Unveiling the state of pre-arranged financing for crises

The Centre for Disaster Protection is on a mission to prevent disasters from devastating lives by ensuring that countries are better prepared for crises. To protect people from the devastating impacts of disasters pre-arranged financing should be the primary way to pay for crisis response so that funding gets where it is needed faster, with greater impact. But how much pre-arranged financing is there, and where does it go?

Since the publication of these preliminary findings, the Centre has further refined its methodology. Based on this latest data, 2.7% of total crisis financing flows in 2021 were pre-arranged and 2.2% of crisis financing across the five-year period 2017-2021.

The most significant shift in the numbers is caused by two contingent disaster financing programmes by the Asian Development Bank, which were not identified by the previous version of the methodology. They are two USD500 million loans to the Philippines and Indonesia respectively.

Please note that these and other (smaller) changes are not reflected in the preliminary analysis below but will be presented in the Centre’s flagship report, to be published in November 2023.

The Centre, with expert input from Development Initiatives, has developed a methodology to assess how much Official Development Assistance (ODA) and other aid-like flows from official donors is pre-arranged financing for crisis response. Pre-arranged financing encompasses two key aspects: direct financing for crisis response, and funding that enables governments and aid-receiving partners to pre-arrange crisis financing through, for example, technical assistance and research.

To understand pre-arranged financing in the broader context of crisis funding, the Centre also developed a method to assess how much ODA is directed towards activities to prevent, prepare for and respond to crises. The definitions, pre-arranged financing and crisis financing methodologies are described here.

In this insight, we outline five findings from our first round of analysis.

Only 1.3% of official crisis financing flows were pre-arranged in 2021.

Total official crisis financing includes all expenditures related to preventing, preparing for, responding to, and recovering from disasters. Official financing flows,

including other official flows, are vital for international actors who wish to create incentives and provide technical assistance and financial support for countries and organisations to prepare for shocks before they happen. The Centre’s analysis shows that pre-arranged financing accounted for only 1.3% ($877 million) of the total official financing dedicated to crisis financing in 2021 ($67 billion).

Large payouts from contingent loans – a financial instrument which only disburses when a disaster occurs – account for the peaks in the proportion of pre-arranged financing in crisis financing observed in 2018 and 2020.

Anticipatory financing accounts for a mere 0.2% of total humanitarian aid.

While some pre-arranged financing can be used to respond to a shock, anticipatory financing

is deployed before the impact of a disaster peaks. Anticipatory financing more than doubled between 2017 and 2021, but it is still a small sub-set of humanitarian financing. In 2021, official financing support for anticipatory approaches was $54.7 million, out of the $34 billion of total humanitarian financing.

Research by the Anticipation Hub reported that in 2022, anticipatory action frameworks by UN agencies, the Red Cross, and NGOs released $53.8 million.

Pre-arranged financing is strongly concentrated in middle-income countries, with very little reaching the poorest countries.

At least 70% of pre-arranged financing ($2.8 billion) from 2017 to 2021 went to middle-income countries (MICs), including 30% to upper-middle-income countries. Only 7% of PAF is reaching the least developed countries (LDCs). In comparison, over the same period, 29% of overall ODA went to LDCs and 42% to MICs.

In contrast, anticipatory financing is much more strongly concentrated in the poorest countries. Humanitarian actors channeled at least 67% of anticipatory financing to low-income countries between 2017 and 2021. However, the total anticipatory financing over these five years ($195.8 million) represents less than 5% of total pre-arranged financing ($4.0 billion). 

Contingent financing from the World Bank makes up over half of pre-arranged financing, but other forms have grown substantially.

The World Bank’s Catastrophe Deferred Drawdown Options (Cat DDOs), the majority of which are contingent loans, amounted to $2.1 billion in the five-year period 2017-2021. This constitutes 54% of total pre-arranged financing. Most of this type of contingent financing has been issued by the International Bank for Reconstruction and Development (IBRD) – the arm of the World Bank largely serving the MICs. The International Development Association, the World Bank’s fund for the poorest countries, is responsible for a smaller share of Cat DDOs.

Governments receive often sizeable amounts of Cat DDO payouts when these are activated following a major disaster.

In 2018, for example, the Philippines received a $500 million payout in response to typhoon Ompong, contributing significantly to the peak in overall pre-arranged financing observed that year (see Figure 1). The covid-19 response also activated several Cat DDO payouts in 2020, adding up to $833 million.

Given the large proportion of Cat DDOs, fluctuations in these payouts significantly impact overall pre-arranged financing levels. Therefore, it makes sense to look at the evolution of pre-arranged financing excluding Cat DDOs, which shows a slow growth over 2017-2019 and a more significant increase in 2020.

A contingent loan from France to Mauritius jumps out in the analysis. The $342 million loan in 2020 accounts for much of the high pre-arranged financing levels in that year (53% excluding Cat DDOs) as shown in the above figure. Ecuador and the Dominican Republic also received significant payouts – $55.3 million and $26.9 million, respectively – from the Inter-American Development Bank in response to covid-19 in 2021.

International financial institutions provide the majority of pre-arranged financing, but the role of other donors is growing

International financial institutions (IFIs), such as the World Bank and regional development banks, have provided most (64%) pre-arranged financing over 2017–2021.

However, the contribution of governments and EU institutions is growing and has more than tripled between 2017 and 2021.

Private donors and multilateral agencies (excluding the IFIs) and funds, for example the Central Emergency Response Fund, play a much smaller role.

What should we make of this?

Pre-arranged financing is a way to pay for crises so that funding reaches where it is needed. It can prevent disasters from devastating lives. This analysis is the first time any organisation has attempted to quantify pre-arranged financing. The findings are both sobering and clarifying: pre-arranged financing is increasing, but it is very far from being the primary means by which the world pays for disaster response. And it is not reaching the poorest countries.

The methodology and scope of ambition in what and how we count pre-arranged financing will need further refinement and work. We welcome feedback on the methodology and invite creative collaborations on new sources of data and approaches to build a better picture of the state of pre-arranged financing.

Later this year, the Centre will publish a flagship report building on this insight. Sign up below to make sure you're the first to get a copy.