Drought Risk Management in Ethiopia – the big LEAP*

1. Drought Risk Management in Ethiopia – the big LEAP* Expert Meeting – Requirements of Weather Markets WMO December 5, 2007 Ulrich Hess, Chief of Business Risk Planning *Livelihoods + Early Assessment + Protection

2. AGENDA • Risk: Managing Risk instead of Managing Disasters • Ethiopia Phase I: Pilot 2006 • Ethiopia Phase II: Risk Management Framework

3. PROBLEM: TIMING and NATURE OF INTERVENTIONSE.g. Safety Net Areas - Highlands Emergency Appeal Life Saving Interventions (mostly food) Crop+ Emergency Needs Assessment Aug Sept Oct Nov Dec Jan 2008 Feb Mar Apr May June July Aug

4. RATIONALE (I): EFFECTIVENESS - PROTECT LIVELIHOODS FIRSTExample: Tigray, Ethiopia Enrolment of Beneficiaries Cash or food for work Aug Sept Oct Nov Dec Feb Mar Apr May June July Aug Jan 2008 LEAP Index signals severe livelihood stress Funds disburse

5. Ethiopia Pilot Drought Insurance Transaction • designed in response to Government’s concern that Ethiopia was wrought in a cycle of responding to disasters rather than managing risks. • tested the possibility of leveraging donor contributions to secure a reliable, timely and cost-effective way of funding emergency operations

6. THE 2006 ETHIOPIA TRANSACTION • Risk Transfer Structure • Counterparty (buyer of option): UN World Food Programme – on behalf of Government of Ethiopia • Competitive Tender Process • Official UN WFP procurement process • 9 companies invited to tender, 5 participated • Tender Winner (seller of option): AXA Re, Paris • Final Transaction: • Premium: $930,000, paid by USAID mainly • Maximum Payout: $7,100,000

7. Lessons Learnt from the Pilot • There is a market for Ethiopian drought risk; • possible to develop objective, timely and accurate indicators that serve as a relatively good proxy of actual aggregate needs; • Ethiopian weather data from NMA satisfies international weather risk market standards; and • If insurance is to become an effective risk-management tool for Ethiopia, it must be coordinated with other financial instruments to provide more comprehensive coverage of Ethiopia’s drought risks.

8. ETHIOPIA PHASE II – RISK MANAGEMENT FRAMEWORK I. IMPROVED INDEX: LEAP II. Develop budgeted contingency plans Early Warning System with reliable baseline and trigger points Contingency Planning for appropriate and timely response Contingent Financing of contingency plans Capacity Building for effective plan implementation IV.Establish timely emergency financing through use of contingency financing III. Build planning and implementation capacity at regional level

9. IMPROVED INDEX – PART OF RISK MANAGEMENT FRAMEWORK I. IMPROVED INDEX: LEAP Early Warning System with reliable baseline and trigger points

10. Role of LEAP as a risk management framework • provide a good proxy estimate of the costs of protecting transient food insecure peoples’ livelihoods at the time of shock; • be an independent, objective, verifiable and replicable index of livelihood losses in the country; • convey information in near real-time to ensure that to the extent possible the response to livelihood crises will be more timely and effective. • Provide early warning of livelihood stress levels • Signal amount of financial resourcesrequired for livelihood protection at regional levels • Crop and pasture monitoring

11. Livelihoods + Early Assessment + Protection:LEAP INDICES • Objective: capture livelihood protection funding needs at regional level • Target group: vulnerable population Weather data Crop + soil coefficients Water Requirement Satisfaction Index (WRSI) for Crops + Rangelands Livelihood Protection Beneficiaries Costs (Livelihood Protection Cost Index LPCI)

12. Viewing output parameters

13. RISK MANAGEMENT FRAMEWORK II. Develop budgeted contingency plans Contingency Planning for appropriate and timely response WFP COMPETENCY

14. III. CAPACITY BUILDING + OWNERSHIP • Government and development partners agreed that the index should be developed with participation of all stakeholders. • A Technical Steering Committee chaired by FSCB, was established to oversee the implementation of phase II of the project. • Training of Government (MOARD, NMA, and FSCB staff) on the LEAP software package was done in June and October. • A concept note and project proposal for LEAP development and endorsed by the Technical Steering Committee. • The phase II was funded jointly by the Government, WFP, the World Bank and FAO.

15. RISK MANAGEMENT FRAMEWORK Contingency Financing of contingency plans IV.Establish timely emergency financing through use of contingency financing WB + DFID (?) + WFP (?)

16. Contingency Grant/Fund/WFP CEMOP Flash Appeal Productive Safety Net Insurance 8.3 Mil Safety Net Beneficiaries 7 Mil Livelihood Protection Target Beneficiaries Drought severity – Early Livelihood Protection costs ($US Mil) IV: INTEGRATED RISK FINANCING Occurrence (no. of years)

17. CONCLUSION: THIS IS IMPORTANT • Destitution • Dignity • Cost • Climate Change

18. THANKS! • Ethiopia LEAP Tool download: http://vam.wfp.org/LEAP Free software download. Please do not distribute without consent of WFP and World Bank • For questions: elliot.vhurumuku@wfp.org, ulrich.hess@wfp.org,