Inter-American Development Bank (IDB) Financial Mechanisms for Risk Management

In order to respond to changes in the development needs of the region, particularly in the field of disaster risk management, the Inter-American Development Bank (IDB) has set up two financial mechanisms: the Disaster Prevention Sector Facility and the Emergency Reconstruction Mechanism.

The Disaster Prevention Sector Facility

The purpose of the Disaster Prevention Sector Facility is to reinforce disaster prevention and risk management systems, reducing vulnerability and increasing the level of natural disaster preparedness. The Sector Facility will help countries to meet the risk reduction goals in their development plans through the building of consensus in such areas as cross-sectoral priorities, institutional strengthening and capacity building to enable countries to launch more ambitious disaster reduction programs.
The resources of this Facility, which was created in March 2001, will be dedicated the reimbursable funding of individual operations as requested by member states up to a maximum of US$5 million, subject also to the total of US$150 million set as a cumulative upper limit for sector facility loans. Several countries have already indicated their intention of using this Facility, which also benefits from a fast-track approval process.

In addition to providing reimbursable financing, and in collaboration with bilateral donors, the IDB will also mobilize non-reimbursable grant funds selectively, particularly in the case of low-income countries, to identify intervention needs and opportunities.

The Sectoral Facility will help countries to adopt an integral approach to reduce and manage the risk posed by natural disasters before catastrophe strikes, by means of the following components:

1. Risk identification and forecasting – in order to understand and quantify vulnerability and risk.
2. Mitigation – to confront the structural causes of vulnerability.
3. Preparedness – to improve the country’s capacity to respond promptly and effectively to an emergency.

Funding will also focus on

4. Risk transfer measures – to spread financial risk over time and among different stakeholders through mechanisms such as insurance, reassurance, and catastrophe bonds; as well as
5. Risk reduction systems – the creation of effective national risk reduction systems.

The Emergency Reconstruction Mechanism

In December 1998, the Bank established the Emergency Reconstruction Mechanism (ERM), which enables the Bank to respond promptly after a natural disaster has struck. The first times that the mechanism was used were after the earthquake that hit the coffee-growing region in Colombia and the landslides in Venezuela. More recently, the ERM was used in Belize (Hurricane Keith) and El Salvador (the two earthquakes of early 2001).

The purpose of the Mechanism is to deliver as quickly as possible the resources needed to finance a pre-established menu of eligible activities, which include assistance to accelerate the re-establishment of public services, or the funding of temporary repairs and clean-ups in the period immediately after a natural disaster. A country’s application for these resources sets in motion a fast-track loan-approval procedure in the Bank headquarters, which can last between two and four weeks. The initial US$100 million fund has been exhausted; based on an assessment of its results, the operation will continue, perhaps without a preset overall limit, although individual operations will still be subject to an upper limit. The Mechanism can lend as much as US$20 million in ordinary capital resources or US$10 million from the Special Operations Fund, which provides highly concessional resources.

For more information: www.iadb.org