Emerging Lessons in Financing Adaptive Social Protection
An adaptive social protection system that provides timely assistance at the household level can greatly increase the effectiveness of crisis response.
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This paper aims to improve understanding of how disaster risk financing (DRF) enables social protection (SP) systems to respond to and mitigate the impacts of climatic and potentially other shocks. As the relationship between poverty and disasters becomes clearer, many poor and chronically disaster-affected countries are now examining how SP systems can be designed to provide an effective shock response mechanism when disasters hit. In poor countries with limited resources, social assistance interventions such as food aid and cash transfers — often described as “safety nets” — have formed the primary government SP intervention for vulnerable groups. As disasters become more severe and frequent, more governments are establishing shock-responsive or adaptive social protection (ASP) programs to channel temporary assistance in response to crisis. The COVID-19 crisis is accelerating this trend, with almost every country or territory having planned, introduced or used ASP measures in response to the pandemic (Gentilini et al. 2020).
While it is evident that ASP systems are an efficient way to flex or scale support during or after a crisis, the added value of adopting a DRF approach is not always so clear. This paper highlights how and why a DRF approach is critical in enhancing ASP systems’ ability to respond effectively to crises. The primary advantage of a DRF approach to ASP is its ability to ensure that resources required to respond are in place, in turn ensuring that assistance reaches affected communities on time—as soon as possible following a shock, or in the case of slow-onset disasters such as drought, before communities are severely affected. Experience suggests that without a DRF approach to ensure that all necessary actions have been taken to resource the scalable mechanisms, operationalizing ASP will be less effective.
A solid and growing body of evidence shows the multiple benefits of a timely response to shocks and disasters. An ASP system that provides timely assistance to the household level can greatly increase the impact and effectiveness of crisis response. Most importantly, an early response ensures direct household-level welfare gains in food security and child nutrition. Speedy assistance also preempts household reliance on negative coping strategies, such as the sale of productive assets, which undermine resilience and push households into poverty. These benefits reduce the overall costs of humanitarian response, which increase as response is delayed. Reducing the losses and impact of a crisis also reduces the economic impact nationally and ensures that scarce government and donor resources are not diverted from basic public services or other development investments.
A DRF approach recognizes that while shocks and disasters cannot be prevented, a government can strengthen its own preparedness to manage their impacts. A DRF approach enables governments to move away from reliance on traditional humanitarian support financed with funds raised after an event and toward a preplanned national response system. This paper outlines what a DRF approach looks like when applied to ASP systems in practice. With a technical (rather than operational) focus, it outlines three emerging lessons for developing ASP systems that face recurrent shocks, such as those arising from natural hazards. The lessons highlight experiences and examples where the application of a DRF approach has proved an important factor in success. It also considers what light these lessons can shed on ASP response to the current COVID-19 pandemic.
Lesson 1: Understand the potential cost of response before the disaster
Understanding the cost of responding to disasters before they occur is an essential element of a DRF approach. Without a clear understanding of the response costs, it is impossible to assess whether such a system is financially feasible or determine the most appropriate way to trigger and finance a response. The costs of an ASP system should be assessed using data from multiple historical years, not just one potential shock event. This ex ante thinking is the fundamental characteristic of a DRF approach: by calculating the potential cost ex ante, policy makers and politicians can make informed decisions before and not during the crisis. Moreover, important trade-offs (e.g., when, how much, and to whom to make payments) can be worked through and the necessary financing instruments established in the most efficient way. Examples of countries that have conducted such ex ante analysis include Afghanistan, Ethiopia, Fiji, Kenya, Lesotho, Malawi, Niger, Senegal and Uganda.
Lesson 2: Pre-plan the funding required to ensure timely response
Ensuring funds are available when they are needed is another critical element of an effective DRF strategy. Once the potential cost and likelihood of response are understood across the range of disaster severity scenarios, financing instruments can be put in place to ensure there is a minimum ASP financing package during and/ or after a disaster. Two key issues should be considered when establishing financing instruments for an ASP program:
- Timeliness: Given the importance of speed of response, instruments should be in place (ex ante) to release the right level of funding when it is required, avoiding the need to agree on and arrange finance during a crisis.
- Risk layering: Since no single financial instrument can cover all levels of response in an efficient way, a range of different instrument should be considered to address different risks. Depending on the context and the frequency and severity of risk, these could include contingent reserves, contingent credit and market-based instruments. The appropriate combination will differ in each circumstance but will work to increase the ownership, impact and cost-efficiency of disaster response financing.
Examples of countries with timely and layered DRF instruments include Caribbean nations belonging to the Caribbean Catastrophe Risk Insurance Facility (CCRIF); governments with a World Bank Catastrophe Deferred Drawdown Option (CAT-DDO) such as Kenya and Malawi; and Mozambique, which has established a Disaster Management Fund.
Lesson 3: Put effective delivery mechanisms systems in place
Understanding the cost of disaster response and putting the financing in place to provide response funds is of limited benefit if the assistance cannot be efficiently channeled to disaster-affected populations. Hence the third key lesson is the need to develop effective delivery mechanisms to distribute assistance quickly and efficiently to disaster-affected populations. Payment systems are critical here. The coverage of mobile and digital money systems is expanding rapidly in many low-income countries, and ASP systems that use these to transfer payments are able to disburse cash faster, more efficiently and with greater accountability than those using manual systems; this is true for both regular and emergency payments. In addition to speed, such systems offer security and flexibility and have proven very robust even in the face of widespread physical destruction. This makes a strong case for putting such systems in place before disasters, particularly in places that are chronically affected by shocks. Examples of countries with preestablished electronic or mobile payment mechanisms include Ecuador, Fiji, Kenya, the Philippines and Uganda.
DRF requires a global shift in thinking: rather than seeing disasters as unpredictable humanitarian crises, it sees them as predictable events that can be planned for and managed to minimize impact and increase protection. DRF involves moving from a reactive approach that addresses the fiscal impact of disasters once they happen to a proactive approach. It also supports a depoliticized decision-making process by providing models and estimations that are based on robust predictions and calculations. By taking a DRF approach to ASP, governments can ensure that needed funding and delivery systems are in place to provide timely assistance directly to families and individuals most affected by a shock.