Disaster risk management funds could become “financial honeypots”

2 Nov 15

Countries planning to establish special disaster risk management funds to meet the costs incurred by earthquakes and floods should “pay attention to the lessons of the past”, an accounting professor has cautioned.

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Countries planning to establish special disaster risk management funds to meet the costs incurred by earthquakes and floods should “pay attention to the lessons of the past”, an accounting professor has cautioned.

The Canterbury region of New Zealand was hit by major earthquakes in 2010 and 2011 Photo: iStock

The creation of special-purpose funds has been advocated by international organisations such as the World Bank and OECD as a way to manage the financial risks presented by natural disasters.

But Sue Newberry, professor and chair of accounting, at University of Sydney Business School told a Public Money & Management seminar on sustainable public management in London last week that such funds risked becoming “financial honeypots” for governments to raid as they see fit.

She cited the example of New Zealand’s Earthquake Commission, which was established in the 1940s to pay for earthquake-related damage to residential properties. It is funded by a levy imposed on top of homeowners’ insurance.

Newberry highlighted a mismatch between the fund’s objectives and how it was used in practice.

Given the Crown guaranteed to meet all earthquake-related costs for householders, its assets were insufficient to demands made of it and rather than protecting the government from fiscal risk, it achieved the opposite, Newberry concluded.

“The Earthquake Commission can’t protect the government from itself,” she added, noting that its revenues were often plundered by the government.

“The establishment of a disaster risk management fund has a great deal of rhetorical appeal,” Newberry concluded.

“But the New Zealand case suggests we should look closer and pay attention to the lessons of the past.”

Regular scrutiny was required to ensure special purpose funds remained effective as it was easy for policies to “degrade over time”.

Other speakers highlighted the tension between the need for long-term sustainable policymaking and short-term political imperatives.

Jeffrey Unerman, professor of accounting and corporate responsibility at Royal Holloway University of London, said short-term solutions could exacerbate long-term problems.

He cited the recent UK row over cuts to tax credits – benefits given to working people on low incomes – as something that could damage inter-generational equity.

Younger people’s life chances could also be affected if investment in education is harmed as a result of the British government’s deficit-reduction programme.

There is “nothing sacrosanct” about current cuts targets, Unerman concluded. “We need to make sure we prepare for the long term.”

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