Colombia

Prevalence of natural hazards

Colombia, which is located in the north-western part of South America, includes several distinct natural regions, among them the Andes Mountains traversing Colombia, the Amazon rainforest, the Pacific Ocean in the west and the Caribbean Sea in the North. These varied natural landscapes with their climatic differences have shaped Colombia’s exposure to natural hazards (Table below).

The Andes are part of the Ring of Fire, a region that is subject to major earthquakes and volcanic eruptions. An estimated 86% of the population of Colombia is exposed to medium to high earthquake risk. Although less frequent than hydrometeorological disasters, earthquakes and volcanic eruptions have inflicted major losses. The eruption of the Nevado del Ruiz volcano in 1985, which triggered massive avalanches of ice, water and rocks resulted in some 23 000 fatalities and an estimated USD 1 billion in damages (Table 7.2). The Paez earthquake in 1994 caused 295 fatalities, and the Armenia earthquake in 1999 some 1 185 fatalities and an estimated USD 1.8 billion in damages (Campos Garcia et al., 2011).

Types of natural hazards to which Colombia is exposed

Category

Type of hazard

Geophysical

Earthquakes, volcanic activity, landslides

Meteorological

Cyclones, severe storms

Hydrological

Floods, tsunamis

Climatological

El Niño, La Niña;events ; droughts

Source: EM-DAT, 2017.

Major natural disasters in Colombia (since 1980)

Disaster event/location

Year

Fatalities

People affected

Estimated damage (in USD)

Volcanic eruption/ Nevado del Ruiz

1985

21 800

12 700

1 billion

Landslides Villatina/ Medellin

1987

640

6 436

not available

Earthquake/ Armenia

1999

1 186

1 200 000

1.9 billion

Floods (La Niña)

2010/11

556

3 78 85 99

6.3 billion

Sources: EM-DAT, 2017; UNGRD (data submitted to authors), ECLAC, 2012.

The humid tropical conditions in the Amazonia, Orinoquia and Caribbean regions frequently bring heavy rains. El Niño and La Niña weather phenomena have also had significant impacts on the rate and intensity of floods, droughts and landslides. An estimated 28% of the population of Colombia is exposed to major flood risk, and 31% to high or medium landslide risk. Intensive urbanisation across the four major metropolitan areas (Bogotá, Medellín, Cali and Barranquilla) has compounded the damages and losses suffered from floods and landslides by causing deteriorating environmental conditions, drying of wetlands and watersheds, loss of forests and vegetation and the resulting erosion and increased runoffs. Due to pressures on the land and uncontrolled development, the number of households and assets in high-risk areas has increased. Insufficient infrastructure further increases the vulnerability of these areas. The floods caused by the 2010/11 La Niña event caused an estimated USD 6.3 billion in cumulative damages.

Climate change is expected to expose Colombia to new risks. Shifting precipitation patterns are expected to change the climate of the Caribbean region to a more arid one. Temperature increases are likely to be especially marked in the Andean region, and a transition from a semi-humid to a semi-arid climate is foreseen for parts of that region. Although the impact of this change on the year-to-year variability of precipitation is still uncertain, disasters related to rainfall variability are projected to become more frequent (OECD, 2014).

Past fiscal impacts of disasters

Estimates of the average annual loss from natural hazards in Colombia range from USD 177 million (Campos Garcia et al., 2011) based on historical records, to USD 381 million (PreventionWeb, 2017). Most of the resources in the aftermath of a disaster are provided by the government. Of the damages caused by the 2010/11 major floods, for example, only 7% were insured (OECD, 2014). Annual average disaster-related government contingent liabilities have been estimated at USD 490 million (GFDRR, 2012).

The majority of resources for managing disasters come from the General Budget of the State. Between 1998 and 2010 the resources invested amounted to an estimated USD 2.5 billion, which corresponds to an approximate annual total of USD 300 million (Campos Garcia et al., 2011). In 2011 and 2012 the government invested 0.9% and 0.7% of gross domestic product (GDP), respectively, in flood response (CONFIS, 2011, 2012 as cited in OECD, 2014). Financing needs were covered by an additional tax on high-value real estate (0.1% of GDP); a levy on financial transactions; a loan from the World Bank; and reallocations within the current budget (CONFIS, 2011). Although regular evidence on disaster risk management expenditures is not available, existing data comparing spending in different years show that there is considerable annual variation.

El Niño and La Niña years are marked by especially big outlays for disaster-related government spending. For example, the La Niña event that took place in 2010/11 led to a total government investment for both the immediate response and recovery spending estimated at USD 1.5 billion. The El Niño event in 2014/15 led to a total of USD 608 million in government spending, of which USD 66 million was financed by the National Unit for Disaster Risk Management (Unidad Nacional para la Gestión del Riesgo de Desastres, UNGRD).

Colombia’s National Disaster Risk Management Fund (hereafter “the Fund”) derives from an earlier Calamities Fund established in 1984, and is based on Law No. 1523. Managed by the UNGRD, the Fund finances research into disaster risks as well as activities related to disaster risk reduction, to disaster risk management as well as activities related to disaster recovery and financial protection. It is the first funding instrument tapped in case of a disaster. The Fund is essentially a disbursement mechanism, whose financing is allocated from the national budget, including different sectoral budgets. The Fund has a very small annual fixed allocation; when a disaster response exceeds what is available in the Fund, the UNGRD has to mobilise other funding resources, including private donations (whose share can be as high as 8% as during the Mocoa landslide in 2017). There is no information available on the Fund’s size or regularity of funding provision. For the time being, the Fund is not regulated but functions through a compromise among different vested actors and agencies.

The Adaptation Fund (Fondo de Adaptación, AF) was initially created following the 2010/11 La Niña rainy season in order to provide funding for the reconstruction and recovery of areas affected by the disastrous rainfalls. The National Development Plan 2014-18 expanded the focus of the AF beyond recovery funding for La Niña-related events and introduced funding for disaster risk reduction and climate change adaptation measures. To accelerate implementation of projects, the AF is allowed to use special procurement processes until 2018.

Colombia also has access to funding through a World Bank-provided Catastrophe Deferred Drawdown Option (CAT DDO) that provides USD 250 million in standby funding in case of an emergency (OECD, 2014). The 2010/11 La Niña floods and mudslides triggered the CAT DDO in December 2011. In 2016, the CAT DDO was renewed to provide USD 250 million in standby funding until 2021 (IEG, 2016).

To increase resources during emergency response and recovery, the central government seeks to increase flexibility in current budget allocations so as to redeploy spending during disasters (OECD, 2014). Funding may be reassigned from sectoral budgets as well as from the general budget administered by the Ministry of Finance and Public Credit. If funds remain insufficient after reassigning existing budgets, the Ministry of Finance and Public Credit requests a budget increase through congress. Until now the scope for budget reassignment has been limited, however, as the great majority of the budget provisions do not allow for such reallocations (World Bank, 2012b).

Managing disaster-related contingent liabilities

Identification of disaster-related contingent liabilities

Identification of disaster-related contingent liabilities requires the identification of both explicit and, to the extent possible, implicit liabilities.

Explicit contingent liabilities

Explicit contingent liabilities arise from legal commitments of both central and subnational governments to provide disaster assistance. The Colombian Government has made a commitment to finance disaster recovery, but that commitment does not explicitly specify cost-sharing agreements (though currently negotiations are under way to change this), nor does it establish a legal responsibility to pay for public or private asset reconstruction. Law No. 1523/2012, which established the institutional framework for disaster risk management in Colombia does not make government obligations in this realm explicit, but broadly states that disasters must be addressed under the principles of equality and protection.

Explicit central government obligations for post-disaster financial assistance in Colombia

Commitment to finance…

Yes

No

… post-disaster response and recovery

… a share of the costs incurred by subnational governments for post-disaster response and recovery

×

… reconstruction and maintenance of central government-owned public assets

×

… recovery and reconstruction of private assets

×

… other expenses incurred by subnational governments (e.g. payments to businesses or individuals)

×

… government guarantees for disaster losses incurred by public corporations and public-private partnerships

×

Source: OECD Survey.

Several reviews have been carried out to identify the central government’s existing disaster-related contingent liabilities. Looking at past expenditure by the government in the aftermath of a natural disaster, the reviews find several liabilities that can be considered as quasi-explicit, given the regularity with which they have been assumed by the government. These include recovery and reconstruction costs of central and sub-national public assets. The government of Colombia has also regularly compensated the losses of private houses for the poorest population groups (strata 1 and 2) under the assumption that this compensation would surpass local governments’ ability to pay. The responsibility to pay for these houses is claimed to be both “legal” and “political”, and so there is some ambiguity in whether the liability is explicit or implicit (Ministry of Finance and Public Credit, 2011). The government has in addition assumed disaster-relates costs incurred by state-owned enterprises.

Implicit contingent liabilities

As mentioned above, the disaster-related contingent liabilities of Colombia’s government are not entirely explicit; Law 1523/2012 indicates a broad obligation by government to provide post-disaster support but it does not specify commitments in detail. Therefore, the government’s past assistance efforts could be classified as implicit liabilities, meaning they are not determined by a law or a contractual rule.

This ambiguity leaves significant room for manoeuvre. For example, even though a semi-explicit commitment from the government is in place to provide post-disaster assistance for low-income population groups, there is no law that stipulates how much each group should receive. Thus in specific circumstances nothing impedes the government from providing post-disaster assistance to any population group, regardless of income.

Estimation of insurance payouts

At present, the national government does not have regular information on the size of past or potential future insurance payouts. It is estimated around 3% of households are insured against the impacts of disasters. Knowledge about businesses disaster coverage is equally scant, although larger businesses tend to have better coverage than smaller ones.

Equally little is known about the insurance coverage of public assets; currently, it is estimated to be less than 5%. The government has only recently begun to regularly assess the sources of the liabilities related to state-owned enterprises and the past costs to government during disasters. It can be assumed that insurance coverage for such enterprises is currently very low. The government is currently engaged in establishing a database on public assets and their respective insurance coverage.

Quantification of disaster-related contingent liabilities

No regular information is currently available on the actual government expenditure on disaster risk management, either at the national or sub-national level. The government has relied on modelling disaster losses and damages for its estimation of disaster-related contingent liabilities. As part of its disaster risk financing policy objectives, the government plans to conduct regular (annual) assessments of these liabilities, based on expected government expenditures. In 2017 such an assessment of future disaster-related government expenditures was carried out for the first time. This initial assessment focused on the quantification of expected spending related to hazardous events triggered by La Niña.

In a 2010 review, the Ministry of Finance and Public Credit (2011) estimated the annual expected loss from disasters to be USD 490 million, with the probable maximum loss for 100-year and 500-year return periods at USD 2.9 billion and USD 5.6 billion, respectively. The fiscal deficit index for disasters captures the relationship between the demand for resources to cover losses that a government would have to assume in the aftermath of a disaster, and the government’s ability to generate internal and external funds to replace the damaged assets; an index greater than 1indicates insufficient ability of a government to respond to disasters. The index for Colombia has been calculated at 1.28 (Government of Mexico and World Bank, 2012a).

Estimated annual disaster-related contingent liabilities in Colombia

Estimated contingent liability

Million USD

% GDP

% Budget

Annual expected loss

490

0.2

0.7

100-year probable maximum loss

2 976

1.2

4.4

250-year probable maximum loss

4 417

1.8

6.6

500-year probable maximum loss

5 655

2.3

8.4

Source: Mechler et al., 2016.

In the absence of evidence on actual government expenditures for disaster risk management, the size of the different funding sources and instruments, including the National Disaster Risk Management Fund and the Adaptation Fund, can approximate yearly funding.

With regard to disclosing disaster-related contingent liabilities, the Ministry of Finance and Public Credit currently publishes information on its website about the progress being made to diminish contingent liabilities.

Estimating the fiscal impacts of disaster-related contingent liabilities and integrating them into overall fiscal forecasting

Through its Risk Deputy Directorate, the Ministry of Finance and Public Credit aims to, reduce Colombia’s fiscal vulnerability. Toward this end, it monitors the risks to which its assets, liabilities, and specified contingent liabilities are exposed. In analysing the fiscal impact of a range of government contingent liabilities, the ministry showed that disaster-related contingent liabilities pose a significant fiscal risk. This estimation does not include the fiscal impact of disasters on subnational governments. The result of the fiscal impact calculation led the government to formally recognise natural hazards as a source of fiscal risks; to make fiscal disaster risk assessment part of a mandatory fiscal risk assessment; and to integrate the calculation into a broader fiscal risk management strategy (Mechler et al., 2016).

With regard to fiscal forecasts, the Ministry of Finance publishes the Medium-Term Fiscal Framework by 15 June every year and submits its results to the Economic Commissions of the Senate and the House of Representatives (World Bank, 2012b). This publication includes projections of government revenues and expenditures over the next decade. Contingent liabilities are outlined in a separate chapter; however, disaster-related contingent liabilities are at present not included.

By publishing the Medium-Term Fiscal Framework on the Ministry of Finance and Public Credit website, the government discloses its contingent liabilities and follows the legal prescriptions of Law No. 819 of 2003, which requires the government to publish a detailed record of its fiscal analysis, including 10-year projections. The law also requires this publication to include a chapter on the government’s explicit expected contingent liabilities.

The fiscal impacts of natural disasters are not considered in the national debt strategy. The macroeconomic and fiscal forecasts consider shocks based on different market variables, but disaster-related impacts are not currently included.

Implementation arrangements for providing post-disaster financial assistance

When a disaster occurs, subnational governments – i.e. municipalities followed by departments – are the first to respond and provide necessary financial resources. If their financial capacity is exceeded, central government assistance comes into play. However, Colombian law does not specify explicit roles or cost-sharing arrangements for the different levels of government, though negotiations are ongoing to establish formal agreements on cost sharing. In the event of a disaster, the board of the National Disaster Risk Management Fund decides on the resources needed and determines priorities for the Fund’s allocation. Responsibility for managing the Fund lies with the aforementioned UNGRD. Law 1523/2012 requires all entities in the National System for Disaster Risk Management to provide financing. The Ministry of Finance and Public Credit is required to ensure that sufficient financial resources for the Fund are available in the Fund. When a disaster response exceeds what is available in the Fund, other funding resources, including donations, may be mobilised. Donations can be substantial; as mentioned above, they made up 8% of the total budget during the 2017 Mocoa landslide.) Upon exhaustion of the Fund, Colombia draws on the contingent credit line CAT DDO, established through the World Bank, to fund emergency relief and recovery.

Mitigating disaster-related contingent liabilities and financing residual risks

Article 220 of Law No. 1450 of 2011 requires the Ministry of Finance and Public Credit to design a strategy to reduce fiscal vulnerability to disasters. With the Policy Strategy for Public Financial Management of Natural Disaster Risk a first strategy document was drawn up with technical assistance from the World Bank in 2017. The document recommends to assess, reduce and manage fiscal risk stemming from disasters. It describes three main policy objectives: 1) identification and understanding of fiscal risk due to disasters; 2) financial management of natural disaster risk, including the implementation of innovative financial instruments; and 3) catastrophe risk insurance for public assets Ministry of Finance and Public Credit, 2017. These priorities are also part of the Colombia’s National Development Plan 2014-18, based on Law No. 1753 of 2015.

To reduce disaster-related contingent liabilities ex ante, the government of Colombia has emphasised the importance of disaster risk reduction. The National Plan for Disaster Risk Management, Colombia’s core policy for disaster risk management, includes a strong focus on disaster risk reduction, with clear goals for public stakeholders to achieve by 2025 (UNGRD, 2016). The Adapation Fund created following the devastating impacts of the 2010/11 El Niño and La Niña events as well as the National Disaster Risk Management Fund may be tapped into for supporting disaster risk reduction projects. The National Plan for Disaster Risk Management also includes a project that seeks to inform the design of disaster risk insurance instruments for central and subnational public assets, critical infrastructure, as well as for businesses and households (UNGRD, 2016). With support from the World Bank, technical guidance has been developed for concessionaires under public-private partnership schemes for road infrastructure. In addition, a framework agreement for regulating insurance intermediaries has been reached with Colombia Compra Eficiente, Colombia’s public procurement agency; the key objective is to standardise procurement arrangements with insurance intermediaries.

References

Campos Garcia, A., N. Holm-Nielsen, C. Diaz-Bonilla, R. Vargas, D. Marcela, P. Costa, R. Carlos, F. Ramirez Cortes and E. Dickson (2011), Analysis of Disaster Risk Management in Colombia: A Contribution to the Creation of Public Policies. World Bank, Washington, DC, https://openknowledge.worldbank.org/handle/10986/12308.

De la Fuente, A. (2009), “Government expenditures in pre- and post-disaster risk management”, Background note for the 2010 World Bank report Natural Hazards, Unnatural Disasters: The Economics of Effective Prevention, World Bank, Washington, DC, www.gfdrr.org/sites/default/files/publication/natural-hazards-unnatural-disasters-2010.pdf.

ECLAC (2012), Valoración de Daños y Pérdidas – Ola Invernal en Colombia 2010–2011 [Damage and loss estimates – Cold wave in Colombia 2010–2011], ECLAC and Inter-American Development Bank, Bogotá, www.cepal.org/publicaciones/xml/0/47330/olainvernalcolombia2010-2011.pdf.

EM-DAT (2017), The Emergency Events Database, Université Catholique de Louvain (UCL) – CRED, D. Guha-Sapir, Brussels, Belgium, www.emdat.be (accessed 14 September 2017).

GFDRR (2012), “Fiscal management of natural disasters in Colombia: Assessing and managing contingent liabilities related to natural disasters”, Disaster Risk Financing and Insurance Program and Global Facility for Disaster Risk Reduction, World Bank Group, Washington, DC, http://siteresources.worldbank.org/EXTDISASTER/Resources/8308420-1342531265657/Colombia_Fiscal_Mgmt_Nat_Dis_final-fcmnb.pdf.

Government of Mexico and World Bank (2012), Improving the Assessment of Disaster Risks to Strengthen Financial Resilience: A Special Joint G20 Publication by the Government of Mexico and the World Bank, World Bank, Washington, DC, https://openknowledge.worldbank.org/handle/10986/26784.

IEG (2016), “ICR review”, Independent Evaluation Group, World Bank Group, http://documents.worldbank.org/curated/en/414991473920825791/pdf/ICRR14919-P113084-Box396299B-PUBLIC.pdf.

Mechler, R., J. Mochizuki and S. Hochrainer-Stigler (2016), “Disaster risk management and fiscal policy: Narratives, tools, and evidence associated with assessing fiscal risk and building resilience”, Policy Research Working Paper, No. 7635, World Bank Group, Washington, DC.

Ministry of Finance and Public Credit (2011), Contingent Liabilities: The Colombian Experience, Republic of Colombia, Bogotá.

Ministry of Finance and Public Credit (2017), “Colombia: Policy strategy for public financial management of natural disaster risk”, Republic of Colombia, Bogotá, www.minhacienda.gov.co/HomeMinhacienda/ShowProperty?nodeId=%2FOCS%2FP_MHCP_WCC-059132%2F%2FidcPrimaryFile&revision=latestreleased.

OECD (2014), Climate Resilience in Development Planning: Experiences in Colombia and Ethiopia, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264209503-en.

UNGRD (2016), Plan Nacional de Gestión del Riesgo de Desastres - Una estrategia de desarrollo 2015 - 2025 [National Plan for Disaster Risk Management - A 2015 - 2025 development strategy], http://repositorio.gestiondelriesgo.gov.co/handle/20.500.11762/756.

PreventionWeb (2017), Colombia - Disaster & Risk Profile, www.preventionweb.net/countries/col/data/.

World Bank (2010), Natural Hazards, Unnatural Disasters: The Economics of Effective Prevention, World Bank Group, Washington, DC, https://www.gfdrr.org/sites/default/files/publication/natural-hazards-unnatural-disasters-2010.pdf.

World Bank (2012), “Fiscal risk assessment of contingent liabilities associated with natural disasters: The Colombian experience”, World Bank Group, Washington, DC, https://openknowledge.worldbank.org/bitstream/handle/10986/22118/Fiscal0risk0as0Colombian0experience.pdf?sequence=1&isAllowed=y.

CONFIS (2011), “Actualización plan financiero 2011/03” [Update of the financial plan 2011/03], Consejo Superior de Política Fiscal [Senior Council for Fiscal Policy, Ministry of Finance and Public Credit].

CONFIS (2012), “Plan financiero 2012/03” [Financial plan 2012/03], Consejo Superior de Política Fiscal [Senior Council for Fiscal Policy, Ministry of Finance and Public Credit].

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