E | FINANCE | FINANCE FINANCE | FINANCE | FINANCE | FINANCE | FINANCE | FINANCE | FINANCE FINANCE | FINANCE | FINANCE | FINANCE | FINANCE | FINANCE E | FINANCE | FINANCE FINANCE | FINANCE | FINANCE | FINANCE | FINANCE | FINANCE FINANCE | FINANCE FINANCE | FINANCE | FINANCE | FINANCE | FINANCE | FINANCE October 2024 Stephanie Allan, Eleanor Bayley Prosperity Insight Series APPLICATIONS BUDGETING AND Tatiana Skalon, Richard Anthony Sutherland, CONCEPTUALIZING DISASTER RISK–BASED EXPLORING PRACTICAL FINANCE | FINANCE FINANCE | FINANCE | FINANCE | FINANCE | FINANCE | FINANCE CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS October 2024 Tatiana Skalon, Richard Anthony Sutherland, Stephanie Allan, Eleanor Bayley © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org 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, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be construed or considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. 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, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: © OSORIOartist / shutterstock photo ID : 2521738271 Further permission required for reuse. TABLE OF CONTENTS Acknowledgments i Abstract ii Executive Summary 1 1. Introduction 5 1.1 The need for disaster risk–based budgeting 5 1.2 Binding constraints on the management of public finances for disaster risk purposes 9 2. Disaster risk–based budgeting entry points 13 2.1 Strategic planning 15 2.2 Budget preparation 19 2.3 Budget approval 23 2.4 Budget execution 25 2.5 Accounting and monitoring 28 2.6 Audit and evaluation 31 2.7 Policy review 33 3. Governance of DRBB 37 4. Recommendations and suggestions for further study 39 4.1 Recommendations 40 4.2 Areas for further study 44 References 46 Boxes Box 1: The macro-fiscal consequences of the 2022 Pakistan floods and 2013 typhoon in the Philippines  6 Box 2: Sample DRF instruments available to governments 8 Box 3: Integrating DRM plans in Ethiopia 16 Box 4: New Zealand’s evolving approach to public asset management 18 Box 5: Quantifying disaster-related contingent liabilities in Colombia, the UK, and the EU 20 Box 6: Cross-sectoral program budgeting in the Philippines 21 Box 7: Approval of COVID-19 spending in the UK Parliament  24 Box 8: The opportunity cost of budget reallocations in Albania 26 Box 9: Disaster and climate budget tagging in Ethiopia 30 Box 10: Real-time audits in Sierra Leone 32 Box 11: Disaster spending in the UK: Evaluations by the National Audit Office and House of Lords 33 Box 12: Deploying policy review tools for disaster resilience: Select examples  36 Box 13: The institutional leadership of the resilience agenda in the UK 38 Box 14: Bottleneck analysis being used to inform DRBB reform in the Philippines 41 Figures Figure ES 1: Entry points for the consideration of disaster risk in the budget cycle 3 Figure 1: Some binding constraints inhibiting disaster-responsive PFM 12 Figure 2: Entry points for the consideration of disaster risk in the budget cycle 14 Figure 3: A proposed framework for structuring post-disaster reallocation decisions 27 Tables Table 1: Scope, purpose, and requirements of DRBB policy and process review tools 35 Table 2: Mapping interventions to potential binding constraints 42 CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS i Prosperity Insight Acknowledgements This report was prepared by a team led by Tatiana Skalon (Senior Financial Sector Specialist) and Richard Anthony Sutherland (Senior Public Sector Specialist) and comprising Stephanie Allan (Senior Public Financial Management [PFM] Consultant) and Eleanor Bayley (Governance Consultant). The team is part of the World Bank Prosperity Vertical, which includes the Disaster Risk Financing and Insurance Program in the Finance, Competitiveness and Innovation Global Practice and the Governance Global Practice. The report was edited by Anne Himmelfarb. The team wishes to express appreciation for the valuable comments received from peer reviewers: Martin Melecky, Lead Economist, Bernard Myers, Senior Public Sector Specialist and Margaux Lucrece Lelong, Governance Specialist. This report greatly benefitted from guidance from Olivier Mahul, Emiko Todoroki, Serdar Yilmaz, Practice Managers, Aart C. Kraay, Chief Economist, and Jean Pesme, Global Director. The team gratefully acknowledges the knowledge, time, and other invaluable contributions offered by the following during interviews: Richard Davis (Senior Research and Evaluation Manager, National Audit Office, UK), James Ebdon (Deputy Chief of Staff, Office for Budget Responsibility, UK), Rachel Fenn (Senior Analyst, National Audit Office, UK), Greg Fowler (Senior PFM Consultant, World Bank), Sarah Houston-Eastergaard (Treasurer, Treasury and Insurance team, Wellington City Council), Jo Kemp (Senior PFM Consultant, World Bank), Kristen MacAskill (Associate Professor in Engineering, Environment and Sustainable Development, University of Cambridge), James Picker (Clerk Assistant, House of Representatives, New Zealand), Andie Thomson (Senior Advisor Insurance, Treasury, Wellington City Council), Alberto Vanzo (Senior Auditor, National Audit Office, UK), and Ken Warren (Chief Accounting Advisor, Treasury, New Zealand). The team is grateful for inputs from Evie Calcutt (Senior Financial Sector Specialist), Raquel Letelier (Senior Financial Sector Specialist), and Jo Kemp (Senior PFM Consultant). Preparation of this reported was enabled with financial support from the Risk Finance Umbrella of the World Bank, which is supported by the UK Foreign, Commonwealth & Development Office (FCDO), the Swiss State Secretariat for Economic Affairs (SECO), and the United States Agency for International Development (USAID). CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS ii Prosperity Insight Abbreviations COVID-19 Coronavirus disease CPIER Climate Policy and Institutional Expenditure Review DBM Department of Budget and Management (Philippines) DRBB Disaster Risk–Based Budgeting DRF Disaster Risk Finance DRM Disaster Risk Management DRR Disaster Risk Reduction DRR-PFM Disaster Resilient and Responsive Public Financial Management EU European Union FY Fiscal Year GDP Gross Domestic Product IFMIS Integrated Financial Management Information System ISSAI International Standard for Supreme Audit Institutions IT Information Technology LGD Lead Government Department ((UK) MHCP Ministry of Finance and Public Credit (Colombia) MTFF Medium-Term Fiscal Framework NAO National Audit Office (UK) NDRRM National Disaster Risk Reduction and Management (Philippines) OBR Office of Budget Responsibility (UK) OECD Organisation for Economic Co-operation and Development PAC Public Accounts Committee PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PFM Public Financial Management SAI Supreme Audit Institution VFM Value for Money © World Bank Photo Collections. Mali. Curt Carnemark / Photo ID : ML023S19 World Bank. Further permission required for reuse. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 1 Prosperity Insight ES. EXECUTIVE SUMMARY This report explores how countries can embed disaster risk in their budgets1— an especially important task as climate change gives rise to greater disaster impacts and as economies and populations grow. This topic is a response to growing recognition that effective disaster risk finance (DRF)2 solutions must be formulated and managed as part of government day-to-day activities rather than occasional investments. This report combines experience from the Finance, Competitiveness and Innovation Global Practice and the Governance Global Practice at the World Bank to look at the interaction between public financial management (PFM) and DRF. Disasters have historically been seen as unexpected events that require extraordinary responses. While this view is changing, and the use of DRF instruments (such as insurance, contingent credit, and reserves) has increased over time, governments still retain a significant portion of the risks they face and meet much of the cost of disasters through the public budget. This is true in countries where access to disaster insurance is more limited (for example, in contexts where the risk is not diversifiable within national borders and there is little risk sharing); but it is also true in countries where insurance is readily 1. Disaster risk refers to “the potential loss of life, injury, or destroyed or damaged assets which could occur to a system, society or a community in a specific period of time, determined probabilistically as a function of hazard, exposure, vulnerability and capacity” (UNDRR, n.d.). The scope of this review is general government (primarily central), with a focus on expenditure measures in particular. 2. Disaster risk finance refers to a system of financial mechanisms that helps countries prepare for disasters, respond to disasters, and reduce the risk of disasters occurring. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 2 Prosperity Insight available. In 2023, disaster losses worldwide Another reason why routine budgeting often fails covered by insurance represented 31 percent of to take disaster risk into account is that ex post total economic losses; in most emerging markets sources of funding are often easier to access: for and developing economies, the figure was less than example, budget reallocations are directly within 10 percent (Aon 2024). The reactive approach to government control.3 Lastly, governments may disasters can have serious macroeconomic and receive considerable credit for disaster response fiscal impacts, which often stretch into the medium measures, such as repairing or reconstructing and long term due to the scale of costs as well as public assets or providing extraordinary support inefficiencies and delays. to businesses or households, and this dynamic can be a disincentive to pursuing political capital Although disasters represent significant costs to from preparedness, risk reduction, or DRF (whose governments, made worse by climate change and returns may not materialize until later in the the growing exposure of people and their assets election cycle). Disasters also lead to a general to disasters, PFM systems are rarely configured to relaxation of standards, due to growing pressure proactively address the risks posed by disasters. to spend quickly, inadequate contingency planning, This includes failing to adequately invest in disaster and disruptions to business processes. risk reduction and disaster preparation as part of the regular budget cycle or arrange financing Disaster risk–based budgeting (DRBB) is a to meet disaster response and reconstruction response to these binding constraints and can needs. Furthermore, DRF solutions are not always be defined as “the consideration of disaster sustained, leaving governments unduly exposed to risk throughout the government budget cycle.” significant fiscal risks and leaving people and their DRBB aims to improve the way governments assets insufficiently protected. prepare for and manage the fiscal implications of natural disasters. There is no universally applicable There are a number of reasons why PFM systems approach, but this review provides some guidance often fail to systematically plan for and prioritize on how governments might tackle some of the disaster risk in routine budgeting processes. most pertinent concerns around public finance for In some cases, there is a perception of disasters disasters, including how much of the budget to put as unpredictable “acts of God” that cannot be aside for a disaster; how to balance investment in prepared for. Governments inherently prefer to risk reduction with investment in disaster response; allocate scarce resources to known or confirmed and how to balance the need to accelerate expenditures rather than to more uncertain emergency spending with accountability demands. contingent liabilities; they fear that spending on the latter would be wasted should the liability not Embedding disaster risk considerations into materialize. This preference is particularly apparent budgets is crucial for achieving the world’s in resource-constrained environments where ambitions in adapting to changing climate. there are unmet needs in sectors like health and Understanding the fiscal impacts of climate-induced education. Moreover, modeling of disaster risk and disasters (on revenue, expenditure, and debt) helps design of DRF instruments require expertise that stakeholders plan, allocate, and use finance more may not be found in all central finance agencies, effectively. For example, several governments are while the need to collaborate across government making strategic use of various DRF instruments presents institutional coordination challenges. to prepare in advance for disaster events; this 3. For example, see a World Bank (2021a) study of COVID-19-related budget reallocations. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 3 Prosperity Insight approach makes post-disaster response and Depending on the underlying cause of their recovery more costefficient and frees resources for continued financial vulnerability to disasters, other priorities. Importantly, ensuring that disaster governments can integrate disaster risk at each risk is part of government’s day-to-day PFM will or any stage of the budget cycle—from strategic make disaster risk finance and management more planning and budget preparation to execution, sustainable and targeted. accounting, and audit, as shown in figure ES 1. Figure ES 1: Entry points for the consideration of disaster risk in the budget cycle •Policy review tools (PERs, DRF Policy Strategic •Costing DRM/DRF strategies and diagnostics, DRR- PFM toolkit) review planning cascading into sector plans •Embedding DRF strategy implementation into the budget process •Risk-informed public investment and •Comprehensive disaster audits Audit and asset management (financial & performance) evaluation •Real-time audits •PAC scrutiny Budget •Quantifying disaster contingent liabilities •In-depth evaluations preparation & integrating them into forecasts •Including disaster risk in the call circular •Providing financial incentives for •Disaster budget tagging Accounting cross-sector collaboration on DRM •Post-disaster controls and monitoring •Budgeting for DRF instruments (reserve funds, insurance) •Risk-informed reallocations Budget Budget •Developing legislative capacity on DRF •Emergency procurement execution approval •Strengthening emergency budget •Streamlining execution approvals processes for response Source: World Bank. Note: DRF = disaster risk finance; DRM = disaster risk management; PAC = public accounts committee. Many governments, facing the reality of growing introduced post-disaster expenditure controls and disaster risks, have adopted elements of the budget tracking systems to monitor spending for DRBB approach. Some countries have set up emergencies. This report takes natural disasters reserve funds, which they fund through annual (including pandemics) as a starting point4 and appropriations. Others have incorporated disasters draws on some of this global experience to inform into their fiscal risk monitoring. Still others have the discussion of DRBB approaches. It looks at 4. The scope of this report does not cover financial crises, food and energy crises, or conflict. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 4 Prosperity Insight upstream PFM processes (concerned in large part well as the binding constraints the country faces. with the adequacy of financing for disasters) and Given the ever-evolving nature of disasters and downstream PFM processes (concerned with how fiscal risks, governments need to enable a learning effectively those funds are executed), both of which environment where robust evidence informs are important to reducing the impact of disasters. planning and budgeting processes that strengthen resilience. Critically, much of this work (and Some lessons are emerging about the importance research) should be done ex ante, i.e., in advance of an adequate institutional structure for of the next disaster, although lessons from the implementing DRBB. While different countries public financial response to historical disasters have adopted different models, central finance should also be taken into account. A practical way agencies—which may include ministries of finance, to adopt DRBB could be by developing a framework fiscal councils, and debt management offices, that is reviewed and updated every year. among others—clearly have a leading role to play in ensuring that the design and delivery of DRF This report contributes to knowledge about a is comprehensive, consistent, and coordinated growing concern in public financial management: across government, and in designing PFM systems how to ensure financial resilience in the face of needed to ensure sustained fiscal safeguards. more frequent and severe disasters. However, it provides only an overview of the key concepts of DRBB is not intended to be a tick box exercise DRBB and summarizes the array of entry points, and will not be the same for all countries. without going into specific detail on any. Some Appropriate entry points for DRBB should be areas would benefit from further research and guided by the individual country’s risk profile as elaboration, as detailed in this paper. © World Bank Photo Collections. Flooding in Jakarta / Photo ID : FA-ID004f. Further permission required for reuse. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 5 Prosperity Insight © Toa55 / shutterstock Photo ID : 1810018291. Further permission required for reuse. 1. INTRODUCTION 1.1. The need for disaster risk–based budgeting Disasters are a growing source of macroeconomic impacts on economic growth, public expenditure, and fiscal instability. From the perspective of public sector asset values, revenues, and other central finance agencies, disasters manifest as economic fundamentals. These impacts became macroeconomic and fiscal shocks that cause parallel widely evident during the COVID-19 pandemic, CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 6 Prosperity Insight which saw both an unprecedented surge in public tropical cyclones as impacts of climate change spending (as governments extended support to (IPCC 2018).5 households and businesses) and sharp declines Against this backdrop, investments in disaster in output growth. The result was a 28 percentage risk management (DRM) and disaster risk point jump in total public plus nonfinancial private finance (DRF) are increasingly critical. DRF has debt in a single year (2020), with more than half been highlighted as critical by many international of this surge occurring on public balance sheets forums, including the UN Climate Change (IMF 2022). Disasters can also derail progress on Conference (COP29), G7, G20, and Asia-Pacific poverty reduction, as happened after the 2022 Economic Cooperation (APEC). Within the World floods in Pakistan and after Typhoon Yolanda in the Bank, DRF is a part of the Evolution Roadmap, Philippines (see box 1). and the World Bank Group Scorecard includes Climate change makes extreme weather events several relevant indicators. The World Bank offers more frequent and more severe. The Marsh a growing number of products to help countries McLennan Flood Risk Index estimates that the better deal with disaster shocks, such as the current share of urban areas, rural areas, and Crisis Preparedness and Response Toolkit (World infrastructure at risk of flooding would double in Bank 2024); and traditional lending is focusing a 2°C warming scenario (Marsh McLennan 2021). on climate adaptation more often than in the Recognizing some variations in modeling as well past. Integrating these strategies within public as regional differences, the Intergovernmental financial management (PFM) frameworks ensures Panel on Climate Change points to increased risk that countries are better prepared to absorb and of drought and increased frequency, intensity, and/ respond to financial shocks, thereby enhancing or amount of heavy precipitation associated with fiscal resilience and sustainable development. Box 1: The macro-fiscal consequences of the 2022 Pakistan floods and 2013 typhoon in the Philippines Pakistan floods In mid-2022, Pakistan was hit by flooding that submerged a third of the country’s land mass, displacing 8 million people and affecting 33 million people in total. Vulnerable groups, including women, children, people with disabilities, and refugees, were disproportionally affected. The Post-Disaster Needs Assessment carried out by the government and partners estimated total damage in the region at US$14.9 billion, predominantly due to destroyed/damaged assets in the housing, agriculture, and transport and communications sectors. Total economic losses amounted to 4.8 percent of gross domestic product (GDP) (Government of Pakistan et al. 2022). The recovery and reconstruction needs were projected at 1.6 times the budgeted national capital expenditure for FY2022/23. In response to the disaster, the federal government’s relief program was valued at Rs 60 billion, including a 25 percent increase in payments through the county’s social protection program, the Benazir Income Support Programme (BISP). Other expenditures (at federal and provincial levels) included search and rescue, the distribution of emergency supplies, an emergency health program, and livelihood assistance grants for smallholder farmers. (Division of Finance, Government of Pakistan 2023) 5. There is moderate to high confidence in these projections. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 7 Prosperity Insight The flood exacerbated the impacts of other domestic and external economic shocks, with Pakistan’s economy contracting by an estimated 0.6 percent in FY2022/23. With flood impacts disrupting supply chains, amid rapid currency depreciation, increasing global prices, and energy price increases, headline inflation rose to a decade high of 29.2 percent, while the fiscal deficit remained stubbornly high at 7.8 percent of GDP. Despite the government’s efforts, poverty is estimated to have risen by five percentage points, to 39.4 percent (US$3.65/day 2017 PPP) in FY2022/23, reflecting an increase in the number of poor Pakistanis of 12.5 million relative to the year prior (World Bank 2023a). Typhoon Haiyan in the Philippines Typhoon Haiyan (Yolanda) made landfall in the Philippines in November 2013, causing 6,300 fatalities and pushing 2.3 million people below the poverty line. A fifth (20 percent) of the Philippine population lived in affected areas, significant numbers of whom were identified as poor and vulnerable. The typhoon affected 16 million people and damaged or destroyed 1.14 million structures. In the first three months following the disaster, the Department for Social Welfare and Development distributed US$12.5 million in unconditional grants under its 4Ps (Pantawid Pamilyang Pilipino Program) social protection program; other relief efforts focused on temporary shelters, family food packs, and reconstruction of roads and transport (Athawes 2018; Bowen 2016). The total loss and damage was estimated at US$12.9 billion. The impact on economic growth was calculated as a contraction of 0.9 percent in 2013 and a further 0.3 percent in 2014. Inflation increased in the immediate aftermath of the typhoon, reaching 4.1 percent in December 2013. This rise was driven in part by increased prices for liquified petroleum gas, which had jumped by 18.5 percent by January 2014 (World Bank 2017). Source: Division of Finance, Government of Pakistan 2023; Government of Pakistan et al. 2022; Bowen 2016; World Bank 2017; World Bank 2023; Athawes 2018. Note: PPP = purchasing power parity. Given that a central objective of PFM is to (OECD 2014). Meanwhile, the Public Expenditure maintain aggregate fiscal discipline and that the and Financial Accountability (PEFA) Secretariat potential impact of disasters on macroeconomic selected “crisis budgeting,” which looks at how and fiscal stability is significant, central finance PFM systems can respond to disasters and other agencies in vulnerable countries ought to treat emergencies, as the theme for its 2022 global disaster risk as a core concern. This is widely report on PFM (PEFA Secretariat 2022). recognized in the PFM literature. For instance, However, central finance agencies seeking to the International Monetary Fund (IMF) proposes be proactive about disasters confront multiple a three-tier classification for risk disclosure and constraints. For example, budgeting processes analysis and encourages regular monitoring and tend to prioritize spending where execution is discussion of specific fiscal risks such as disasters known and predictable, while disaster expenditures (IMF 2018). The Organisation for Economic Co- by their nature are largely uncertain contingent operation and Development (OECD) also provides liabilities. This tendency is particularly pronounced recommendations and principles for fiscal risk in resource-constrained environments, where it can assessments; principle 9, on budgetary governance, be difficult to justify putting aside funds in reserve requires fiscal risks to be identified and reported in when there are unmet needs in critical sectors like budgetary documents and appropriately managed CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 8 Prosperity Insight health and education. Moreover, central finance A complex landscape of DRF instruments agencies may lack the data to underpin informed has emerged to help countries build financial ex ante action, or may lack the in-house experts resilience to disasters, but these solutions needed to arrange and deliver DRF solutions (such are not always sustained or used to their full as actuaries or financial market specialists). It is capacity. Many instruments—including disaster also the case that as a cross-cutting area, disaster reserve funds that provide rapid liquidity, resilience demands a response that spans multiple contingent credit that pays out upon a predefined sectors and government agencies, and thus poses trigger, and insurance and debt market instruments institutional coordination challenges. Political that transfer a portion of the risk to external risk incentives may also work against proactive disaster holders in return for a fee—are now available from financial planning and risk reduction; elected a wide range of development partners and financial members may experience increased political institutions (see box 2). But DRF instruments are popularity for their response to disaster shocks, often underutilized (for example, they provide but may have little incentive to undertake disaster insufficient coverage), or they are introduced but planning that extends beyond electoral cycles. For not sustained (for example, insurance policies are all these and many other reasons, the management not renewed and reserve funds not replenished). and financing of disaster risk are often not part of Such lapses are particularly likely when elected day-to-day central finance agency functions. officials or other decision-makers change, when Box 2: Sample DRF instruments available to governments Governments generally address risk by transferring some of it (so another party pays to meet the costs of the disaster, usually for a fee) and retaining some the rest. For the portion of risk that they wish to transfer, governments may use the following instruments: • Insurance (indemnity or parametric) for governments, households, farmers; microinsurance • Market-based instruments (e.g., catastrophe bond, catastrophe swap) • Humanitarian aid For the portion of risk that they retain, governments may use the following instruments: • General contingency reserves • Dedicated disaster reserve funds • Contingent credit (e.g., catastrophe deferred draw down options) • Post-disaster borrowing (external and domestic) • Budget reallocations Source: World Bank 2014a. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 9 Prosperity Insight instruments do not pay out for a number of years DRBB, drawing on experience from a variety in a row6, or when instruments do pay out and are of countries across income classifications. It expected to become more expensive (as can be the is intended as a foundational document to build case with insurance). In such cases, when a disaster understanding of the relationship between disaster hits, governments will often step in as the insurer risk and the budget cycle, and it considers a wide of last resort, with the ensuing fiscal pressures range of challenges and elements of public financial described at the start of this section. A lack of management. It also aims to be of practical use for financial planning for disasters can undermine the central finance agencies looking to improve the way adequacy, timeliness, and efficiency of response they prepare for and manage disaster risks, and it and reconstruction efforts, ultimately augmenting responds to common questions they may ask— disaster impacts.7 for example, how much of the budget to put aside for a disaster; how to balance investment in risk Disaster risk–based budgeting (DRBB) is a reduction with investment in disaster response; and response to the tendency of PFM systems not how to balance the need to accelerate emergency to pay adequate attention to disaster risk, and spending with accountability demands. Building the tendency of governments not to embed DRF on some emerging lessons learned, the report also instruments in PFM systems. DRBB encourages provides practical recommendations on how DRBB efforts to embed resilience across the government reforms can be implemented. budget cycle, focusing on general government expenditure measures that reduce disaster risk and The report is structured as follows: the remainder measures that respond to it (such as expenditures of section 1 provides the definition of DRBB and on disaster response and reconstruction). It also discusses some of the binding constraints that it encompasses efforts to increase the frequency seeks to address; section 2 discusses a number and regularity with which DRF instruments are of different DRBB entry points around the budget reviewed and redesigned or renewed, in line with cycle and provides illustrative country case studies; the budget cycle. section 3 offers guidance for governing DRBB; and section 4 provides recommendations and plans for This report provides some policy further, more in-depth, study. recommendations for the implementation of 1.2. Binding constraints on the management of public finances for disaster risk purposes DRBB tries to address two challenges. The due attention to how decisions might affect the first challenge is that PFM systems do not pay risk of disasters, and without sufficient financial adequate attention to disaster risk, despite the planning for different disaster scenarios. The global potential negative impacts of disasters on public shortfall in expenditures on disaster risk reduction finances. Spending decisions are made without (DRR) and climate adaptation, despite their well- 6. See for example the independent evaluation of the African Risk Capacity regional risk pool, which found that staffing changes, election cycles, and past payouts all impact policy renewals. The evaluation notes constant pressure within domestic budgets to reduce premium amounts and therefore coverage (OPM 2022). 7. An examination of the impact of the FONDEN disaster fund in Mexico found that when disaster costs were covered by transfers from the fund, local economic recovery was accelerated by up to two years (del Valle, de Janvry, and Sadoulet 2020). CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 10 Prosperity Insight documented benefits in terms of lives saved and meaningfully be prepared for. This view shifts losses avoided, is one consequence of this failure.8 political emphasis from preparation to coping This issue is particularly acute in low-income mechanisms, in turn minimizing opportunities to contexts: disaster impacts on the economies of more comprehensively prepare for and mitigate least-developed countries measured as a share of the fiscal impacts of disasters. gross domestic product (GDP) are around 10 times • Related to this, an inherent preference in worse than impacts on the economies of the richest budgeting systems to allocate scarce resources countries; and yet less than two-thirds of least- toward known and confirmed expenditures over developed countries have DRR strategies, and contingent liabilities (because if contingencies less than half report having early warning systems do not materialize, the funds could be deemed (UNDRR 2022). Moreover, practices during the wasted). This issue is particularly acute in COVID-19 pandemic—such as widespread reliance economies with limited fiscal space. on multiple supplementary budgets and efforts to fast-track the procurement of emergency supplies • The perceived (and often real) complexity of while also avoiding fraud—are evidence of limited modeling risk and designing DRF solutions, which financial planning for emergencies.9 may require specialist expertise (for example, in actuarial modeling or financial markets) not The second challenge is that DRF instruments necessarily found in all central finance agencies. are often underutilized or not always sustained This complexity is in contrast to the comparative because the decision-making around them is not ease of access to post-disaster borrowing (at sufficiently embedded in budgeting processes. least for economies at low or moderate risk of There are multiple examples of governments that debt distress12) or budget reallocations.13 have decided not to renew disaster insurance because it did not pay out for a number of years in • The political visibility and publicity gained from a row, without regard to future risk projections.10 public acts of disaster response—such as the Similarly, there are multiple examples of (re)construction of tangible public assets—as governments underfunding disaster funds, even opposed to preparedness or risk reduction though these are routinely exhausted early in the (Clarke and Dercon 2016), which can reduce fiscal year.11 incentives to spend on early action or financial preparedness. Several binding constraints lead to this dual challenge. While these will vary depending on • The lowering of budget implementation and context, some of the most prominent or reoccurring monitoring standards during disaster response constraints include the following: periods, which may occur given the urgency of the situation and the focus on spending more, • The perception that disasters are “acts of God”— and more quickly. that is, they are unpredictable, and cannot 8. See for example International Science Council (2023); UNEP (2023). 9. See for example CABRI (2021a, 2021b). 10. See for example the case of Kenya and African Risk Capacity insurance (OPM 2022). 11. One relevant example is offered by the Philippine Quick Response Fund, which was designed to meet immediate disaster response costs but which was exhausted and replenished every year covered in a recent Public Expenditure Review (World Bank 2020). Another example is provided by the Government of Ethiopia’s contingency budget, which is used for disasters and other unplanned expenditures, and is routinely exhausted in the second quarter of the financial year (Ministry of Finance 2023). 12. Fisera, Horvath, and Melecky (2023) show that disasters increase the cost of debt financing for middle- and low-income countries, but decrease the cost for high-income countries. The disparities between countries will be further explored in subsequent papers. 13. See an example of COVID-19-related budget reallocations in World Bank (2021a). CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 11 Prosperity Insight © World Bank Photo Collections. Parched soil by the White Nile. Khartoum, Sudan. Arne Hoel / Photo ID : AH-SD2161869 World Bank. Further permission required for reuse. • The focus of efforts to strengthen ex ante DRF risks and arrangement of DRF does not fall on the provision of adequate disaster funding, under a single institution but is rather a cross- with less emphasis on how those funds will be sectoral responsibility. This creates challenges executed; and inefficiencies in downstream PFM associated with interagency and intra-agency more broadly. coordination, financial tracking, monitoring, and accountability. • Political volatility, or short election cycles, which may reduce the focus on efforts to promote Figure 1 further details some of the factors longer-term resilience. contributing to these binding constraints, which (as detailed in the rest of this report) DRBB aims • The fact that the management of disaster to address. Figure 1: Some binding constraints inhibiting disaster-responsive PFM Problem statement Disasters affect economies, people, Cause of problem statement and fiscal stability; disaster impact is growing Binding constraints Contributing factors Inadequate (i.e., insufficient, ineffective, or delayed) financing Other causes not explored: augments disaster impacts across the DRM cycle, fiscal space, cultural, humanitarian from preparedness to response and reconstruction aid flow, administrative / HR DRF solutions PFM systems are not configured to proactively address are not disaster risk (do not proactively prioritize resources; sustained future returns have lower priority than immediate returns) Focus is on Cultural beliefs: More political capital Disaster expenditure is General relaxation of expectations "money in" disasters are Ex post accrues from disaster DRF solutions uncertain and unpredictable DRF is cross- and standards during disaster periods more than acts of God / financing is response than are complex and demands cutting issue and absence of consequences "money out" cannot be easier to access from preparation a longer-term outlook for poor performance (expenditure prepared for or risk reduction efficiency) DRM is not considered Education Donor aid reduces Other institutions' Political volatility, Pressure to spend quickly exceeds a regular area to look at incentives for ex actions and short-term pressure to spend well ante preparedness spending lack election cycles transparency Lack of data and evidence Decision-making authority devolved prevent informed decision-making Budget reallocations Response and to lower levels with less oversight considered cost- Institutional reconstruction free and are easy complexity funding is more Specialist expertise is required for to access visible than Business processes physically putting in place DRF instruments/ preparedness disrupted (e.g., digital financial resourcing No institutional or risk reduction management and reporting systems) Borrowing is lead on DRF available/ long-term costs Less familiarity with/guidance on not well understood emergency procedures Source: World Bank. Produced using Whimsical. Prosperity Insight CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS Note:DRF = disaster risk finance; DRM = disaster risk management; HR = human resources; PFM = public financial management. 12 CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 13 Prosperity Insight © provectors / Adobe stock # 369000893. Further permission required for reuse. 2. DISASTER RISK–BASED BUDGETING ENTRY POINTS DRBB refers to the consideration of disaster risk could occur to a system, society or a community throughout the budget cycle, where: in a specific period of time, determined probabilistically as a function of haz ard, exposure, • Disaster risk refers to “the potential loss of life, vulnerability and capacity” (UNDRR, n.d.). injury, or destroyed or damaged assets which CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 14 Prosperity Insight • The budget cycle refers to the steps taken by This review seeks to cover the breadth of binding government to ensure that public expenditure constraints and entry points; follow-up studies are is well planned, executed, and accounted for. expected to consider these issues in more depth. The exact steps are defined by a country’s legal As figure 2 implies, there are potential entry points framework, but typically include processes for in all stages of budgeting, which could be applied strategic planning, budget formulation, budget at the national, subnational, or sectoral level. These approval, execution, monitoring and accounting, span upstream PFM processes, concerned in large and finally audit and oversight. part with the adequacy of financing for disasters, as well as downstream PFM processes, which deal DRBB is an approach to budgeting in which with how effectively those funds are executed. It central finance agencies calibrate their PFM is worth noting that these entry points do not only systems to proactively manage disaster risk and serve the disaster risk agenda; they also could to increase the sustainability of DRF options be used to promote any cross-cutting priority in and solutions. It aims to address the binding the core budget process that would benefit from constraints highlighted in section 1.2. The rest of a mainstreaming approach. The identification of this section lays out some potential entry points DRBB entry points draws from lessons learned in for integrating disaster risk considerations into budgeting for climate change, poverty, nutrition, the different phases of a generic budget cycle.14 gender, and other issues.15 Figure 2: Entry points for the consideration of disaster risk in the budget cycle •Policy review tools (PERs, DRF Policy Strategic •Costing DRM/DRF strategies and diagnostics, DRR- PFM toolkit) review planning cascading into sector plans •Embedding DRF strategy implementation into the budget process •Risk-informed public investment and •Comprehensive disaster audits Audit and asset management (financial & performance) evaluation •Real-time audits •PAC scrutiny Budget •Quantifying disaster contingent liabilities •In-depth evaluations preparation & integrating them into forecasts •Including disaster risk in the call circular •Providing financial incentives for •Disaster budget tagging Accounting cross-sector collaboration on DRM •Post-disaster controls and monitoring •Budgeting for DRF instruments (reserve funds, insurance) •Risk-informed reallocations Budget Budget •Developing legislative capacity on DRF •Emergency procurement execution approval •Strengthening emergency budget •Streamlining execution approvals processes for response Source: World Bank. Note: DRF = disaster risk finance; DRM = disaster risk management; PAC = public accounts committee. 14. The generic budget cycle framework is drawn from World Bank (1998). 15. See for example Simson (2012); Budlender (2014); World Bank (2021b); Piatti-Fünfkirchen et al. (2023). CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 15 Prosperity Insight 2.1. Strategic planning The strategic planning phase of the budget cycle While numerous governments have developed DRM is when the government defines its goals and and DRF strategies, a recurring challenge is ensuring objectives in line with policy priorities, and sets out that they are adequately reflected in strategic plans how it intends to achieve these goals and objectives at central, sectoral, and subnational levels (see with a view to organizing the delivery of public box 3 for the example of Ethiopia). Disaster risk services over time (typically a three- to five-year management is often seen as a stand-alone policy period). Plans at national, sectoral, and subnational area, much like health or education, rather than a levels should be consistent with each other. Linking cross-cutting concern that should be cascaded into the financing of plans to overall fiscal forecasts policy and planning cycles across multiple sectors. and to annual budgets helps ensure the plans are Insufficient linkage to budgets leaves DRM and DRF affordable and can be implemented. strategies ungrounded in fiscal realities, unlikely to be implemented, and quickly forgotten. Integrating disaster risk concerns into strategic planning is important because it provides clarity To maximize their impact, DRM and DRF in the disaster risk outlook and in the shared strategies should be costed and mainstreamed priorities for resilience building. It also provides an into operational plans across the machinery important opportunity to ensure that risk reduction of government. In practice, this means that the and preparedness are given due importance and key elements of DRM policies are integrated into not subordinated to the more visible response and corresponding long-term and annual plans at central reconstruction initiatives. In turn, proper attention and sectoral levels; that the costs of implementing to risk reduction and preparedness helps to tackle plans are documented in sector budgets; and perceptions that disasters cannot be prepared for. that funding sources are accounted for in sector budgets. The process of mainstreaming plans likely Governments’ strategic commitments, goals, and requires DRM and DRF to be led from the center priorities in disaster risk are often part of DRM of government, with political commitment and strategies or plans (which tackle disaster risk technical expertise from the central finance agency reduction and preparedness, as well as response to ensure that the budget itself reflects DRM and and resilient reconstruction). DRF strategies detail DRF plans. It also requires awareness raising and how the costs of disaster will be met; among capacity building among government departments other things, they articulate the government’s to help them understand DRM strategic priorities risk appetite (how much of the risk will be paid and integrate them into their own sectoral agendas. for from government sources and how much will Finally, it requires transparency around external be transferred to insurance markets, the private financing sources, including donor financing for sector, and households). Setting out a government’s DRM and DRF initiatives. commitment to disaster risk financing and management can support other actors in making more focused and consistent decisions. For example, in Switzerland the government has set out requirements at national and cantonal (subnational) level for the provision and uptake of insurance for a wide range of natural hazards (OECD 2015). CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 16 Prosperity Insight Box 3: Integrating DRM plans in Ethiopia Ethiopia’s geographic vulnerabilities, coupled with (especially rural) poverty, mean that disasters can have a significant impact, locally and nationally. Among the most prominent hazards Ethiopia faces are drought, flood, locusts, conflict, and epidemics, all of which are made worse by climate change. The government has drawn up two key strategies to tackle climate change and disaster risk: the Climate Resilient Green Economy Strategy (2011) and the National Disaster Risk Management Policy (2013). Both focus on disaster risk in the agriculture, water irrigation, and energy sectors. In devising its 10-year development plan (2021–30), which would in turn direct medium-term sector plans, the government wanted to ensure alignment with these policies. A review of the draft 10-year development plan (funded with support from the UK) showed that the plan did not integrate disaster risk considerations or adequately reflect the DRM policy. The review also noted that though the climate strategy was reflected in the plan, the skills and expertise to implement the plan were not in place. In response, the Planning and Development Commission revised the pillars of the strategy to include disaster risk, and checklists were provided to sectors to ensure relevant initiatives were included. In 2023, the DRM policy was revised and a DRF strategy was published alongside it, which indicates that the policy will be financed through a mix of existing and new risk financing instruments. Source: Tesso 2019; Ministry of Finance 2023. For a country that has a DRF strategy in place, it deductibles is limited to NZ$20 million) in response is important to ensure that the DRF strategy is to the statutory requirement to prepare for a 1-in- also linked to the annual budget process, which 1,000-year event. Beyond these guidelines, annual is a key mechanism for its implementation. For decisions are made concerning the actual amount example, the start of the budget process could be of asset insurance to take on (and subsequently an opportunity to refresh decisions about what level the amount of contingent credit needed to cover of risk transfer and risk retention the government remaining loses, and the budget required for can afford, as well as how much it needs to allocate premiums and deductibles), in line with the for insurance premiums, reserve funds and other council’s budget preparation process. In 2022, the contingencies, and investments in risk reduction combination of inflationary pressures (driving up and preparedness. In New Zealand’s Wellington the valuation of assets) with the release of a new City, the 2015 Insurance Management Strategy seismic hazard model (reflecting increased risks) dictates the instruments the city council can use resulted in a steep jump in the expected losses, in to meet earthquake costs (these include asset turn leading to a review of the insurance strategy, insurance, contingent credit, cost sharing with which is currently ongoing.16 the national government, and council budgets). It Public investment and asset management receive also seeks to set internal limits to some of those particular attention in DRBB because public assets instruments (for example, the budget for insurance 16. Based on Wellington City Council (2015); World Bank team interviews with Wellington City Council staff, January 2024. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 17 Prosperity Insight © World Bank Photo Collections. Sichuan Province after 2008 earthquake. China. Wu Zhiyi / Photo ID : WZY-CN9902 World Bank. Further permission required for reuse. are so significantly exposed. For some haz ards (such of losses, for example through public asset insurance as floods, earthquakes, and typhoons), damage (discussed more in the next subsection); such to publicly owned assets usually constitutes a insurance requires an understanding of the value significant portion of overall disaster expenses, one and vulnerability of assets, meaning a public asset that imposes a long-lasting financial burden on the registry is usually a prerequisite for any public asset budget. Additionally, harm to crucial infrastructure insurance program. amplifies the economic and social consequences of The strategic planning process can be used to the disaster by impeding access to vital services. embed risk considerations in public investment Risk-informed public investment and asset plans; for example, line agencies can be required to management seeks to limit these costs and knock- screen new investments’ vulnerability and exposure on consequences, by embedding disaster risk to climate and disaster risks, detail how new concerns in asset life-cycle management. It may investments adhere to risk reduction requirements, include such initiatives as screening for and mitigating and ensure that asset maintenance and disposal disaster risks during project design and development, costs are properly accounted for in sector budgets. registering acquired assets and indicating their The budget process can be a useful tool for making vulnerability to disaster hazards, and understanding public investment and asset management a center- the economic implications of disruptions to give a led, all-of-government approach, one that gives the complete picture of the government’s exposure. It government a holistic picture of its stock and flow can also include risk reduction measures, such as of assets, considering their exposure, sensitivity, risk-informed asset acquisition, design, and building and adaptive capacity. As the experience from New codes and regulations; diversification and business Zealand underscores (box 4), a centralized approach continuity planning to minimize disruptions; and asset can bring economies of scale for risk reduction and maintenance and disposal. Funding of maintenance financial protection and can enable more strategic is also important to improve assets’ disaster decision-making. resilience. Risk-informed public asset management may also promote efforts to manage any residual risk CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 18 Prosperity Insight Box 4: New Zealand’s evolving approach to public asset management In New Zealand, the management of assets is an agency-level responsibility, with minimal central oversight and no central register. The Canterbury earthquakes of 2011 caused damage estimated at around NZ$40 billion, or 20 percent of GDP; but they had only moderate national macroeconomic impact, in large part because of high levels of private and public insurance coverage relative to other high-income countries (the insurance liability totaled just over NZ$32 billion). That said, significant underinsurance of public assets was reported. Since the hardening of insurance markets, agencies have come together in clusters to collectively insure assets (such as district health boards coming together to insure hospitals). Some agencies have opted to self-insure assets through funds created via proactive budget allocations and/or dedicated user levies/taxes; for example, the New Zealand Transport Agency has established a levy-based contingency fund for damage to roads, bridges, and tunnels. Behind these pockets of collective action, there is a growing consensus that a center-led approach could bring significant opportunities, and the government is considering options for a collective approach to the financial protection of public assets. By pooling risk for all of the national government under a single program, it is posited that the government could achieve economies of scale in premium prices and could help minimize pricing volatility. In addition, a consolidated approach to local and international markets would help ensure that the government is strategic in its use of limited insurer capacity. Finally, making use of a holistic view of the national risk profile would enable informed decision-making on the financial management of risks, including how much to retain on government balance sheets and how much to transfer. New Zealand already has a fairly centralized approach to insuring private (residential) property against disasters, which it does through the government-backed Earthquake Commission. Source: World Bank 2021c; and Antich et al. 2023. As a first step, countries looking to integrate continued relevance and application. A first step in disaster risk concerns into their strategic planning integrating disaster risk considerations into asset should ensure DRM strategies are costed and that management would be registering public assets and key initiatives are cascaded into sector plans and indicating their vulnerability to the most prominent budgets. Those with a DRF strategy should revisit disaster risks the country faces; as noted, this is a it during the annual budget process to ensure its prerequisite for a public asset insurance program. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 19 Prosperity Insight 2.2. Budget preparation Budget preparation typically starts with forecasting assets and liabilities (due to public infrastructure revenue and expenditures and setting macroeconomic damage, as well as the potential rise in interest and fiscal targets. Priority fiscal risks may be modeled paid on debt, in cases where disaster leads to an to see how these impact the paths forecasted. This exchange depreciation). Contingent liabilities can modeling can include disaster risks to make their be modeled for a range of disaster events of varying impacts more widely expected. severities. However, data needs for comprehensive probabilistic modeling are substantial. A growing The central finance agency, typically in consultation number of countries are routinely meeting this with the cabinet, defines expenditure limits for line challenge, including Colombia (see box 5); but many ministries using budget circular guidelines. For cross- countries cannot regularly update such models or sectoral concerns, such as disaster resilience, this even afford to purchase them. A simpler approach is particularly vital, as the budget guidelines can starts by looking only at direct costs, drawing on establish shared priorities that apply to all spending historical disaster expenditures where available agencies. Ministries then draft budgets, carry out (World Bank 2021c; OECD and World Bank 2019). consultations, and submit budgets for bilateral Given that vulnerability and resilience to climate hearings with the central finance agency. Using the change can affect the cost of government borrowing government-wide process of budget preparation so (Cevik and Jalles 2022), quantifying and introducing that all relevant agencies consider and collaborate proactive budgeting for contingent liabilities could on DRM helps address institutional coordination help protect sovereign ratings from the adverse challenges. impact of disasters.18 A foundational step in the integration of disaster Once the disaster contingent liabilities are identified risk into budget preparation is to ensure that the and quantified, the estimates should feed into potential costs of disasters are known, along with medium-term forecasting exercises to determine the probability that those costs will be incurred whether disaster impacts constitute a significant in any given year. Identifying and quantifying fiscal risk (that is, whether they cause significant disaster contingent liabilities is key: this step can deviations from the central forecast of key macro- use historical government expenditure and revenue fiscal variables, including debt and the fiscal balance). trends and a qualitative review of cost sharing to Such an exercise, conducted by central government, arrive at an assessment of direct fiscal impacts on provides a central finance agency with a rudimentary revenues and expenditures along with (a narrow idea of the fiscal space and/or reserves required set of) associated contingent liabilities triggered by to respond to shocks without pushing debt toward disasters. Over time, this effort could evolve into unsustainable levels. Usually, this function is done in a comprehensive balance sheet approach17, one house, although as the example of the UK shows (see that also takes into account indirect fiscal costs box 5), fiscal forecasting and risk analysis can also be (such as the impact of a credit rating downgrade on undertaken by official independent fiscal watchdog borrowing costs) and the impact of the value of public institutions. 17. Central finance agencies are progressively shifting from a focus on fiscal deficit and surplus to a more comprehensive balance sheet approach, which adds details of assets and liabilities and considers other impacts such as debt and interest rates. This enables governments to take a longer-term view of fiscal management and to consider more complex and longer-term impacts of public policies on public finances. This approach is not covered in this report, which focuses on general government; but for a discussion of sovereign asset and liability management in relation to disasters, see World Bank (2021c). 18. More research on the implications of these measures for countries that enact them would be valuable. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 20 Prosperity Insight Box 5: Quantifying disaster-related contingent liabilities in Colombia, the UK, and the EU Colombia’s diverse topography exposes it to various natural hazards, including earthquakes, landslides, volcanic activity, cyclones, floods, and tsunamis. The Risk Deputy Directorate of the Ministry of Finance and Public Credit (MHCP) works to reduce Colombia’s fiscal vulnerability by monitoring the risks that government assets and liabilities are exposed to. Colombia’s annual Medium-Term Fiscal Framework (MTFF) routinely includes contingent liabilities related to natural disasters, which have been quantified using scenarios for climate- and other hazard-induced disasters. According to the 2022 MTFF, 3.9 percent of Colombia’s GDP could be lost due to the impact of events related to climate change such as floods (1 percent) and droughts (0.3 percent), as well as other natural phenomena such as earthquakes (2.7 percent). These figures show that disaster-related contingent liabilities pose a significant fiscal risk. A revised methodology for quantifying these contingent liabilities at the national level was recently approved by the MHCP. The revised methodology seeks to provide more accurate estimates based on probabilistic techniques and will quantify the potential contingent liabilities due to disasters related to (i) the reconstruction of infrastructure and other public assets, and (ii) the expenses incurred during the emergency and rehabilitation phases. The capital district of Bogotá is in the process of adapting this revised methodology to quantify its contingent liabilities for inclusion in its own MTFF. A better quantification of contingent liabilities due to disasters will allow estimation of financing gaps with respect to financial instruments currently used (e.g., National Disaster Fund, public asset and agriculture insurance, contingent loans), and will allow policy makers to reduce fiscal vulnerability by expanding or reducing these instruments, and by contracting or implementing new instruments (e.g., catastrophe bond, parametric insurance). In the UK, medium- and long-term forecasting is outsourced to the independent Office of Budget Responsibility (OBR). Its report on fiscal risks and sustainability presents long-term fiscal projections and analysis of major potential fiscal risks. These major risks change with each publication and are selected based on what is considered tractable and of high potential impact; in 2021, they included the impact of climate change, specifically more severe and frequent flooding and heat waves, on the UK’s long-term outlook. Drawing on existing models from the Bank of England’s Network for Greening the Financial System, overlaid with the government’s spending plans as reported to the Climate Change Commission, the report modeled the fiscal consequences of climate change under different temperature scenarios, including the impact of the government’s stated debt targets. The Treasury is required by law to respond to OBR’s fiscal risk analysis, and it uses the analysis to engage with line departments on risk management. Within the European Union (EU), discussions are currently ongoing to potentially amend the EU’s 2011 directive on budgetary frameworks of the member states. The amendment calls for the publication of disaster- and climate-related contingent liabilities, and for the assessment and publication of disaster- and climate- related losses and fiscal costs, as well as the instruments used to mitigate or cover them. This would expand what is already current practice in some EU member states. For example, in Georgia the fiscal risk statement provides a historical perspective on financial losses and numbers of people affected by disaster, offering a forward-looking assessment of annual expected damage at different periods, as well as an overview of budgetary DRF instruments. Source: Barragan 2021 OECD and World Bank 2021; OBR 2021; World Bank and European Commission 2024. Ensuring that disaster-related fiscal risks are visible disaster risk can be flagged in the budget call and clear allows the government to balance short- circular as a priority for agencies to include in their term demands with long-term resilience, make submissions, and sources of information on the tough choices and trade-offs with finite resources, components of disaster risk (i.e., hazard, exposure, and coordinate action across sectors. For example, vulnerability, and capacity) can be highlighted to CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 21 Prosperity Insight guide spending plans. The budget preparation disaster resilience budgets; in the Philippines, process can also be configured to provide financial for example, additional funds are earmarked for a incentives for interagency collaboration on number of cross-sectoral budget programs (box 6). Box 6: Cross-sectoral program budgeting in the Philippines Since 2012, the Philippines has been operating what it terms Program Convergence Budgeting (PCB). This reform was introduced to facilitate and incentivize coordination between agencies on priority interagency programs. Agencies are required to collaboratively identify, integrate, budget for, and monitor activities relating to a number of cross-sectoral areas. Where previously departments found it difficult to get Department of Budget Management approval for line items relating to interventions that were the core mandate of another agency, funds are now earmarked for convergence programs, and any contributing agency can apply for them. The Risk Resiliency Program brings together 31 agencies under the leadership of the Department of Environment and Natural Resources. Source: Department of Budget Management, forthcoming. It is also important that during the preparation of approaches seek to link disaster fund allocations the annual budget, sufficient funding is provided to expected needs; these are informed by a model for the DRF instruments, including disaster reserve of expected losses and a risk-layering strategy funds and insurance instruments, that are in that defines the type and severity of a disaster the place to cover a portion of disaster costs. Meeting reserve fund can be used for (typically the lower this requirement is often a political economy end of severity events, i.e., those with a 1-in-5-year challenge, but still requires robust technical inputs return period or less). and evidence. This would include determining an Adequate budgetary provisions for disaster appropriate and evidence-based annual allocation insurance would also be important at this stage for a disaster reserve fund; the allocation should (including sovereign insurance, agricultural be sufficient to enable the government to mount an insurance, or insurance for public assets). These effective response, while avoiding the risk of having provisions need to consider several aspects: excessive funds lie idle (with the opportunity cost that that implies). Different countries have adopted • Budgeting for insurance premium and deciding differing approaches for funding disaster reserves, on insurance cover. The budget needs to cover but most mandate that a proportion of government the cost of the annual premium alongside an expenditure, revenues, or GDP be allocated to the estimated cost of administration (including fund (international experience suggests reserving broker fees, for example). The amount assigned up to around 3 percent of spending, depending on to insurance coverage can be fixed in advance, the extent of vulnerability) (Cebotari et al. 2009; and the coverage sought should be as cost- Cevik and Huang 2018). Other more sophisticated effective as possible based on the available CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 22 Prosperity Insight funds. Alternatively, budgets can be set to arrangements with state governments, in which cover optimal coverage after the initial pricing up to half the costs of reconstructing local assets and structuring stages. In practice deciding on were covered for a first claim, but successively coverage likely requires some back-and-forth less was covered for repeat claims where the between the central finance agency, policy states had not taken out their own insurance holder, broker, and the market, which needs to (World Bank 2012). be timed to align with the budget preparation • Sustainability of budgets for insurance over calendar. Importantly, the central finance agency the medium term. The price of insurance will needs to be clear on the policy objectives of somewhat vary year to year, but allocating an insurance—in particular the severity of events the indicative amount for premiums on a multiyear insurance is designed to cover (usually defined basis—for example by including them as a line in in the risk-layering strategy). Otherwise there is the medium-term expenditure framework—can a tendency for budget departments to negotiate enhance sustainability of insurance instruments down the budgets for premium costs, which in and offer some longer-term predictability to the turns reduces the amount of coverage that can agencies being insured. be bought and might mean that insurance fails to meet its strategic objectives. There are many ways in which risk can be integrated into budget preparation processes. As a first step, • Allocation of the budget and ownership of a government might want to start modeling the insurance. Consideration also needs to be given fiscal impacts of the most significant disaster to how that cost will be allocated in the budget. risks (drawing from historical expenditures where A single centralized appropriation is one option; probabilistic modeling is not yet available). It can alternatively, participating government agencies then use this information to consider whether may be required to contribute a share (based spending on risk reduction and preparation needs to either on a flat rate per unit insured or on the be better incentivized (which can be done through level of expected risk of each agency) (Antich et the call circular and additional funding incentives) al. 2023). and whether instruments for disaster response are • Creating the right incentives. In creating adequate for needs. insurance programs or purchasing insurance, governments may create a moral hazard problem where these programs inadvertently reduce incentives for insured people to undertake adequate risk reduction and preparedness. Favorable incentives need to be proactively created. For example, Mexico’s FONDEN, a budget account that provided resources for the rehabilitation and reconstruction of uninsured or underinsured public assets, was structured to incentivize agency-level risk transfer: the share of reconstruction costs covered by the fund tapered off for second and third claims in cases where agency assets were not insured by the agency. FONDEN also established cost-sharing CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 23 Prosperity Insight 2.3. Budget approval The budget approval process typically consists of the either bilateral or multilateral (where opportunities finalized budget being presented to the legislature, arise). Such events could enhance learning and scrutinized by a budget committee, and discussed in promote sharing of experience at local as well as a series of hearings, which may involve academic or national levels. In 2024, the World Bank supported civil society participation. After legislative approval, the Philippine Department of Budget Management the budget becomes legally binding. in delivering an introductory course to research and committee staff from Congress, including the Senate. Legislative awareness of, engagement with, and This training aimed to increase exposure to and oversight of planned disaster spending enables understanding of key DRF and DRBB concepts and lawmakers to generate political capital from sources, as well as explore how support to elected investments in risk reduction, preparedness, representatives could integrate this knowledge and and sound financial planning for disaster shocks information. (which would otherwise more routinely be derived from response measures). Because disasters can For medium-term impact, some legislatures have significantly impact government spending, they sought to strengthen engagement with and learning sometimes require the legislature to further approve from academic communities, which could be helpful amended or supplementary budgets. Given the in providing specialized guidance and expertise to urgent nature of disaster response, stakeholders scrutinize policies and budgets. The UK Parliament in the legislative process (legislators, civil society, has established a small Knowledge Exchange Unit academic experts, and citizens, among others) will that facilitates engagement between researchers likely not have adequate time to properly scrutinize and the Parliament and that supports researchers in budget changes. To a certain extent, the integration of engaging with policy and scrutiny processes. Short- DRM and DRF concerns into strategic plans and into term secondments have been established, where the preparation of the original annual budget should academics are attached to relevant committees to minimize budgetary changes following an emergency. provide direct guidance. The UK’s Parliamentary However, strengthened scrutiny in the annual budget Office of Science and Technology (POST) team has process should be complemented by strengthened established secondments (fellowships) sponsored by procedures for scrutiny of supplemental spending professional associations. These initiatives support requests during disaster response. the use of evidence and help bring in expertise on DRF without significant long-term cost implications. Legislatures are unlikely to have in-house expertise on DRF, particularly as a resource that can stretch While countries often have procedures in place to across the budget scrutiny process and be available enable swift budget approvals when a disaster occurs for sectoral committees and broader groups of (such as streamlined approval for supplementary elected representatives. Legislatures often operate budgets), an accelerated timeline for scrutiny and with significant budget constraints and are thus approval can mean crucial perspectives and evidence limited in how much specialized expertise they can are missed, leading to poorly designed disaster hold in house. However, there are ways in which to responses. Disaster responses also tend to be develop legislative capacity for scrutiny of DRF. In strongly informed by political considerations, which the short term, existing representatives and staff may not always align with evidence. Establishing can seek to engage in peer learning and exchange, and strengthening preparatory processes for CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 24 Prosperity Insight emergency budget approvals could counter this Parliament to provide the government with the risk by supporting evidence-informed responses authority to incur expenses and capital expenditure and ensuring that good standards of response and before passing the Appropriation Act and to make accountability are maintained, including (where capital injections before authorization. However, in feasible) publicly available information and decision- March 2020, the Parliament passed a third Imprest making. Many countries have emergency budget Supply Act for NZ$52 billion (almost US$31 billion), approval processes in place, but when faced with and for 2020/21 the approved second imprest the scale and duration of the COVID-19 pandemic, Supply Act amounted to NZ$56.5 billion (almost a number of countries had to improvise procedures US$33.5 billion), a significant increase from the because their emergency measures were not approved second Imprest Supply Act for 2018/19 sufficient (OECD 2020). For example, New Zealand’s of NZ$16.3 billion.19 The imprest supply process is Parliament, the Pāremata Aotearoa, improvised by not usually subject to detailed ex ante scrutiny but making use of the imprest supply process to pass is generally debated only briefly in Parliament. The emergency funding for pandemic response. This UK Parliament faced similar challenges during the process is the statutory mechanism that allows COVID-19 pandemic (see box 7). Box 7: Approval of COVID-19 spending in the UK Parliament The scale and impact of the COVID-19 pandemic was not anticipated in a number of countries, including the UK and Australia. In 2020/21 alone, UK government spending is estimated to have been £179 billion higher than anticipated. The UK Contingencies Fund Act allows for contingency spending of up to 2 percent of the previous year’s cash spending. However, in response to the scale of the COVID-19 pandemic impact, the UK Parliament approved a procedure to increase the share to 50 percent. Some Members of Parliament felt the approval process was unduly rushed. In making this case, Sir Edward Davey, an opposition Member of Parliament, paraphrased a pamphlet he had written on budget scrutiny: “This House does not really have sovereignty over the Budget. We look at these Bills when they come along and we nod them through, but our processes of examining draft budgets and estimates are shocking” (UK Parliament 2020). The approvals process for the Coronavirus Act 2020 was also accelerated; it condensed what is normally an 11-week process into just four days. The UK Parliament noted that members could not scrutinize the bill in detail in that short time frame. Moreover, the Civil Contingencies Act 2004, which was established to enable the UK government to respond to civil emergencies, was not used. The government argued that the act was not suitable because it was established to respond to sudden events rather than the gradual emergence of an epidemic. In 2023 the UK Parliament passed the Procurement Act (to come into force in October 2024). This legislation draws on learning from the pandemic and contains clauses specifically focused on emergency procurement. The aim is to minimize direct awards of contracts in response to an emergency and instead condense the competitive process, thus ensuring timely delivery of goods and services while retaining transparency. Source: Brien and Keep 2023; OECD 2020; UK Parliament 2020; Public Administration Committee 2020; UK Cabinet Office 2023. 19. Based on Controller and Auditor General (2020); World Bank team interviews with New Zealand House of Representatives staff member, November 2023. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 25 Prosperity Insight Lessons from the COVID-19 pandemic could analysis could be uneven. This limitation is particularly inform a process of establishing or strengthening important when considering the complexity of some ex ante measures that reinforce Parliament’s role arrangements that legislators would have to consider, in scrutinizing the budget as part of the approvals for example government use of loans or guarantees. process in disaster contexts. More research in As a first step towards the adoption of DRBB in budget this area that addressed some key issues could scrutiny processes, legislatures should take an be valuable. In particular, the provision of timely evidence-informed approach to devising procedures evidence and analysis is critical. The OECD (2020) for budget scrutiny in an emergency. They may decide noted that, due to the speed of the disaster response to include additional budget for the provision of swift during the COVID-19 pandemic, some legislatures and specialized analysis; require the government to reduced or delayed the requirement to have analysis provide data and analysis for decision-making; or accompanying the budget. Moreover, legislators did codify procedures for remote committee meetings not always have access to high-quality, independent and the delivery of awareness-raising activities by analysis. Some legislatures relied on external think governments and other relevant institutions. tanks for information, but provision of and access to 2.4. Budget execution This stage of the budget cycle involves implementing becomes the next challenge. By establishing systems government activities. The budget execution process and processes before a disaster occurs to promote begins with the release of funds by the central finance evidence-informed decisions on how and where agency in accordance with the legislature-approved to deliver funding, it is possible to tackle common budget. Line ministries then allocate funds to challenges in disaster budget execution, including spending units, enabling the initiation of procurement challenges related to uncertain funding amounts processes or issuance of payment orders. and routes and to maintaining standards in spending quality, transparency, and accountability. While these processes may be accelerated in periods of disasters, robust controls help maintain high Following disasters, governments often rely on standards of accountability. Budget revisions can budget reallocations to fund response efforts. occur through virements (transfers between budget Among other advantages, this approach offers swift items) and supplementary budgets (for exceptional access to funds, especially where transfers are changes or performance management purposes). In within virement parameters. Governments typically a disaster these are very commonplace, but efforts have legislation in place to allow for some limited can be introduced to ensure their costs are fully reallocations through virements and supplementary appreciated. Disaster response can often require an appropriations. However, disasters often require increase in public spending in areas that were not significant budget reallocations that may exceed anticipated. This increase can be met in a number stated limits, or require a higher volume of changes of ways, such as through domestic contingency in a shorter time period than is usual. In particular, funding, insurance schemes, budget reallocations, budget lines associated with social protection, health or international funding. Given the unexpected services, debris clearing, and asset reconstruction nature of disasters, the execution of this funding are likely candidates for additional funding. There CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 26 Prosperity Insight may also be reduced requirements from other parts as a cost-free financing instrument, but postponing of the budget due to disruption or restrictions arising or canceling viable government spending incurs an from the emergency (for example, in South Africa, opportunity cost in terms of forgone returns. Such tourism activities shut down during the height of the costs are not routinely factored in by governments, pandemic, leading the government to cancel tourism and evidence from Albania (see box 8) suggests budgets). Budget reallocations have often been seen these could be significant. Box 8: The opportunity cost of budget reallocations in Albania The Government of Albania used virements, normative budgets (supplementary budgets), public sector borrowing, and its Council of Ministers Reserve Fund to respond to the increased budget pressures brought on by the COVID-19 pandemic response. By creating a counterfactual of what spending outturns would have been in the absence of the shock, research from the World Bank estimated that total budget reallocations in 2020 amounted to lek 17.7 billion (US$163 million), equivalent to 93 percent of total COVID-19 expenditure that year, or 5 percent of total expenditure. Of the lek 17.7 billion underspent, the study estimated that lek 7.8 billion was nonviable spending (i.e., it was cut from budget lines that could not have proceeded because of the widespread restrictions in movement and economic activity), but that the remaining lek 9.9 billion had incurred an opportunity cost. A significant portion of the cuts fell in the education and defense sectors. Overall, the study estimated that had the viable spending not been postponed or canceled, it could have generated returns of lek 12.3 billion (US$113 million), which is equivalent to 0.76 percent of 2020 GDP, or 65 percent of COVID-19 expenditures. This implies an opportunity cost multiple of US$1.23 for every US$1 mobilized through budget reallocations. Source: World Bank 2021a. Risk-informed budget reallocation refers to the sluggish execution performance, thereby ensuring process of moving funds between budget lines in that funds are not left idle during periods of financial response to a disaster, in a manner that minimizes scarcity. Finally, lower-priority spending is targeted associated opportunity costs. The study in Albania within discretionary expenditure domains. Although (World Bank 2021a) provides a framework for this. defining this area is more intricate, insights into As a primary step, countries should systematically sectoral priorities, anticipated returns on public identify any nonviable expenditures through rapid investments, and the overall adequacy of sector post-disaster needs assessments or satellite budgets can guide decision-makers. This approach technology. They should also maintain a dynamic would not only reduce uncertainty in the process record of nonviable expenditure tailored to hazard and limit associated costs, but would also strengthen scenarios. Diverting funding from these areas is likely transparency and accountability processes, given to incur only negligible opportunity costs. Following that the decisions and actions would be documented this, the framework proposes that the government as part of standard procedures. should reallocate funds from areas experiencing CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 27 Prosperity Insight Figure 3: A proposed framework for structuring post-disaster reallocation decisions Nonviable spending • What: Cut spending that is no longer feasible post Negligible cost dicastor 1 • How: Maintain a catalogue of nonviable spending by disastertype Underexecution 2 • What: Cut spending in areas of weak execution • How: Identify program execution below historical Low/Negligible cost levels; consult with LMAS Lower-priority spending • What: Out discretionary speeding that has lower 3 priority Low/High cost • How: Consider expected returns, sufficiency of spending & resilience budgeting Source: World Bank 2021a. Note: LMAs = line ministries and agencies. Governments can also put in place emergency utilities (estimated by the Government of Japan to procurement procedures and protocols to speed up total US$43 billion), but thanks to the instruments in the procurement of goods and services in a disaster. place, the main highways and roads to affected areas However, such expedient procedures should still were repaired within one week, and the bullet train ensure adequate accountability, transparency, and service was resumed within 49 days. This work, in overall value for money. For example, these protocols turn, supported relief activities in the affected areas may allow direct award of contracts for relief or (Ranghieri and Ishiwatari 2014, 171–74). rehabilitation services. Alternatively, governments Planning how to disburse funding in a disaster is as may set up prearranged contracts (or framework important as planning how to raise it, so streamlining agreements) with trusted private sector partners execution processes for disaster response that facilitate quick mobilization of the needed programs, especially at local level, is critical. This rehabilitation workforce by allowing government effort could include developing clear targeting and agencies to skip the procurement process and disbursement channels for shock-responsive social start work immediately. The Government of Japan protection, so that support is delivered to the right has such contracts in place with companies people at the right time. For example, preparation covering construction, engineering, surveying, and could be made for using mobile money in cases telecommunications; this arrangement offers a where access to formal banking infrastructure guarantee of payment without burdensome contracts might be disrupted. Streamlining of execution and paperwork. The Great East Japan Earthquake could also include advance planning around access (and subsequent tsunami) of 2011 caused procedures for reserve funds. Such planning could tremendous damage to infrastructure and public CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 28 Prosperity Insight benefit the Philippines, for example: the country A first step for a government seeking to better has over 43,000 Local Disaster Risk Reduction and integrate risk into budget execution processes Management Funds, but many local governments would be to review the disbursement procedures are unclear about the conditions under which and performance of key disaster response programs these funds can be used. As a result, they continue and identify bottlenecks that undermine spending to rely on the national government, and many of timeliness and efficiency. It could also be worthwhile these funds lie dormant.20 Moreover, the Philippine to review the experience of procurement entities Development Plan (2023–28) noted that the 2016 and suppliers in implementing existing emergency People’s Survival Fund was not fully utilized and that procurement processes, and to develop additional or only six Local Government Units were able to access more streamlined procedures and provide guidance its funds. The low uptake has been attributed to a and training where required. In the event of a lack of local capacity to respond to the application disaster, documenting reallocation decisions (where requirements (Government of the Philippines 2023). money is cut, where it is augmented/protected, and the reasons why) could help the development of a more formal framework for future shocks. 2.5. Accounting and monitoring Accounting and monitoring of revenue and governments need an accurate and comprehensive expenditure ensure the budget is implemented as picture of how much they are spending on avoiding, agreed. Monthly, quarterly, and annual reports are preparing for, and responding to disasters. This need generated concurrently with budget execution. Key was highlighted in the UK National Audit Office (NAO) aspects include a control function, ensuring funds are 2023 audit of extreme weather events, which noted used correctly, and a development function, ensuring that the government does not know how much the budget execution aligns with intended targets. public sector is spending to manage extreme weather Implementing agencies are typically responsible for risks because “action is taken across a wide range accounting and monitoring their own budgets, while of organizations [and] there is no common definition the central finance agency has a role in coordination of what constitutes resilience activity” (NAO 2023, and standard setting—that is, in checking whether 46). Without this, the NAO found, it was difficult to appropriate monitoring information is generated and determine whether spending represented good value reaching decision-makers. for money. Disasters typically result in a surge in public Given the fragmented and multisectoral nature expenditure, which alongside expedited procedures of disaster-related public expenditure, building can increase the risk that funds are misused. Robust up a comprehensive picture of public spending on accounting and monitoring processes are therefore disasters cannot easily be done through existing paramount. Furthermore, to enable the strategic standard expenditure reports. In response to this allocation of resources and decisions on trade-offs, challenge, some countries have introduced disaster 20. Based on World Bank (2020). CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 29 Prosperity Insight budget tagging systems, which demarcate and • Coverage. This determines the sectors and codify budget lines that are relevant to disaster classes of spending included. Options include resilience. While the practice of budget tagging for taking a whole-of-government approach, or disasters is relatively nascent, practitioners can focusing on priority sectors/levels of government learn from and build on the experience of tagging for (which should mirror the legal and de facto other cross-sectoral themes (particularly climate responsibility for DRM). Tagging can cover capital budget tagging, which overlaps substantially with and recurrent funds along with allocations and disaster budget tagging). Tagging systems are often expenditures. Integration of the tag into an introduced following the completion of a diagnostic Integrated Financial Management Information (such as a Public Expenditure Review, discussed System (IFMIS) can enable the wider application in section 2.7), or after a one-off tracking exercise of the tag to different spending classes and has associated with a particular disaster event in an the potential to influence real-time budgeting effort to regularize more frequent reporting. Key decisions. design criteria include the following (World Bank • Institutional roles. These determine which 2021b): entities apply the tagging and perform other • Definitions and taxonomy. These determine the roles around quality assurance and oversight; boundaries of what counts as disaster-relevant they might include the central finance agency, spending. Determinations can draw from a line ministries, the DRM commission, or some national policy framework or from international combination of these. frameworks such as the Sendai Framework or • Estimation methods. These determine whether OECD DRR markers (OECD 2018) (see box 9 for a simple binary typology or a weighting system the experience of Ethiopia). that distinguishes between varying degrees of relevance is adopted.21 © Bilanol / shutterstock Photo ID : 2505947151. Further permission required for reuse. 21. For example, the UN Office for Disaster Risk Reduction’s disaster and climate budget tagging methodology differentiates between expenditures that primarily reduce disaster risks (that is, those where DRR is the principal objective or primary outcome) and those that indirectly affect disaster risk (those that are related to DRR but are not implemented with DRR as their principal objective/main outcome). Differentiated weights are applied for the two types of expenditure (100 percent and 50 percent respectively) (UNDRR 2023). CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 30 Prosperity Insight Box 9: Disaster and climate budget tagging in Ethiopia Ethiopia is affected by droughts, floods, epidemics, insect infestations, landslides, wildfires, volcanoes, and earthquakes. The 2023 INFORM risk index covering 191 countries worldwide ranks Ethiopia as the 12th most at risk from disasters. Moreover, Ethiopia is vulnerable to the effects of climate change and has also recently experienced conflict. The Government of Ethiopia recognizes the risks associated with disasters and climate change and is committed to adopting a multisectoral approach to reduce vulnerability and strengthen resilience. In recent years, with the support of its partners, it has conducted multiple stand-alone expenditure reviews, looking at historical spending related to climate change and disasters. However, in an effort to make such analysis more timely and sustainable, in 2023 the Ministry of Finance introduced a budget tagging system to routinely flag spending on the whole disaster cycle as well as on climate change (adaptation and mitigation).The dual system was adopted to reflect the substantial synergies between climate and disaster risk management, where spending associated with increasing resilience to hydrometeorological hazards contributes to both DRR and climate adaptation. The tagging system is integrated into the national IFMIS and currently covers capital expenditures under priority sectors in the national government only. The tagging is done by line ministries, via climate focal points located within the sector institutions. This arrangement was adopted in order to build sector ownership while minimizing the burden on Ministry of Finance staff. Relevant expenditures are indicated in sector-specific guidelines that draw from Ethiopian policy documents and the OECD DRR markers. Although more work needs to be done on strengthening climate budget tagging in Ethiopia, with this tagging, the Ministry of Finance is hoping to use the evidence to inform strategic resource allocation decisions (including for example, the balance of spending on risk reduction vs. response) and to demonstrate government financing to attract more external support. Line ministries would also be able to use the information generated to defend their budget proposals. Source: World Bank 2023, World Bank Group 2024, Ministry of Finance 2023; BRE 2023. Alongside transparent reporting, post-disaster in internal controls puts more pressure on external control functions ensure that the expedited audit and parliamentary oversight, and misses spending and augmented flexibility do not the opportunity for course correction to prevent compromise safeguards. These functions may the mismanagement of funds when a disaster include new or streamlined protocols for spending response is underway. very quickly, including through contracts, direct An initial step countries can take in this area is to awards to the public and businesses, and issuance review where the responsibilities for initiating and of loans. Clear separation of functions is also approving emergency expenditures lie, and then important to avoid conflicts of interest and reduce ensure that these are different from each other the risk of fraud or misappropriation—for example, and that the guidelines are widely disseminated. a single individual or small group of individuals Moreover, thinking in advance about how decisions should not initiate, approve, undertake, and on public spending will be recorded can help review the same action (World Bank 2022a). It strengthen transparency and provide a basis for is not uncommon for such controls to be in place more systematic budget tagging later on should for routine expenditure but to be loosened or that be required. suspended during times of crisis. Such a blind spot CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 31 Prosperity Insight 2.6. Audit and evaluation Audits and evaluations serve important purposes for The Philippine government goes beyond auditing governments, citizens, and societies more broadly, the Disaster Commission and conducts an annual particularly in democratic countries. Scrutiny comprehensive audit of all disaster-related spending of spending and of decision-making provides from all budget sources. This has been useful for accountability and, ultimately, legitimacy for identifying financial issues (for example, failure to government. meet stipulated funding targets for local disaster funds) as well as other performance issues (such For governments, the process also provides an as the absence of comprehensive DRM monitoring opportunity to learn from successes, challenges, and frameworks in certain localities).23 Like monitoring failures and to reach evidence-informed conclusions, exercises, comprehensive disaster audits need to be which can in turn raise expectations and standards for underpinned with a clear definition of what constitutes how disaster response can be funded and delivered. disaster resilience spending; an expenditure tagging Audit and evaluation can help counteract a general system (as discussed in the previous subsection) can lowering of propriety and standards often associated greatly facilitate this effort. It is also important to with periods of emergency. Moreover, the process of preserve information on disaster response processes auditing and evaluating disaster expenditure and and decisions (such as budget reallocations) for procedures also brings information into the public ex post scrutiny and accountability. This means domain. It helps to challenge the notion that disasters having clear requirements in place to retain data cannot be planned for, and it can direct public and information, as well as provisions to share this attention toward the benefits of risk reduction and information with the legislature and the SAI. preparedness, which tend to generate less political capital for officials than disaster response. While such audits can provide important lessons, they have historically been conducted ex post. Supreme Audit Institutions (SAIs) examine Thus government and other actors have been able compliance and performance of budget execution. to use the findings to improve responses to future Comprehensive disaster spending audits can expenditure processes, but not able to change the provide scrutiny of spending across the disaster expenditure in response to the disaster that was cycle—from risk reduction and preparedness to audited. In recent years, however, some countries response and resilient construction. The International have established real-time audit processes, where Standards for SAIs (ISSAIs) cover all these aspects SAIs undertake audits during the response in an of disaster audits.22 Many countries routinely conduct effort to ensure compliance and gain information regular audits of national disaster commissions or to improve the response process as it unfolds. The agencies, including the US Office of Inspector General, Auditor General of South Africa undertook a real- which conducts frequent financial and performance time audit during the COVID-19 pandemic, and the audits of relief programs delivered by the Federal Audit Service Sierra Leone undertook a real-time Emergency Management Agency (although recent audit during the Ebola epidemic (see box 10). The research finds the increased frequency of disasters Sierra Leone real-time audit enabled citizens to has constrained the agency’s capacity to incorporate exert pressure on government to strengthen disaster audit findings into programming) (Waddell 2024). expenditure processes. 22. For example, ISSAI 5510 covers audits of DRR and preparedness, while ISSAI 5520, ISSAI 5530, and ISSAI 5540 cover aspects related to audits of individual disaster events as well as general audits of response and reconstruction spending, including the heightened risk of fraud. 23. See for example Commission on Audit (2017). CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 32 Prosperity Insight Box 10: Real-time audits in Sierra Leone Public pressure prompted the Audit Service Sierra Leone to undertake a real-time transaction audit of funds during the Ebola outbreak in Sierra Leone in 2014. The audit process covered procurement, hazard payments, cash and bank management, and internal control. The real-time approach sought to enable timely feedback and management of funds. The report was presented to the Public Accounts Committee in a televised public hearing, and the findings caused a public outcry. The audit report highlighted irregularities, inadequate controls, and noncompliance with the procurement process. As a result of the report, the Government of Sierra Leone improved processes to implement stronger controls, crucially in relation to the management of Ebola response funding. According to the Auditor General, the results of this real-time audit also prompted a review of management practices during emergencies. A real-time audit was again carried out during the COVID-19 pandemic in 2020. Source: Mills 2022; Taylor-Pearce 2018. Parliaments and, in particular, public accounts expected in the immediate response to a disaster? committees (PACs) can play a significant role in How can that oversight be delivered? Can or should strengthening oversight and evaluation of disaster processes for special audits be standardized risk financing and disaster expenditure. A study by in a country to support timely oversight during the Commonwealth Parliamentary Association UK the budget execution process? Finally, how can (2021) found that the response of Commonwealth communication and cooperation between the SAI PACs to the COVID-19 pandemic varied depending and the legislature be formalized and strengthened on two factors: the PACs’ ability to adapt to for post-disaster emergency work? Further research working virtually, given connectivity issues; and the on these questions would be valuable. timeliness of audit reports. Some PACs studied in Over a longer time frame, legislatures and SAIs can the report noted that the SAIs had increased the provide more in-depth evaluations and targeted frequency of audit reports and special audits on learning for government in order to improve COVID-19 expenditure, and that the SAIs could disaster risk management and financing, in turn offer support in the drafting of PAC questions to strengthening mitigation and prevention of disaster government. One PAC highlighted its creation of a impacts. Box 11 outlines two ways in which the whistleblowing process, which enabled the public to UK system is using evaluation to strengthen UK contact it directly and provided public reassurance of government disaster risk and resilience policy, oversight. The content of the study suggests several financing, and process. further questions: What is the minimum standard of oversight of budget expenditure that should be CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 33 Prosperity Insight Box 11: Disaster spending in the UK: Evaluations by the National Audit Office and House of Lords The UK National Audit Office maintains a value for money (VFM) audit function alongside its financial audit function. The VFM team conducts studies on how public money is spent to achieve government objectives and to support inquiries by the UK Parliament’s Public Accounts Committee. The VFM team proactively selects issue areas to focus on that can also inform PAC questions and shine a light on issues for the public. In 2023 the NAO published two studies focused on resilience, one on flooding and one on extreme weather. The report on flooding highlighted a potential issue with the government’s existing plans and financing to protect properties from flooding. It noted that, due to inflationary pressures on the floods capital program, the government had reduced the number of properties that would be protected by new flood defenses by 40 percent; moreover, it was not meeting targets for maintenance of existing defenses. This report, and these points in particular, were amplified by a subsequent PAC evidence session in early 2024 and related media attention. The UK Parliament’s House of Lords formed an ad hoc Risk Assessment and Risk Planning Committee, which published a report in 2021 titled “Preparing for Extreme Risks: Building a Resilient Society.” This report included reflections on DRF. For example, two witnesses providing evidence to the inquiry indicated that when prioritizing budgets, preference is given to spending that will give a short-term return. DRF necessarily includes budget items that look at longer-term prevention or mitigation, and funding for potential needs for disaster response rather than confirmed needs. Such budget proposals can be subject to overly high discounting rates and hence may be deprioritized. This report has been influential within government and informed the development of the UK Government Resilience Framework in 2022. Crucial to this evaluation process is that the government is required to respond, often within a specified time frame. This ensures government attention to the evidence and findings. It also serves to bring a greater number of perspectives and a range of evidence into the decision-making process. Source: Select Committee on Risk Assessment and Risk Planning 2021; NAO 2023; World Bank team interviews with National Audit Office staff, January and February 2024. As a first step in strengthening the evaluation and PACs may also seek to identify a process and audit of disaster spending, legislatures can review resources for scrutinizing post-disaster scenarios. and discuss the relationship between the PAC and This effort could be carried out in consultation with the SAI to identify opportunities and processes for the legislature more broadly. working together during and following a disaster. 2.7. Policy review The budget process concludes with a review and stand back and examine evidence on policy impacts, update of existing policies and the development of to communicate progress in policy implementation, new ones if necessary. This is undertaken outside of and to debate policy options. Establishing a formal the budget process timeline and so allow more time to policy review process can systematize the learning CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 34 Prosperity Insight process at the budget cycle’s end, thereby helping to component. These reviews adapt the well- improve existing policies, identifying nonperforming established PER methodology to unpack public projects, and shaping new ones. expenditure trends, processes, and results as they pertain to disasters (or in the case of the CPIER, Spending reviews focused on disaster-related public to mitigation and adaptation spending, including expenditure can consider the role of the state, the spending related to reduce hydrometeorological private sector, and households in the achievement of disaster risk). A PER will answer key questions resilience objectives, in turn determining how much about the fiscal sustainability of policies, risk the government bears and how much it transfers strategic allocation of resources, efficiency and to others. Reviews can also consider how to deploy the effectiveness of spending, and institutional full swathe of policy tools—information, regulation, capacities to deliver these (World Bank 2014b). taxation, public spending, and risk transfer—to meet these objectives. In addition, policy reviews can be • The Disaster Resilient and Responsive Public used to identify revenues and expenditures that are Financial Management (DRR-PFM) assessment aligned with disaster resilience policy objectives and tool targets processes rather than policy. those that are contrary to them, while also shedding Developed by the World Bank, the DRR-PFM light on issues of fiscal sustainability, strategic assesses a country’s PFM systems in order to resource allocation, the role of government, the prepare for, respond to, and recover from disasters. efficiency and effectiveness of spending, and the It involves a review of current PFM practice across capability of institutions. five dimensions (planning and budgeting, public investment management, budget execution and Various policy review tools have been developed control, public procurement, audit and oversight) or adapted for the purposes of scrutinizing disaster and three cross-cutting themes (institutional expenditure and outcomes against policy objectives: arrangements, IT systems and records, and • The DRF diagnostic was co-developed by social inclusion). The assessment also identifies the World Bank’s Disaster Risk Financing and opportunities to sustain PFM functions after a Insurance Program and the Asian Development disaster. Successive DRR-PFM assessments are Bank as a comprehensive analysis of the intended to track reform implementation (World economic and fiscal impacts of disasters, the Bank 2022a). legal and institutional foundations for DRM, and Which policy review methodology a country selects the current financing landscape (including the use depends on the objectives of the exercise. Where of budgets and other risk financing instruments, it is primarily to inform PFM processes during PFM processes, and domestic insurance and emergencies, the DRR-PFM assessment tool would capital markets). The analysis determines the suffice. If a broader review of public expenditure funding gap and proposes options for improved trends is required, a PER is more appropriate. A financial protection. Often, the completion of a DRF diagnostic is useful for comparing current diagnostic is a precursor to the introduction of a financing against projected costs and informing the DRF strategy (Benson, Mahul, and Alton 2017). development of new DRF instruments. A comparison • A disaster-focused Public Expenditure Review of the scope, purpose, and requirements of each (PER), and its climate counterpart the Climate tool is given in table 1. Real-world examples of each Policy and Institutional Expenditure Review tool’s application are provided in box 12. (CPIER), focus exclusively on the public financing CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 35 Prosperity Insight Table 1: Scope, purpose, and requirements of DRBB policy and process review tools DRF DRR-PFM diagnostic Disaster PER assessment What does it cover? Economic/fiscal impact of disasters ✓ ✓ partial Financing of disasters from domestic sources ✓ ✓ Financing of disasters from external sources (inc. DRFI) ✓ Financing of risk reduction and preparedness ✓ depends on scope Assessment of PFM processes ✓ partial ✓ ✓ elaborate Review of domestic insurance and capital markets ✓ Assessment of financing gap ✓ Recommendations ✓ ✓ What does it serve? Precusor to a new DRF/DRM strategy ✓ Precursor to budget tagging system ✓ Precursor to disaster resilient PFM reform ✓ ✓ Tracking progress over time (through successive assessments) ✓ Cross-country benchmarking ✓ What are the data requirements? Budgets and expenditures ✓ ✓ Private sector/ hh insurance penetration ✓ Hazard profile ✓ Economic, fiscal and social impact assessments ✓ Information on legal and insitutional framework for DRM/DRF ✓ ✓ Information on PFM processes ✓ partial ✓ ✓ What does it entail? Average time for completion 6-12 months 6-12 months 2-4 months DRM expertise ✓ ✓ ✓ DRF expertise ✓ ✓ ✓ PFM expertise ✓ ✓ ✓ Actuarial expertise ✓ Source: World Bank. Note: DRF = disaster risk finance; DRFI = disaster risk financing and insurance; DRM = disaster risk management; DRR-PFM = Disaster Resilient and Responsive Public Financial Management; HH = household; PER = Public Expenditure Review; PFM = public financial management. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 36 Prosperity Insight Box 12: Deploying policy review tools for disaster resilience: Select examples In 2022, at the request of the Ethiopian Ministry of Finance, the World Bank prepared a climate and disaster risk finance diagnostic, with the objective of assessing Ethiopia’s financial preparedness to disasters and crises at the sovereign, firm, and household levels. The request came about as the government was facing increasingly frequent and severe disaster shocks (particularly from drought, flood, and conflict), which threatened the country’s ability to sustain the robust growth and progress on poverty alleviation of recent decades. The diagnostic focused on the historical socioeconomic and fiscal impact of disasters in Ethiopia, the key legal and institutional arrangements relevant to DRF, the role of the private sector, and ways that costs of disasters are currently met. Among its findings was that Ethiopia is largely reliant on ex post financing—primarily official development assistance and humanitarian aid, budgetary reallocations, and emergency borrowing. The diagnostic provided the evidentiary underpinning and strategic direction for the government to chart an alternative path forward, which it did, launching its first DRF strategy in 2023. This document heralded a new approach to financing disaster costs, including new ex ante and risk transfer instruments, as well as a series of reforms to make PFM systems more responsive to disasters (related to disaster budget tagging, post-disaster budget reallocation processes, and fiscal risk modelling). In 2020, the World Bank worked with the Department of Budget Management to prepare a PER on disaster response, recovery, and reconstruction activities in the Philippines. Despite the country’s high exposure to natural disaster shocks and climate risks, no comprehensive review had been carried out for disaster- related public expenditures. The PER provided a better understanding of post-disaster expenditures derived from the country’s array of national and local disaster funds, contingency funds, and agency budgets, with case studies on how these operated during periods of armed conflict, typhoons, and earthquakes. It found that one-third of post-disaster spending was financed through prearranged funding sources for disasters, many of which experienced execution bottlenecks. This gave rise to recommendations to streamline the procedures of the National Disaster Risk Reduction and Management (NDRRM) fund. The other two-thirds of spending was mainly financed through budget allocations and reallocations, which undermined allocative efficiency and diverted funding from its intended purpose. Moreover, the PER noted substantial challenges in the tracking of disaster spending, which prevented robust audit and oversight. The PER exercise showed that despite having had a DRF strategy in place since 2015, many of its principles had not been fully operationalized through the PFM system. This finding led the Department of Budget Management to introduce a national DRBB framework in 2023, which identified incremental and iterative ways in which PFM systems and processes are configured to proactively manage disaster risk. Key reform priorities in the first year of implementation included mainstreaming risk into the budget preparation process through use of an updated catastrophe risk profile and incentivizing agencies to prioritize risk management. Other priorities included undertaking more strategic budgeting for the NDRRM fund, strengthening legislative oversight of DRM budgets and spending, and tracking disaster expenditures. In 2019, the World Bank conducted DRR-PFM assessments in multiple countries in the Caribbean region, which is particularly vulnerable to natural disasters (like hurricanes, earthquakes, droughts, floods, and landslides) that often cause significant damage to life, property, and livelihoods. Despite these risks, many countries in the region still rely on conventional PFM systems that are not well suited to responding to disasters while also maintaining transparency and accountability. The reviews found that while countries had strengths in areas like funding for disaster response, there were inefficiencies and bottlenecks that hindered their ability to respond to natural disasters and maintain fiscal resilience. For example, many countries struggled with reviewing and scrutinizing expenses related to natural disasters, which led to increased risks of fraud, waste, and abuse. Emergency procurement procedures were also rare, and response agencies did not always consider gender in disaster response activities. Based on these and other findings, the World Bank provided follow-up technical and financial support to help countries like Jamaica, St. Lucia, and Haiti introduce rules and institutional arrangements that made their public financial systems more responsive to disaster risks. Source: World Bank 2020, 2022a, 2022b; Ministry of Finance 2023. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 37 Prosperity Insight © provectors / Adobe stock # 374648767. Further permission required for reuse. 3. GOVERNANCE OF DRBB A key objective of DRBB is anchoring decisions on of Budget and Management (DBM) is the lead disaster risk financing in the budget process; this institution for implementing DRBB. The anchoring aim implies certain governance aspects. First, it also implies a certain regularity: the DBM is in the implies a vital role for central finance agencies in process of preparing its first DRBB framework, establishing disaster-sensitive PFM procedures. which includes a set of priority entry points and In the Philippines, for example, the Department an action plan with measures to be implemented CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 38 Prosperity Insight through the budget process. Achievement of this coordination challenges. In many countries, the plan will be reviewed each year, and the framework authority of the central finance agency and the will be updated annually. Given the cross-sectoral budget process can overcome these challenges. nature of disaster resilience, this work cannot be However, some countries have tried to address done in isolation from those institutions and entities coordination challenges by mobilizing the seniority involved in setting and implementing DRM policy and convening power of other senior institutions in (including local governments, line ministries, the the center of government; this was the approach private sector, and nongovernmental organizations). taken by the Cabinet Office in the UK (see box 13). These coordination efforts are unlikely to be led by Adopting a whole-of-government approach to a disaster agency, unless the agency has sufficient risk management promotes synergies across seniority and its mandate covers the full DRM agencies and allows governments to identify spectrum, from disaster risk reduction to response and manage interdependent and interconnected and recovery (and not just response, as is usually disaster risks—but it can also pose substantial the case). Box 13: The institutional leadership of the resilience agenda in the UK Following the experience with the COVID-19 pandemic, in 2022 the United Kingdom launched a UK Government Resilience Framework that set out its strategic approach to strengthening resilience through a whole-of-society approach. The framework defined the following institutional governance structure: • A Resilience Directorate in the Cabinet Office was established to lead the UK government’s work on resilience. It produces the National Security Risk Assessment and the National Risk Register. The response to larger-scale emergencies is headed by a Lead Government Department (LGD) and, in the most serious cases, is coordinated through the Cabinet Office Briefing Rooms (COBR) Unit. • The Cabinet Office identifies LGDs for each risk. Their responsibilities include leading on risk identification, assessment, prevention, resilience, preparation, emergency response, and recovery. LGDs are expected to coordinate with other departments and devolved administrations in carrying out their responsibilities. • The UK Resilience Forum brings together representatives of the public, private, and third sectors to improve communication and collaboration on risk, emergency preparedness, and crisis response and recovery. • At the local level, Local Resilience Forums bring together first responders and local authorities to carry out risk assessments and coordinate preparedness and response measures. The UK’s setup is highly distributed—that is, there is no single agency responsible for emergencies or resilience. Instead, the UK seeks to mobilize the authority and convening power of the center of government to coordinate the dispersed actors. A 2023 audit concluded that “government has yet to set out what the respective roles of central government, local government, the devolved administrations, the private and voluntary sectors, and the public are, leading to uncertainty on what actions to take” (NAO 2023, 4). In contrast, in Australia, the National Emergency Management Agency (NEMA) is the singular agency responsible for response, recovery, and resilience. The National Strategy for Disaster Resilience prescribes the respective roles and responsibilities of government, business, nongovernmental organizations, and individuals in relation to resilience. Source: NAO 2021, 2023; NEMA 2011; World Bank team interviews with NAO staff and OBR staff, January 2023. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 39 Prosperity Insight © provectors / Adobe stock # 369000748. Further permission required for reuse. 4. RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER STUDY Disasters have historically been treated as rare a global reminder of this trend. Despite this changing and unpredictable occurrences that require reality, however, PFM systems are not configured to responses outside of everyday policy making. proactively embed DRF instruments and practices In fact, the frequency, intensity, and diversity of in the budget cycle, a limitation that increases the disasters are growing. The COVID-19 pandemic was potential fiscal impacts on governments and people, CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 40 Prosperity Insight especially the most vulnerable, and also increases in section 2. Actions can be identified that allow the chance that policy and political focus and action countries to configure PFM systems so that they on DRF are not sustained. proactively address growing disaster risks and better protect current and future populations, the Disaster risk–based budgeting offers governments public budget, and economies from the impacts a means of overcoming some of the binding of disasters. The application of this approach constraints that impede PFM systems from will depend on a number of factors: the context, adequately integrating disaster risk into policy and practices, and procedures that are in place, and budget preparation, delivery, and oversight. DRBB the nature of risks the country faces, among has the potential to strengthen countries’ financial others. Despite the need to tailor approaches resilience in the face of growing disaster risks. It also and instruments to the context and to recognize gives DRF instruments more strategic and consistent that different types of disaster require different coverage and increased impact. responses, a few general recommendations DRBB can be implemented through multiple emerge for public finance actors seeking to manage entry points within the budget cycle, as indicated disaster risk better. 4.1. Recommendations Recommendation 1: Integrate disaster risk The most appropriate entry points for DRBB will considerations into PFM systems across the depend on the binding constraints a government budget cycle; appropriate entry points will differ is trying to overcome to foster a more disaster- based on binding constraints. resilient economy. Therefore, the design of a targeted DRBB program should involve a process PFM systems do not regularly—or by default—take to identify bottlenecks and underlying causes, and into account disaster risk factors in their pursuit of to agree on feasible solutions and the stakeholders fiscal discipline, allocative efficiency, and technical and steps to address them. This is in line with the efficiency. With growing disaster risks, central World Bank’s GovEnable approach, and is best finance agencies need to start proactively and carried out as a collaborative process with team deliberately accounting for disaster concerns. They members, including those involved in financing and can do so by adjusting existing PFM systems to delivering disaster preparedness and response. Box employ DRBB. 14 below describes such a process in action in the Philippines. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 41 Prosperity Insight Box 14: Bottleneck analysis being used to inform DRBB reform in the Philippines In 2023, the Department of Budget and Management of the Government of the Philippines decided to develop a DRBB framework as part of an effort to reinvigorate implementation of the 2014 Disaster Risk Finance and Insurance Strategy and make the Philippines more financially resilient to disaster shocks. To support this process, the World Bank provided DBM management and staff with a series of technical seminars on international practices around DRBB (which eventually gave rise to this report). This technical training, accompanied with disaster PER and other analyses, led the DBM management to select six areas of focus for their DRBB reforms: mainstreaming disaster risk into annual budgets, budgeting for DRF instruments, risk-informed public asset management, emergency procurement, strengthening legislative oversight of DRM budgets and spending, and tracking disaster expenditures. For each of these areas, a Technical Working Group was put together composed of relevant units within DBM and other agencies, as appropriate. Each group’s first task was to review the current financial and governance practices in relation to the area under its purview and discuss and document the bottlenecks and causal factors. Budget and spending data, as well as qualitative responses from DBM officials and the wider government, underpinned these assessments. Based on the findings, the groups prepared a prioritized action plan for the coming fiscal year and beyond, detailing measures to address these bottlenecks. These plans are consolidated to form the implementation of the DRBB framework, and the Technical Working Groups meet regularly to assess progress against them. Source: World Bank. While a country-led process of unpacking constraints unpredictable or uncertain events, quantifying and developing tailored responses is always disaster-related contingent liabilities can help bring preferable, some of the most common binding clarity to expected costs, while audits or a disaster constraints (as presented in section 1.2) could be PER can help shed light on the consequences of addressed by one or more of the intervention areas being underprepared. Alternatively, where the main set out in section 2; Table 2 provides an indicative challenge is a lack of cross-sectoral coordination, mapping. The approach and design of interventions the situation might be improved by costed disaster will need to be informed by the political, economic, plans that are cascaded into sector plans and and social environment. However, the aim is for this budgets, financial incentives for interagency mapping to be useful for governments as a prompt collaboration on disaster resilience, and budget to consider potential interventions. For example, tagging systems. in contexts where disasters are considered CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 42 Prosperity Insight Table 2: Mapping interventions to potential binding constraints Binding constraint Relevant DRBB entry points • Integration of quantified disaster-related contingent liabilities into forecasts • Risk-informed public asset management Belief that disaster is uncertain and cannot • Auditing of disaster expenditure; scrutiny by PAC be prepared for • In-depth evaluations • Disaster spending policy review tools (PER) Inherent preference in budgeting systems • Inclusion of disaster risk in the call circular to allocate scarce resources to known • Financial incentives for cross-sector collaboration on disaster resilience and confirmed expenditures rather than • Budgeting for dedicated DRF instruments contingent liabilities • Risk-informed public asset management • Budgeting for dedicated DRF instruments • Embedding of DRF strategy implementation in the budget process Complexity of DRF solutions • Disaster spending policy review tools (DRF diagnostic) • Development of legislative capacity on DRF • Risk-informed budget reallocation processes Ease of access to ex post financing • Disaster spending policy review tools (PER, DRF diagnostic) • Development of legislative capacity on DRF Visibility and positive publicity gained from • Disaster budget tagging systems tangible disaster response vs. limited credit • Auditing of disaster expenditure; scrutiny by PAC for preparation/risk reduction • In-depth evaluations • Disaster spending policy review tools (PER, DRF diagnostic) • Development of legislative capacity on DRF • Auditing of disaster expenditure; scrutiny by PAC • In-depth evaluations Lower expectations for performance and • Emergency procurement propriety in disaster response scenarios ; • Streamlining execution of disaster response programs possible relaxation of controls arising from • Post-disaster control functions expedited procedures • Strengthening of emergency budget approvals • Disaster spending policy review tools (DRR-PFM) • Use of technology to facilitate faster processing of transactions without compromising controls • Disaster risk in the call circular Institutional coordination challenges posed • Financial incentives for cross-sector collaboration on disaster resilience by DRF as a cross-cutting issue • Cascading of costed disaster plans into sector plans and budgets • Disaster budget tagging systems Source: World Bank. Note: DRF = disaster risk finance; DRR-PFM = Disaster Resilient and Responsive Public Financial Management; PAC = public accounts committee; PER = Public Expenditure Review. Besides binding constraints, the preexisting PFM The examples of DRBB reforms in this report were system will also determine appropriate entry points. not achieved with a single reform directive, but For instance, the orientation of a budget structure rather in an iterative manner. Efforts to reform PFM toward outputs (as in program budgeting) is a systems to include DRBB should aim to review prerequisite for disaster budget tagging. progress annually and to achieve higher standards and more ambitious reforms over time as capacity develops and approaches are refined. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 43 Prosperity Insight Recommendation 2: Adopt a whole-of-government decision-making. In addition, building of capacities approach to the financial management of disaster and understanding across government and public risks, led by the center of government (typically, a bodies in relation to DRBB and oversight of DRF central finance agency). would help actors interpret and apply evidence for better policy design, implementation, and oversight. A whole-of-government approach helps ensure that the political will needed to prioritize DRBB Recommendation 4: Prepare PFM systems before is present and that the spending decisions of a a disaster happens. disparate set of actors are aligned. On a functional Rather than scrambling to adapt to new realities level, this approach also enables more effective following a shock, governments should understand interagency collaboration and coordination for how systems will or will not adjust to a shock before critical tasks such as risk-informed public asset it occurs. Using a DRBB approach to take stock of management. Mainstreaming of strategic plans challenges helps governments identify actions that into sectoral plans and annual budgets is a key part can be implemented well in advance of a disaster. of this process because it ensures that broader For instance: government practices support disaster resilience. While DRF reforms are usually led by central finance • Putting a system of risk-informed budget agencies, implementation of DRBB requires cross- reallocations in place will help ensure a measured, agency collaboration. evidence-based, and more predictable approach to reconfiguring the budget after a shock. This Recommendation 3: Support a learning step could include the development of protocols, environment focused on disaster resilience, guidance documents, and training. DRBB, and DRF to ensure continual improvement in these areas. • Developing rolling manuals for emergency procurement and real-time audit guidelines A learning environment could be supported through can help improve the efficiency and timeliness domestic processes—for example, audit reports and of post-disaster disbursement and maximize government or legislative inquiries. Countries should effective use of public funds. regularly review their approach to configuring PFM systems so that they proactively address disaster • Assessing contingent liabilities in advance of a risks—for example, by updating the DRBB stock-take disaster event can help a government determine and action plan. Bilateral and international learning its risk appetite and make a policy decision about can also be supported through peer-learning and how much to allocate to disaster funds or how training programs. It could also be supported much to transfer through insurance. through the use of policy review tools designed to aid detailed learning, such as disaster PERs, DRF • Developing ex ante guidance on how all diagnostics, or the DRR-PFM assessment tool. This transactions must be recorded, and automating learning environment should rest on a solid base of the publication of data and reports wherever evidence related to DRBB implementation, which possible, can help boost transparency of public government could begin to develop by creating spending in disaster situations where there is and maintaining an accurate register of contingent pressure to spend more, and more quickly.24 liabilities. Budget tagging would provide up-to-date spending information to allow quick and effective 24. See NAO (2024) for more suggestions in this area. CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 44 Prosperity Insight © World Bank Photo Collections. A path through a field of yellow flowers. Belarus. / Photo ID : Belarus-22428700081 World Bank. Further permission required for reuse. 4.2. Areas for further study As an overview paper, this report identifies some of be useful to explore more deeply the political drivers the key challenges involved in promoting disaster of DRBB and DRF as well as obstacles to them, in part risk–informed PFM, as well as some approaches to achieve a more nuanced understanding of how and instruments for addressing these challenges. political, economic, historical, and societal factors To strengthen governments’ understanding, inform the commitment to proactive and sustained application, and adaptation of some of the practices financing of disaster risk. This effort would take outlined above, more in-depth learning on DRBB into account how political economy factors vary for is recommended. This section highlights some key different types of disaster (e.g., slow versus rapid areas that would benefit from further research, onset, climatological versus non-climatological based on the authors’ assessment of gaps in the hazards) and in contexts with different levels of existing literature/evidence base and on the limits in economic development. This understanding, in the current paper’s scope. turn, would inform the design of proposed DRBB interventions and approaches to make them as politically relevant and effective as possible. Drivers and challenges for DRBB Political economy of disaster spending. Political Operationalization and sustaining of DRF interest in and commitment to financing disasters strategies. Many countries may now be considering (through DRF and DRBB) constitute a foundational, revising or updating their DRF strategies. It would ongoing, and constantly evolving challenge. It would therefore be useful to study the extent to which CONCEPTUALIZING DISASTER RISK–BASED BUDGETING AND EXPLORING PRACTICAL APPLICATIONS 45 Prosperity Insight first-generation DRF strategies were incorporated areas: how reserve funds are formed and maintained into government plans and budgets and ultimately (especially in resource-constrained contexts); how implemented, including sustained placement of DRF reserve funds are integrated into broader DRBB instruments. It would also be useful to document and PFM systems; how funding targets are met and any lessons learned. protected from political interference (and broader political economy issues); and how the optimal balance between reserve funds and other DRF Broadening the scope of DRBB instruments can be achieved within a broader risk- Subnational DRBB. The scope of this review did not layering approach. allow for an in-depth consideration of the factors that shape DRBB at a subnational level. As disasters are Budget tagging. This is a relatively recent often not felt equally across a state and often affect innovation (in the disaster field), and there is more localities in particular ways, it will be important to to be learned about its use, such as the implications further study how DRBB can be configured to best of disaster-related budget tagging for interagency support citizens through subnational government. coordination. It would also be desirable to have Such a study would include the relationship more technical knowledge on harmonization of this between national and subnational PFM systems effort with other tagging initiatives, such as climate and governance processes and could focus on cost- budget tagging. sharing arrangements, the role of intergovernmental fiscal transfers and subnational budgeting/fiscal Accountability and learning in DRBB rules, and processes for subnational (spatial) Budget approval. Research to date suggests that reallocation after disasters. Like the current review, strengthening ex ante disaster-related budget it would draw on examples and experiences of DRBB approval processes could facilitate greater across the world. transparency, use of evidence, and accountability. DRBB beyond general government expenditure Further research on challenges facing this effort— concerns. The scope of this review is limited and efforts to transform improvised processes into to general government (particularly central considered and formalized ones—would be valuable. government) and the expenditure-side tools Further study in this area would distill lessons it can use to strengthen financial resilience to on emergency budget approvals in developed, disasters. Much more could be said on the role emerging, and developing economies (beyond of debt management and revenue policy in this those documented from COVID-19) and would also task. In addition, expanding the scope of DRBB to explore issues related to budget approvals for off- encompass the wider public sector, including central budget funds. banks and parastatals, would be of interest, as this Audit and accountability. Further research on perspective opens up many useful opportunities effective design and implementation of real-time for coping mechanisms and reallocating resources audits would strengthen disaster response and after disasters. improve financing of the response as it progresses. Study in this area would also consider audit trails in DRBB interventions: Deeper dives into ar- more detail, and the potential uses of digital currency eas less well covered in existing literature and blockchain technology. Deeper understanding Design of and budgeting for reserve funds. 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