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PC News - October 2015

Reforming funding arrangements for natural disasters

The Commission recently recommended a major restructure of Australia's natural disaster funding arrangements. This would boost Australian Government funding for disaster mitigation while giving states and territories greater autonomy and responsibility for recovery.

Natural disasters have a major impact on Australia's economy, environment and communities. Since 2009, bushfires, floods and cyclones have claimed over 200 lives and destroyed more than 2600 houses.

Although there is little evidence of changes in the pattern of these disasters in the past 40 years, their economic impact has risen, broadly in line with growth in population and the value of assets in risky areas (see figure).

These disasters have had a financial impact on governments through the costs of repairing damaged public infrastructure and providing support to affected communities.

Most natural hazards are unavoidable, but their consequences can be managed. Yet there are widely held concerns that governments spend too much on recovery and do not do enough to mitigate disasters, raising the costs to the community when disasters strike.

Reflecting these concerns, the Australian Government asked the Productivity Commission to conduct an inquiry into the effectiveness and sustainability of Australia's natural disaster funding arrangements.

The report was released in May 2015.

Commonwealth-state funding

State and local governments are responsible for most infrastructure and service delivery, and thus for managing the risks of natural disasters.

The Australian Government provides financial support to the states and territories through the Natural Disaster Relief and Recovery Arrangements (NDRRA). It funds up to 75 per cent of the costs of disaster relief and recovery, above a given threshold.

Insurance losses from natural disastersa

  • Insurance losses from natural disasters
a 'Normalised' losses are losses that would have occurred if past natural disasters were to happen in 2011. They are calculated by adjusting nominal losses for inflation and changes in population, wealth and building standards in cyclone prone areas.

The Commission's recovery funding model

Cost sharing 50 per cent of above-threshold costs
Annual expenditure threshold 0.45 per cent of total state government revenue
Small disaster criterion $2 million, indexed over time
Provision of funding Essential public assets - assessed damages and benchmark prices
Community recovery - reimbursement model, transitioning to untied grants based on assessed recovery costs
'Top-up' fiscal support Actuarially fair premium for states to purchase a lower small disaster criterion or threshold, or higher cost-sharing rate

While the NDRRA provide an important fiscal 'safety net' to the states, the arrangements also influence the incentives states have to manage risks. A major problem is that the arrangements are highly prescriptive, with funding only provided to restore assets to their pre-disaster standard.

This makes it difficult for state and local governments to rebuild assets in a way that improves resilience to future disasters ('betterment').

By subsidising recovery, the arrangements can also discourage states from undertaking mitigation or taking out insurance.

To address these problems, the Commission recommended a new funding model that would give state and local governments greater autonomy in how they spend recovery funding. Funding to restore public infrastructure would be provided based on upfront estimates of damages and 'benchmark prices', with states having more flexibility in their expenditure decisions.

The Australian Government would also cover half the additional costs of betterment to make assets more resilient, provided adequate asset management plans are in place.

At the same time, the Australian Government's marginal cost sharing rate would be limited to 50 per cent and the expenditure thresholds that determine when it will contribute to a state's costs would be raised. This would better align with relative fiscal capacity in the federation.

Reimbursement for community recovery activities - including counter disaster operations and personal hardship relief - would also be rationalised. Australian Government funding would move towards a system of untied grants to give states greater flexibility to respond to local needs.

In addition, eligibility criteria for the Australian Government Disaster Recovery Payment would be legislated to reduce ministerial discretion, with the amount reviewed to reflect immediate relief needs.

The Commission also found that governments underinvest in mitigation that would reduce the impact of natural disasters in the first place.

It recommended that the Australian Government increase its mitigation funding to the states to $200 million per year, allocated to jurisdictions on the basis of natural disaster risk. This would be conditional on states matching funding and adopting best-practice arrangements for selecting mitigation projects.

Other policy areas

The Commission also examined policy areas that influence the community's exposure and vulnerability to natural disasters.

It found that governments, insurers and others have improved the accuracy and availability of natural hazard information, but more can be done.

Governments should work together to develop guidelines for future natural hazard modelling and mapping.

They also need to release more of the data they hold and give greater thought to how to disclose risk information to the community. Insurers have a role to play too, by providing better information to their customers on natural hazards and indicative rebuilding costs.

There is also room for state and local governments to better consider natural disasters in their land use planning.

While planning usually only affects new properties, it can have a major long-term influence on the community's exposure to natural disasters. States can do more to help local governments to better incorporate natural disaster risk into their decisions by providing better guidance and limiting their legal liability for actions taken in 'good faith'.

Local governments could make greater use of private funding sources to recover the costs of disaster mitigation from the beneficiaries, especially in high risk areas of existing settlement.

Natural Disaster Funding Arrangements: Summary of the Commission's key recommendations*

  • Funding arrangements for recovery

    The Australian Government should fund natural disaster recovery by:

    • cost sharing with state and territory governments at a rate of 50 per cent above an annual expenditure threshold
    • providing funding based on assessed damages and benchmark prices
    • providing an option for states to purchase 'top up' fiscal support at an actuarially fair price.

    This funding would be triggered where an annual threshold of 0.45 per cent of state government revenue is met, with a small disaster criterion of $2 million applied to events at the state level. There should also be a transparent mechanism for exceptional circumstances support.

  • Funding arrangements for mitigation

    The Australian Government should increase the amount of annual mitigation funding it provides to the states to $200 million, conditional on states matching funding and adopting best practice project selection.

  • Transparency and accountability

    The Australian Government should publish estimates of future costs of natural disasters in its budget, and provision for a base level of natural disaster expenditure in the forward estimates.

    States should be required to report on: published risk assessments; transparent natural disaster liabilities in state budgets; asset registers and asset management plans at the state and local level that incorporate natural disaster risk; implementation of the Enhancing Disaster Resilience in the Built Environment Roadmap; and effective mechanisms to identify and prioritise mitigation spending.

  • Managing shared risks

    The Australian Government should legislate the current eligibility criteria for the Australian Government Disaster Recovery Payment, remove Ministerial discretion, and review the amount provided so it is more reflective of immediate emergency relief needs.

  • Information

    Governments at all levels should make new and currently held natural hazard data publicly available in accordance with pen public sector information principles.

    State and local governments and insurers should explore opportunities for collaboration and partnerships.

    Governments should support the development of guidelines for the collection and dissemination of natural hazard mapping, modelling and metadata.

  • Built environment

    States should clearly articulate their statewide natural hazard risk appetite in land use planning policy.

    States should provide their local governments with statutory protection from liability for releasing natural hazard information and making changes to local planning schemes where such actions have been taken in 'good faith'.

  • Insurance

    State taxes and levies on general insurance should be phased out and replaced with less distortionary taxes.

    Insurers should provide additional standardised information to households regarding their insurance policies, the natural hazards they face and indicative costs of rebuilding after a natural disaster.

* A complete list of draft recommendations are available in the report overview.

Natural Disaster Funding Arrangements

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