DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. Productivity Commission Natural Disaster Funding Draft Report Arrangements Volume 1 t fSeptember 2014 a r D This is a draft report prepared for further public consultation and input. The Commission will finalise its report after these processes have taken place. DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report.  Commonwealth of Australia 2014 Except for the Commonwealth Coat of Arms and content supplied by third parties, this copyright work is licensed under a Creative Commons Attribution 3.0 Australia licence. To view a copy of this licence, visit http://creativecommons.org/licenses/by/3.0/au. In essence, you are free to copy, communicate and adapt the work, as long as you attribute the work to the Productivity Commission (but not in any way that suggests the Commission endorses you or your use) and abide by the other licence terms. Use of the Commonwealth Coat of Arms For terms of use of the Coat of Arms visit the ‘It’s an Honour’ website: http://www.itsanhonour.gov.au Third party copyright Wherever a third party holds copyright in this material, the copyright remains with that party. Their permission may be required to use the material, please contact them directlyt. Attribution f This work should be attributed as follows, Source: Productivity Commission, Natural Disaster Funding a Arrangements. If you have adapted, modified or transformed this work in anyway, please use the following, Source: based on Productivity Commission data, Natural Disaster Funding Arrangements. r An appropriate reference for this publication is: D Productivity Commission 2014, Natural Disaster Funding Arrangements, Draft Inquiry Report, Canberra. Publications enquiries Media and Publications, phone: (03) 9653 2244 or email: [email protected] The Productivity Commission The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. Its role, expressed most simply, is to help governments make better policies, in the long term interest of the Australian community. The Commission’s independence is underpinned by an Act of Parliament. Its processes and outputs are open to public scrutiny and are driven by concern for the wellbeing of the community as a whole. Further information on the Productivity Commission can be obtained from the Commission’s website (www.pc.gov.au). DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. Opportunity for further comment You are invited to examine this draft and comment on it by written submission to the Productivity Commission, preferably in electronic format, by 21 October 2014. Further information on how to provide a submission is included on the inquiry website http://www.pc.gov.au/projects/inquiry/disaster-funding The Commission will be holding public hearings in late October 2014 (23 October to t 30 October). Likely locations for public hearings are Adelaide, Brisbane, Canberra, Melbourne, Sydney and Townsville, but the ultimate location and timing of public hearings f will be determined by participant demand. a The Commission invites parties to register their interest in appearing before a public hearing by 10 October 2014. r The final report will be prepared after further submissions have been received and public hearings have been held, and will be forwarded to the Australian Government by the end of D 2014. Commissioners For the purposes of this inquiry and draft report, in accordance with section 40 of the Productivity Commission Act 1998 the powers of the Productivity Commission have been exercised by: Jonathan Coppel Commissioner Karen Chester Commissioner OPPORTUNITY FOR FURTHER COMMENT iii DRAFT REPORT DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. Terms of reference Productivity Commission Inquiry into Natural Disaster Funding Arrangements Terms of Reference I, Joseph Benedict Hockey, Treasurer, pursuant to Parts 2 and 3 of the Productivity Commission Act 1998, hereby request that the Productivity Commission (the Commission) t undertake an inquiry into the efficacy of current national natural disaster funding arrangements. The inquiry should take into account the priority of effective mitigation to f reduce the impact of disasters on communities. a Background In the last five years, natural disasters around the country have claimed more than 200 lives and impacted hundreds of thousands of perople. Natural disasters also have significant financial and economic costs. The impacts and costs of extreme weather events can be expected to increase in the future with population growth and the expanding urbanisation D of coast lines and mountain districts near our cities. Many communities experience repeated disruptions from flood, cyclone and fire events. Some of these events are unforeseen and the damage is unavoidable, but in many cases the consequences of natural disasters could be mitigated. The National Strategy for Disaster Resilience underpins a coordinated and cooperative effort to enhance our ability to prepare for, withstand and recover from natural disasters. The benefits associated with building the resilience of our communities and investing in disaster mitigation include: improved community safety and resilience, a reduction in damage to property, speedier recovery, and a reduction in overall costs to the national economy. The range of mitigation options are diverse and span both structural and non-structural measures. However, current Commonwealth funding arrangements are heavily weighted towards disaster recovery, which reduces the economic incentive for state, territory and local governments to mitigate disaster risk. Disaster management is the responsibility of the state, territory and local governments, which largely determine the type and level of relief and recovery measures to be adopted following a disaster, and manage the administration of assistance measures. In accordance with this responsibility, state and territory governments bear a significant level of disaster relief and recovery expenditure. State, territory and local governments also have responsibility for land use planning. iv NATURAL DISASTER FUNDING ARRANGEMENTS DRAFT REPORT DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. Notwithstanding this, the Commonwealth has played a major role in providing financial and other assistance to help alleviate the burden on states and territories and to support the provision of urgent assistance to disaster affected communities. Under the Natural Disaster Relief and Recovery Arrangements (NDRRA), the Commonwealth currently reimburses up to 75 per cent of the state and territory recovery bill after certain thresholds are met, at a cost to the Commonwealth of approximately $12 billion for events since 2009. The majority of this expenditure is used to provide partial reimbursement to states and territories for rebuilding essential public assets, in particular roads and road infrastructure. Scope of the Inquiry The Commission will analyse the full scope (incorporating the quantum, coherence, effectiveness and sustainability) of current Commonwealth, state and territory expenditure on natural disaster mitigation, resilience and recovery, and develop findings on the following: t 1. The sustainability and effectiveness of currentf arrangements for funding natural disaster mitigation, resilience and recovery initiatives, including – where directly a relevant to an improved funding model – the management of disaster relief and recovery; 2. Risk management measures available to and being taken by asset owners – including r the purchase of insurance by individuals, business and state, territory and local governments, as well as self-insurance options; D 3. The interaction between Commonwealth natural disaster funding arrangements and relevant Commonwealth/state financial arrangements; 4. Options to achieve an effective and sustainable balance of natural disaster recovery and mitigation expenditure to build the resilience of communities, including through improved risk assessments. The options should assess the relationship between improved mitigation and the cost of general insurance. In doing this, the Commission should consider: a. How business, the community, Commonwealth, state, territory and local governments can most effectively fund natural disaster recovery and mitigation initiatives; b. How to ensure the right incentives are in place to support cost-effective decision making within and across all levels of government, business, non-government organisations and private individuals; c. Mechanisms and models to prioritise mitigation opportunities and evaluate the costs and benefits of a range of mitigation options; d. Options for urban planning, land use policy and infrastructure investment that support cost-effective risk management and understanding of the changes to the risk profile; e. Options to fund identified natural disaster recovery and mitigation needs, including thresholds for triggering Commonwealth assistance to the states and territories; TERMS OF REFERENCE v DRAFT REPORT DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. 5. Projected medium and long term impacts of identified options on the Australian economy and costs for governments as compared to impacts of the current funding arrangements; and 6. Options for transitioning to and implementing any proposed reforms to national natural disaster funding arrangements. In undertaking the inquiry, the Commission is to take into account the roles and responsibilities of Commonwealth, state, territory and local governments, communities, insurers, business (including private providers of essential infrastructure), non-government organisations and private individuals. The Commission should consider funding for disaster response only where directly relevant to mitigation, relief and recovery and existing Commonwealth/state joint funding arrangements. The Commission should also take into account evidence from ptrevious reports, reviews and inquiries, including best practice, from overseas and in Australia. It should also take into account relevant recommendations of the Commissiofn of Audit and developments in federal financial relations, noting that the Commonwealth is developing a White Paper on a Reform of the Federation. Further, since much disaster spending is directed towards infrastructure, the Commission should take into account evolving infrastructure and asset management policy and practice r at the national, state and local levels. The scope of the inquiry will be focDused on naturally occurring rapid onset events that cause a serious disruption to a community or region, such as flood, bushfire, earthquake, storm, cyclone, storm surge, tornado, landslide or tsunami. This is consistent with the definition included in the Natural Disaster Relief and Recovery Arrangements (NDRRA) Determination. Process The Commission is to undertake an appropriate public consultation process including holding hearings, inviting public submissions and releasing a draft report to the public by September 2014. It will consult with Commonwealth, state and territory, and local governments in undertaking this inquiry. The final report should be provided to the Government by the end of December 2014. The reports will be published. J. B. HOCKEY Treasurer [Received 28 April 2014] vi NATURAL DISASTER FUNDING ARRANGEMENTS DRAFT REPORT DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. Contents The Commission’s draft report is in two volumes. This volume 1 contains the overview; draft recommendations, findings and information requests; chapters 1 to 4; and volume 1 references. Volume 2 contains supplementary papers 1 to 9 and volume 2 references. Below is the table of contents for both volumes. Volume 1 t Opportunity for further comment iii f Terms of reference iv a Abbreviations xi Glossary xiii Overview r 1 Draft recommendations, findings and information requests 33 D 1 About the inquiry and effective risk management 45 1.1 What has the Commission been asked to do? 46 1.2 The conceptual framework 49 1.3 A guide to the report 60 2 The performance of Australia’s natural disaster funding arrangements 63 2.1 Current natural disaster funding arrangements 64 2.2 Managing risks to government-owned assets 76 2.3 Managing shared risks 102 3 Intergovernmental natural disaster funding reform 111 3.1 A framework for effective natural disaster management 112 3.2 Relief and recovery 115 3.3 Mitigation 135 3.4 Accountability 138 3.5 Managing shared risks 147 3.6 Implementation 149 CONTENTS vii DRAFT REPORT DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. 4 Policy reforms to improve natural disaster risk management 153 4.1 Information 155 4.2 The built environment 168 4.3 Insurance markets 177 4.4 Infrastructure 184 References 187 Volume 2 1 The Commission’s approach 193 t 1.1 The conduct of the inquiry 193 f 1.2 Key themes from stakeholder input 196 1.3 List of submissions and visits a 221 2 The impacts of natural disasters 229 2.1 Introduction and key points 229 r 2.2 Natural disaster types and trends in Australia 230 D 2.3 The economic costs of natural disasters 236 2.4 The fiscal costs of natural disasters 249 Annexes 257 3 Natural disaster funding arrangements 261 3.1 Introduction and key points 261 3.2 A brief history of Australia’s emergency management and natural disaster funding arrangements 262 3.3 Private and government sector roles and responsibilities 266 3.4 Government funding frameworks 275 3.5 Government funding 280 3.6 Private funding 295 4 Effective natural disaster risk management 297 4.1 Introduction and key findings 297 4.2 What is effective natural disaster risk management? 299 4.3 Effective natural disaster risk management by households and businesses 304 viii NATURAL DISASTER FUNDING ARRANGEMENTS DRAFT REPORT DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. 4.4 What is the role for government? 312 4.5 Managing natural disaster risks to government-owned assets and service delivery 314 4.6 Setting policy to reduce impediments to effective natural disaster risk management 322 4.7 Supporting management of shared risks 328 5 Natural disaster mitigation 329 5.1 Introduction and key points 329 5.2 What is mitigation? 330 5.3 Assessing mitigation options t 336 5.4 Institutional and governance arrangfements for mitigation decision making 348 a 5.5 Funding and financing mechanisms 357 6 Insurance and natural disasters 365 6.1 Introduction and key proints 365 6.2 The role of insurance in risk management 366 D 6.3 Are governments’ insurance arrangements consistent with effective risk management? 368 6.4 Are private insurance arrangements consistent with effective risk management? 375 6.5 Insurance affordability and coverage 391 7 Managing natural disaster risk to the built environment 401 7.1 Introduction and key points 401 7.2 Policy instruments for managing the built environment 403 7.3 Land use planning 405 7.4 Building regulations 422 7.5 Existing areas of settlement 430 7.6 Other built assets 438 Annex — Land use planning arrangements 442 8 A quantitative assessment of funding arrangements for natural disasters 445 8.1 Introduction and key points 445 CONTENTS ix DRAFT REPORT DRAFT REPORT This draft report is no longer open for consultation. For final outcomes of this project refer to the inquiry report. 8.2 Key considerations 447 8.3 Natural disaster costs under the counterfactual 456 8.4 Quantitatively assessing reform option 1 463 Annex — Econometric modelling 472 9 Lessons from other countries 477 9.1 Introduction and key points 477 9.2 Mitigation funding arrangements 478 9.3 Relief and recovery funding arrangements 482 9.4 Government-backed insurance schemes 490 t 9.5 Fiscal management of natural disasters 498 f 9.6 Natural disaster information provision 500 a 9.7 Regulation of the built environment 504 References 509 r D x NATURAL DISASTER FUNDING ARRANGEMENTS DRAFT REPORT