Financing Natural Disaster Policy
by Lex Drennan
Since 2009, Australia has experienced numerous natural disasters, taking over 200 lives, and affecting all states and territories. The latest report by the Australian Business Roundtable projects the tangible and intangibles annual cost of natural disasters will rise to $33 billion per annum by 2050.
Over the past decade, under the intergovernmental funding framework, the Natural Disaster Relief and Recovery Arrangement (NDRRA), the Commonwealth has incurred over $13 billion in tangible infrastructure expenses as an unfunded liability. This represents a thirteen-fold increase on the previous decade and, in the context of projections of the growing frequency and severity of disasters, led to the Commonwealth establishing the Productivity Commission Inquiry (PCI) into Natural Disaster Funding. The key direction in the terms of reference, issued by then Treasurer Joe Hockey, was “to review the efficacy and equity of current funding arrangements”.
Far from enhancing intergovernmental coordination and cooperation, state and territory ministers feared the PCI would be used as a cover for cost shifting from the Commonwealth to revenue constrained sub-national administrations. They feared too that demands to invest a greater proportion of funds in mitigation and insurance would fall primarily to them, rather than on the Commonwealth, as it struggles to reset its budget strategy amid rapidly declining revenues. This tension has been a feature of intergovernmental disaster management policy for the last three years as the Productivity Commission took submissions and issued reports. The Commonwealth’s response to the Final Report, delayed due to the election, was issued earlier this year.
In commissioning the Inquiry, the Commonwealth asserted that current “funding arrangements are heavily weighted towards disaster recovery, which reduces the economic incentive for state, territory and local governments to mitigate disaster risk.” Further, despite the responsibility of States and Territory Governments to carry the costs of disaster mitigation, response and recovery, “the Commonwealth has played a major role in providing financial and other assistance to help alleviate the burden on states and territories”.
Items 1 and 4 of the original Terms of Reference (TOR) are instructive in this regard, directing the Productivity Commission to explore and make recommendations on:
1. The sustainability and effectiveness of current arrangements for funding natural disaster mitigation, resilience and recovery initiatives; and
4: Options to achieve an effective and sustainable balance of natural disaster recovery and mitigation expenditure to build the resilience of communities, including through improved risk assessments.
These TOR presuppose that the current arrangements are neither sustainable nor effective. If the Commonwealth considered the current arrangements sustainable and effective then, by definition, the entire PCI undertaking was unnecessary. Submissions by the states and territories made it clear that they did not support the Commonwealth’s operating assumptions.
Given the extensive time, effort and resources committed to the PCI process, by all participants in the disaster governance policy network, it is worth exploring what the Commonwealth’s response means in practical terms. Particularly considering the impact of natural disasters is projected to grow to $25 billion per annum by 2030, it is also worth asking if the Commonwealth’s response to the PCI Final Report will achieve the stated objective of improving natural disaster mitigation and reducing disaster recovery costs.
Findings and Recommendations
The Final Report provided a comprehensive analysis of the current state of natural disaster funding policy in Australia. Its numerous findings and recommendations address risk mitigation policy, insurance and, perhaps most importantly to sub-national governments, cost-sharing for disaster recovery. The ‘headline’ in that theme was that “Australian Government post-disaster support to state and territory governments (states) should be reduced, and support for mitigation increased.”. It expanded on this finding in two parts; the first that the activation threshold for support was too low and the second was that the support ratio (up to 75%) was too high.
To address this finding, the Commission recommended sweeping changes to the cost-sharing arrangements within the NDRRA including:
- Raising the individual event activation threshold (the ‘small disaster criterion’) to $2 million;
- Reducing the maximum safety net contribution by the Commonwealth to 50%; and
- Raising the safety net total reimbursement threshold to 0.45% (from 0.225%) of annual State revenue.
These changes were balanced against recommendations to allow State governments to purchase ‘top-up’ support against any of those three changes, almost as an insurance policy between the States and the Commonwealth. Finally, these changes were to be offset against increased Commonwealth mitigation funding of $200 million per annum matched by States.
Assessing the Commonwealth’s Response
The Commonwealth’s response declined to change the activation or support thresholds, declined to address the duplication of relief payments to the community and recited extant budget commitments in lieu of addressing the PCI’s recommendation to expand mitigation funding. Where recommendations had no net impost on the Commonwealth’s budget, they were supported — such as calls for greater consistency from the insurance industry on policy settings and promotion of existing policies for integrating greater disaster resilience into infrastructure planning. The Commonwealth did, however, take up the Commission’s recommendations around restructuring the funding of the restoration of essential public assets (REPA) to provide greater flexibility and more opportunity for asset betterment post disaster.
The Commission presciently foresaw this outcome, clearly stating that “The recommended reforms comprise a coherent policy package…‘Cherry picking’ component parts would see the much needed balance between mitigation and recovery, as well as greater state autonomy, remain elusive.”
To be perfectly blunt, the Commonwealth’s response can best be described as a damp squib. That does not necessarily mean it is a bad thing for intergovernmental policy, only that its efforts to fundamentally re-align the cost sharing mechanisms appear to have largely been abandoned.
The Restoration of Public Assets
Despite the generally underwhelming nature of the Commonwealth’s response, the changes to the REPA aspects of the NDRRA are a significant improvement to the current arrangements. Currently, the REPA expenses account for the vast majority of Commonwealth and State disaster recovery costs, so any changes to these provisions will broadly impact how public assets are built and rebuilt after disasters. The proposed changes have the immediate potential to reduce administrative overheads and will bring the Commonwealth’s costs into the financial year in which the disaster occurs, thereby reducing the budgetary impact on forward estimates.
More importantly, the approach of upfront payment based on estimated reconstruction costs creates a window of opportunity for State and Local Governments to then determine how best to rebuild, improve or reconfigure the asset in question. This is a significant step away from ‘like for like’ replacement methodology which has been a frustration of the NDRRA for years.
Unsurprisingly for such a complicated policy domain, the devil is in the detail of how the Commission’s recommendations are operationalised. The REPA provisions are currently the most complicated and costly of the NDRRA and there have been many concerns expressed about how the upfront repair estimation process would function. Similarly, the States have expressed concerns about bearing the responsibility for cost over-runs arising in the reconstruction process. It is also not immediately clear how this approach would reduce the Commonwealth’s REPA contribution expenses although the premise is that more effective mitigation through improved asset reconstruction would minimise future REPA costs.
Where to Next for Disaster Funding Policy?
There are ultimately two ways of looking at the Commonwealth response — the significant change to REPA provisions opens up the opportunity for effective betterment funding. However, the response backs away from fundamental overhaul of NDRRA, essentially maintaining the status quo of the framework. This approach sidesteps a major fight with States and leaves the Commonwealth with the ongoing issue of unfunded contingent liabilities. The Commonwealth’s response does little to fundamentally alter Australia’s disaster mitigation and recovery arrangements. Whilst the REPA changes are significant they are a refinement on the current theme, albeit long overdue.
A cynic could be forgiven for thinking the Commonwealth decided it does not have the political capital to win a fight with the States over allocation of disaster recovery costs. This is unsurprising because, although the NDRRA is an obscure policy document to the majority of the general public, the optics of refusing to support the recovery of disaster-affected communities is easily grasped.
If the original rationale for the PCI remains valid, the Commonwealth’s response leaves the country just as exposed to escalating disaster expenditure as before the PCI. Of course, it that rationale is not valid, as could be interpreted by the Government’s new position of refining the status quo, one could also be forgiven for thinking the PCI exercise has been a waste of time, effort and money — and a significant missed opportunity.
ABOUT THE AUTHOR
LEX DRENNAN
Lex Drennan is an industry leader in crisis management and business continuity. She has held senior roles in the public and private sector, leading the development and implementation of crisis and business continuity management frameworks. Her broad experience across crisis management fields spans mining oil and gas, natural hazards management, critical infrastructure protection and resilience and business continuity management in infrastructure and financial services. Lex is engaged as an Adjunct Industry Fellow within Griffith Climate Change Response Program at Griffith University, researching in the field of disaster resilience.
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