Seychelles Damage, Loss, and Needs Assessment (DaLA ... - GFDRR

APPENDIX 8
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Appendix 8. Development Policy
Loan with a Catastrophe Deferred
Drawdown Option (CAT DDO)
The Development Policy Loan with Catastrophe Deferred
Drawdown Option (CAT DDO) is a contingent
credit line that provides immediate liquidity to IBRD
member countries in the aftermath of a natural disaster.
It is part of a broad spectrum of World Bank
Group disaster risk financing instruments available to
assist borrowers in planning efficient responses to catastrophic
events.
The CAT DDO helps develop a country’s capacity to
manage the risk of natural disasters and should be part
of a broader preventive disaster risk management strategy.
Governments determine the mix of disaster risk
financing instruments based on an assessment of risks,
desired coverage, available budget, and cost efficiency.
The CAT DDO complements existing market-based disaster
risk financing instruments such as insurance, catastrophe
bonds, reserve funds, etc.
In order to gain access to financing, the borrower must
implement a disaster risk management program, which
the Bank will monitor on a periodic basis.
Key Features
The CAT DDO offers a source of immediate liquidity
that can serve as bridge financing while other sources
(e.g., concessional funding, bilateral aid, or reconstruction
loans) are being mobilized after a natural disaster.
Borrowers have access to financing in amounts up to
US$500 million or 0.25% of GDP (whichever is less). 3
The CAT DDO has a “soft” trigger, as opposed to a
“parametric” trigger, which means that funds become
available for disbursement upon the occurrence of a
natural disaster resulting in the declaration of a state
of emergency (Table A8.1).
3 For small island countries, the amount can be adjusted,
depending on the country conditions.
At a Glance
■■
Provides immediate liquidity following a natural
disaster, in the form of a contingent loan
■■
Three-year disbursement period, renewable up
to four times
■■
Focuses on developing countries’ ex-ante
capacity to manage natural disaster risk
■ ■ Country must have a disaster risk management
program in place
The CAT DDO has a revolving feature: amounts repaid
during the drawdown period are available for subsequent
withdrawal. The three-year drawdown period
may be renewed up to four times, for a total maximum
period of 15 years.
Pricing Considerations
The CAT DDO carries a LIBOR-based interest rate that
is charged on disbursed and outstanding amounts. The
interest rate will be the prevailing rate for IBRD loans
at the time of drawdown. A front-end fee of 0.50%
on the approved loan amount and a renewal fee of
0.25% also apply.
The CAT DDO provides an affordable source of contingent
credit for governments to finance recurrent losses
caused by natural disasters. The expected net present
value of the cost of the CAT DDO is estimated to be at
least 30% lower than the cost of insurance for medium
risk layers (that is, a disaster occurring once every three
years). This cost saving can be even higher when the
country’s opportunity cost of capital is greater. The CAT
DDO ensures that the government will have immediate
access to bridge financing following a disaster, which is
when a government’s postdisaster liquidity constraints
are highest. It should be complemented with disaster
risk transfer instruments (such as catastrophe risk insurance
or catastrophe bonds) for high risk layers.