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Governments under-invest in natural disaster mitigation: Productivity Commission

The Australian Government’s Productivity Commission’s recently released Natural Disaster Funding Draft Report argues that a greater focus on mitigation would limit the impact of natural disasters, and the Australian Government should increase mitigation funding to the States.

The report finds that the evolution of natural disaster funding arrangements is characterised by a ‘growing generosity’ by the Australian Government during the previous decade, followed by a swing to constrain costs and increase oversight after the recent concentrated spate of costly disasters. It states that natural disaster costs have become a growing, unfunded liability for governments, especially the Australian Government.

Key points from the report include:

  • Australia is exposed to natural disasters on a recurring basis. Effective planning and mitigation of risks is an essential task for governments, businesses and households.
  • Current government natural disaster funding arrangements are not efficient, equitable or sustainable. They are prone to cost shifting, ad hoc responses and short-term political opportunism.
  • Governments generally overinvest in post-disaster reconstruction, and underinvest in mitigation.
  • States need to shoulder a greater share of natural disaster recovery costs to provide them with more autonomy and a sharper incentive to manage, mitigate and insure these risks.
  • Australian Government mitigation funding to states should be increased.
  • Governments have a role in providing emergency relief payments to individuals who have been seriously affected by natural disasters, to avoid immediate economic and social hardship. Reducing duplication, inconsistency, inequity and inefficiency in the provision of such relief is needed.
  • Governments can also do better in terms of policies that allow people to understand natural disaster risks and have incentives to manage them effectively.
  • Information is critical to understanding and managing natural disaster risk. Information on hazards and risk exposure has improved significantly in recent years, but there are opportunities to improve its consistency, sharing and communication.
  • Insurance is an important risk management option, especially for private assets. Households and businesses should be relied upon to manage natural disaster risks to their assets. Insurance markets in Australia for natural disaster risk are generally working well. Pricing is increasingly risk reflective, even to the individual property level.

The report argues that when a significant disaster overwhelms a community, some degree of risk sharing with government ‘may be’ appropriate to protect vulnerable populations and maintain social cohesion. It states that disaster relief payments — coupled with charitable contributions, non-profit and volunteer efforts, as well as the existing social safety net — provide for the management of shared risks.

It also states that the levels of assistance through the disaster relief payments appears excessive for short-term emergency needs (such as temporary accommodation, food and clothing) and relative to other government support for people who experience traumatic events, such as the Crisis Payment (a one-off payment equal to one week’s payment of the claimant’s existing income support). It argues that there is also the risk that the expectation of government assistance creates a ‘moral hazard’ (also known as ‘charity hazard’ when assistance is from community groups) by reducing incentives for individuals and businesses to take out insurance and invest in mitigation, although it concedes that the evidence for this is largely anecdotal.

While the report states that there is merit in providing an emergency relief payment to individuals who have been seriously affected by natural disasters, that these payments should be ‘modest’. It argues that payments should be focused on meeting people’s immediate needs, such as short-term accommodation, and clothing and food for a few days, and that it should not be provided as ‘compensation’ to people who experience disaster damage, nor should it be a substitute for people using their own resources. Longer-term recovery needs can be addressed through people’s own resources (savings and insurance), the existing social safety net and assistance from the community and charities.

In terms of community recovery the report acknowledges that assistance to help restore social networks, community functioning and community facilities produces community -wide benefits that could not be achieved without some support from governments. Further, assistance to non-profit organisations that alleviates the financial burden of natural disasters is also likely to provide community – wide benefits. The report suggests that assistance to non-profit organisations is also best provided as a grant, as opposed to concessional loans or interest rate subsidies.

Organisations are invited to examine the draft report and to make written submissions by Tuesday 21 October 2014.