RAR24

Regional Assessment Report on Disaster Risk Reduction in Latin America and the Caribbean

Disaster Risk Reduction financing in Latin America and the Caribbean

The RAR24 analyzed the availability of financing for Disaster Risk Reduction (DRR) in Latin America and the Caribbean (LAC) and incorporates the Mid-Term Review of the Sendai Framework 2015-2030 to determine that, despite progress made through regulations, fiscal incentives, or insurance funds, there is a need to increase financing for DRR.

Although the region shows encouraging progress in increasing investment, the rise in the economic costs of disasters is often not accompanied by an increase in DRR financing. Additionally, economic recessions tend to reduce budget allocations for this area.

The RAR24 presents a set of actions that, when implemented in a coordinated manner, improve disaster risk management and facilitate decision-making. These actions are referred to as the enabling framework for DRR and include: national laws and regulatory instruments addressing DRR (for which the Disaster Risk Management Public Policy and Governance Index - iGOPP - is available); National Public Investment Systems (SNIP) to create conditions and instruments for decision-making and allocation of specific resources; and disaster risk reduction through community actions.

The third critical challenge is that the central public issue is not the disaster itself, but the risk: since the disaster is the consequence of poor risk management, the RAR24 calls for adding governance considerations to DRR investment agendas. The fourth challenge is the growing impact the region has suffered from climate change and global warming, characterizing it as a multi-hazard region.

It is essential to increase and improve tax revenue collection in the countries of the region for these purposes, which is low in most cases.

Regarding the financing mechanisms available for DRR, one of the instruments is tax reform with an environmental focus to finance part of the risk reduction costs, while also establishing price signals for decision-making that benefit the environment, such as eco-taxes that increase the costs of pollution or the removal of energy subsidies.

It is also necessary for national and local governments to seek non-tax financing options, tailored to the specific conditions of each country. One of the options is multilateral loans with National Development Banks (NDBs) or commercial banks, and another option is the issuance of government bonds. To access these mechanisms, it is important for governments to maintain an appropriate credit rating, ensure the economic, social, and environmental viability of projects, and guarantee the financial solidity of government operations.

To channel this financing into DRR projects, the RAR24 outlines three alternatives available to the public sector:

The allocation of specific budget items for DRR;
Special funds for specific events that do not compromise public finances and can serve as reserves in case of an event;
Specific investment projects, which have the advantage of allocating financial resources to DRR in contexts where its institutionalization is still limited, carried out through "soft" strategies (non-structural measures) or structural-engineering measures.

In addition to the aforementioned mechanisms, the governments of the countries have access to various financing instruments to mobilize resources for disaster risk reduction.

A financing instrument is an agreement that creates a financial asset for one party and a liability for the other. It can be a grant, bond, loan, derivatives, concessions, among others. These instruments must align with the objectives of the funding sources and safeguard the returns on investment.

One of the sources of financing for governments comes from the Organisation for Economic Co-operation and Development (OECD) through what is called Official Development Assistance (ODA). The institutions and actors providing the financing can be: bilateral (mainly provided by Germany, France, Japan, the Republic of Korea, and the People's Republic of China in LAC), multilateral (primarily the Multilateral Development Banks -MDBs-), and private actors.

Official Development Assistance (ODA) institutions have different instruments to channel financing, among which the following are notable:

Grants and donations, especially aimed at humanitarian aid and responding to immediate crises;
Global funds, whose main goal is to attract, manage, and distribute resources to achieve global objectives, such as the Global Environment Facility, the Adaptation Fund, and the Green Climate Fund, among others, created under the United Nations Framework Convention on Climate Change (UNFCCC);
Trust funds from MDBs, which are financial contributions from third parties, managed in trust by the MDBs as fiduciaries (there are currently more than 200 established trust funds).

In addition to the ODA instruments, national and subnational governments can also turn to debt instruments from multilateral organizations and banks to obtain financing for DRR. These include:

Concessional loans with favorable conditions to attract investor interest (for example, extending repayment periods or offering interest rates lower than the market rate, among others), where countries must adhere to solid and stable macroeconomic policies;
Credit enhancement products, where deficiencies in a project's financial viability are identified and corrected to increase its attractiveness to investors and improve its credit rating;
Contingent loans, which link response actions with corrective and prospective management initiatives.

Given that investing in DRR exceeds the capabilities of the public sector, financial instruments from the private financial sector are a key element in finding new sources of financing.

The following instruments from the private financial sector are highlighted:

Insurance against damages and losses: This is an alternative to share costs among the population, while also serving as a clear signal of the need to manage risk and establishing a pricing structure that reflects it;
Parametric insurance;
Thematic bonds: These can be social bonds, sustainability-linked bonds, green bonds, or resilience bonds (the latter specifically related to DRR), issued by banks, companies, or governments.

The latter are an attractive option for investors, considering that there are international standards guiding their issuance.

Finally, the RAR24 presents the potential of using remittances for DRR financing in LAC, as the income from this source far exceeds other financial flows received by the region. Moreover, remittances tend to increase during times of crisis, making them a factor in recovery for recipient households and a multiplier for the local economy. Therefore, it is proposed that governments encourage the use of remittances in DRR investments and small-scale community projects.

_{Photo credit: First, photo of Barbara Zandoval in Unsplash; Second, photo of Malachi Brooks in Unsplash}