Report and Recommendation of the President to the Board of Directors Project Number: 50212-001 November 2016 Proposed Policy-Based Loan Cook Islands: Disaster Resilience Program Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Public Communications Policy 2011. CURRENCY EQUIVALENTS (as of 10 October 2016) Currency unit – New Zealand dollar (NZ$) NZ$1.00 = $0.7169 $1.00 = NZ$1.395 ABBREVIATIONS Cat DDO – catastrophe deferred drawdown option DRM – disaster risk management GDP – gross domestic product PBL – policy-based loan PCRAFI – Pacific Catastrophe Risk Assessment and Financing Initiative PFM – public financial management NOTES (i) The fiscal year (FY) of the Government of the Cook Islands ends on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2016 ends on 30 June 2016. (ii) In this report, “$” refers to US dollars unless otherwise stated. Vice-President S. Groff, Operations 2 Director General X. Yao, Pacific Department (PARD) Director E. Veve, Urban, Social Development and Public Management Division, PARD Team leader A. Parker, Principal Social Sector Economist, PARD Team members C. Benson, Principal Disaster Risk Management Specialist, Sustainable Development and Climate Change Department (SDCC) T. Faletau, Safeguards Officer, Pacific Subregional Office, PARD D. Kuizon, Operations Assistant, PARD B. Olsson, Country Coordination Officer, Pacific Subregional Office in Suva, Fiji, PARD C. Png, Principal Counsel, Office of the General Counsel C. Tinio, Associate Economics and Statistics Analyst, PARD Peer reviewers A. Sinha Roy, Disaster Risk Management Specialist (Climate Change Adaptation), SDCC In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page PROGRAM AT A GLANCE I. THE PROPOSAL 1 II. THE PROGRAM 1 A. Rationale 1 B. Impact and Outcome 6 C. Outputs 6 D. Development Financing Needs 7 E. Implementation Arrangements 8 III. DUE DILIGENCE 8 A. Economic and Financial 8 B. Governance 9 C. Poverty and Social 9 D. Safeguards 9 E. Risks and Mitigating Measures 9 IV. ASSURANCES 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14 3. Development Policy Letter 15 4. Policy Matrix 18 Project Classification Information Status: Complete PROGRAM AT A GLANCE 1. Basic Data Project Number: 50212-001 Project Name Disaster Resilience Program Department PARD/PAUS /Division Country Cook Islands Executing Agency Ministry of Finance & Borrower Cook Islands Economic Management 2. Sector Subsector(s) ADB Financing (NZ$ million) Public sector management Public expenditure and fiscal management 13.95 Total 13.95 3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic Pillar 1: Economic opportunities, including Climate Change impact on the Low growth (IEG) jobs, created and expanded Project Environmentally Disaster risk management sustainable growth (ESG) 4. Drivers of Change Components Gender Equity and Mainstreaming Governance and capacity Institutional development Some gender elements (SGE) development (GCD) Public financial governance 5. Poverty and SDG Targeting Location Impact Geographic Targeting No Nation-wide High Household Targeting No SDG Targeting Yes SDG Goals SDG13 6. Risk Categorization: Complex . 7. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C . 8. Financing Modality and Sources Amount (NZ$ million) ADB 13.95 Sovereign Program loan: Ordinary capital resources 13.95 Cofinancing 0.00 None 0.00 Counterpart 0.00 None 0.00 Total 13.95 9. Effective Development Cooperation Use of country procurement systems Yes Use of country public financial management systems Yes Source: Asian Development Bank This document must only be generated in eOps. 31102016104207644167 Generated Date: 31-Oct-2016 10:45:29 AM I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed policy-based loan (PBL) to the Cook Islands for the Disaster Resilience Program.1 2. The Cook Islands is located in a part of the South Pacific Ocean that is at high risk from natural hazards, particularly cyclones, tsunamis, and floods. To reduce risks from, better plan for, respond to, and recover from disasters, the country is taking important steps to improve its disaster risk management (DRM) system. The proposed program will provide the Government of the Cook Islands rapid access to financing, contingent on a disaster affecting the country.2 Funds will be used to help meet short-term, post-disaster recovery needs. To establish eligibility to access the contingent financing, the government has undertaken prior policy actions that (i) clarify and implement policy and institutional arrangements for DRM, including the capacity for post-disaster response and recovery; (ii) improve the disaster resilience of physical assets; and (iii) expand disaster risk financing. Post-program monitoring will ensure continued progress toward attaining overall program goals. II. THE PROGRAM A. Rationale 3. Development context. The Cook Islands has a resident population of about 14,974 dispersed across 15 small islands, comprising a land area of 67 square kilometers spread over 2 million square kilometers of the South Pacific Ocean; 70% of the population lives on the largest island of Rarotonga.3 The economy is well managed, tax revenues are strong, and fiscal deficits were below 2% of gross domestic product (GDP) during FY2010–FY2015. Although external debt is rising, it remains at a sustainable level (24.8% of GDP in FY2016) and is well within the government’s threshold of 35.0% of GDP.4 The country’s average economic growth in FY2010–FY2015 was 2.2% per year, driven largely by strong growth in the tourism sector, which accounts for about 60.0% of GDP.5 But this average hides annual fluctuations that have seen GDP growth vary from –2.7% to 4.8% during FY2010–FY2015, depending on changing external, trade, and investment conditions. 4. Disaster risk. The Cook Islands is highly vulnerable to disasters, and has periodically experienced major cyclones that have caused substantial economic damage and loss of life. (Tables 1 and 2). 1 The design and monitoring framework is in Appendix 1. 2 Contingent financing was previously used in Asian Development Bank (ADB). 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Republic of Indonesia for the Public Expenditure Support Facility Program. Manila. 3 Government of the Cook Islands, Ministry of Finance and Economic Management, Statistics Office. 2012. Cook Islands 2011 Census of Population and Dwellings: Main Report. Rarotonga. 4 A debt sustainability analysis, which ADB did based on the World Bank and International Monetary Fund template and guidelines, assumes long run growth of 2.0%, declining fiscal deficits from 0.5% to 0.1%, and inflation at 2.0% over the long term (ADB. 2016. Cook Islands: Macroeconomic Assessment. Consultant’s report. Manila [TA 8565- REG]). 5 The Cook Islands is not a member of the International Monetary Fund or the World Bank Group. In place of the International Monetary Fund’s assessment letter, a Macroeconomic Assessment Summary (accessible from the list of linked documents in Appendix 2) has been prepared based on a detailed assessment carried out by ADB at the request of the Government of the Cook Islands (ADB. 2016. Cook Islands: Macroeconomic Assessment. Consultant’s report. Manila [TA 8565-REG]). 2 Table 1: Significant Cyclones in the Cook Islands Estimated losses Estimated losses Year Cyclone Name Severitya ($ million) (% of GDP) 1987 Sally Category 2 24.6 51.6 1997 Martin Category 3 7.5 7.6 2005 Meena Category 4 10.0b 5.5 Nancy Category 4 Olaf Category 5 Percy Category 5 2010 Pat Category 2 7.8 3.2 GDP = gross domestic product. a Severity is measured following the Saffir–Simpson hurricane wind scale. Cyclones above category 3 are considered major cyclones because of their potential for significant loss of life and damage. b Combined estimated losses for all four cyclones in 2005. Sources: Asian Development Bank. 2006. Draft Final Report: Strengthening Disaster Management and Mitigation (Component 2: Preventive Infrastructure Master Plan)—Volume 4: Climate Change Considerations. Consultant’s report. Manila (TA 4605-COO); and World Bank. 2015. The Cook Islands: Disaster Risk Financing and Insurance. Washington, DC. Table 2: Potential Cyclone Loss by Return Period Return period Estimated potential losses Estimated potential losses (years) ($ million) (% of GDP) 1-in-10 10.0 4.1 1-in-50 56.8 23.3 1-in-100 103.0 42.2 1-in-250 198.1 81.2 GDP = gross domestic product. Source: World Bank. 2015. The Cook Islands: Disaster Risk Financing and Insurance. Washington, DC. 5. The country’s high exposure to disaster risk is due to (i) its geographic location in the South Pacific cyclone belt; (ii) the remoteness and low-lying nature of many of its islands; and (iii) the proximity of many buildings and infrastructure services to the coast, especially on the largest island of Rarotonga. In addition, the heavy reliance on revenues from the tourism sector makes the economy vulnerable to the impact of disasters. 6. The financial resources for short-term recovery6 needed to reduce the economic and social impact of disasters through swift action are likely to be significant. However, the Government of the Cook Islands currently has few options for accessing sufficient post-disaster financing, leaving the country vulnerable to the impact of disasters. For example, in addition to the overall impact on the economy indicated in Table 1, annual GDP growth fell from 2.2% in 2004 to –1.1% in 2005, after four cyclones in early 2005, before it recovered to 5.0% in 2006.