“mexican experience in the creation and implementation of financial instruments to prevent and...

SEGOB S E C R E T A R Í A D E G O B E R N A C I ÓN

“Mexican experience in the creation and implementation of financial instruments to

prevent and attend natural disasters"


Emergency and/or Disaster(meanwhile and afterwards)

Disaster Prevention(before)

All federal plans and programs are activated in order to attend the disaster

reconstruction

FOPREDEN FONDEN

Days To Weeks

Hours, Days to Weeks

Months to years

Days, Weeks to Months

Immediate Fund

Occ

urr

ence

o

f th

e p

hen

om

eno

n

EMERGENCYDECLARATION

AID SUPPLIES FOR THE POPULATION

How it is detonated? How it is detonated?

DISASTERDECLARATION

FONDEN resources

Disaster Time Line

Programmed actions Urgent actions

New Reconstruction Fund for local entities


• One of the main targets of the Mexican Government is precisely to transit from a disaster reactive system to a preventive system.

• To accomplish that, by 2004 two prevention programs were implemented: i) the Preventive Trust (FIPREDEN), and ii) the Natural Disasters Prevention Fund (FOPREDEN); which can be used by federal entities, as well as by the Mexican states for the execution of preventive projects, focusing on risk reduction, eradicate vulnerability and exposition of public infrastructure and dwellings of low income population.

Preventive Financial Instruments

Reactive Preventive

• With more resources invested in prevention, we are achieving to avoid large disbursements of resources to attend the damages caused by natural disasters.

Global Strategy


Merge between FIPREDEN and FOPREDEN;

Projects based in the risk knowledge;

The possibility to present projects the entire year round;

The projects has to contain a favorable opinion of a technical federal entity;

The Local Risk Atlas as a starting point to present new preventive projects;

The resources approval and exercise thru the Preventive Trust;

The participation of the academic sector thru the investigation account within the Preventive Trust;

The resources approval can be made within the same year that the project is presented;

Variability in the percentages of participation, seeking to benefit the risk analysis and the promotion of a preventive and self protection culture.

New FOPREDEN


Actions focused in the identification and evaluation of hazards, vulnerabilities and risks;

Actions focused in the risk reduction and the mitigation of the damages caused by the impact of natural phenomena and to avoid the risk social construction process, and

Actions to strength the preventive capacities of the population and self protection before risk situations.

Preventive actions financed by the new FOPREDEN


In attention to the government’s concerning to increase their capacity to attend the damaged caused by natural phenomena without altering the public finances, by 1996 the Natural Disasters Fund (FONDEN) was created.

Although with the FONDEN constitution the trouble related to avoid a lead off on the regular programs resources was in a way solved, there were not a legal regulation which provides the correct control and transparency in the money application; therefore in 1999 the first FONDEN rules were issued, which has had over the years many substantial modifications to accomplish that the procedures be held with maximum efficiency and opportunity.

Background

Presence of disasters caused by nature

The Natural Disasters’ Fund (FONDEN) was created in

1996 Federal Government

Natural Disasters Fund “FONDEN”

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I. The FONDEN program.- which has a budget line within the Federal Budget of every year;

II. The FONDEN Trust.- which is the financial tool thru which the reconstruction is paid and also to finance the acquisition of risk transfer instruments;

III. The Immediate Fund.- which is financed by the FONDEN program and/or the FONDEN trust indistinctly;

Aid supplies acquisition

Reconstruction of damaged infrastructure and housing

Contracting ofrisk transfer instruments

The FONDEN is integrated by the following instruments:

According to the article 37 of the Federal Budget Law, the FONDEN program budget of each year plus the FONDEN trust reserves cannot be less than 0.4% of the federal budget ($800mdd aprox).

supports to develop a risktransfer strategy for local assets


In the event of damages in the infrastructure of the States and Municipalities, the supports provided by FONDEN will be until 50% of the total cost for the reconstruction. The federal entities will be in charged of the execution of this 50% and the local governments will be responsible for the reconstruction of the other 50% with their own resources or thru a credit line from the new Reconstruction Fund for local entities.

To attend the federal infrastructure, all the resources will be provided thru FONDEN, with the condition that the federal entities justified that they don’t count with resources in their budgets to pay by themselves the damages. The trustee of the Federal FONDEN Trust is in charge of delivering the approved resources to the contractor businesses of the Federal entities according to the reconstruction advances.

The FONDEN procedure

SEGOB S E C R E T A R Í A D E G O B E R N A C I ÓNFONDEN PROCEDURE

1/2Beginning

I. Geological

III. Others

II. Hidrometeorological

Issues an opinion regarding the

occurrence of the natural phenomena

Natural

disaster

Ask for the confirmation of the occurrence of

the natural phenomena

Technical entity

Opinion?Opinion?

Negative

Positive

End

Notifies the State that his request

is positive

Local StateNatural Phenomena


Request the issueof the natural

disaster declaration

Installation of the evaluation committee

Each sector evaluates and determine the

amounts required for the reconstruction and

Delivery of the evaluation results

Request for the rapid response

resources to realize urgent actions

Present to the Committee

their preliminary lists of works and actions to be done

Ask for resources to attend the evaluation

Issue and publish on the national

official newspaper the natural

disaster declaration

2/1

Local State

Local State

Federal Agencies

Ask for advancesto start the

reconstruction

Local State

SHCP

Local FONDEN Trust Committee/

SEGOB

Authorizes therapid response

resources torealize the

urgent actions

2/3

Installation

APIN

FONDEN PROCEDURE

Approve the list of urgent

actions to be realized by

each sector


Federal FONDEN Trust National

Committee

Approve the advances

Authorizes thetotal resources

for thereconstruction of

the federal infrastructure andas much as 50%

of the localinfrastructure for

the federal entities to attend.

Meanwhile theStates will take

care of the other 50%

Issue a positive opinion for the documents ofeach sector

so the resources can be approved

3/2

Federal Entities SEGOB

Review and present the

final documents to access the

total resourcesfor the

reconstruction

Fin

SHCP

Start the urgentworks and

actions for thereconstruction

with theadvancesauthorized

Federal Entities

FONDEN PROCEDURE


The Ministry of Interior is the coordinator of the process, since the occurrence of the natural disaster until the approval of the resources, as well as monitoring the correct application of the resources in each and every reconstruction program, no matter if it’s federal or local infrastructure.

The execution of the reconstruction works corresponds to the Federal Entities and the Local States. The reconstruction of the federal infrastructure suffer no changes; the federal entities will be in charged of the reconstruction and FONDEN will pay 100% of the cost directly thru the Federal FONDEN trust.

For the local infrastructure, the States will have to go thru all the FONDEN process and then once the evaluation is done they will have to sign an agreement with the federal government in which they will let the federal entities reconstruct 50% of the damaged infrastructure with FONDEN resources and they will be in charge of the other 50% with their own resources.

Execution


1. The Preventive Action and the Disaster Risk Management as the central key.

2. Strengthening of the existent financial instruments.Seek in a medium time, to merge FONDEN with FOPREDEN, which purpose will be to finance and support the prevision, risk identification, prevention, mitigation, preparedness, emergency attention, recovery and reconstruction, all under one legal regulation and according to the DRM concept, putting the efforts altogether.

3. Strengthening the flexibility, transparency and control in the resources approval and their exercise.

Challenges and Priorities


Balance:

PreventionPreventionReconstructionReconstruction

Challenges and priorities

The preventive action and the disaster risk management in Mexico as a central key element.

FONDENUS$4,731 MDD

FONDENUS$4,731 MDD

FOPREDENUS$114 MDD

How much have we invested in the prevention field?

Between 2005 and 2010 there is a wide gap between the total disbursement in reconstruction against the investment in prevention

The prevention, understood as an investment, will represent in the near future substantial savings, which could be used in the development and economic growth of the country


US $788 million dlls average

US $25 million dlls average

FOPREDEN budget per year:

Balance: Not investing in prevention lead to excessive material and social costs which also compromise the sustainable development of our country

TODAY

PreventionPrevention ReconstructionReconstructionDISASTER

Average FONDEN

expenditure per year:


2005-2010

2005-2010


FOPREDEN

FONDEN

$ minimum

Average loses per year:

20% of the average losses

Investment in prevention per year:

Balance: The prevention, understood as an investment, will represent in the near future substantial savings, which could be used in the development and economic growth of the country

TOMORROW

... diminish

... main financial instrument toinvest in prevention

DESASTREPreventionPrevention ReconstructionReconstruction



Preventive aspects of FONDEN

1. Improvements and additions.

2. Local state funds.

3. Specialized equipment to prevent and attend natural disasters.

4. Risk transfer instruments.








2005-2010

FOPREDEN AND IMPROVEMENTS

$1.42 billionsReconstruction $ 3.05 Billions

RECONSTRUCTION FOPREDEN AND IMPROVEMENTSVS

Improvements and additions: thru FONDEN’s budget, it’s possible to include mitigation actions to avoid future damages thru specific reconstruction norms that will reduce the vulnerability before future disasters

1. Improvements and additions


1.42

3.05

FOPREDEN and improvements

USD$1.42 billions

Reconstruction

USD$3.05 billions


Attending to an eminently preventive spirit, we seek that in a medium time limit all the States count with their own natural disaster fund, in order to decentralize this function from the federal government and avoid that all natural disasters that occur in the country continue being attended with federal resources.


2. Local states funds


This section of FONDEN was created to attend the necessities that the federal entities that belongs to the National Civil Protection System have, to count with the appropriate and sufficient equipment to help the states and municipalities to attend all kinds of different situations caused by disasters.

3. Specialized equipment to prevent and attend natural disasters.



• “Cat Mex” was a combination of a parametric reinsurance policy and a cat-bond covering earthquakes in specific zones of the Mexican territory, which consequently provides protection to FONDEN trust capital.

• The operation covered earthquake risk for up to 450 million dollars for three years. An insurance claim payment is triggered if:

o There’s an official state of emergency or state of disaster declaration issued by the Ministry of Interior, and

o An earthquake with the specified magnitude and depth is recorded with its epicenter located in specific zones.

In May of 2006, the Mexican Government subscribed the first catastrophic bond issuance in Latin America (“Cat Mex”). A new scheme to complement FONDEN through the financial markets.

4. Risk transfer instruments



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Mexico City

Cat-Mex - Features

Cat Mex was a combination of a parametric reinsurance contract and a cat-bond (290 and 160 md, respectively); it covered for three years specific zones against earthquake risk.

Zone A: Northwest Cocos

Zone B: Central Cocos

Zone C: Outer Mexico City

Zone A Zone B Zone CTriggersMagnitude (Mw) >8.0 >8.0 >7.5Depth (km) 200 200 150Sum Insured 150 md 150 md 150 md

SEGOB S E C R E T A R Í A D E G O B E R N A C I ÓNMulti Cat Mexico 2009-Earthquake

MultiCat covers 3 zones against earthquake; the coverage amounts to 140 md.

Zone A Zone B Zone CTriggersMagnitude (Mw) >7.9 >7.4 >8.0Depth (km) 200 200 200Sum Insured 140 md

Multi Cat Mexico is a catastrophic bond that provides protection for earthquake and hurricane risks. The period covered is three years for 2009-2012.

SEGOB S E C R E T A R Í A D E G O B E R N A C I ÓNMulti Cat Mexico 2009-Hurricane

MultiCat provides financial protection to 150 md against hurricanes in two of the highest-risk zones in the Pacific Coast and the riskiest zone in the Atlantic Coast.

TriggerNorth Pacific Area

B MichoacanSouth Pacific Area

C B. California Atlantic Yucatán

Category 4 4 5Sum Insured 50 md 50 md 50 md

Zone


• In this regard, during the first half of this year Mexican Government designed and placed a stop loss insurance for FONDEN. This coverage will provide protection to the public infrastructure and housing in poverty during one year from June 10th and will contribute to minimize the probability of cutting funds assigned to other important programs.

• All of these, in order to give a prompt response to Mexican people, affected by the occurrence of natural disasters.

• The coverage contracted is unique in it type by an emerging country to transfer natural disasters risks.

With the same database and risk analysis done, Mexico began the develop of a risk transfer scheme for events in a bottom layer that covered by Multi Cat.

Stop Loss Coverage - Design

“mexican experience in the creation and implementation of financial instruments to prevent and...

Documents

preventive actions

preventive system

preventive capacities

preventive trust fipreden

risk reduction

natural disasters fund

risk knowledge

risk situations