98002 FONDEN: Mexico’s National Disaster Fund An evolving inter-institutional fund for post-disaster expenditures Background Highlights Every year, federal and state governments in Mexico  FONDEN is a financial vehicle that ensures the GoM spend close to US$1.5 billion on reconstruction of has adequate financial capacity following natural public assets and low-income housing after natural disasters. disasters. In 2010 alone, major floods required over US$5 billion, mostly for local assets. In response to the  FONDEN builds on its inter-institutional framework, continued need for ex post budget reallocations the requiring collaboration between federal ministries and Government of Mexico (GoM) established the Fund for affected State governments. Natural Disasters (FONDEN) in 1996. Its original  FONDEN continues to evolve, leveraging its resources mandate was to provide adequate financial resources with innovative market-based risk transfer instruments for federal and state reconstruction efforts without to increase funding in extreme loss years. compromising committed government spending. Additional resources can be transferred from federal Objectives surplus and other programs if funding is insufficient. BANOBRAS, a state-owned development bank, is the FONDEN is a financial vehicle by which the federal fiduciary. government allocates budget ex ante for post-disaster response and reconstruction. Its objective is to improve the budgetary management of adverse natural events and support the rapid reconstruction of federal and state infrastructure, low-income housing and eligible natural environment assets. FONDEN is the GoM’s mechanism to face the dual challenge of financing disasters and executing post-disaster resources efficiently and transparently across all levels of government. Operation FONDEN’s operation relies on a clear framework for damage and loss assessments, resource allocation, After an event occurs, designated technical agencies inform funding channels and implementation timelines the Ministry of Interior (SEGOB), which declares the state of between federal and state government agencies after a emergency or disaster. The first makes Emergency Relief disaster. This allows the GoM to manage emergency funding available, while a declaration of disaster triggers a response and reconstruction funds with efficiency and damage and loss assessment leading to a reconstruction transparency, while generating trust and discipline. program. Affected federal and state agencies agree on the program and split up the projects according to the cost- FONDEN’s resources are allocated through the Federal sharing guidelines. Budget. The Program for Reconstruction is FONDEN’s primary budget account. It channels resources to the FONDEN finances 100 percent of the reconstruction of FONDEN Trust and the Emergency Relief Fund, which in federal assets and 50 percent of local assets the first time turn create specific financial accounts for each it’s required. The percentage decreases for local assets if reconstruction program (Graph 1). By Law, FONDEN insurance is not purchased. The Technical Committee and its related funds (FOPREDEN and CADENA, a between the Ministry of Finance and SEGOB approves the vehicle for agricultural insurance) must receive no less distribution and instructs BANOBRAS to create dedicated than 0.4 percent of the annual budget (around US$800 sub-accounts and commit funds. The service providers million in 2011), including any uncommitted funds in implementing the reconstruction works charge the sub- the Trust from the previous fiscal year. accounts directly. FONDEN’s evolution and innovations Lessons Learned FONDEN has evolved from an ex ante budgetary tool to one 1. Developing a clear inter-institutional framework is of the cornerstones of Mexico’s integrated disaster risk essential. Well-defined rules and funding channels allow for management strategy. Since 2006, the FOPREDEN Program expedited, needs-based expenditures. Guidelines are for Natural Disaster Prevention finances disaster risk continually updated to adapt and streamline procedures. reduction activities, from risk atlas to small structural Continuous communication between agencies is vital. interventions. Its annual budget allocation is around US$25 million, channeled similarly to FONDEN (Graph 1). 2. Innovative, market-based risk transfer solutions help leverage additional financing for emergency response and The GoM has also introduced the “build back better” reconstruction following extreme losses. Mexico has built principle, allowing the reconstruction of infrastructure at its risk financing strategy starting with a risk-retention higher standards and to relocate public buildings and/or mechanism like FONDEN and using risk transfer low-income communities to safer zones. Another recent instruments to leverage its resources when expenditures addition is the Emergency Relief Fund, which covers are above its budget allocation. activities immediately before or after a disaster occurs. 3. IT and governance innovations allow efficient The high variability of disaster losses has meant funding monitoring and allocation of expenditures, maximizing the needs have exceeded FONDEN’s resources in 5 of the last impact of disbursed funds. Geocoding and digital imagery 14 years. To manage this volatility, in 2004 the GoM improve monitoring and oversight, while matching funds enabled the FONDEN Trust to pay premiums and receive and insurance requirements incentivize prevention. loss payments from risk transfer instruments (Graph 1). Mexico’s first catastrophe bond was issued in 2006, 4. National disaster funds can promote ex ante disaster followed by MultiCat bonds in 2009, 2012 and an risk management (DRM). In Mexico, the establishment of indemnity-based insurance for FONDEN losses. The GoM is FOPREDEN enabled the government to channel funds for building a disaster risk financing and insurance (DRFI) the full DRM cycle through one budgetary tool. This strategy covering different layers of risk by complementing simplified investments and drawn more attention to risk FONDEN’s risk retention coverage with innovative risk reduction, retention and transfer. transfer instruments (Graph 2). References GoM, The World Bank (2011). FONDEN: Mexico’s Natural Disaster Fund-A Review. Washington, DC: The World Bank. GoM (2012). “Disaster Risk Management in Mexico: from Response to Risk Transfer”. Improving the Assessment of Disaster Risks to Strengthen Financial Resilience. Washington, DC: The World Bank and G-20 Mexican Presidency. Contact Oscar Ishizawa, Specialist, Disaster Risk Management, Information is part of FONDEN’s evolution as an integrated Latin America and Caribbean, The World Bank, disaster risk management mechanism. FONDEN’s online oishizawa@worldbank.org system, geocoding and digital imagery are used to ensure Olivier Mahul, Program Coordinator, Disaster Risk efficiency and accuracy during the damage and losses Financing & Insurance, FCMNB and GFDRR, The World assessment process and to supervise fund execution. In Bank, omahul@worldbank.org partnership with UNAM, the National University, the GoM Hannah Yi, Policy Analyst, Disaster Risk Financing & developed R-FONDEN, a probabilistic catastrophe risk Insurance, FCMNB and GFDRR, The World Bank, model tool. It has been used by some federal agencies to hyi@worldbank.org improve their insurance coverage and will inform the design of the Fund’s risk financing strategy. Updated January 2013 www.worldbank.org/fpd/drfip www.gfdrr.org