as a long-term goal. Nevertheless, when the pandemic hit member • After a disaster that affects electricity states, CARILEC documented and disseminated infrastructure, in-kind assistance is ideal to best practice measures to ensure that customers’ recover service quickly. Since the launch of needs continue to be served. For example, CDAP in 1998, CARILEC has provided joint according to CARILEC, most member utilities manpower restoration assistance on more than such as the Jamaica Public Service Company 20 occasions. This type of in-kind assistance Limited adopted response practices that include has been beneficial to CDAP’s subscribing (a) stopping disconnections resulting from late utilities. Power utilities in the Caribbean need payments, (b) waiving late fees, and (c) creating substantial manpower when repairing and flexible payment plans. In general, CARILEC became rebuilding electricity infrastructure damaged a key resource to guide utilities in ensuring an by disasters, particularly hurricanes. Electricity uninterrupted power supply during the pandemic. must be restored as quickly as possible for affected areas to restore other essential services • Lessons learned and recommendations. The such as water supply, transportation, and CARILEC CDAP demonstrates that mutual, medical services. However, CARILEC utilities regional disaster assistance can offer support for do not have sufficient staff members to meet utilities in small, developing island nations that this need on their own in the aftermath of a are susceptible to disasters on a regular basis. disaster. Therefore, assistance from supporting Support for such disasters are otherwise difficult crews from other CARILEC utilities is usually to obtain because of the islands’ relative smaller what affected utilities need most urgently after scale of operations. CDAP helps restore electricity an emergency. supply significantly faster than could be done otherwise, which speeds up the disaster-recovery • In-kind assistance should be coupled with process in all other sectors of the economy. Some financial assistance to fully restore service lessons that can be drawn for other regions are faster. CDAP’s in-kind assistance model is the following: crucial to the region, but it is limited to the availability of financial resources that an • Regional disaster policy coordination is key. affected utility can access after an emergency. Regional platforms, such as CARILEC, have Having a mechanism to finance the rapid been essential in developing a common recovery works needed to restore service understanding of disaster risks and for could make CDAP’s efforts more effective and informing national policies to minimize impact. efficient. Developing one language and approach to disaster management allowed the region to 82 | Financial Protection of Critical Infrastructure Services • The linemen’s occupational health and • CDAP’s flexible mechanism of governance safety must be a priority. CDAP considers has allowed the fund to evolve as needed to the linemen’s physical and mental health as provide timely support. The board of directors a priority when deploying them to a disaster- of CARILEC reviews CDAP’s lifecycle disaster stricken area. This consideration is reflected management annually and makes adjustments in the multilayered approach to disaster based on recent performance. The board also preparedness that CDAP has adopted. This reviews the fund’s applications and terms approach consists in assessing the linemen’s during its quarterly meetings each year. This personal and family circumstances and the reviewing allows for flexible adjustment of potential impact of disasters on their lives membership fees, of the fund’s floors and before deployment. This assessment helps ceilings, and of the withdrawal cap. ensure that the individuals, their families, and their community will support the linemen’s • Pandemics could be included as a disaster deployment to an affected utility. in CDAP. Mutual assistance does not need to be exclusively physical. CDAP could formalize • The establishment of the disaster fund has its knowledge sharing, its remote technical been pivotal to the implementation of CDAP. assistance, and the best practice development Reimbursing utilities for expenses incurred so CARILEC members are uniformly guided while aiding others promotes mutual assistance. during this type of disaster. In addition, participation of CDAP subscribing utilities through shared funds fosters a shared ownership of the program and highlights the spirit of mutual assistance of CDAP. 83 | Financial Protection of Critical Infrastructure Services Annex VII. Australia: Defining Risk Ownership for Rapid Recovery Australia has a history of natural hazards, climate payments. The exact percentage of the reimbursement variability and extreme weather events including depends on the size of the disaster-related costs tropical cyclone, flood, earthquake, and bushfire. The that the subnational government has incurred in a social and economic cost of past events has been given year. Expenditure thresholds are established to considerable in Australia; estimates of average annual calculate the level of financial support; those thresholds economic cost of natural disasters in Australia came consider the capacity of individual states to fund relief to US$18.2 billion per year between 2007 and 2016, and recovery assistance. As the cost to the subnational equivalent to 1.2 percent of average gross domestic government increases, so too does the assistance product (GDP).i provided by the central government. Because of its history of natural disaster exposure, In exceptional circumstances, regional government can Australia’s federal government has natural disaster access an additional ex post disaster-assistance subject, funding arrangements to support disaster recoveries. which is an implicit contingent liability. In the past, this Cost-sharing arrangements of reconstruction and category of assistance was used for exceptional costs, relief between federal and state governments are well such as the dredging of a port after the 2010-2011 articulated and regularly updated. Queensland floods, and it was meant to provide the government with the necessary flexibility to support Risk Allocation of Disaster- unforeseen recovery and reconstruction needs. There Related Contingent Liabilities has been a concerted effort across levels of government to ensure that such payments do not raise unrealistic To enhance the financial resilience of subnational expectations with regard to future levels of central governments against disaster risk, the Australian government assistance. For example, the assistance is government both provides subnational governments provided only after the details of the disaster’s impact with financial assistance and encourages them to have been assessed, and it is subject to authorization reduce their disaster risk. Through the Natural Disaster from the prime minister. Relief and Recovery Arrangements (NDRRA), the Commonwealth formalizes conditions of financial Quantification of Disaster- assistance to subnational entities. Related Contingent Liabilities A comprehensive legal framework gives the Australian Across all levels of government, Australia has government a clear role in providing financial support recognized the need to assess disaster-related for post-disaster relief and recovery. For subnational contingent liabilities as part of budget planning and governments, the central government provides financial fiscal-risk considerations. The central and subnational assistance under the NDRRA and reimburses up to 75 governments in Australia carry out regular inventories percent of eligible expenditures on relief and recovery of past disaster-related expenditures and of expected i Australian Business Roundtable for Disaster Resilience and Safer Communities and Deloitte Access Economics, The Economic Cost of the Social Impact of Natural Disasters (Sydney: Deloitte Access Economies, 2016), http://australianbusinessroundtable.com.au/assets/documents/Report%20-%20Social%20costs/Report%20-%20The%20economic%20cost%20of%20the%20 social%20impact%20of%20natural%20disasters.pdf 84 | Financial Protection of Critical Infrastructure Services future expenditures arising from past incidents. The disasters. There are no standard procedures to evaluate assessments include an examination of spending at a macro-fiscal scenario that follows a combination of the subnational level; the examination is based on extreme events. Instead of projecting the coincident data provided in NDRRA reimbursement requests occurrence of such events, the government instead and on public accounts of subnational governments. has had to learn from actual experiences such as the The process is jointly managed by the Australian 2010–2011 Queensland floods, which occurred when Attorney-General’s Department, the Treasury, and Australia’s economy was negatively impacted by the the Department of Finance. global financial crisis. The government discloses information about its Insurance of Public Assets explicit disaster-related contingent liabilities in the State governments develop insurance funds to provide Statement of Risks in its budget papers, specifically standardized insurance coverage for public assets Budget Paper 1. Future disasters are recognized as and access to international reinsurance capacity. an unquantifiable contingent liability in the budget State governments are also required to undertake documents. Since 2014, the formal Statement of independent assessments of their insurance Risks has explicitly acknowledged disaster-related arrangements every three years and to submit the contingent liabilities, which are defined as potential results to the Commonwealth for review. Most states costs to the central government arising outside its have developed a self-insurance system, such as control ii. Budget estimates include expected NDRRA government-owned captive insurers and mutual expenditures for eligible costs not yet incurred for insurance pools for critical state-owned assets. recovery and reconstruction from past events, although According to an assessment conducted by Australia’s estimates do not include a forecast of expenditures Department of Finance and Deregulationiv, most caused by potential future events that might entail states have abundant and cost-effective insurance NDRRA expenditures. The main reason is that NDRRA arrangements for nonroad assets, which meet the expenditures have varied significantly from year to NDRRA’s obligations. Some local governments insure year, making it difficult to forecast expenditures with non-road assets through a mutual pool arrangement any level of accuracy. or commercial insurance. To mitigate the fiscal impact of disaster-related The public assets of more than 160 Australian contingent liabilities and other fiscal risks, a non- government entities (including all departments of appropriated contingency reserve is included in the state) are insured through Comcover, the Australian budget. Under the NDRRA, no provision is made for government’s general insurance fund.v Comcover future disasters, but the annual Budget Paper 3 outlines handles only those entities that are within the general expected payments to subnational governments for government sector and are subject to the Public disasters in the previous fiscal year iii. The government Governance, Performance and Accountability Act 2013 conducts exercises to develop longer-term projections (i.e., fund members). Managed by the Department of of the cost of future disasters. Finance, Comcover keeps a register of insured public assets that are declared by each fund member, and it The central government also holds a qualitative provides cover for all general insurable risks including discussion to evaluate the potential fiscal impacts of natural hazards (but excluding workers’ compensation, ii OECD and World Bank, Fiscal Resilience to Natural Disasters, chapter 2. iii Treasurer of the Commonwealth of Australia and Minister for Finance of the Commonwealth of Australia, Federal Financial Relations Budget Paper No. 3, 2016–17. Sydney: Commonwealth of Australia, 2016. iv Australian Department of Finance and Deregulation, “Review of the Insurance Arrangements of State and Territory Governments under the Natural Disaster Relief and Recovery Arrangements Determination 2011,” Commonwealth of Australia, Sydney, 2011. v Comcover website at https://www.finance.gov.au/government/comcover 85 | Financial Protection of Critical Infrastructure Services which is the responsibility of Comcare). Comcover to build in additional resilience during reconstruction, seeks information from fund members about assets although the Commonwealth government currently to be covered by the fund, and it charges property has few (if any) tools to encourage state and territorial premiums that are based on the sum insured and past governments to build back better. The states and claims experience, while taking into account the value territories are able to seek reimbursement for some of the property premium pool for the entire fund. costs related to investments that improve resilience, although such requests are not very frequent. There Building Back Better is an ongoing discussion of increasing the NDRRA funding support for such investments. NDRRA generally provides funds to return assets to their pre-disaster state. State and territory governments are expected to consider any need to relocate assets or 86 | Financial Protection of Critical Infrastructure Services Abbreviations APEC Asia-Pacific Economic Cooperation BCPs Business Continuity Plans CARILEC Caribbean Electric Utility Services Corporation CAT Catastrophe CAT DDO Catastrophe Deferred Drawdown Option CCRIF SPC Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company CDAP Carilec Disaster Assistance Program CDEM Civil Defence Emergency Management CDERA Caribbean Disaster Emergency Response Agency DRFIP Disaster Risk Financing and Insurance Program EOC Emergency Operations Centre EMAC Emergency Management Assistance Compact ERPs Emergency Response Plans FMCG Fast-Moving Consumer Goods FEMA Federal Disaster Management Agency FONDEN Natural Disaster Fund GEJE Great East Japan Earthquake GDP Gross Domestic Product GFDRR Global Facility for Disaster Reduction and Recovery GRiF Global Risk Financing Facility ICT Information and Communications Technologies ICS Incident Command System IFIs International Financial Institutions 87 | Financial Protection of Critical Infrastructure Services IMF International Monetary Fund IPPs Independent Power Producers ISO Independent System Operator KPIs Key Performance Indicators NAGWICO National General Insurance Corp N.V NCMC National Crisis Management Centre NDRRA Natural Disaster Relief and Recovery Arrangements NIMS National Incident Management NRF National Response Framework O&M Operations and Maintenance OBR United Kingdom’s Office of Budget Responsibility OECD Organisation for Economic Co-Operation and Development OFWAT UK England and Wales Water Regulator Water Services Regulation Authority PCDPPP Pan Caribbean Disaster Preparedness and Prevention Project PJIA Princess Juliana International Airport PJIAE Princess Juliana International Airport Operating Company N.v. PPI Private Participation in Infrastructure PPIAF Public-Private Infrastructure Advisory Facility PPPs Public-Private Partnerships RTO Regional Transmission Organization SEADRIF Southeast Asia Disaster Risk Insurance Facility SOEs State-Owned Enterprises SXM TF Sint Maarten Recovery, Reconstruction, and Resilience Trust Fund VBRRA Victorian Bushfire Reconstruction and Recovery Authority 88 | Financial Protection of Critical Infrastructure Services References APEC (Asia-Pacific Economic Cooperation). “APEC Regional Trends Analysis: New Virus, Old Challenges, and Rebuilding a Better Asia-Pacific; APEC Amid COVID-19: Navigating Risks and Opportunities toward Resilience.” APEC, Singapore, November 2020, https://www.apec.org/Publications/2020/11/APEC-Regional-Trends-Analysis- --November-2020 APEC. “Joint Ministerial Statement.” APEC Finance Ministers’ Meeting, Lima, October 15, 2016. https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-Meetings/Finance/2016_finance.aspx APEC. “Joint Ministerial Statement.” APEC Finance Ministers’ Meeting, Port Moresby, October 17, 2018. https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-Meetings/Finance/2018_finance#:~:text=1.%20 We%2C%20the%20Finance%20Ministers%20of%20the%20economies,Papua%20New%20Guinea.%20Global%20 and%20Regional%20Economy%202 APEC. “Joint Ministerial Statement,” APEC Finance Ministers’ Meeting, Santiago, October 15, 2019. https://www.apec.org/Meeting-Papers/Sectoral-Ministerial-Meetings/Finance/2019_finance Australian Business Roundtable for Disaster Resilience and Safer Communities and Deloitte Access Economics. 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