Natural disaster funding

• Australia is exposed to natural disasters on a recurring basis. Effective planning and mitigation of risks is an essential task for governments, businesses and households.
• Current government natural disaster funding arrangements are not efficient, equitable or sustainable. They are prone to cost shifting, ad hoc responses and short-term political opportunism. Groundhog Day anecdotes abound.
• The evolution of the funding arrangements can be characterised by growing generosity by the Australian Government during the previous decade, followed by a swing to constrain costs and increase oversight after the recent concentrated spate of costly disasters.
• Governments generally overinvest in post-disaster reconstruction, and underinvest in mitigation that would limit the impact of natural disasters in the first place. As such, natural disaster costs have become a growing, unfunded liability for governments, especially the Australian Government.
• Australian Government post-disaster support to state governments needs to be reduced, and support for mitigation increased. Some budget provisioning is also needed.
  • The Commission's preferred funding reform option is to provide a principal level of support to states commensurate with relative fiscal capacity and the original 'safety-net' objective, with the option of top up insurance for those states that require it.
  • States need to shoulder a greater share of natural disaster recovery costs to provide them with more autonomy and a sharper incentive to manage, mitigate and insure these risks.
  • Australian Government mitigation funding to states should be increased.
• Governments have a role in providing emergency relief payments to individuals who have been seriously affected by natural disasters, to avoid immediate economic and social hardship. Reducing duplication, inconsistency, inequity and inefficiency in the provision of such relief is needed.
• Governments can also do better in terms of policies that allow people to understand natural disaster risks and have incentives to manage them effectively.
  • Information is critical to understanding and managing natural disaster risk. Information on hazards and risk exposure has improved significantly in recent years, but there are opportunities to improve its consistency, sharing and communication.
  • Regulations affecting the built environment have a significant influence on the exposure and vulnerability of communities to natural hazards. While building regulations have generally been effective, there is evidence that land use planning is not always incorporating natural disaster risk. Greater transparency is needed.
• Insurance is an important risk management option, especially for private assets. Households and businesses should be relied upon to manage natural disaster risks to their assets. Insurance markets in Australia for natural disaster risk are generally working well. Pricing is increasingly risk reflective, even to the individual property level.

Natural Disaster Funding Arrangements

The Productivity Commission is recommending a major restructure of Australian Government funding for natural disasters in a draft report released today.

The Commission is recommending financial support to the states and territories for natural disaster relief and recovery be reduced while mitigation funding be increased to encourage governments to manage natural disaster risks more sustainably and equitably.

'Natural disasters are an unavoidable part of the Australian landscape,' said Commissioner Jonathan Coppel. 'However, current funding arrangements are prone to cost-shifting, ad hoc responses and short-term political opportunism.'

The inquiry into the natural disaster funding arrangements has found that the current Natural Disaster Relief and Recovery Arrangements (NDRRA) create a financial disincentive for state and local governments to invest in mitigation and insurance.

This is because they must bear the full costs of those activities, whereas they only pay a fraction of the cost of restoring essential assets damaged by a natural disaster.

'The funding arrangements overwhelmingly tip the balance away from planning for and mitigating against natural disasters and towards waiting for expenditure to rebuild destroyed assets' commented Commissioner Jonathan Coppel.

The inquiry also found evidence of duplication, inconsistency, inequity and inefficiency in the provision of emergency relief to individuals.

'We heard many firsthand accounts of assets repeatedly damaged by successive natural disasters, only to be rebuilt in the same location and to the same standard. Groundhog Day anecdotes abound' said Commissioner Karen Chester.

The draft inquiry report identifies several options to reform the funding arrangements for natural disaster relief and recovery.

The Commission's preferred option is to reduce support under the NDRRA by increasing the small disaster criterion (from $240,000 to $2 million), increasing the annual eligibility thresholds and having a flat cost sharing rate of 50 per cent.

'This inquiry is not driven by the need to reduce fiscal costs for the Australian Government. It is about restoring autonomy and incentives to better manage natural disaster risks' said Commissioner Karen Chester.

State and territory governments would have greater autonomy in how the funds are spent and also have the option of purchasing 'top-up insurance' if they require it. The Commission also recommends the Australian Government substantially increase its funding to the states for mitigation from about $40 million currently to $200 million annually.

The draft report also makes findings and recommendations in relation to land use planning, insurance markets and the consistency, sharing and communication of natural hazard information, especially to households.

The Commission was asked by the government to review current natural disaster funding arrangements, with the aim of achieving a more effective and sustainable balance of natural disaster recovery and mitigation.

This report is a draft and the Productivity Commission is seeking views on its proposed reform option. Further submissions will be accepted until 21 October 2014, and there will be public hearings in late October.

• Preliminaries
  • Cover, Copyright and publication details, Opportunity for further comment, Terms of reference, Contents, Abbreviations and Glossary

Volume 1

• Overview
• Draft recommendations, findings and information requests
• Chapter 1 About the inquiry and effective risk management
  • 1.1 What has the Commission been asked to do?
  • 1.2 The conceptual framework
  • 1.3 A guide to the report
• Chapter 2 The performance of Australia's natural disaster funding arrangements
  • 2.1 Current natural disaster funding arrangements
  • 2.2 Managing risks to government owned assets
  • 2.3 Managing shared risks
• Chapter 3 Intergovernmental natural disaster funding reform
  • 3.1 A framework for effective natural disaster management
  • 3.2 Relief and recovery
  • 3.3 Mitigation
  • 3.4 Accountability
  • 3.5 Managing shared risks
  • 3.6 Implementation
• Chapter 4 Policy reforms to improve natural disaster risk management
  • 4.1 Information
  • 4.2 The built environment
  • 4.3 Insurance markets
  • 4.4 Infrastructure
• Volume 1 References

Volume 2

• Supplementary Paper 1 The Commission's approach
  • 1.1 The conduct of the inquiry
  • 1.2 Key themes from stakeholder input
  • 1.3 List of submissions and visits
• Supplementary Paper 2 The impacts of natural disasters
  • 2.1 Introduction and key points
  • 2.2 Natural disaster types and trends in Australia
  • 2.3 The economic costs of natural disasters
  • 2.4 The fiscal costs of natural disasters
  • Annexes
• Supplementary Paper 3 Natural disaster funding arrangements
  • 3.1 Introduction and key points
  • 3.2 A brief history of Australia's emergency management and natural disaster funding arrangements
  • 3.3 Private and government sector roles and responsibilities
  • 3.4 Government funding frameworks
  • 3.5 Government funding
  • 3.6 Private funding
• Supplementary Paper 4 Effective natural disaster risk management
  • 4.1 Introduction and key findings
  • 4.2 What is effective natural disaster risk management?
  • 4.3 Effective natural disaster risk management by households and businesses
  • 4.4 What is the role for government?
  • 4.5 Managing natural disaster risks to government owned assets and service delivery
  • 4.6 Setting policy to reduce impediments to effective natural disaster risk management
  • 4.7 Supporting management of shared risks
• Supplementary Paper 5 Natural disaster mitigation
  • 5.1 Introduction and key points
  • 5.2 What is mitigation?
  • 5.3 Assessing mitigation options
  • 5.4 Institutional and governance arrangements for mitigation decision making
  • 5.5 Funding and financing mechanisms
• Supplementary Paper 6 Insurance and natural disasters
  • 6.1 Introduction and key points
  • 6.2 The role of insurance in risk management
  • 6.3 Are governments' insurance arrangements consistent with effective risk management?
  • 6.4 Are private insurance arrangements consistent with effective risk management?
  • 6.5 Insurance affordability and coverage
• Supplementary Paper 7 Managing natural disaster risk to the built environment
  • 7.1 Introduction and key points
  • 7.2 Policy instruments for managing the built environment
  • 7.3 Land use planning
  • 7.4 Building regulations
  • 7.5 Existing areas of settlement
  • 7.6 Other built assets
  • Annex — Land use planning arrangements
• Supplementary Paper 8 A quantitative assessment of funding arrangements for natural disasters
  • 8.1 Introduction and key points
  • 8.2 Key considerations
  • 8.3 Natural disaster costs under the counterfactual
  • 8.4 Quantitatively assessing reform option 1
  • Annex — Econometric modelling
• Supplementary Paper 9 Lessons from other countries
  • 9.1 Introduction and key points
  • 9.2 Mitigation funding arrangements
  • 9.3 Relief and recovery funding arrangements
  • 9.4 Government backed insurance schemes
  • 9.5 Fiscal management of natural disasters
  • 9.6 Natural disaster information provision
  • 9.7 Regulation of the built environment
• Volume 2 References