Natural Disaster Financial Management: It’s All About Pre-crisis Preparation

By Jay Collins, Vice Chairman of Corporate and Investment Banking, Citi

Global economic losses related to natural disasters in 2011 reached a staggering $380 billion, making it the worst year in history. Put in the context of the last two years of natural disaster damage, $124 billion in 2010 and $48 billion in 2009, the magnitude of the increase is daunting. While the Japanese earthquake and tsunami shook the world in so many ways, 2011 will also be remembered for the breadth and number of global tragedies, from tornados across the United States to floods that devastated families from China to Colombia.

Many countries can now be classified as serial victims of natural disasters, experiencing catastrophes with increased frequency and severity. Regular, repeated, and sustained events, like those impacting the Philippines and Pakistan, are straining the capacity of governments around the world to respond to the urgent needs of citizens, financially challenging governments’ ability to operate, and ultimately inhibiting the efforts of governments to rebuild.  As the size, frequency, and global nature of natural disasters mount, the real challenge for governments is to reprioritize pre-crisis planning and preparation.

The need to develop viable and appropriate contingency plans is particularly critical in the area of emergency financial management. Governments living in a cash and paper world stand little chance of successfully responding to the demands of their citizens and the suffering of victims in the aftermath of a disaster. The application of technological advances in the areas of electronic banking and financial management are now enabling governments to replace cash and paper with fast, transparent, efficient, and controlled ways to move money in a crisis.  Unfortunately, these tools require planning and cannot be introduced as calamity strikes.

There are several examples of financial crisis management where pre-crisis work is critical to minimizing damage and human casualty as well as improving response effectiveness.

  • Infrastructure—Pre-crisis investment in upgrading physical urban infrastructure can save countless dollars in post-crisis rebuilding efforts, particularly in coastal urban areas with dense populations and significant GDP concentrations. While fiscal pressures and competing pent-up demand for new infrastructure projects present limitations on government, investment in infrastructure maintenance, land use management, and resilience can make an enormous difference. 
  • Government Procurement —Procurement is often the area of government that is least efficient and most vulnerable to corruption. Natural disasters exacerbate this problem, as the reliance on cash and paper all but eliminates the ability to transparently and effectively deploy and compensate government vendors. Small and medium enterprises (SMEs), often at the front end of the emergency response supply chain (medicine, food, shelter, debris removal, road repair, etc.), can only function for so long without being paid, and they often don’t have the liquidity to manage through a multi-month crisis.  Pre-issued and pre-positioned procurement cards, instant issue emergency procurement cards, and virtual cards are all variations on how card technology is increasing transparency and driving best practices in ensuring governments’ ability to procure in a crisis.
  • Emergency Relief Funds Distribution Process— The financial inclusion agenda is directly related to emergency funds transfer.  If one were to draw a Venn diagram consisting of three circles, one for poor families that require government financial assistance, one for the unbanked, and another for the hardest hit victims of natural disasters, the three circles would end up being virtually concentric. That is why the plight of the unbanked and the policy agenda around government benefit payments is fully aligned with successful post-crisis distribution of emergency relief funds; the recipients are often the same. Currently, the prepaid benefit card is the solution of choice in this area, replacing paper voucher systems; helicopters carrying emergency bags loaded with cash will soon become a thing of the past.

Electronic banking tools and the use of cards have become increasingly important in reassuring donors that the monies they provide not only arrive but are having an impact. In fact, it is important to note that recent aid donors (governments, NGOs or corporates), are not only committing less to countries where aid flows lack transparency and control, but in many cases, they are actually refusing to push the send button for lack of comfort around the fund distribution processes.

Going forward, as mobile financial solutions become more common in developing countries, we will likely see the mobile phone overtake benefit cards as a crisis payment form. Approximately two billion people in the world have mobile phones but are still without bank accounts; in the Venn diagram above, one could draw a fourth circle for mobile subscribers and it would also be a concentric fit.  The potential for mobile finance to have a material impact on natural disaster response and relief is significant, as the phone will carry with it all the capabilities of the prepaid card, as well as identity solutions, and the ability to store and receive critical information. 

Following a disaster, governments are frequently faced with financial strains to fund recovery and rebuild damaged areas. Having plans in place that enable liquidity during the immediate crisis is essential. At a time when governments are mired in debt and deficits, finding creative funding solutions is imperative. One way to manage the financial risks of disasters is by issuing catastrophic bonds, which pay out in the event of specified parametric thresholds and take advantage of investor desire to take uncorrelated risk. Mexico has been at the forefront of sovereign risk mitigation strategies vis-à-vis natural disasters, insuring against Atlantic and Pacific hurricanes as well as earthquakes.

Any discussion of natural disaster response would not be complete without mention of the ever-increasing role of the private sector and global corporate citizenship in this area. Socially responsible corporate citizenship in the disaster area has been transformed markedly since the Asian tsunami of 2004, as many corporations have moved from simple cash donation activities to coordinated in-kind giving, in-area and out-of area advice and technical support. In addition, the level and sophistication of pre-crisis alignment and partnership between the private sector, NGOs, and governments have improved. There are countless partnership examples, including Coca-Cola and the Red Cross, Swiss-Re and USAID, Target and FEMA, FedEx and the U.S. Chamber of Commerce, as well as Citi and the World Food Program. These partnerships bring innovation to response efforts with a focus on improving speed, efficiency, and impact. However, what really defines the success of these public-private efforts is their focus on pre-crisis planning and preparation.

[Editor's note: This article is part of The Role of Business in Disaster Response report.]