Research Report A FUNDING MODEL FOR THE DISASTER RISK MANAGEMENT FUNCTION OF MUNICIPALITIES

Transcription

1 Research Report A FUNDING MODEL FOR THE DISASTER RISK MANAGEMENT FUNCTION OF MUNICIPALITIES JULY 2009

2 Document Information Document Version Number Document Type Short Title Long Title Applicability Status Main Contributors Author(s) Date of this Compilation Contact information Client Copyright Version 1 Research Report Funding model: DRM A funding model for the disaster risk management function of municipalities Local government, South Africa Final African Centre for Disaster Studies Southern Business School Mr. Riaan Visser Prof. Dewald van Niekerk July 2009 Dewald.vanNiekerk@nwu.ac.za or rvisser@telkomsa.net South African National Disaster Management Centre 2009 South African National Disaster Management Centre 2

3 Reducing disaster vulnerability in developing countries may very well be the most critical challenge facing development in the new millennium it is an issue of doing development right, and making sure that activities contribute to reducing disasters rather than exacerbating them. James Wolfensohn, former President of the World Bank Group,

4 TABLE OF CONTENTS 1 BACKGROUND PROBLEM STATEMENT RESEARCH QUESTIONS OBJECTIVES OF THE STUDY RESEARCH METHODOLOGY INTERNATIONAL AND NATIONAL DEVELOPMENTS AND VIEWPOINTS REGARDING DISASTER RISK MANAGEMENT FUNDING International developments and viewpoints National developments and viewpoints Legislative framework for funding arrangements Funding options for disaster risk management in general Considerations regarding the design and structure of funding arrangements Recommended funding options for each disaster risk management activity Assessment of the funding arrangements included in South Africa s disaster risk management policies FINDINGS SUMMARISED Funding for start-up activities The case of Stellenbosch local municipality The case of Dr Kenneth Kaunda district municipality The case of the City of Cape Town The case of the Western Cape s Provincial Disaster Management Centre Funding for on-going activities The case of Stellenbosch local municipality The case of Dr Kenneth Kaunda district municipality The case of the City of Cape Town The case of the Western Cape s Provincial Disaster Management Centre Funding for disaster risk reduction The case of Stellenbosch local municipality The case of Dr Kenneth Kaunda district municipality The case of the City of Cape Town The case of the Western Cape s Provincial Disaster Management Centre Funding for response, recovery, rehabilitation and construction efforts The case of Stellenbosch local municipality The case of Dr Kenneth Kaunda district municipality The case of the City of Cape Town The case of the Western Cape s Provincial Disaster Management Centre Funding for education, training, capacity-building and research The case of Stellenbosch local municipality The case of Dr Kenneth Kaunda district municipality The case of the City of Cape Town The case of the Western Cape s Provincial Disaster Management Centre CONCLUSIONS REGARDING FINDINGS Conclusions: Funding for start-up activities Conclusions: Funding for on-going activities Conclusions: Funding for disaster risk reduction Conclusions: Funding for response, recovery, rehabilitation and construction efforts 68 4

5 8.5 Conclusions: Funding for education, training, capacity-building and research RECOMMENDATIONS: A PROPOSED FUNDING MODEL FOR MUNICIPALITIES Description of the funding model Funding for start-up activities Funding for on-going activities Funding for disaster risk reduction Funding for response, recovery, rehabilitation and construction efforts Funding for education, training, capacity-building and research MECHANISMS TO ENTRENCH THE RECOMMENDED MODEL The municipality s disaster risk management policy The municipality s disaster risk management plan and the IDP CONCLUSION REFERENCES ACKNOWLEDGEMENTS Annexure A: INTERVIEW SCHEDULE

6 1 BACKGROUND The South African Disaster Management Act (Act 57 of 2002) heralds a new era as far as the way in which disaster risks, hazards and vulnerability will be perceived in South Africa in the future. As one of the finest pieces of legislation ever promulgated in South Africa, the Disaster Management Act brings the functions and activities of Disaster Risk Management right into the backyard of each and every province, metropole, district and local municipality, as well as all the organs of the state and entities in the public sector. It calls for the establishment of structures, frameworks, plans, procedures, and strategies that cut across all government sectors. It introduces a new way of managing the complex and perilous society in which we find ourselves. It further gives the responsibility of managing disaster risks to the highest political authority in each sphere of Government. The cornerstone of successful and effective disaster risk management is the integration and coordination of all the role- players and their activities into a holistic system aimed at disaster risk reduction. Disaster risk reduction in South Africa consists of a variety of cross- cutting facets requiring the participation of a host of sectors and disciplines, not only from within the spheres of government (national, provincial and local), but involving the private sector, civil society, non- governmental organisations (NGOs), community- based organisations (CBOs), research institutions, and institutions of higher learning, to name but a few. In the context of disaster risk management, none of these role- players can act in isolation from the other. Disaster risk management in South Africa has been established as a public sector function within each sphere of government. But disaster risk management goes beyond pure line function responsibility. Disaster risk management as an activity at all levels of government is defined by the Disaster Management Act (Act 57 of 2002) as an integrated, multi- sectoral, multi- disciplinary approach aimed at reducing the risks associated with hazards and vulnerability. It therefore needs to become an integral part of the development planning 6

7 process in order to be successful. For this reason disaster risk management plans form an integral part of the Integrated Development Plan (IDP) of each and every municipality. In the light of the IDP and the budgeting process within the local government sphere in South Africa, aiming at sustainable development within local government, the direct link with disaster risk management is undeniably of strategic importance. Development planning should therefore be assessed according to its contribution towards either disaster risk reduction or disaster risk augmentation. Unfortunately, the current policy and legislation do not provide adequate guidance to municipalities in terms of their funding arrangements for disaster reduction, response and recovery. Various funds and funding mechanisms are available; this leads to a considerable amount of confusion. The need to consolidate all disaster reduction and response- related funding into one funding pool is well known and has been already discussed within the disaster management fraternity. Although this would be the ideal situation, it is not realistic to assume that an all- inclusive fund would be in any way possible given the public financial infrastructure of South Africa. In the interim it would make more sense to ensure that at least the major components of disaster risk management which require funding are properly covered. 2 PROBLEM STATEMENT The Disaster Management Act (Act 57 of 2002) makes specific provision in, Chapter 6 of the Act, for the funding of post- disaster recovery and rehabilitation. The Act also requires that a disaster management plan should be prepared for a specific municipal area and should form an integral part of the municipality s overall integrated development plan (IDP). Such a disaster management plan must indicate measures to reduce the vulnerability of disaster- prone areas, communities and households, as well as the appropriate strategies for prevention and mitigation. 7

8 To implement these provisions of the Act, guidelines were provided in the National Disaster Management Framework for South Africa, issued in terms of the Disaster Management Act 57 of Section 7(2)(k) of the Act therefore stated specifically that the legislation must provide a framework within which organs of the state may fund disaster management, with specific emphasis on preventing or reducing the risk of disasters, as well as providing grants that can contribute to post- disaster recovery and rehabilitation. Such a framework or guidelines for its implementation are therefore included in Table 7.1, as recommended funding arrangements in the Framework document which is supposed to cover all the expenditure associated with the following disaster management activities: The so- called start- up activities; The continuous disaster risk management operations; Disaster risk reduction; Response, recovery and rehabilitation activities; and Training and capacity- building programmes. Although these provisions in the Act and the guidelines in the Framework exist, it is not always clear which processes should be followed by municipalities to access this funding, especially when it should be provided by the other two spheres of government (national or provincial). It is also not clear to what extent municipalities should fund disaster risk management out of there own budgets. In the case of this research project the research problem can therefore be stated as follows: Municipalities, especially district municipalities, experience difficulties in making funding available for establishing and maintaining the disaster risk management function that is their responsibility in terms of the given legislation. In order to address the problem a number of questions, as stated in the next paragraph, need to be answered. 8

9 3 RESEARCH QUESTIONS The following key questions will be answered by this research project: What type of funding can be made available by the other two spheres of government and how can it be accessed by municipalities? For what purposes should municipalities provide funding in their own budgets for disaster risk management? The answers to the above- mentioned questions will determine the gap between the provisions in the Disaster Management Act and the guidelines provided in the National Disaster Management Framework. These form the theoretical basis and point of departure for this study, and the practical realities of disaster risk management funding as experienced by municipalities. 4 OBJECTIVES OF THE STUDY The primary objective of this research project is: To develop a funding model for the disaster risk management function of municipalities. This primary objective can only be achieved if certain secondary objectives are accomplished. The secondary objectives of this research project are the following: i. To determine what funding for best practices in disaster risk management are followed internationally that can be utilised within the South African local government context. ii. iii. iv. To determine the type of funding that can be made available by the other two spheres of government and how can it be accessed by municipalities. To determine how the existing municipal budget votes can directly and indirectly provide funding for disaster risk management. To ascertain to what extent local and district municipalities can work together to enhance the availability of funds for the establishment and maintenance of a Municipal Disaster Risk Management Centre. 9

10 5 RESEARCH METHODOLOGY A literature study of the primary and secondary sources was undertaken to provide a sound basis for this study. From the literature study a theoretical foundation was established and the best practices were determined in terms of which the findings of the study may be evaluated and put into perspective. As far as the collection of data is concerned a qualitative research approach was used for this research project. In terms of this approach, three case studies were identified to cover the three categories of municipalities in South Africa, namely a metropolitan municipality (category A), a district municipality (category C) and a local municipality (category B). In order to ensure that the appropriate data were collected, specific municipalities with a known record in good financial management had to be selected. The City of Cape Town was used as a case study of a metropolitan municipality, the Stellenbosch municipality was used as a case study of a local municipality and the Dr. Kenneth Kaunda District Municipality was used as a case study of a district municipality. For each case study semi- structured interviews were conducted as part of an action- research process, involving different functionaries within each municipality as participants. For this purpose, the interview schedule, attached as Annexure A, was used. The benefit of action research for this project was that the research design evolves as the project progresses and it does not have to be finalised in advance. Some elements of historical research were also utilised to a certain extent as far as the analysis of planning documents (Integrated Development Plan (IDP) and Service Delivery and Budget Implementation Plan (SDBIP)) and the approved annual and medium- term budget documents are concerned. The information obtained from these three municipalities was also verified by having interviews with the following persons: 10

11 The Chief Director responsible for the Provincial Disaster Management Centre in the provincial Department of Local Government of the Western Cape Provincial Government; The Chief Director: Budget Planning at the National Treasury; and The Director: Intergovernmental Relations Policy at the National Treasury. 6 INTERNATIONAL AND NATIONAL DEVELOPMENTS AND VIEWPOINTS REGARDING DISASTER RISK MANAGEMENT FUNDING The international and national developments and viewpoints regarding disaster risk management will subsequently be discussed to provide a theoretical basis for the studying of this topic that could also influence the design and development of a funding model for the disaster risk management functions of South African municipalities. 6.1 International developments and viewpoints Based on an analysis of the economic and insured losses due to natural disasters worldwide, Ghesquiere and Mahul (2007:2) indicated in a research working paper, issued by the World Bank, that there is growing evidence that the frequency and severity of natural disasters is increasing. As a result, the fiscal and economic exposure of developing countries increases every year. This can be due to a variety of reasons, ranging from the growing concentration of populations and assets in high risk areas to increases in climate variability. Both Olokesusi (2005:17) and Ghesquiere and Mahul (2007:2) have indicated that disasters have serious implications for long- term development efforts if risk management is not actively applied. As such, this issue poses an increasing threat to poverty reduction and sustainable development. Although the emphasis in disaster risk reduction should be on risk mitigation, Ghesquiere and Mahul (2007:2) found that the focus is lately on the capacity of government to react in the aftermath of a major disaster, specifically regarding government s capacity to finance 11

12 relief and reconstruction costs after disasters. This development is confirmed by the growth in literature pertaining to disaster response, recovery and relief. Ghesquiere and Mahul refer specifically in this regard to the articles of: Freeman, Keen and Mani, 2003, entitled, Dealing with Increased Risk of Natural Disasters: Challenges and Options (IMF Working Paper WP/03/197); The article of Hofman and Brukoff, 2006, entitled, Insuring Public Finances against Natural Disasters: A Survey of options and recent initiatives (IMF Working Paper WP/06/199); and The article of Mahul and Gurenko, 2006, entitled, The Macro Financing of Natural Hazards in developing Countries (World Bank Policy Research Working Paper 4075). If the fiscal and economic risk exposure of developing countries to catastrophic events is considered, then it becomes clear that it has increased significantly as a result of the increased concentration of the world s population in vulnerable urban areas, substandard construction practices and low insurance coverage. According to Ghesquiere and Mahul (2007:2), the average damages from large disasters faced by developing countries represented 7,1% of GDP over the period 1977 to Ghesquiere and Mahul (2007:3) stated that a quick analysis of recent catastrophes shows that funding for relief and reconstruction in developing countries generally comes from different sources than is the case in developing countries. In more developed countries losses from natural disasters are typically funded through a combination of private risk financing arrangements and an efficient public revenue system that relies on wide and deep taxation systems. In middle and low- income countries, which have relatively low tax ratios and ongoing fiscal policy- funding sources for post- disaster reconstruction tends to be more varied, with strong reliance on ex- post borrowing and assistance from international donors. Assistance from multilateral financial agencies plays a particularly important role in middle- income countries, while support from bilateral donors is generally predominant in low- income countries. 12

13 It is, however, important to note that economic theory suggests that countries should ignore uncertainty for public investment and behave as if they are indifferent to risk because they can then pool risks to a much greater extent than private investors. Ghesquiere and Mahul (2007:3) refer specifically to Arrow and Lind (1970) in this regard. These authors have formulated the Arrow- Lind Public Investment Theorem, and have demonstrated that when the risks are publicly borne, the social cost of risk- bearing is insignificant. Consequently, the government should ignore uncertainty in evaluating public investment, because it can distribute the risks associated with any investment among a large number of people. According to Ghesquiere and Mahul (2007:4), a key assumption underlying this theory is that returns from a given public investment are independent of the other components of national income. In the case of the financing of natural disasters, the theory of Arrow and Lind suggests that governments should act as being risk- neutral towards natural disasters and should not invest in any risk- financing strategies that are more expensive than the expected losses caused by any particular disaster. This theory has already been implemented by a number of large developed countries that rely on post- disaster financing, including budget reallocation and tax increases, to finance catastrophic losses. When this theory of Arrow and Lind is applied to developing countries it has been discovered that there are several cases where the assumption of the government s policy of risk neutrality does not hold (Ghesquiere & Mahul, 2007:4). It therefore requires in those cases the use of ex- ante- risk- financing instruments that could include sovereign insurance. Sovereign insurance is normally provided by a regional body, established by international donors, to a number of participating countries. These countries may require catastrophic or disaster risk insurance (Ghesquiere & Mahul, 2007:18). There are, however, a number of reasons why the above- mentioned theory cannot be applied in developing countries. 13

14 Firstly, the small size of some states prevents them from efficiently pooling natural disasters. The passage of a hurricane, for example, is a systemic risk that affects the entire economy of the country. Secondly, the high level of indebtedness of some countries governments does not allow them to access capital markets in the aftermath of a disaster, thus preventing them from transferring some of the risk to future generations. This is also referred to as inter- temporal diversification. In the third instance, post- disaster risk financing instruments may not provide quick liquidity after a disaster. This creates in most cases a so- called liquidity crunch or bottle- neck. Under these circumstances the most cost- effective risk financing strategy that can be developed by a government is to secure funds ex- ante through reserve funds, insurance or contingent debt (unless the level of debt is already very high). If the government uses ex- ante risk financing instruments, such as sovereign insurance, it should mainly cover the immediate needs, since it is usually more expensive than post- disaster financing. In this case it should be kept in mind that long- term expenditure should be financed through post- disaster financing, including ex- post borrowing and tax increases. In other words, sovereign insurance should not finance the long- term resource gap, but only the short- term liquidity gap. In this case, the liquidity gap can be defined as the potential lack of funds for the financing of government deficit losses at different periods after the occurrence of a natural disaster. It presents a matrix of fiscal vulnerability that should help governments analyse potential liquidity gaps and devise optimal insurance strategies. This concept differs from the standard concept of a resource gap; this is usually defined as the long- term gap between financial needs and post- disaster financing instruments. The World Bank has lately been promoting a country risk management framework to assist countries in reducing their reliance on external assistance. According to Gurenko and Lester (2004, in Ghesquiere & Mahul, 2007:9), this framework is partly based on corporate risk management principles, but also on certain factors found in the key economic and social 14

15 context, such as fiscal profiles, the living conditions of the poor, and investment in risk mitigation. This risk management approach relies on the identification of potential resource gaps between potential losses and the capacity of a country to finance relief and reconstruction needs in times of crisis. This approach is, however, based on a static framework for the financing of catastrophic risks that focuses on the total losses caused by a potential event and the determination of funding arrangements to recover the losses. Unfortunately, this approach falls short of providing a practical framework for action; and it may lead to sub- optimal use of risk financing instruments. While losses resulting from a major disaster can occur in a very short space of time, the resulting financing needs can be spread over a much larger period. It is therefore important to keep in mind that although the losses are immediate, relief and reconstruction operations can be spread over several years. An analysis of the resources needed after a disaster that takes this timeframe into account should allow for the development of a more efficient risk financing strategy for countries exposed to natural disasters. Ghesquiere and Mahul (2007:9) therefore present a catastrophic risk financing framework for countries and sub- national entities, such as municipalities that are exposed to adverse natural events that integrate the dynamic aspects of risk financing needs and resources. In this case the concept of dynamic liquidity is relevant and can be defined as the potential lack of funds for financing public expenditure at different periods (short, medium and long- term) after the occurrence of a natural disaster. This framework make provision for the financing of the liquidity gaps by using a combination of ex- ante risk financing instruments, including reserves, budget reallocations, contingent debt and insurance, and ex- post financing instruments, such as borrowing, donor assistance and tax increases. In terms of the resource and liquidity gap that needs to be addressed, attention should be given to the budgetary impact of such natural disasters. Natural disasters generally put enormous strain on the budget of an affected country. The budgetary implications are based 15

16 on the financing needs faced by a government during the three main phases in the post- disaster period. These are namely: during the relief operations, early recovery operations and reconstruction operations. Ghesquiere and Mahul (2007:9-10) have indicated that it can be difficult to provide an ex- ante estimate of the cost of relief operations, since it depends on the specific characteristics of the catastrophic event (location, intensity, period of the year [winter or summer], time of the day [day or night]), but it is relatively small compared to the cost of subsequent recovery and reconstruction operations. Relief operations usually include emergency assistance provided to the affected population to ensure that the basic needs, such as the need for shelters, food and medical attention are adequately addressed. These costs can be estimated based on a scenario analysis. It is important to bear in mind that although relief costs are limited, they should be able to be financed in a matter of hours after a disaster event occurs. The capacity of governments to mobilise resources for relief operations at short notice should therefore be a key component of their risk financing strategies. As far as early recovery operations are concerned, several techniques exist to estimate the likely cost of such. Catastrophic risk models can simulate the impact of natural disasters, such as earthquakes, on the infrastructure and thus provide rough estimates of the lifeline infrastructural requirements (e.g. water, electricity and key transportation lines) that are likely to be damaged in the event of a major disaster, as well as the removal of debris and the establishment of basic safety nets. Such models can also be used to assess the number of people that are likely to be homeless and the number of buildings that will have to be rebuilt. One of the important purposes of the early recovery operations is to limit secondary losses and to ensure that reconstruction can start as soon as possible. The early recovery stage can also be used as an opportunity to appoint engineering firms that can start the design of infrastructure works that will have to take place during the reconstruction phase. 16

17 In the case of reconstruction operations, catastrophe risk modelling techniques can be used to estimate the potential damage to the infrastructure, as well as to any public and private property. These techniques can provide risk assessments for each group of assets, such as the probable maximum losses during a given return period. This can help the authorities determine the budgetary needs caused by any such potentially catastrophic events. Reconstruction operations generally centre on the rehabilitation or replacement of assets damaged by a disaster. These include public buildings and infrastructure which are the direct responsibility of the state. It is, however, important to note that national or municipal authorities generally have to face obligations that go beyond their own assets. In most cases, government will have to subsidise the reconstruction of private assets, and in particular the housing for low- income families who could not otherwise afford to rebuild their houses. It is important to note that the use of scenario analysis coupled with risk models, can also help authorities to understand their potential needs better over time. In all three phases, the capacity to provide relief, carry out recovery works and complete reconstruction operations will also depend on the absorption capacity of the affected economy. In the cases of major disasters, all the damaged assets cannot be rebuilt at once and the government will have to establish priorities according to which key assets can first be rebuilt or rehabilitated, while other assets may be restored at a later stage. These choices made by the authorities will influence the timing of financing required for any reconstruction operations. According to Ghesquiere and Mahul (2007:11), it is important to consider local budget appropriations and executive regulations when analysing budgetary requirements. While some countries have developed emergency legislation that allows for emergency procurement before a financing source has been identified, most countries have maintained more conservative legislation. In some countries, for example, tenders for emergency works cannot start until full budget appropriations have been approved by parliament. 17

18 An optimal risk financing strategy will need to ensure that funds are available at the appropriate time in a post- disaster situation, but should also aim at amending outdated legislation that may prove to be a burden in the aftermath of a major catastrophic event. As far as disaster risk reduction is concerned, a variety of measures can, according to Freeman et al. (2003:14-16), be applied to reduce the physical destruction caused by natural disasters. These measures include: land- use planning to reduce construction on seismic fault lines, coastal regions subject to storm damage, and river shorelines subject to frequent floods; building standards aimed at ensuring some level of robustness against earthquakes or hurricanes; mitigating environmental degradations, such as soil erosion, that can worsen the impact of disasters; and by means of engineering interventions, such as the creation of dams for flood control, dikes to reroute flood waters, fire breaks and seawalls to break storm surges. In one of the recent World Disaster Reports (2001), the Red Cross indicated that investments of US$40 billion in disaster preparedness, prevention and mitigation would have reduced global economic losses in the 1990s by US$280 billion. This means that for every US$1 spent on disaster risk reduction, US$7 could have been saved in terms of post- disaster expenditure on recovery, rehabilitation and reconstruction. Structural measures might therefore be necessary in sectors such as agriculture, water and construction. These structural developments will have significant fiscal consequences, as a result of both explicit public policy commitments and the implicit responsibilities of the state in the context of such disasters. Government, therefore, has an important role to play in disaster risk reduction, not only in terms of safeguarding its own property, but also in respect of measures, such as coastal defences and early warning systems for detecting timeously any developing weather risks, and the implementation of appropriate regulatory controls, for example, on land use. 18

19 Infrastructure planning too needs to be sensitive to risks of extreme weather events. There is, however, a marked difference in the extent of risk reduction measures in developed and developing countries. In the USA expenditure on preparedness and mitigation measures has significantly increased over the past years. In contrast, in many developing countries, the financial resources, technical knowledge and political will to mitigate physical vulnerability are often absent. This situation in developing countries seems to prevail because little incentive exists to mitigate damages with ex- ante measures, since such damages are in many cases largely paid for by the national government. In the case of sub- national governments, such as municipalities, or in the case of the national government itself, this is done by foreign donors. This is sometimes also referred to as the Samaritan s dilemma (Freeman et al., 2003:17). In other words, governments of developing countries or sub- national governments in those countries believe that they can rely on disaster relief from the national government or foreign donors without taking any ex- ante measures to deal with disaster risks themselves. This situation with regard to developing countries has been confirmed by Mahul and Gurenko (2006:2), who indicated that the availability of free or inexpensive post- disaster funding discourages proactive ex- ante risk management on the part of developing countries, such as looking into market- driven risk transfer solutions, including reinsurance. In addition, there has been a willingness on the part of rich, developed countries and other donors to provide post- disaster funding for vulnerable, developing countries that are subject to frequent catastrophic events. It is, however, reasonable for the developing countries to rely largely on free ex- post aid and the post- emergency lending of development banks given the high cost of disaster risk financing solutions offered by the private markets. Other reasons for specifically low insurance penetration rates are the underdeveloped state of domestic insurance markets, which lack the necessary capital base, low underwriting expertise, a common mistrust in the formal insurance sector by consumers, and a weak regulatory capacity that can control the insurance industry. 19

20 Mahul and Gurenko (2006:3) also maintain that when it comes to funding natural disasters ex post financing is not the right approach. They proposed a formal country risk financing framework that would provide tangible incentives for proactive country risk management and promote market risk financing. This approach should include developing risk funding solutions that would provide developing countries with strong economic incentives to engage in active risk management and to therefore achieve significant reductions in their growing vulnerability and levels of exposure. Such a major turnaround would, however, require linking, at least to some extent, donor s post- disaster reconstruction grants and emergency loans from major development banks to facilitate the progress achieved by countries in ex- ante catastrophic risk management. This approach also rests on the notion of leveraging the World Bank s emergency funding with that of international reinsurance and capital markets. Developing countries would therefore only be in a position to adequately meet their demands for capital to fund the residual risks that occur after major catastrophic events, by combining the funding capacity of donor countries, development banks and global reinsurance and capital markets. Caballero (2003:37, in Mahul & Gurenko, 2006:3) is, however, of the opinion that, Even in the best- managed emerging economies, aggregate risk management is being done with stone- age instruments and methods. This view is supported by the findings of Mahul and Gurenko (2006:4). They are of the opinion that governments in developing countries generally rely on their domestic budgets, including the diversion of resources from other projects, and on extensive financing from international donors to absorb the losses caused by natural disasters. It must, however, be realised that historically most governments have not taken much interest in the ex- ante management of disasters, because of a perception of low vulnerability levels and the fact that most severe hazards manifest themselves very infrequently (Kaplow, 1991 and Kunreuther, 1996, in Mahul & Gurenko, 2006:7). 20

21 The literature does, however, show that disaster risk reduction is becoming more and more important. This is emphasised by a global review of disaster reduction initiatives of the United Nations Inter- agency Secretariat of the International Strategy for Disaster Reduction (2004:345). This organisation has pointed out that the mounting costs of disasters, the huge losses that have to be covered by insurance companies, and the fiscal pressure on government in undertaking post- disaster recovery and reconstruction measures have called for sustainable financing arrangements to address disaster risks. Financing disaster risk reduction has become a critically important issue in view of the increasing need for investment in disaster mitigation and for preparedness at national and local levels. Recent developments have encouraged disaster risk reduction to become embedded in development projects, particularly as risk assessments are taken into account. These developments has been supported internally by the OECD (Organisation for Economic Cooperation and Development), the World Bank and the IMF (International Monetary Fund), as well as other development banks (UN/ISDR, 2004: ). In addition, as governments also require resources to deal with small and medium- size disasters, they have to depend on domestic resources for financing disaster risk management schemes. Domestic financing for disaster risk management has been slow to develop, owing to institutional ignorance and a weakness in addressing disaster risks. National budgets that usually make provision for disasters focus mainly on relief and emergency response activities. Prevention and mitigation, on the other hand, have not yet become an integral part of public financing, nor have institutional channels for mitigation investments been developed. A number of special funds have now been set up in many countries for the financing of disaster risk reduction, namely the so- called calamity funds, reconstruction, mitigation and vulnerability reduction funds, as well as social funds and public works programmes (UN/ISDR, 2004: ). 21

22 Market- based instruments that have been developed are insurance, catastrophe bonds and weather derivatives and microfinance services. Closer to home in Africa, Professor Femi Olokesusi (2005:17) of the Nigerian Institute of Social and Economic Research in Abadan, Nigeria, also maintains that adequate funding is required for both ex- ante and ex- post facto disaster risk reduction activities. He specifically indicates that on the African continent it is clear that there are competing demands for the resources required to achieve the Millennium Development Goals (MDGs). Olokesusi therefore states that such a trend indicates that existing disaster mitigation financing mechanisms should be critically examined. In Nigeria, for example, the Federal Government is responsible for the financing of disaster management programmes, but their funding depends to a large extent on the fluctuation in oil prices on the international markets. At the same time, the other tiers of government in Nigeria are also not yet fully committed to disaster management. Olokesusi (2005:17) therefore suggests that a number of funding alternatives for disaster risk management should be explored in Nigeria, including the following: Public- private partnerships; A disaster risk insurance pool for households; A Disaster Risk Mitigation Fund managed by the State through a formal institutional structure; A Disaster Mitigation Trust Fund managed by the private sector; Lotteries and fund- raising events; Bilateral and multilateral assistance at international level; Special taxes and levies; and Accessing the Global Environmental Facility (fund of the World Bank). These developments worldwide, including in Africa, also have a specific bearing on local government (municipalities) and local authorities. The irony is, however, that disaster risk management strategies have usually focused on mitigation at a national or country level and 22

23 less frequently on the vulnerability and needs of villages, towns and cities of all sizes (UN/ISDR, 2004:125). At the same time, fewer resources are allocated to the local level or sphere of government to be utilised for routine hazard identification or to support sustained community- based risk management strategies, despite some evident advantages in seeking to do so. The Global Review of the UN/ISDR (2004:126) highlights the fact that urban vulnerability is one of the most underestimated issues, specifically in urban development. It is estimated that by 2050, the world population is expected to grow by three billion more people. Almost all of this growth will take place in developing countries, and particularly within their cities or metropolitan areas and towns. The urban infrastructure is itself vulnerable to natural hazards because inhabitants are more dependent on increasingly sophisticated, but also often poorly maintained, infrastructure. The Global Review of the UN/ISDR (2004:127) therefore indicated that with the growth and importance of cities and local areas as the basis of national and local economies in developing and industrialised countries alike, the reduction of vulnerability to disasters in towns and metropolitan areas is one of the critical challenges now facing development. Experience and modern risk management practice do, however, recognise the importance of a strong and well- structured local disaster risk management capacity. As a result, the introduction of a specific disaster risk reduction programme in a growing number of countries has been able to provide an umbrella for local authorities to work in a coordinated fashion, often at first informally and then with a more structured approach, that relates to disaster risk management. The underlying reason for this approach is that municipal authorities are well placed to reduce the human and financial costs of disasters by establishing a competent disaster risk management plan. Eventually, the implementation of such plans relies, however, on the fact that central governments have to establish a national strategy that enables decentralised 23

24 decision- making, as well as providing resources for local planning, assessment and intervention (UN/ISDR, 2004:128). As such, there is a need to promote the development of strong expressions of political will at local levels which will create the necessary interest in institutionalised knowledge and help to mobilise resources. To ensure success, all of these efforts should be based on cooperative arrangements, extended partnerships and a broad local community input. 6.2 National developments and viewpoints The developments and viewpoints on disaster risk management, specifically the funding arrangements in South Africa, will subsequent be outlined to indicate what can be expected as far as funding is concerned A legislative framework for funding arrangements As far as national or domestic developments and viewpoints are concerned, municipalities in South Africa have to adhere to the provisions of the Disaster Management Act (Act 57 of 2002). The provisions of the Act are elaborated on in further detail in the National Disaster Management Framework, which was issued during The Act, with the exception of Chapter 6 on the funding of post- disaster recovery and rehabilitation, does not provide clear guidelines for the provision of funding for disaster risk management. As far as disaster risk reduction is concerned, section 7(2)(k) only refers to the fact that the Framework must provide a framework in which organs of the state may fund disaster management with specific emphasis on prevention or reducing the risk of disasters. In order to give effect to the requirements of the Act, four key performance areas and three enablers have been identified in the National Disaster Management Framework to guide the implementation of the Act. As a result, funding from a range of sources for the different 24

25 aspects of disaster risk management, are outlined in the key performance areas and enablers are included. The National Framework therefore make provision for the funding arrangements for disaster risk management in terms of start- up activities, the ongoing disaster risk management operations, disaster risk reduction, response, recovery, rehabilitation and reconstruction efforts, as well as education, training and capacity- building programmes. It also indicates which funding source and funding mechanism should be used for each of these activities. Based on the suggested funding arrangements, municipalities have a responsibility for the funding of most of the disaster risk management activities, except as a funding source for start- up activities which are supposed to be the responsibility of national departments/government. These funding mechanisms indicate that the national and provincial spheres of government obviously have a bearing on the funding that should be provided by municipalities (local government). In other words, funding at the local level will also be influenced by the arrangements within the South African government regarding intergovernmental relations. Although schedule 4 of the Constitution of the Republic of South Africa, Act 108 of 1996, designates disaster risk management as a concurrent national and provincial competence, section 23(7) of the Disaster Management Act (Act 57 of 2002) places the responsibility for certain disaster risk management activities squarely within the local government sphere by stating that, Until a disaster is classified as either a national or a provincial disaster, it must be regarded as a local disaster. This provision is supported by section 10A of the Municipal Systems Amendment Act 44 of 2003, which imposes new constitutional obligations on local government. In terms of this provision, the Cabinet member, MEC or other organ of the state initiating an assignment of a function or power to a municipality in terms of section 9 and 10, must take appropriate steps to ensure that sufficient funding is available and capacity- building initiatives are undertaken as may be needed for the performance of the assigned function. 25

26 This is especially necessary if the assignment of the function or power imposes a duty on the municipality which falls outside the functional areas listed in Part B of Schedule 4 or Part B of Schedule 5 to the Constitution, or is not incidental to any of these functional areas, and the performance thereof has financial implications for the municipality. It is, however, important to note that Chapter 6 of the Disaster Management Act outlines two principles that should be applied to funding the cost of a disaster when such an event is declared. The first principle provided for by section 56(2) of the Act is that in the event of a disaster, National, provincial and local organs of the state may financially contribute to response efforts and post- disaster recovery and rehabilitation. The second principle is supported by the Act assigning the responsibility for repairing or replacing infrastructure to the organ of the state responsible for the maintenance of such infrastructure. However, to allow for some flexibility, section 57 of the Act states that a municipality or provincial government can request financial assistance for recovery and rehabilitation from national government. In general, the Act attempts to encourage budgeting for disaster recovery and rehabilitation through threshold funding, because section 56(3) allows the Minister for Provincial and Local Government to prescribe a percentage of the budget of a provincial or municipal organ of the state as a threshold for accessing national funding for disaster response efforts. The extent to which an organ of the state has implemented disaster risk reduction efforts will be taken into account when requests for disaster response and post- disaster rehabilitation funding are considered. In this way, national government does not implicitly guarantee the provision of financial assistance to organs of the state for disasters that could have been reasonably prevented or reduced in some way. It is important to note at this stage that section 56(4)(d) of the Act states that any applicable post- disaster recovery and rehabilitation policy of the relevant sphere of government may take into account whether the damage caused by the disaster is 26

27 covered by adequate insurance, and if not, the reasons for the absence or inadequacy of such insurance cover. The use of municipal funds for disaster response, relief and recovery efforts is, however, regulated by section 29 of the Municipal Finance Management Act (MFMA) 56 of In terms of this section, the mayor of a municipality is allowed to authorise unforeseeable and unavoidable expenditure arising from an emergency situation. Such expenditure must be ratified by the council in an adjustments budget within 60 days after the expenditure has been incurred. In addition, section 29(2) of the MFMA states that unforeseeable and unavoidable expenditure may not exceed a certain percentage of the budget. This restricts the amount of funds available to respond to emergencies. Such a percentage must be determined by the National Treasury and prescribed through regulations, which have not so far been issued. As far as funding is concerned, it should be kept in mind that disaster risk management has certain unique characteristics which differ markedly from other public services. The reason for this is that disasters are by their very nature unpredictable and require an immediate and decisive response. The National Framework has therefore acknowledged that it is crucial that a balance be struck in the financing framework between the need for financial controls and oversight on the one hand, and the need to ensure that rapid response and recovery are not compromised, on the other hand. Section 214(2)(j) of the Constitution therefore explicitly refers to the requirement that, The need for flexibility in responding to emergencies should be used as one of the criteria for the equitable division of nationally collected revenue among the three spheres of government Funding options for disaster risk management in general 27