83782 Building Morocco’s Resilience Inputs for an Integrated Risk Management Strategy Building Morocco’s Resilience Inputs for an Integrated Risk Management Strategy © 2013 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and con- clusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concern- ing the legal status of any territory or the endorsement or acceptance of such boundaries. 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Table of Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Section I: A New Approach for Governments’ Risk Management . . . . . . . . . . . . . . . . . . . . 1 1. A Changing Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Risk Management is Becoming More Strategic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 From Managing Risks in “Silos” to Integrated Risk Management . . . . . . . . . . . . . . . . . . . . 2 1.3 The Risk Management Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section II: Integrated Risk Management in Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2. Introduction: Three Pillars of Morocco’s Risk Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.1 Natural Disasters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.1. a Morocco’s disaster risk profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.1. b Disaster risk institutional and legal framework . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.1. c Options for reducing Morocco’s risk due to natural disasters . . . . . . . . . . . . . . . . . . 24 2.2 Commodity (Energy) Price Volatility Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.3 Risks in the Agriculture Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.3. a Morocco’s agriculture risk profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2.3. b Institutional and legal framework in the agriculture sector . . . . . . . . . . . . . . . . . . . . 33 2.3. c Options to mitigate risks in the agriculture sector . . . . . . . . . . . . . . . . . . . . . . . . . 34 2.4 Disaster Risk Financing and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section III: Moving from Risk Assessment to Integrated Risk Management in Morocco . . . . . . . . .41 3. Morocco: The Road Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Appendix 1: Project Outputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy List of Figures Figure 1: Integrating Risk Management in a Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 2: Eight Steps of the Risk Management Process . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 3: The Three Key Risk Priorities of the Moroccan IRM Strategy . . . . . . . . . . . . . . . . . . . 14 Figure 4: Four Basic Modules of a Catastrophe Mode . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 5: Technical Reports and Sample Outputs of MnhPRA from the Disaster Risk Portion of the Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 6: Average Annual Loss (AAL) for Earthquake and Flood by Commune . . . . . . . . . . . . . . 20 Figure 7: Tangier Industrial Zone Flooded in 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Figure 8: Map Showing Return Periods for Severe Drought for the Three Crops Considered in MnhPRA to Date . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 9: Schematic of Institutional Structure During a Disaster . . . . . . . . . . . . . . . . . . . . . . 24 Figure 10: Cost of Subsidies-Actual versus Budgeted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Figure 11: Rainfall Variations, GDP, and Agricultural GDP (1981–2006) . . . . . . . . . . . . . . . . . . . . 33 Figure 12: GoM-WB Risk Management Partnership, 2008–current . . . . . . . . . . . . . . . . . . . . . . 44 List of Boxes Box 1: World Bank’s Five Pillars of Action on Disaster Risk Management (DRM) . . . . . . . . . . . . . 2 Box 2: The World Development Report (WDR) 2014: Managing Risk for Development . . . . . . . . . 3 Box 3: World Economic Forum Risk Response Network . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Box 4: Enterprise Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Box 5: The UK Cabinet Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Box 6: Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Box 7: The Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Box 8: Benefits of Integrated Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Box 9: An Integrated Approach to Fiscal Risk Assessment and Management in Colombia . . . . . . . 9 Box 10: MnhPRA – Morocco natural hazards probabilistic risk analysis . . . . . . . . . . . . . . . . . . 19 Box 11: “What-ifs” Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Box 12: Measuring and Enhancing Economic Resilience through IO and CGE Models . . . . . . . . . 23 Box 13: Risk Perception Survey of Communities in Morocco . . . . . . . . . . . . . . . . . . . . . . . 25 Box 14: Building Resilient Communities in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 iv Table of Contents Box 15: Mexico’s Oil Hedging Strategy: Institutional Capacity for Risk Management . . . . . . . . . . 32 Box 16: Proposed Modifications to Law 34-08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Box 17: The Southeastern Europe and the Caucasus Catastrophe Risk Insurance Facility (SEEC CRIF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Box 18: Improving India’s National Agricultural Insurance Scheme Through Risk Data Infrastructure Relying on Innovative Technology . . . . . . . . . . . . . . . 39 Box 19: Overhauling Insurance of Public Assets in Colombia . . . . . . . . . . . . . . . . . . . . . . . 40 List of Tables Table 1: Partial Summary of Historic Major Natural Hazards in Morocco 1900–2008 . . . . . . . . . . . 15 Table 2: Example of an Event Loss Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Table 3: Morocco Natural Hazard Estimated Losses for Varying Return Periods . . . . . . . . . . . . . 18 Table 4: Hazards and Possible Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table 5: Overview of Selected Commodity Price Risk Instruments: Advantages and Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Table 6a: AAL for a 1-in-100 Year Event for Selected Assets . . . . . . . . . . . . . . . . . . . . . . . . 36 Table 6b: Maximum Expected Loss (MEL) for a 1-in-100 Year Event for Selected Assets . . . . . . . . . 36 Table 7: Summary of Key Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 v Preface Over the last few decades, risk management has evolved (GFDRR), by the Swiss Agency for Development and Coop- from a technical exercise to something much more strategic: eration (SDC), by the Trust Fund for Environmentally & So- a fundamental change in terms of how to think about and cially Sustainable Development (TFESSD) and by the FIRST best improve risk resilience. This transformation began in the (Financial Sector Reform and Strengthening) initiative. The private sector but is now increasingly being adopted in the work on disaster risk and disaster risk financing constitutes public sector, including at the level of heads of governments. the largest part of the work financed by and conducted under the supervision of the World Bank and donors. The Towards the goal of strengthening Morocco’s resilience to spe- World Bank also conducted initial analyses for commodity cific internal and external shocks, a broad initiative is being price (energy) volatility risk, albeit to date less extensively. undertaken by the Government of Morocco (GoM) to devel- For risks in the agriculture sector, the World Bank engaged op a national strategy for integrated risk management (IRM). in ongoing dialogue with key stakeholders but did not com- Through this initiative, Morocco aims to approach selected mission specific analytical work (and as such the present re- key risks the country faces in a more holistic manner—rather port does not convey the full analysis that has been already than looking at risks in “silos” (if at all) as has traditionally conducted by Morocco in the agriculture sector). been the case. Thus far, this integrated approach has focused on three key risks: (i) natural disasters; (ii) commodity (en- This report is for the GoM as an input for its strategy for ergy) price volatility; and (iii) risks in the agriculture sector. integrated risk management. It also serves as a summary of These were selected by the GoM based on a preliminary risk the results of the collaboration of the GoM with the World identification phase which determined that they had high cu- Bank (extensive other documentation is also available) This mulative political, economic and social impacts, even though report may also be of interest to other governments, as an it was explicitly understood that additional risks (such as fi- example of good practices and the step-by-step actions re- nancial sector risk) are equally important systemically, and quired to develop a national risk management strategy. could over time become part of the ‘integration’ process. Section 1 of the report provides background on the chang- These risks were also identified by the GoM as elements ing state of risk management worldwide and highlights the on which it wanted to work together with the World Bank. importance of moving from disconnected risk management Given time and resource constraints, it was decided at the actions to a consciously and better coordinated set of ac- outset of this activity to build a solid foundation on a few tions at national and local levels across different types of key risks for which advanced risk assessments could be risks. It also discusses the eight key steps for successful risk completed, in particular in the area of natural disasters. management, as well as some of the benefits that such a na- Clearly, the selection of the three risks is only a first step: tional IRM strategy provides. Reference is made to related in the longer term, and with stronger risk-management in- initiatives occurring in other countries, recognizing that stitutions that the GoM now intends to establish, the GoM each country approaches IRM differently depending on its will be able to include more risks in its integrated analy- own culture, institutional arrangements, level of economic sis of and approach to risk management. As such, this ini- development, and level of institutional development. Sec- tial phase needs to be seen as part of a dynamic process tion 2 describes in detail the work done on natural disas- in which the scope of risk management measures can be ters, commodity price (energy) volatility and agriculture broadened over time. risks for Morocco—the three key priorities selected by the GoM in 2008 for collaboration with the World Bank—and This initiative began at the end of 2008 and has been sup- considers also disaster risk financing and insurance options. ported by the World Bank and a core team of advisors, by Section 3 concludes the report by providing an initial road- the Global Facility for Disaster Reduction and Recovery map for the implementation of Morocco’s IRM strategy. Acknowledgements This report serves as a summary of the work undertak- munity perception survey and institutional assessments. en as part of the partnership between the Government of The report, especially chapter 2.1, also builds on the work Morocco (GoM) and the World Bank on integrated risk undertaken by RMSI Pvt. Ltd., (team led by Pushpendra management, which was initiated in 2008. The report was Johari, Vice-President of Risk Initiatives) which not only managed by Axel E. N. Baeumler (TTL and Senior Infra- supported the Moroccan government in data collection structure Economist, MNSSD) and Aditi Banerjee (Co- across ministries, but also developed the software mod- TTL and Disaster Risk Management Specialist, MNSSD). el MnhPRA. Macro-economic models were developed by Pierre Rondot (now Consultant) was the previous TTL of Mohammed Rachid Doukkali (Professor of Applied Econ- the project from 2008 to mid-2012 and has played a key omy, Agronomic and Veterinary Institute Hassan II) and role throughout the GoM and World Bank partnership on his team. Jehanne Aouab (Consultant) provided assistance conceptualizing an integrated approach to risk manage- throughout the project, as did Sophie Hans-Moevi (Pro- ment in Morocco. gram Assistant, MNSSD) and Soumia Driouch (Program Assistant, MNCMA). The report was edited by Charles Erwann Michel-Kerjan (Advisor; Professor, Wharton Busi- Warwick. ness School, Pennsylvania) and Charles Scawthorn (Advi- sor; Professor Emeritus, Kyoto University) played a leading Overall guidance for the report was provided by Franck role as advisors on the overall project since its inception in Bousquet (Urban, Social Development and Disaster Risk 2008 and in the production of this report. Management, Sector Manager in the Middle East and North Africa Region, MNSSD), Simon Gray, (Country Di- Ivan Zelenko (until 2012, now Director, CROMC)), Anto- rector, MNC01) and Michael Hamaide (Senior Country nio S. Davila-Bonazzi (Senior Financial Officer, Treasury) Officer, MNC01). Peer Review comments were received and Julie Dana (Lead Financial Officer, Treasury) have been from Jean-Pierre Chauffour (Lead Economist, MNSED), leading the dialogue with the GoM on commodity price Ana M. Carvalho (Operations Officer, AFMAO), Stephane volatility, Olivier Mahul, (Program Manager, Disaster Risk Hallegatte (Senior Economist, SDNCE), Andrea Liverani Financing and Insurance Program, FCMNB and GFDRR) (Senior Social Development Specialist, MNSSO), Eunice the dialogue on natural disaster risk financing and Pierre Mucache (Consultant, GFDRR) and Raja Rehan Arshad Rondot and Marc Sadler the dialogue on agriculture risks. (Lead Disaster Risk Management Specialist, GFDRR). The specific contributions in the report were as follows: The study was conceived and developed under the overall Chapters 1 and 2.1 were co-authored by Erwann Mi- leadership of the GoM, particularly the Ministry of General chel-Kerjan and Charles Scawthorn. Chapter 2.2 was Affairs and Governance (MAGG) in 2008, at the time led by written by Antonio S. Davila-Bonazzi (Senior Financial Minister Nizar Baraka, current Minister of Finance. Since Officer, Treasury) and Julie Dana (Lead Financial Officer, 2011, Minister Mohamed Najib Boulif has led the project, Treasury). Pierre Rondot (Consultant) and Mohamed Me- supported by Sabah Bencheqroun (Advisor to the Head of douar (Senior Rural Development Specialist, MNSAR) au- Government, MAGG), and Mohamed Tabyaoui (Special thored chapter 2.3. Chapter 2.4 was written by Olivier Ma- Assistant, MAGG). hul and Laura Boudreau (Disaster Risk Financing Analyst, FCMNB). Chapter 3 was written by Erwann Michel-Kerjan Additionally, the team would like to acknowledge the fol- and Charles Scawthorn. Fatna Benzeroual and Abdeslam lowing government officials who have been engaged with Dahman Saidi (Consultants on Community Based Disaster the project at different stages over the past four years. Rep- Risk Management) provided key contributions on the com- resentatives from the Ministry of Economy and Finance: Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy Khalid Safir (Secretary-General), Hassan Boubrik (Director Ibn Brahim (Head of the National Geophysical Institute); of Insurances and Social Benefits), Fouzi Lekjaa (Director representative from the Central Reinsurance Corporation: of Budget), Faouzia Zaaboul (Director of Treasury and Ex- Mohamed Larbi Nali (Managing Director); representatives ternal Finances), Mohamed Chafiki (Director of Financial from Bank Al Maghrib: Mohammed Othman Amrani (Di- Projections and Studies), Youssef Farhat (Deputy Director rector of Internal Auditing and Risk Prevention), Mohamed of Budget), El Hassan Eddez (Deputy Director of Treasury), Touaj (Deputy Director of Internal Auditing and Risk Pre- Malika Dhif (Head of Financing and Multilateral Rela- vention); and Anis El Youssoufi (Head of International Re- tions), Nasr Boularbah (Head of Agriculture and Compen- lations); and representatives from the National Planning sation), Mohammed Amrani (Head of Debt Restructuring), Commission: Khellaf Ayache (Head of Modeling) and Ab- Mohamed Feriss (Head of Insurances, Legal Liability and delaziz Nihou (Head of Projections and Forecasting). Transport); representatives from the Ministry of Interior: Nour-Eddine Boutayeb (Wali, Secretary-General), Allal Extensive consultations were held with academics, experts Sakrouhi (Wali, General Directorate of Local Communi- in public policy, and national and international organiza- ties), Najat Zarrouk (Governor, Director of Training of Ad- tions’ personnel working on the topic of risk in community ministrative and Technical Personnel), Abdelatif Chadali projects. Valuable contributions were received from Driss (Governor, Director of Planning and Equipment), and Li- El Hadani (General Manager of the Royal Centre for Re- ouae AbdelKhalki (Executive) as well as Ragbi Bouameur, mote Sensing, CRTS), Abdellah Mokssit (General Manager Adil Hidane, Said Ait Faraji and Ilham Haddouch (Direc- of the Directorate of National Meteorology DMN), Mo- torate of Financial Projections and Studies, Ministry of In- hammed Tawfik Mouline (Director General of the Royal terior); representatives from the Ministry of Habitat, Urban Institute for Strategic Studies), Houda Bouchtia (Head of Planning and City Policy: Mohammed Nabil Benabdellah Studies, General Confederation of Enterprises of Moroc- (Minister), Essaid Zniber (Secretary-General), Moulay Ab- co), and Mohammed Rachid Doukkali (Professor of Ap- delghani Abouhani (General Manager of Urban Planning, plied Economy, Agronomic and Veterinary Institute Has- Architecture and Land Settlements), Toufiq Benali (Direc- san II); Fabrizio Poretti, Adriano Kupfer, Roderick Kuehne tor of Urban Planning), and Majida El Ouardirhi (Technical and Manuel Stark (Swiss Agency for Development and Director of Housing); representatives from the Ministry of Cooperation in Morocco), Anne-France Wittmann (Com- Energy, Mines, Water and Environment: Mohammed Yahya munity-Based Adaptation to Climate Change Program Zniber and Mustapha Geanah (Secretary-Generals), Meh- Coordinator UNDP-FEM), Martin Tampe and Mohamed di Chalabi (Director of Risk Monitoring and Prevention), Boussaid (German International Cooperation-GIZ), Bra- Farah Bouqartacha (Head of Prevention and Intervention him Jaafar (Ministry of Energy, Mines, Water and Environ- Strategy), Abdelhamid Ben Abdelfadel (Head of Water Re- ment & United Nations Development Program), Moham- sources) and Khalid Margaa (Head of Prevention Services); med Bendali et Hamid Azizi (Moroccan Red Crescent). representatives from the Ministry of Agriculture, and Ma- rine Fisheries: Majid El Yacoubi (Director of Finances) and The study was financed with the support of the World Nabila Gourroum (Head of Financing Division); represen- Bank, the Global Facility for Disaster Reduction and Re- tative from the Ministry of Equipment and Transport: Kha- covery (GFDRR), the Swiss Agency for Development and lid Cherkaoui (Head of Strategic Studies). Representatives Cooperation (SDC), the Trust Fund for Environmentally of the National Centre for Scientific and Technical Stud- & Socially Sustainable Development (TFESSD) and the ies: Abdelaziz Benjouad (Interim Manager), and Aomar FIRST initiative. x Acronyms AAL Average Annual Loss (the estimated loss per year due to a hazard or hazards when averaged over a very long period) AICI Agriculture Insurance Company of India BAM Bank Al Maghrib BCR Benefit-Cost Ratio CBDRM Community Based Disaster Risk Management CdC Caisse de Compensation CGE Computable General Equilibrium (macroeconomic models) CNRST Centre National de la Recherche Scientifique et Technique CORE Center of Risk Excellence COSO Committee of Sponsoring Organizations of the Treadway Commission CVC Centre de Veille et de Coordination DAPS Department of Insurance DRFI Disaster Risk Financing Initiative DRM Disaster Risk Management ERM Enterprise Risk Management EWS Early Warning Systems FEIP Oil Revenues Stabilization Fund FSEC le Fonds de solidarité contre les événements catastrophiques FWS Flood Warning System GFDRR Global Facility for Disaster Reduction and Recovery GIS Geographic Information System GoM Government of Morocco HCP Haut Commissariat au Plan IO Input-Output (macro-economic models) IRM Integrated Risk Management ISO International Organization of Standardization MAD Moroccan Dirham Currency Symbol MAGG Ministry of General Affairs and Governance MAMDA Mutuelle Agricole Marocaine d’Assurances MEF Ministry of Economy and Finance MEMEE Ministry of Energy, Mines, Environment and Water MENA Middle East & North Africa (World Bank region) MHCP Ministry of Finance and Public Credit (Colombia) MnhPRA Morocco Natural Hazards Probabilistic Risk Analysis MoI Ministry of Interior (Morocco) NAIS National Agricultural Insurance Scheme (India) NEAMTWS North Eastern Atlantic, the Mediterranean and Connected Seas Tsunami Early Warning and Mitigation System Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy NORM National Office of Risk Management NRA National Risk Assessment NRR National Risk Register OECD Organisation for Economic Co-operation and Development PPP Public-Private Partnership RIMS Risk Information and Management System RRN Risk Response Network SCR Société Centrale de Réassurance SDC Swiss Agency for Development and Cooperation SEEC CRIF Southeastern Europe and the Caucasus Catastrophe Risk Insurance Facility TFESSD Trust Fund for Environmentally & Socially Sustainable Development WDR World Development Report WOG-IRM Whole-of-Government Integrated Risk Management xii Executive Summary This report is in support of the Government of Morocco be no entrepreneurship)—it is the lack of good risk man- (GoM)’s development of an integrated risk management agement that IRM is aiming to address. strategy. It is driven in part by the phenomena of top deci- sion makers and governments worldwide witnessing an ac- Morocco recognizes the strategic aspect of good risk man- celerating number of major shocks—global financial crises, agement and is one of the vanguard countries developing hyper volatility in commodity prices, devastating natural an IRM strategy. In 2008, the GoM launched a broad ini- disasters, intercontinental pandemics as well as the chang- tiative in close collaboration with the World Bank and its ing nature of terrorism threats. advisors to improve the management of some key risks af- fecting the Moroccan economy and its budget, as well as the These shocks, which inflict human suffering and major so- social stability of the country. This report provides details cial, economic and political disruption, are fundamentally on how this initiative began and the work undertaken to changing how governments view the importance of good support Morocco’s evolution to improved risk manage- risk management and the need to strengthen national re- ment. The emerging IRM strategy has addressed three key silience. As a consequence, risk management has evolved risks considered to be a priority by the government: from being a technical issue (when addressed at all) to a XXNatural disasters (Morocco is exposed to earthquakes, strategic consideration. tsunamis, floods, and droughts) Indicative of the changing approach worldwide is that the XXCommodity (energy) price volatility (Morocco is World Bank, OECD, the World Economic Forum, and the highly dependent on oil imports) G20 now consider risk management a key priority. In an in- creasingly interdependent world, managing risks requires XXAgriculture risks (agriculture employs about 40% of recognizing that risks can no longer be managed in isola- Morocco’s workforce and generates about 15% of GDP) tion. A more coherent enterprise-wide risk-management Of these, natural disaster risk was the most extensively approach, led by top management, and consisting of assess- assessed.1 State-of-the-art probabilistic risk assessments ing, prioritizing, managing and financing an organization’s for the entire country, reveal that floods, earthquakes and key risks, has become good practice in the private sector. tsunamis are expected (on a probabilistic basis) to cost on A similar approach can also be very beneficial for govern- average MAD 5.0 billion annually, of which flooding con- ments, as recognized by the GoM. stitutes the biggest part. An extreme scenario would be a Developing and adopting a national strategy for integrated major earthquake striking a highly populated area of the risk management (IRM) will not only make Morocco bet- country, which could cost MAD 100 billion, equivalent to ter prepared to avoid future crises, and be more reactive 5.1% of GDP or 23% of the national budget. Morocco is and resilient if/when they occur, but also allow the GoM to also highly dependent on oil imports and the volatility of make more informed decisions on overall resource alloca- commodity prices had a MAD 30 billion negative impact tion and prioritization. This is crucial because not all risks on the national budget in 2011 alone.2 For the agriculture are equal, nor can they be similarly managed. Countries that adopt an IRM approach are likely to not only enjoy 1 In the context of the World Bank-Morocco partnership a stronger economic growth and social stability, but also are comprehensive risk assessment was performed for the natural more likely to attract foreign investment as investors will hazards through the creation of MnhPRA. perceive the country as safer and more stable. However, it 2 GoM policy subsidizes the consumer price, absorbing the difference from international market prices. The MAD 30 is important to note upfront that risk, in and of itself, is not billion is the difference between the budget commodity price necessarily the problem (without risk taking there would subsidy and the actual amount paid Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy sector, the total exposure to various risks (drought, pest Of course, Morocco does have a strong framework of exist- and diseases, and market price volatility) was estimated to ing institutional structures, programs and initiatives geared be MAD 75 billion in 2008 (projected to increase to MAD towards risk mitigation. For example, for managing disas- 185 billion in 2020). ters resulting from natural hazards, the GoM has in place good systems for crisis response managed through the Cen- Quantifying these key risks allows Morocco to move to tre de Veille et de Coordination (CVC) within the Ministry the next phase of the IRM initiative, which consists of bet- of the Interior—supported by a corresponding legislative ter managing its risk exposure through dedicated invest- framework. The Department of Water formulated the Na- ment programs, both in terms of physical infrastructure tional Water Strategy in 2009. This includes setting up early and financial protection solutions. The choice of which warning systems for floods, weather forecasting and flood protection solutions to adopt will depend on several fac- risk plans for urban planning and watershed management. tors, including the willingness of the GoM to assume risk Morocco also has a National Flood Protection Plan which (that is, its risk appetite), what part of its national budget it identifies the specific sites vulnerable to floods and identi- wants to allocate to risk management, its capacity to bor- fies corresponding investment programs. Furthermore, the row money from capital markets and international organi- GoM has initiated several activities aiming to reduce the ex- zations, and the time horizon over which the government posure of its economy to the prices of commodities, such as wants to implement its IRM strategy. Note also that these managing consumption, diversifying sources and increas- three categories of risks were selected as a priority to start ing domestic production of energy, incentivizing increased this process; as the IRM strategy develops more risks can storage and modernizing the existing compensation (sub- be gradually integrated. sidy) mechanisms. Finally, the Ministry of Agriculture and Technical Reports and Sample Outputs of MnhPRA, from the Disaster Risk Portion of the FIGURE ES-1:  Project xiv Executive Summary Marine Fisheries (MAMF) has recently developed a Nation- ment much more effective in an increasingly complex oper- al Strategy for Agricultural Risk Management in an effort ating environment. (This will of course be done in parallel to shift from ex post crisis management to risk mitigation. to sectoral strategies which require specific approaches to Other important local initiatives are also underway. deal with a given type of risk.) For example, a massive flood will have different impacts on various ministries—the Min- However, until now, Morocco’s approach to risk manage- istry of Public Works will need to ensure that development ment has been highly sectoral. The initiatives listed above occurs outside the flood zone; the Ministry of Agriculture are often independently implemented and suffer from in- will be involved if the flood affects farming communities; stitutional fragmentation—a key shortcoming an integrat- the Ministry of the Interior will co-ordinate security/emer- ed approach to risk management aims to address. To be gency services; the Ministry of Health will provide treat- successful and sustainable, Morocco’s IRM strategy should ment of victims in hospitals; and the Ministry of Finance be (i) based on a coordinated inter-ministerial action at would organize compensation of affected individuals and the highest level of government, facilitated by a National communities and the financing of reconstruction. Con- Office of Risk Management (horizontal integration) and sideration of risks in an integrated manner will enable the institutionalized within each line Ministry in partnership government to understand the totality of risk; to make the with local actors (vertical integration); (ii) based on a clear necessary linkages; and to improve future infrastructure but flexible integrated risk management strategy with and related public investment decisions. It will also help the milestones and deliverables so one can measure progress government to better anticipate budget needs and prioritize over time; and (iii) supported by appropriate risk infor- budget allocation; coordinate actions across ministries to mation and management systems across different types of improve communication; avoid overlapping actions; and risk. Depending on the risk, specific mitigation measures benefit from economies of scale. This will in turn reduce will be required and financial protection solutions will be the cost of mismanaged and underestimated risks and different but can complement each other and generate improve social resilience by allowing the government to co-benefits. Based on the work completed to date, Table be more proactive in attempting to reduce the economic ES-1 indicates some actions that could be considered by and social impact of a massive shock. There might also be Morocco in this regard. some cost-sharing with the private sector though dedicated public-private partnerships (PPP) if stronger national re- Collectively, the actions in Table ES-1 have emerged out of silience enhances competitiveness of Moroccan businesses. the policy dialogue between Morocco and the World Bank and, as such, constitute an initial input for Morocco’s ef- But for large crises, the government is often considered to forts in developing a national IRM strategy. The actions are be the risk manager of last resort, and has a de facto finan- risk-specific in many cases, but also include key cross-cut- cial liability regarding major risks the country faces (for ting institutional actions that will enhance mitigation of example, through ex ante subsidy and ex post compensa- all risks under consideration here. A timeframe for each tion). Managing risks more strategically will also enable the action, in terms of S (short term, 1–2 years), M (medium Ministry of Finance to better manage this financial liability term, 2–5 years) and L (long term, > 5 years), is indicat- after a national crisis, which is often not budgeted for, be ed. Many details need to be finalized before the actions in it a sharp increase in the price of food or oil, a natural di- Table ES-1 can become an operational strategy—specific saster, or a major drought. Ultimately, an IRM strategy will government ministries and agencies need to be tasked and help the GoM make better informed decisions on how risks resourced, to implement these, and other important, ac- compare, how a limited budget can be allocated across dif- tions. It should be noted that since most of the work on ferent risk-reduction initiatives, and how such policy can agriculture risks was done by the GoM itself the level of benefit from economies of scale across the country. This details on this pillar in the present report is kept minimal; will also position Morocco as one of the more active coun- this is not to say that Morocco has not conducted extensive tries on risk management, which as noted can serve as a work on the matter but rather that the involvement of the strong signal for foreign investors. IRM team remained informal. Clearly, this is an ambitious and long-term agenda. Moroc- Operationalizing an IRM strategy presents a significant op- co could adopt a gradual approach to the implementation of portunity for Morocco. It will help ease the implementation this agenda, starting with a few key actions and then grad- of required cross-sectoral linkages that make risk manage- ually scaling up the engagement. Through the initiative de- xv Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy scribed in this report, Morocco has now entered the group where to start, nor what needs to be done, to develop an of countries (currently, mostly OECD countries) that have IRM strategy. started to implement IRM strategies. While there is more to be accomplished, this step in itself constitutes an important Note finally that this report is a summary of more than 20 and highly visible leadership move. technical reports that have been produced since 2008 with cor- responding in depth quantitative analysis and computer-based The framework Morocco is developing can also serve as a modeling programs. These reports discuss in detail methodol- model for other governments—not only in the Middle-East ogies, data, assumptions, results, comparative analyses, inter- and North Africa (MENA) region but also in other parts national benchmarks and other aspects of Morocco’s risks (see of the world—which recognize the national imperative to Appendix 1 for the list of outputs). All this documentation has improve risk management, but do not necessarily know been developed with extensive input from the GoM. Table ES-1: Summary of Key Actions Cross-Cutting Institutional Actions Time* Establish a National Risk Management Office (NORM) M Develop an Integrated Risk Management Strategy S Establish a Risk Information and Management System (RIMS) M Create a Centre of Risk Excellence (CORE) M Natural Disasters Programs and Institutions Establish early warning systems for floods, tsunamis and earthquakes S Enhance hazard mapping and analysis for floods and earthquakes based on MhnPRA S Enhance building code compliance to reduce potential earthquake impact in high earthquake risk S/M provinces (Nador, Al-Hoceima, Berkane, Taza, Tetouan) and extend to other provinces over time Establish a program to educate public and private building owners about need for retrofits in high earthquake S risk provinces (Nador, Al-Hoceima, Berkane, Taza, Tetouan) and extend to other provinces over time Include DRM in Plan Communal de Development and enhance rescue and relief plans in communities M/L identified as high risk by MnhPRA Structural Measures Accelerate flood protection structural improvements in provinces with high flood risk M/L (Kenitra, Tetouan, Casablanca, Sidi Kacem) and extend to other provinces over time Implement earthquake retrofitting of public buildings in high earthquake risk provinces M/L (Nador, Al-Hoceima, Berkane, Taza, Tetouan) and extend to other provinces over time Invest in small-scale community-based risk resilient infrastructure in communities M identified as high risk by MnhPRA Commodity (Energy) Price Risk** Programs and Institutions Develop a commodity price risk management strategy and establish corresponding S/M institutional management arrangements Risk Transfer Commodity price hedging through financial instruments S Continued on next page xvi Executive Summary Table ES-1: Summary of Key Actions Agriculture Sector Risk Programs and Institutions Extend drought risk analysis to entire agricultural sector based on MhnPRA S (which has covered so far only three crops) Establish data collection systems for collection, management, and processing of agricultural data and S weather information Build institutional capacity for improved data management on risks in the agricultural sector M Enhance early warning systems for droughts M M Structural Measures Build irrigation networks in priority areas, including in Souss-Massa-Draa, Meknes, and Marrakech-Tensift M/L Invest in flood protection works in high-risk rural areas, including in Gharb-Chaouia-Ourdigha M/L Invest in equipment, for example synoptic stations, modeling, computers, software, satellite photos, etc., M necessary for the implementation of the parametric insurance Disaster Risk Financing and Insurance Operationalize Law 34-08 to establish a national catastrophe insurance program for private assets S Develop and implement an integrated disaster risk financing strategy that builds on the establishment of a M national catastrophe insurance program (covering businesses and individuals) and the outcomes of a fiscal risk assessment (evaluation of government’s exposure) Promote agricultural insurance market development through technically-informed product design and M transition to a stronger PPP Evaluate the implementation of a national insurance program for public assets M *S: short term (1–2 years); M: medium term (2–5 years); L: long term (> 5 years). ** Commodity (Energy) Price recommendations focus only on one aspect: how to use market-based commodity price risk hedging as a way to mitigate the short-term impact of commodity price volatility on Morocco’s budget. Broader measures are of course also required, such as the reform of the subsidy system, diversification of energy supply, and improved energy efficiency. xvii SECTION I: A New Approach for Governments’ Risk Management 1. A Changing Context The World Bank has emerged as a leading partner for low- and middle-income countries in their efforts to manage risks, including those of natural disasters. For instance, the  isk Management is Becoming 1.1 R World Bank has developed a series of specific disaster risk More Strategic management actions in several countries (Box 1). The number and nature of risks governments now face More recently, the World Bank has recognized the need on a more regular basis and that increasingly jeopardize to go beyond natural disasters and has begun to articu- the economic development and social stability of their late an approach to risk management that better captures countries are changing. Catastrophes have occurred at an the interconnected challenges of risk management, as ev- unprecedented rate in the past few years, including glob- idenced by the 2014 World Development Report which al financial crises, hyper-volatility in commodity prices focuses, for the first time ever, entirely on risk manage- (from oil to food), large-scale natural disasters (floods and ment (Box 2). droughts of great magnitude, massive storms, and devas- tating earthquakes), intercontinental pandemics, and the changing nature of terrorism threats. Today’s world is also There also have been several other important initiatives marked by mounting food and water scarcity, high cli- addressing the need for efficient strategies to manage the mate variability, nuclear proliferation, and cyber risks. As increasing financial burden of catastrophes, delineating the with other countries, Morocco is not immune to many of roles and responsibilities of key stakeholders in the pub- these risks. lic and private sectors in the management of risks and es- tablishing good practice risk management guidelines. For The frequency of high-impact events is likely to increase instance, the Organization for Economic Cooperation and even further. A combination of a growing and rapidly ur- Development (OECD) established the International Net- banising population, particularly in hazard-prone areas, and work on the Financial Management of Large-Scale Catastro- the increasing frequency of disasters due to climate change phes in 2006 which promotes the exchange of information mean that governments, as well as companies, will have to and experiences among policymakers, industry, and lead- learn how to better manage the risk of extreme events. ing research institutions in both OECD and non-OECD countries. Furthermore, the OECD was recently asked to As a result, developing and implementing adequate risk develop the joint G20/OECD framework on risk manage- management strategies (which encompasses several com- ment published at the end of 2012. The World Bank and plementary activities, from risk perception to risk assess- the UN were also associated with these new G20 activities, ment, risk reduction and risk financing) is also increasing in demonstrating a rapidly emerging interest on how to best strategic importance. address risk management challenges. The Government of Morocco (GoM), as other governments Additionally, the evolution of risk management as an inte- around the world, is now faced with the following question: gral responsibility of government is becoming increasingly apparent at many global forums, such as the World Eco- How can the GoM pro-actively develop more co-ordinat- nomic Forum (WEF) which launched its Risk Response ed and effective methods of anticipating and managing Network in Davos in 2010 and has devoted an increasing major risks, while creating the foundations for a more number of sessions on global risk management at its annual resilient society should these risks realize into losses? and regional meetings (Box 3). Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy World Bank’s Five Pillars of Action on Disaster Risk Management (DRM) BOX 1:  Though the World Bank has been assisting countries on building resilience to disasters since the 1980s, its strategic role evolved with the creation of the Global Facility for Disaster Reduction and Recovery (GFDRR)—a multi-donor partnership and financing mechanism to mainstream disaster and climate risk management into development strategies and planning. Housed within the World Bank, GFDRR also acts as the Bank’s focal point for oversight, partnership building, and business development in DRM. The growing strategic commitment of the World Bank to DRM is reflected in the number of Country Assistance and Partnership Strategies that now build disaster risk into their approach. The DRM practice operates across five strategic pillars of action: 1. Post-Disaster Needs Assessment (PDNA) and Emergency Reconstruction & Recovery: large-scale emergency recovery programs such as those after the Aceh tsunami in Indonesia, the 2005 earthquake in Pakistan and the Wenchuan earthquake in China in 2008. There have been 26 PDNAs to date, supported by rapid mapping and damage validation through remote sensing and Earth observation, such as the one conducted in Haiti in 2010. 2. Disaster risk mitigation and related climate adaptation investment programs and multisector mainstreaming of DRM: risk mitigation programs, including those focusing on climaterelated hazards, such as the India National Cyclone Mitigation Project. 3. Innovation and application of new technologies: innovative risk financing instruments such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and the Pan-African Drought Insurance Pool; remote sensing and geospatial analysis for mapping risks; analyzing intervention options and assessing post-disaster impacts; and leveraging public-private partnerships. 4. Global knowledge solutions and building access to data: actively informing the global DRM and climate change adaptation agenda with cutting-edge knowledge products, such as the Housing Reconstruction Handbook, and the seminal study on the economics of prevention Natural Hazards, UnNatural Disasters, etc. 5. Partnership development and donor coordination: through the GFDRR, building strategic and operational alliances with technical and political leaders in the DRM field. Source: http://www.gfdrr.org/sites/gfdrr.org/files/WorldBank_DRM_Brochure_Jan2012.pdf The Government of Morocco has the opportunity to be- seen events and mismanaged risks tend to affect many come one of the leaders and early adopters of more strate- parts of an organization simultaneously. Additionally, the gic risk management at the country level and has already interdependence of those parts and different risks needs begun to share its vision at recent World Bank, OECD and to be better understood and managed. WEF events in the above context. In the private sector, recognition of these gaps has led to the rise of Enterprise Risk Management (ERM) (Box 4), which 1.2  From Managing Risks in Isolation to developed as a response to the inadequacy of the silo-based Integrated Risk Management approach to risk management. ERM did not develop over- night but rather evolved as the process of risk management Within both private and public sector organizations, risk matured, where risks are quantified, compared with one management until recently has been fragmented, with another, managed in a coordinated manner and in an inte- risks treated in isolation and their management undertak- grated way across an entire business. en in “silos.” While there may be a tendency at times to fo- cus on specific risks, traditional organizational structures As a result, ERM enables risk reduction actions to address (with separated functions and hierarchical layers) have multiple risks spanning multiple business sectors simulta- contributed to this “silo” mentality. As a result, there is a neously and to generate economies of scale (for instance, by tendency to compartmentalize tasks into distinct, mutu- purchasing insurance coverage for multiple risks from one ally exclusive categories. Although it is easier to manage insurer at the same time rather than buying a multitude of small tasks, and to hope that the consequences from un- small insurance contracts from several insurers for which foreseen events will be confined to a small area, unfore- the firm might not have the same negotiation power). 2 SECTION I: A New Approach for Governments’ Risk Management The World Development Report (WDR) 2014: Managing Risk for Development BOX 2:  The World Development Report (WDR) 2014 will concentrate on the role of risk management in development and poverty reduction. It will argue that responsible and efficient risk management is crucial not only to reduce the negative impacts of shocks and hazards, but also to enable individuals, households, and enterprises to pursue new opportunities for growth and prosperity. Responsible and efficient risk management requires a systematic approach that combines preparing for (ex ante) and coping with (ex post) risk. Whether risks are imposed or assumed voluntarily, growth and development can be achieved only by confronting risks responsibly and efficiently. Risk management should, therefore, be a central concern at all levels of society. From both private and public perspectives, the goal of risk management is to mitigate the losses and improve the benefits that people may experience while conducting their lives and pursuing development opportunities. Whether risks are idiosyncratic or systemic, risk management is a shared responsibility, requiring actions that individuals and social systems must undertake, often in coordination. It is virtually impossible for individuals to handle successfully all of the risks they face on their own. Effective risk management requires the participation of well- functioning social and economic systems—the household, the local community, the enterprise sector, the financial system, the state, and the international community—with each providing support to people’s risk management in different yet complementary ways. Looking at risks in an integrated manner helps define priorities, and avoids overspending on managing one risk while neglecting others. Synergies and tradeoffs exist in managing individual risks, while synergies offer opportunities to achieve more easily attainable initial targets and low-cost actions. A multi-stakeholder approach to national risk management enables these tradeoffs and synergies across risks to be identified and managed. It also makes the process of risk management less prone to political capture, and introduces critical accountability mechanisms. Source: World Bank WDR team. Today, ERM is seen as good practice by many corporations, countries face serious public deficit challenges. If the govern- even though its level of application varies widely. Because of ment is asked to provide compensation to counteract high in- growing pressures on CEOs and Boards of Directors to bet- crease in prices from international markets or to help victims ter manage a firm’s risks in a holistic way, increasingly com- of an earthquake, it is irrelevant to the Ministry of Finance panies have implemented ERM while others are starting the what triggers the non-budgeted extra spending. Regardless process. For instance, a recent survey of U.S. firms indicates of the cause, each extra dollar spent on disaster recovery or that the proportion that had completed their ERM strategy compensation is a dollar that will not be spent elsewhere or increased from 9% to 23% between 2009 and 2012; signifi- that has to be financed through debt issuance. cantly for large corporations this proportion was 47%.3 Any government wanting to build national resilience needs Nonetheless, in substance, governments face the same is- to develop the proper tools, which are discussed in the next sues as private sector firms, and are beginning to realize section. There is also a need for increased institutional col- that whatever the nature of the risks, the government is of- laboration across different ministries, as none of them has ten the risk manager of last resort. Most governments have full responsibility for managing the entirety of a risk. For a de facto financial liability vis-à-vis major risks the country instance, a massive flood will not just impact one sector of faces as they will be asked to fulfil some of the financial the economy, but many simultaneously. Different minis- needs when major risks do occur (for example through ex tries will have oversight over one element of risk. Public ante subsidy and ex post compensation). This is specifically the case in countries where insurance cov- 3 See Beasley, M., B. Branson, and B. Hancock. 2012. “Current State of Enterprise Risk Oversight: Progress is Occurring but erage is low or non-existent, and where people and businesses Opportunities for Improvement Remain.” ERM Initiative at rely on their government for assistance after a national crisis, North Carolina State University on behalf of the American whether this is a sharp increase in the price of food or oil, or Institute of CPAs Business, Industry & Government Team, available at http://poole.ncsu.edu/vol2/erm/ee/i/weblogs/ a natural disaster. Such financial liability is typically not in- research-documents/AICPA_ERM_Research_Study_2012_ cluded in national budgets but has become more apparent as Final_Submission_July_16,_2012.pdf. 3 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy World Economic Forum Risk Response Network BOX 3:  The World Economic Forum’s Risk Response Network (RRN) serves as a neutral, impartial and trusted platform that connects all of the Forum’s risk related activities by: (a) convening relevant experts from all disciplines both physically and virtually to respond to global risks; (b) curating knowledge, experiences and practices from around the world that offer new solutions; and (c) catalysing partnerships, initiatives and research that shape global, regional and industry agendas. The RRN concentrates currently on four core activities at the global, regional and industry levels. Providing a Strategic Assessment of Global Risks: Each year over 1,000 experts worldwide evaluate 50 global risks in terms of their perceived likelihood and impact over a 10-year horizon and, most importantly, their interconnections across five categories of risks: economic, environmental, geopolitical, societal and technological. The findings also serve as the basis of the Forum’s flagship publication on Global Risks published in January in advance of its Annual Meeting in Davos, Switzerland. Improving National Resilience to Global Risks: Countries are increasingly vulnerable to exogenous shocks over which they have no control. Often such shocks emanate from risks that are difficult to predict and where there is little experience or knowledge on how to handle their impact. The RRN’s primary effort in this context is to develop innovative ways to improve a country’s resilience (i.e. its ability to absorb and recover from external shocks while preserving core functions of critical systems) via new diagnostic methods. It also aims to promote the establishment of a Country Risk Officer function in national governments similar to a Chief Risk Officer in multinational corporations, which is very much aligned with the IRM strategy discussed in this report. Advancing Risk-Related Industry Initiatives: Forum industry communities have initiated major initiatives that focus on specific global risks. RRN objectives include fostering cross-industry collaboration and promoting knowledge and data sharing among public, private and academic institutions. Cyber-Resilience, Global Supply Chain Risks, Corruption in High-Growth Markets, Catastrophic Risks and Global Food Safety are among the industry workflows in this context. Identifying and Evaluating Leading Practices: Via the Forum’s virtual interaction and knowledge management platform (Toplink), the RRN connects experts and curates their experiences in the form of an interactive, online exchange which evaluates successful practices in improving resilience to major risks at the global, national or industry levels. Source: World Economic Forum’s Risk Response Network Team Works to assure constructions are build outside of a flood the specific country circumstances. Different governments zone; Agriculture if the flood affects farmers; Interior for approach risk management differently; some government security/emergency services; Heath for the treatment of the teams are tasked stand-alone units (Netherlands, Singa- victims in hospitals; and Finance for indemnification of the pore, Columbia) while others are integrated into a broad- victims and rebuilding destroyed public infrastructure. er strategic unit (United Kingdom). Nonetheless, all these countries have recognized that a dedicated team must re- In recognition of these elements, there is a growing trend port to the highest level of decision making in the country. in several countries towards better risk governance and risk management. Experience in countries like Canada,4 4 According to the Treasury Board of Canadian Secretariat (2010), Risk Management is described as a systematic the Netherlands, the United Kingdom, and Singapore has approach to setting the best course of action under shown that implementation of a government-wide compre- uncertainty by identifying, assessing, understanding, making hensive integrated risk management (IRM) framework decisions on, and communicating risk issues, and is an integral component of good management. As a result, reduces risks and saves resources. It also makes countries Integrated Risk Management promotes a continuous, more attractive to foreign investments as they are more sta- proactive and systematic process to understand, manage and ble, being resilient to internal and external shocks. Boxes communicate risk from an organization-wide perspective in a cohesive and consistent manner . . . . [i]t requires an ongoing 5, 6 and 7 briefly describe the methods and approaches of assessment of risks at every level and in every sector of the some of these countries. However, it is important to note organization, aggregating these results at the corporate level, that there is no one-size-fits-all IRM design, so that ulti- communicating them and ensuring adequate monitoring and review. Integrated risk management involves the use of these mately the decision for IRM and its design must be made aggregated results to inform decision-making and business by the head of government and line ministries in light of practices within the organization. 4 SECTION I: A New Approach for Governments’ Risk Management Enterprise Risk Management BOX 4:  The Committee of Sponsoring Organizations of the Treadway Commission (COSO) published an Enterprise Risk Management (ERM) standard in 2004, which is now widely recognized by risk management practitioners. It provides a framework for undertaking ERM and has gained considerable influence because it is linked to the Sarbanes-Oxley federal law requirement for companies operating in the United States. On a global level, the International Organization of Standardization (ISO) released its dedicated ISO 31000 risk management guide in November 2009, which is viewed as an internationally agreed-upon standard to provide firms with a unifying risk management framework. ISO 31000 is intended to be applied within existing management systems to formalize and improve risk management processes. When implementing ISO 31000, attention is to be given to integrating existing risk management processes in the new paradigm addressed in the standard. ISO 31000 ‘Harmonization’ programs have centered on: (i) transferring accountability gaps in enterprise risk management; (ii) aligning objectives of the governance frameworks with ISO 31000; (iii) embedding management system reporting mechanisms; and (iv) creating uniform risk criteria and evaluation metrics. While ERM strategies differ from by firm, industry and country, the strategy consulting firm McKinsey identified five building blocks in many successful ERM strategies. • A risk dialogue forum for top management where the executive team reviews the risk profile of the company and discusses the risks associated with major decisions. • A risk charter for the Board, with a clear definition of allocation of responsibilities of risk oversight processes. • A user-friendly synthesized risk dashboard, which can be used by the top management and Board of the firm (typically an extension of that report and metrics already used by decision makers). This approach ensures that all the information is in one place. • A risk appetite statement, which defines how the company decides to create value, and determines whether risks are acceptable or not. • Risk management is to be embedded in all business decisions. ERM is most successful when it becomes a tool that helps business leaders balance risks and rewards and integrate risk more systematically in the evaluation of business opportunities. This lesson from international experience is important for section, a dedicated risk management office reporting di- Morocco to move forward and why, as discussed in the next rectly to the head of the GoM is needed. BOX 5: The UK Cabinet Office The UK Cabinet Office (essentially the Prime Minister’s office) established its strategy unit in 2002. The Strategy Unit was an elite group of 45 to 90 people which operated under Prime Ministers Tony Blair and Gordon Brown until its functions were transferred to other units in the Cabinet Office at the end of 2010. The Strategy Unit’s role was to provide the head of government with in-depth strategy advice and policy analysis on key priorities. This included monitoring key national risks, reports to the Cabinet on progress achieved and responsibility for guidance on the risk management framework previously adopted. Its role was to increase policy-making at a strategic level within and between Ministries. It also provided the Prime Minister and all Ministers with longer-term thinking and dedicated studies to help decision-making.a The British government also monitors the most significant emergencies that the UK and its citizens could face over the next five years through the National Risk Assessment (NRA). This annual confidential assessment draws on expertise from a wide range of departments and government agencies. The National Risk Register (NRR), the public version of the assessment, publishes a number of scenarios, to better inform citizens and businesses of the hazards and threats facing the country. The purpose of making these scenarios available is to inform the public, and provide guidance on what the public can do to prepare for the consequences of the most likely risks, should they wish to do so. a. See the “Orange Book”: Her Majesty’s (HM) Treasury. 2004. Management of Risk— Principles and Concepts. London: HMSO. See also: Cabinet Office. 2002. Risk: Improving Government’s Capability to Handle Risk and Uncertainty. Strategy Unit Report, November 2002. London; HMSO.. 5 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy BOX 6: Singapore In Singapore, the Whole-of-Government Integrated Risk Management (WOG-IRM) framework aims to improve the risk awareness of all government agencies. Though most agencies are already aware of most of the risks that fall within their remit, some agencies have not deliberately and systematically identified the full range of risks. Agencies may also lack an awareness of how such risks are affected by the action or inaction of other agencies, and vice versa. In a growing interdependent world, being able to consider this interconnectedness of risks is especially critical. The tendency of an approach favoring risk avoidance in government agencies failures to consider how much is lost by foregoing opportunities or by not creating them. Singapore’s WOG-IRM framework stands out as a good practice because it not only helps address gaps in risk management, but also identifies cross-agency risks that may have fallen through gaps in the system. It helps agencies to address their own vulnerabilities and to identify those that are contingent upon the vulnerabilities of others, while reinforcing the government‘s broader effort to evaluate and prioritize key risks in a holistic manner (OECD, 2009). The implementation of the WOGIRM strategy is tracked throughout the year and aligned with the annual budget cycle. This ensures that priority budget allocations are awarded to initiatives that address the key risks identified in the strategy. A Strategy Committee provides oversight and guidance by serving as the main platform to steer and review the overall implementation and progress. The Committee meets quarterly and comprises Permanent Secretaries from the various ministries across the government of Singapore.a a. Organisation for Economic Co-operation and Development (OECD). 2009. Innovations in Country Risk Management, Paris: OECD. As noted earlier, experience shows that designing and im- ant and immediate co-benefits to investing in the imple- plementing an IRM strategy for a country is not easily nor mentation of an IRM approach and in resilience more gen- quickly accomplished and it is a more time-consuming pro- erally. For instance, while investing in making existing or cess for an entire country than for a private sector company. new infrastructure more resilient has a cost, it immediately It requires time, resources, expertise and leadership as well creates a large number of jobs which has significant positive as a long-term vision for the country. However, if carried impact on the local communities where these investments out correctly, the benefits could be felt widely across its take place. While this report provides cost-benefit analysis population as well as its private sector and trade partners. based on avoided losses from risk reduction measures, it is clear that the overall benefits of many of these measures Box 8 provides an overview of the direct benefits from IRM. would actually be higher because of the urban regenera- It is, however, also important to note that there are import- tion, jobs creation and overall economic activity these ini- BOX 7: The Netherlands In 2007, the Netherlands was one of the first countries to adopt a Cabinet’s Strategy on National Safety. This Strategy seeks to examine all risks that can seriously affect the country on a common basis. For instance, in 2007 and 2008 a Cabinet’s Taskforce Flooding was installed to develop worst credible flood scenarios and formulate a nationwide preparation. It cumulated in a week long exercise involving about 15,000 people from NGOs, different governmental organizations and different operational organizations. In 2009, following special attention to floods, the country organized the largest European Union exercise to test the assistance from Member States of the EU. That same year the National Risk Assessment paid special attention to pandemics (pre-empting the global outbreak of H5N1). In 2010–11, special attention was given to cyber risks, and associated issues. The National Steering Committee for National Safety (“Stuurgroep Nationale Veiligheid”, SNV) was formed in 2011 to strengthen the holistic risk management approach. The SNV realizes coherence in national risk assessment and management at several levels of government policy, both regional and national, as well as international policy. The SNV advises the Dutch Cabinet and Parliament on risk reduction and regularly reports on National Risk Assessment and activities to strengthen capabilities and national risk management coherence. As such, the national IRM strategy is also based on a whole-of-government approach instead of departmental tasking and on a systematic national risk assessment, which guarantees more flexibility and agility in the risk management and risk financing strategy process. 6 SECTION I: A New Approach for Governments’ Risk Management BOX 8: Benefits of Integrated Risk Management Integrated risk management (IRM) has a number of clear benefits over traditional risk management. This is because IRM considers major risks in a consistent manner using common criteria and, at times, combines risk reduction vehicles and methods, whereas traditional risk management typically operates in silos, does not collate comparable risk data and separately pursues differing risk reduction options based on inconsistent criteria. Overall, IRM is a major step towards managing the complexity inherent in the many risks facing a nation. It does this through a transparent, continuous, multi-stakeholder processes that coordinates risk assessment and risk reduction efforts. It increases the systematic integration of the risk factors into a large number of day-to-day and strategic decisions—and helps to more efficiently allocate scarce risk reduction resources as well as monitor progress on multiple fronts. The specific benefits of IRM include, among others: a,b,c,d • Identifying Risks and Preparedness: IRM results in a more consistent identification and prioritization of key risks facing a country, which leads to a clearer understanding of the capabilities and capacities for reducing these risks. • Improving understanding of risk interdependencies: Risks are too often treated in silos but they are becoming more and more interdependent. For instance, a massive flood will impact different ministries differently–Public works to ensure constructions are built outside of a flood zone; Agriculture if the flood affects farmers; Interior for security/emergency services; Health for the treatment of the victims in hospitals; and Finance for compensation of impacted individuals and communities and the financing of reconstruction. • Making Informed and Cost-Effective Decisions: IRM is transparent, rational, and if implemented well can lead cost-effective decision making—its key value for decision makers is the ability to comprehensively consider options within the larger context and across multiple risks. Opportunities for synergy and leveraging, particularly in the financial arena, are more easily identified and implemented (highest ‘bang for the buck’). • Enhancing communication and coordination: IRM promotes a common vocabulary and technology across ministries, breaks down “silos”, enhances vertical and horizontal integration within the government and involves other key stakeholders (such as scientific organizations, community leaders, businesses, NGOs etc) to improve effective risk management. • Providing top decision makers with a complete dashboard of exposure and possible solutions: By approaching risk management holistically, one can provide the right information top decision makers need rather than relying on piecemeal results from independent studies looking only at one aspect of a problem at a certain time. In doing so, the integration also typically elevates risk management to a more strategic level than smaller risk management initiatives could achieve. Ultimately, an integrated risk management strategy will help governments make more informed decisions on how risks compare to each other, how limited budget can be allocated across different risk reduction initiatives, and how such policy can benefit from economies of scale across the country. Implementing an IRM approach would also position Morocco as one of the more active countries around the world on risk management, which in turn can serve as a strong signal for foreign investors. Erwann Michel-Kerjan. “MENA Countries Need to Foster Their Risk Management Capabilities, But How?” The Huffington Post, a.  October 26, 2010. b. According to the US Department of Homeland Security. CNA Institute for Public Research, http://www.cna.org/learnaboutrisk c.  d. http://www.franklincountyohio.gov/emahs/documents/irm_benefits.pdf tiatives will generate. This is important politically because This report suggests that IRM is achievable by devel- considering the overall benefits of any policy will make it oping countries, and provides a strategy for guiding an easier to justify the required additional spending. on-going IRM initiative launched by the GoM in 2008, in collaboration with a dedicated World Bank team and It is significant to note that the few countries that approach its advisors. This initiative is unique for a developing risk in a more integrated way are all developed economies, economy in its scope and the diversity of the risks on raising the question of whether IRM is achievable by devel- which it focuses. oping countries as well. 7 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy It is also important to stress that the World Bank envisions their objectives (Interior for security, Finance for economics, that the collaboration with the GoM in the coming years Energy for commodities, Urban for construction, etc.). The will continue to help provide the country with the best ex- horizontal cross-ministerial integration helps to explain the pertise in the field and also to provide capacity building different components of the risk and how collaboration is within Morocco. The World Bank has already started to do developed across Ministries to manage the entire risk cycle, this in the IRM initiative by training representatives in sev- not just part of it. Optimum allocation of resources from the eral line ministries to some of the risk quantification tools national budget requires that risk criteria and risk mitigation developed for Morocco , by working closely with the sci- alternative selection should be consistent government-wide. entific community and leading research institutions in the Additionally, several of the steps described in Figure 1 will country, by collaborating with national experts in different be similar across many Ministries (e.g., risk quantification), dimensions of the work (e.g. development of macro-eco- so that efficiency and consistency suggest that a common set nomic models, community-based disaster risk manage- of tools be developed and employed government-wide. ment) and by exchanging with the private sector (insurance industry and representatives from the General Confeder- Further efficiencies can be gained if the common set of tools ation of Moroccan Enterprises). In summary, the work to is used not only by the national government, but also at the date has been very inclusive. regional and local levels. To facilitate this coordination, a Moroccan National Office of Risk Management (NORM) Figure 1 illustrates the organizational integration of risk should be established. NORM is envisioned as a compre- management on two dimensions that the GoM might use as hensive country-wide office for assessing, monitoring and a guiding principle: horizontal and vertical. The horizontal managing risks at the national level, and promoting these integration means that the economic and social impacts of activities at the regional and local levels. the risks are being discussed across different Ministries to provide the Head of Government in Morocco with a clear NORM is not envisioned as an operational agency that risk dashboard. Each Ministry will likely be responsible for replaces or competes with existing Ministries, but rath- managing risks associated with their activities and delivering er as a small office within the Head of Government’s Integrating Risk Management in a Country FIGURE 1:  Head of Goverment National Office of Risk Managemnt (Coordination) Ministres Vertical Integration Ministries Province and Local Goverments Communities Businesses Horizontal Integration 8 SECTION I: A New Approach for Governments’ Risk Management An Integrated Approach to Fiscal Risk Assessment and Management in Colombia BOX 9:  The Government of Colombia (GoC) was one of the first movers in a growing number of countries concerned about taking an integrated, strategic approach to identification, quantification, disclosure, and management of fiscal risks. The GoC’s interest in the topic was driven by a substantial series of calls on demand guarantees related to public- private partnerships (PPPs) in power, telecom, and toll roads in the 1990s (eventually resulting in cumulative payments by the government of 2% of GDP) that led to the passing of Law 448 of 1998, which dictates that the national government, territorial entities, and other decentralized entities should include in their public management the necessary appropriations to cover possible losses arising from contingent liabilities. It also mandates that (i) the national government develop and enforce methodology for estimation of contingent liabilities; (ii) the Ministry of Finance’s General Directorate of Public Credit and the National Treasury have oversight over estimation and management of contingent liabilities; and (iii) that the national government establish a contingency fund for government entities and determine what type of risks were to be covered by the fund. Since the passing of Law 448, the GoC has been improving and expanding its approach to fiscal risk assessment, disclosure, and management. In 1998, it established the Risk Management Subdirection in the Ministry of Finance to lead this effort. The Risk Management Subdirection began the process of quantifying and publicly disclosing fiscal risks in 2003 with the government’s contingent liability to public credit operations. It has since expanded its methodology to assess and manage four other contingent liabilities, including natural disasters. In 2010, the first time that the government comprehensively assessed all of its contingent liabilities, the GoC identified natural disasters as its second largest contingent liability behind legal actions against the state. Other middle-income countries have also established dedicated units in the Ministry of Finance responsible for overall management of most fiscal risks—for example, in Indonesia and Peru. Other countries have been expanding the scope of their debt management departments to monitor and manage risks from contingent liabilities. Source: World Bank-GFDRR Disaster Risk Financing and Insurance Program, 2013. Office, that develops data and facilitates data-driven ideally flow through different levels of government to the management of risks by existing Ministries. Its role is communities (often the ultimate risk bearers), with com- to ensure coordination of current and future risk man- monly used risk metrics. This is facilitated by all agencies agement activities across Ministries and to be a point of using the same data and analytical procedures. Once risk is contact on government risk management for the private identified and measured, it needs to be managed—that is, sector. To fulfill this vision, NORM will require special- agencies should have a suite of risk reduction tools that are ized personnel and technical support. It is interesting to applied in a similar manner, according to similar criteria. note that the concept of NORM is similar to the emerg- ing recommendation in the World Bank WDR 2014 re- Finally, it is the decision of the government to know how garding the establishment of National Risk Boards to much integration is required for each key risk. For instance, help manage multiple risks across horizontal and vertical if investing in a levee or drainage system to protect a high- boundaries in a country. ly vulnerable city from flooding (e.g. Tangiers), the central government is likely to budget the spending in the nation- NORM could be complemented by a new fiscal risk al budget, but the implementation has to be made locally. management unit within the Ministry of Finance (any However, if a decision is made to purchase financial protec- risks considered in Morocco will ultimately have an tion on international markets to hedge against commodi- impact on the national budget) and work in concert ty price volatility, only the Ministers and their staff will be with the Ministry of the Interior which handles crisis involved (most likely the Finance Minister), not the local management at a national level. communities. Additionally, the integration needs to be vertical. While the 1.3  The Risk Management Process members at the highest levels of government provide the vision, it is also important that this vision be translated into While there are numerous ways to define risk management, concrete action on the ground in order to make a difference. a successful risk management process typically follows the Information, awareness and coordination efforts should steps described in Figure 2. 9 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy FIGURE 2: Eight Steps of the Risk Management Process 1. Risk Identification 2. Risk Prioritization 8. Progess Evaluation 7. Implementation 3. Risk Assessment 6. Designing an Implementation Strategy 4. Identifying Risk Reduction options 5. Decisions on what Options to Support First Step 1: Identify the risks. It is necessary to understand the Step 4: Identify risk reduction options. This step depends risks the organization or country faces (likelihood, mag- on the organization or country under consideration. Risk nitude, and cascading effect). Typically this identification culture is also an important factor because some solutions process can result in a large number of risks, sometimes might be appealing in some organizations or countries but exceeding 30 or 40.5 not in others. Also, the cost and benefit of implementing each one of these options needs to be calculated. This of- Step 2: Prioritize the risks. Many of these risks do not pose ten requires re-running the whole risk assessment with and large-scale problems and would not have major impacts without these risk reduction measures in place and com- should they occur. It is important to determine several key paring the costs and benefits to find the most attractive risks that have been judged critical for the organization or ones. country. This does not mean that the risks that are not se- lected will not be managed—they might be addressed af- Step 5: Decide what options to pursue first. Not all risk ter the significant risks have been reduced to an acceptable reductions solutions can be implemented. There are always level, or they may be more easily managed at a local level. budgetary constraints and competing demands. In theory, the solutions yielding the higher benefit/cost ratio should Step 3: Complete risk assessment. Currently, the technology exists to quantify risks fairly precisely. State-of-the art meth- 5 It is important to note that risk, in itself, is not necessarily odologies (i.e., probabilistic risk assessment) should be used a problem—provided it is addressed consciously after an where appropriate. Collecting the right data can be a lengthy assessment of its potential costs and benefits. The World process and therefore an important aspect of risk assessment Bank’s WDR 2014 on risk suggests that the identification and selection of risk management options should be based on is to know in advance who will be the end user of the assess- the obstacles to efficient risk taking, i.e. on what is leading to ment. For example, engineers will require a different type of excessive risk taking. The obstacles include incentive issues risk assessment than financiers or emergency planners. Once (e.g., when some actors responsible for risk taking do not support the consequences of their actions), information issues a risk assessment is completed for all the key risks that were (e.g., when some actors take risks without the information on selected, it is possible to compare those risks (order of mag- potential losses), behavioral issues (e.g., when the information nitude) across the entire organization or entire country, or is available but not in a form that makes it usable for decision- makers or when they make systematically biased decisions), focus on an area of interest (e.g., if a city has a very large pop- and resource issues (e.g., when credit constraints make it ulation or hosts a strategic industrial complex). impossible to implement economically-desirable actions). 10 SECTION I: A New Approach for Governments’ Risk Management be selected first (if the decision metric is financial), al- ant to establish and adhere to a timeline. Therefore, coordi- though other considerations can affect this decision (e.g., nation of the implementation phase by the top leadership social priority). and ensuring the implementation team is accountable is crucial. Step 6: Design a risk reduction strategy. After risk reduc- tion goals are set the strategy shows how the organization/ Step 8: Monitor progress and update the strategy. As country plans to achieve them through specific spending risks are being better managed, progress toward the goals and actions over a defined timeline and level of investment is monitored. Since the whole implementation can take (for example, per year per risk). The strategy also indicates several years, it is also important to monitor how the risk who will be responsible for implementing these actions, environment changes to adapt the strategy. and who will report to whom on the results. As discussed, Currently, Morocco has undertaken steps 1, 2 and 3 (Sec- the institutionalization of the strategy is critical. tion 2) and is now moving to step 4. It is important to note that the findings of these first three steps will be crucial Step 7: Implementation. This phase completes the tasks. for Morocco not only to determine risk reduction options Depending on the ambition and priorities of the country, (should they be physical, financial and based on specific this phase can be achieved over several years. It is also im- public policies) (step 4) but also in designing and imple- portant to obtain tangible results early, to demonstrate that menting the risk management strategy and monitoring progress is occurring. As for any project, it is also import- progress (steps 5 to 8). 11 SECTION II Integrated Risk Management in Morocco Inter Ministerial meeting on Morocco’s Integrated Risk Management Strategy – Rabat, January 2013 2.  Introduction: Three Pillars of Morocco’s Risk Assessment Morocco is vulnerable to a varied number of important risk prevention and mitigation initiatives into an integrat- risks. Key risks include economic shocks (such as com- ed risk management strategy and program. To make the modity price volatility for energy, food etc.), natural haz- country more resilient to future shocks, the GoM launched ards (such as earthquake and associated tsunami, floods, an initiative in 20089 aimed at improving the management droughts etc.), technological hazards (such as building col- of some key risks affecting the Moroccan economy and its lapse, transportation accidents especially marine oil spill, budget, as well as the social stability of the country. etc.) and biological hazards affecting humans, livestock or plants. This vulnerability is further exacerbated by in- creasing urbanization and the imminent threat of climate 6 Abu Swaireh, L. 2009. Disaster Risk Reduction Global and Regional Context, Regional Workshop on Climate Change change. Out of a total population of 30 million, currently and Disaster Risk Reduction in the Arab Region “Challenges 18 million live in urban areas, and it is anticipated that the and Future Actions”, organized by ISDR, WB, GFDRR, LAS, AASTMT, Cairo, Egypt, 21–23 November 2009; and IPCC. urban population will increase by 4 million by 2025. Glob- 2007: Climate Change 2007: The Physical Science Basis. al climate change is projected to result in increased inten- Contribution of Working Group I to the Fourth Assessment sity and frequency of both droughts and floods; exposing Report of the Intergovernmental Panel on Climate Change [Solomon, S., D. Qin, M. Manning, Z. Chen, M. Marquis, K.B. up to 25 million urban dwellers to floods in the Middle Averyt, M.Tignor and H.L. Miller (eds.)]. Cambridge University East and North Africa region6 and resulting in a 30–50% Press, Cambridge, United Kingdom and New York, NY, USA. drop in water availability, thereby exacerbating an exist- 7 World Bank, 2007. “Making the Most of Scarcity: ing severe water scarcity.7 In Morocco specifically, it can Accountability for Better Water Management Results in the Middle East and North Africa.” MENA Development Report. be argued that climate change has already contributed to World Bank, Washington, DC. increased floods and droughts in the last decade, reduced 8 http://www.arabwatercouncil.org/administrator/Modules/ water quality and caused ground water aquifers to dry up Events/IWRA%20Morocco%20Paper.pdf. at an increasing rate.8 9 This initiative was supported by a US$2 million grant provided by the World Bank, the Global Facility for Disaster Reduction As a result of increased awareness of the relatively high and Recovery (GFDRR), the Swiss Agency for Development and Cooperation (SDC), the Trust Fund for Environmentally probability of key risks, the Government of Morocco has & Socially Sustainable Development (TFESSD) and the FIRST decided to consolidate, modernize and expand existing initiative. Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy FIGURE 3:  The Three Key Risk Priorities of the Moroccan IRM categories are not being managed by Strategy GoM, but that they are not currently being integrated into the IRM strate- gy. The goal is, of course, to integrate them in the coming years. National Integrated Risk Management Strategy The following discusses in more de- tail the results of the risk assessment Agricuture Risks and proposals for mitigation actions Catastrophe Commodity (steps 1 to 4 of the risk management Price Risks process, as depicted in Figure 2). This Risks work was a full collaboration between the GoM and the World Bank and its advisors and was intended to serve as input to Morocco’s evolving risk management practices. In each step, But where should risk management start? Should Morocco there was considerable consultation across Ministries and be working on all the risks it is exposed to, from the minor numerous stakeholders were involved, including government ones to the large ones, or just a selection of those? Several officials, universities and research centers, business leaders, inter-ministerial meetings and workshops were held in col- civil society, and NGOs. Within the World Bank, the holistic laboration with the World Bank team in 2008 and 2009. The nature of the IRM approach also required cross-department purpose of this risk identification phase was to identify and expertise and coordination, as well as world-class advisors to then prioritize about a dozen risks. The goal was to come up propose, design, and supervise the work necessary to launch with a list of 3 or 4 key categories of risks that would (i) have the IRM strategy initiative. a serious social impact on a number of people in the coun- try should they materialize; (ii) have significant economic The degree of risk assessment and progress differs from one impact on citizens, businesses and the government budget; risk to another. A significant part of the work focused on natu- and (iii) be the most promising in terms of concrete steps ral disaster risks (Section 2.1) and, to a lesser extent, on a need that could be taken in the following five years to start better assessment performed on commodity (energy) price hedging assessing these risks and find solutions that can be imple- (Section 2.2). While not covered specifically with the World mented to reduce the country’s exposure to them. Bank team, the GoM has been actively assessing and manag- ing agriculture risks. The Bank team provided some guidance Given time and resource constraints it was decided at the on risk management in the agriculture sector and some key outset of this activity to build a solid foundation on a few aspects of this are presented at the end of this section. key risks for which risk assessments could be completed as opposed to looking at too many risks simultaneously. It is equally important to note that the selection of three risks is only a first step: in the longer term, and with stron- As a result of this selection phase, the GoM identified three ger risk-management institutions, the GoM will be able priority risks, as a starting point, to explore options for an- to include more and more risks in its integrated analysis alyzing and improving existing risk management practices. of and approach to risk management. As such, this initial These are (i) natural disasters (a category of risks which in- phase above all builds a strong foundation for risk manage- cludes floods, earthquakes, and tsunamis); (ii) commodity ment which can be extended over time. (energy) price volatility risk; and (iii) risks in the agricul- tural sector generally. These risks were selected as a result of the aforementioned preliminary risk assessment which de- 2.1 Natural Disasters termined that they had high cumulative political, economic Morocco’s disaster risk profile 2.1. a  and social impacts—although with an explicit understand- ing that additional risks (such as financial sector risk and Natural disasters such as earthquakes, floods, tsunamis or technological risks) are equally systemically important. droughts are a potential source of great loss for Morocco. Even That does not mean that risks that were not in these three the largest and most technologically advanced economies 14 SECTION II: Integrated Risk Management in Morocco struggle to deal with such events: the 2011 Japan earthquake XX2008: Tangier, 30 deaths, economic losses (industrial and tsunami (20,000 fatalities); the 2008 China earthquake area). (80,000 fatalities) and the 2005 Hurricane Katrina in the Unit- XX2009: Al Gharb, 400 houses destroyed, 100,000 hectares ed States (which cost US$150 billion) are examples of this. of land destroyed with the cost of damage exceeding Disasters have also had devastating impacts in low- and mid- MAD 1 billion. dle-income countries: the 1999 Turkey earthquake (19,000 fatalities); the 2004 Indian Ocean tsunami (250,000 fatalities) Earthquakes and the 2008 Myanmar Cyclone Nargis (138,000 fatalities). XX1960: Agadir, magnitude 5.7, 12,000 killed. Each of these events occurred suddenly and was termed XX2004: Al-Hoceima: 628 dead, 926 injured and 12,367 “low probability” beforehand and “unprecedented” after- collapsed houses. wards. They resulted in massive national disruption and required the full attention of the central government to Locust invasions maintain its credibility and authority. Economically, such XX1987–89, southern Morocco, cost MAD 1 billion disasters have been ruinous, typically resulting in massive XX2003–04, southern Morocco and eastern zone, 2,832,000 disaster relief from the national government (for the richest hectares affected. countries), new significant borrowing and short-term fiscal crises (for the less developed countries). In order to supplement the historic record, and assist with the development of the national IRM strategy, a major in- The lesson to be learned is simple yet crucial—natural disasters ter-ministerial project addressed natural hazards risk in happen, and a recent lack disasters is not an indication of low Morocco in a 2010–12 project coordinated by the Ministry risk—in fact, recent quiescence can be a prelude to disaster. for General Affairs and Governance (MAGG), with sup- port from the World Bank, the Global Facility for Disaster The historic record for natural hazards in Morocco is rela- Reduction and Recovery (GFDRR) and the Swiss Agency tively short and not always well documented. Table 1 sum- for Cooperation and Development (SDC). marizes the record for natural hazards, which indicates that hydro-meteorological risk, especially flood and drought/ The project developed a new GIS-based analysis tool, Mn- heat wave, has affected more people than any other phe- hPRA (“Morocco natural hazards Probabilistic Risk Anal- nomena, and has caused the most economic loss, while ysis, see Box 10), which was used to analyze earthquake, earthquake has caused the greatest loss of life, and is also a flood, tsunami, drought and landslide risk in Morocco major source of economic loss. using state-of-the art probabilistic risk assessment (or ca- tastrophe models). Selected specific events include: A probabilistic catastrophe modeling approach provides Floods more value than a deterministic approach because it in- XX2002: Mohammedia and Berchid: 63 dead, collapsed cludes all the events that can cause damage, and it generates houses, flooded hundreds of homes, hundreds of hect- a detailed analysis of return period based on advanced haz- ares of farmland affected. ard models. The four basic modules of a catastrophe model  artial Summary of Historic Major Natural Disasters in Morocco 1900–2008 Table 1: P Fatalities Total Population Affected Estimated Damage (MAD million) Flood 1,556 531,926 2,400 Earthquake 12,728 38,465 4,200 Drought / Heat Wave — 412,000 7,200 Total 14,531 997,549 13,800 Source: EM-DAT. 15 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy FIGURE 4:  Four Basic Modules of a Catastrophe bination of data gathering, on-site-visit and satellite-based Model information. The third module quantifies vulnerability, or how the prop- Hazard erties or infrastructure at risk (i.e., the inventory) will phys- ically behave under events generated in the hazard module. Vulnerability functions are the relationships between haz- Vulnerability Loss ard intensity (e.g., water depth for flood or intensity of an earthquake) at the site and the level of damage experienced. Inventory The last module is loss. Assume for the moment that the only uncertainty is the occurrence of an event. That is, for example, the occurrence of a flood in Casablanca follows a are: hazard, inventory, vulnerability and loss, as illustrated certain mathematical process that was specified in the haz- here: ard module. Given an event has occurred, the second part of the hazard module calculates the severity of the event For the first module, the risk of the hazard phenomenon is across the entire city. The vulnerability module then cal- estimated (for instance earthquake or floods). This module culates the mean damage ratio at each location given the includes two main parts. The first part addresses the occur- characteristics specified in the inventory module. Lastly, rence and frequency of the events. It does this by first devel- the loss module considers the damage given the inventory oping a stochastic event set; a set of simulated events char- exposure values and calculates the total loss at that location. acterizing the observed or scientifically modeled events and their probabilities of occurrence. The second part of These losses are then compiled and collected in a table the hazard module calculates the severity of the events at called an event loss table (ELT). A typical ELT is such that every site of the study region, in this case the entire country each row corresponds to a catastrophe event taken from a of Morocco. group of credible scenarios (e.g., flood) with an identifica- tion number (Event IDj), an annual rate of occurrence (λj), The second module of a catastrophe model characterizes and resulting loss (Lj) for IDj, as described here: the inventory of the properties at risk. This can be a build- ing of specific interest, a dwelling representative of the aver- Combining information on frequency and severity of losses, age construction type in a given area exposed to the hazard, the probabilistic catastrophe model generates the distribu- or an entire portfolio of buildings with different character- tion of the expected losses associated with all possible sce- istics (e.g., an entire city). For the MnhPRA project, the narios of disasters (that for floods, then earthquakes, then portfolio was the entire built environment of Morocco—a tsunamis, and for the entire country). This is often expressed major undertaking since the analysis had to be done for in terms of an aggregate loss exceedance probability (EP) all types of assets in Morocco (residential, commercial, in- curve. For a given portfolio of structures at risk, an EP curve dustrial, public infrastructure, etc.). This required a com- is a graphical representation of the probability (p) that a cer- tain level of aggregated loss $L will be exceeded in a given year. The Average Annual Loss (AAL) is the expected loss Table 2: E  xample of an Event Loss Table over all simulated events affecting the portfolio per year. Event ID Annual Rate of Occurrence Loss MnhPRA is the computer program that was developed to 1 λ1 L1 generate all of the aforementioned information in a us- er-friendly mode. The development of MnhPRA and its 2 λ2 L2 technical basis are extensively documented (Figure 5). … … … MnhPRA provides the AAL for any type of inventory for k λk Lk a selected hazard in a selected location (e.g., risk of houses in Fez due to earthquakes). It also provides the accumu- … … … lated exposure for the entire country to a specific type of K λK LK disaster using this probabilistic risk assessment approach. 16 SECTION II: Integrated Risk Management in Morocco Technical Reports and Sample Outputs of MnhPRA, from the Disaster Risk Portion of the FIGURE 5:  Project As described in Table 3, this program identified that Mo- a 95% chance of an earthquake or flood in Morocco causing rocco has very substantial risk due to natural hazards. In losses amounting to MAD 5 billion, a 90% chance of an event order to better understand these summary statistics, it is causing losses of MAD 10 billion and a 65% chance of an event necessary to examine what assets are at risk, what threat- causing losses of about MAD 25 billion. However, floods are ens these assets, and then in more detail specify the risk. fairly frequent while earthquakes are rare (and tsunami even rarer). It was learned that a rare, but possible, earthquake or What assets are at risk? MnhPRA’s estimates were based tsunami can be more damaging than a flood and that different on the total value of the built environment in Moroc- hazards affect different parts of the asset portfolio differently. co—that is, the replacement value of all houses, businesses, For earthquakes, buildings of all types represent about 93% of factories, roads, bridges, ports, vehicles and other man- the AAL, while for floods building losses are about 75% of the made tangible objects at risk. Morocco’s built environ- AAL (and only 50% in the case of tsunami). ment total value, or “exposure”, is MAD 2.7 trillion or about MAD 90,000 per capita. Buildings of all kinds rep- How much risk is acceptable or, conversely, how much is un- resent about 70% of the total value at risk, with public acceptable? One common measure of risk that is often used buildings constituting about 10% of this, and a variety of is the Loss Cost, which is the AAL divided by the exposure. infrastructure, such as ports, airports, rail and road, and the electrical network, accounting for the other 30% of the total value at risk.10 10 This is only a partial listing of the value of the built environment, particularly those parts perhaps most What could happen? Currently only a few partial answers vulnerable to physical damage. Many other items, such as road pavements, underground water and wastewater are available. According to the probabilistic risk assessment piping, electrical distribution infrastructure, and business and estimates based on MnhPRA, over the next 30 years there is industrial stocks and inventories, are not included. 17 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy  orocco Natural Hazard Estimated Losses for Varying Return Periods (MAD millions)* Table 3: M Hazard Earthquake Flood Tsunami 1000– 1000– 1000– 100-year year 100-year year 100-year year Occupancy AAL* return return AAL* return return AAL * return return Residential 506 8,670 24,604 1,895 12,092 14,718 23 57 17,639 Commercial 144 2,823 10,628 434 2,530 3,006 18 180 9,053 Industrial 35 674 2,704 471 2,231 2,569 18 148 8,898 Govt. Buildings 7 151 591 369 2,351 2,751 0 — 50 Essential Facility 97 1,564 3,918 1,005 8,328 9,762 1 5 1,421 Infrastructure 60 1,435 4,559 3 24 1,302 63 14 21,793 Total 850 15,317 47,004 4,177 27,556 34,108 124 404 58,854 * AAL = Average Annual Loss (million MAD) – that is, the estimated loss per year due to a hazard or hazards when averaged over a very long period, while “100” refers to a loss with an annual probability of occurrence of 0.01 (i.e., 1/100). “1000” similarly refers to a loss with an annual probability of occurrence of 0.001 (i.e., 1/1000). A Loss Cost of 1‰ (i.e., one per mille or one-tenth of 1% of rocco’s overall building earthquake risk to buildings can be the asset value being lost each year) is often taken as a simple significantly lowered. boundary for acceptance, for catastrophic type events. By that measure, floods are an unacceptable loss for all of Morocco, Of the different categories of asset types analyzed, publicly while earthquakes are marginally acceptable, and tsunamis owned buildings are the direct responsibility of the govern- generally a much lower and tolerable risk. On a preliminary ment, and have a total value of MAD 17 billion. All other basis, nationally, analysis shows that flood risk reduction buildings are owned by, and the direct responsibility of, the should probably receive more resources than earthquake, private sector. Different categories of assets therefore rep- while tsunami risk reduction is far less important. resent different risk reduction approaches from adminis- trative, disaster risk financing and insurance points of view However, the above results are national averages, which (see Section 2.4). tend to spread the risk over the entire nation and hide for example that a risk for a particular province may be very Floods are a chronic problem for Morocco, annually caus- high. In order to better understand Morocco’s risk, more ing millions of Dhirams in losses. Figure 7 shows the Tang- detailed analysis is required. For that purpose, GIS-based ier Industrial Zone, flooded in 2008 from a channel that tools such as MnhPRA are useful to analyze risks down to might have had a higher levee or flood wall. Using Mn- the commune level. hPRA, Figure 6 shows that flood risk, as compared with earthquake, affects many more parts of Morocco (in fact, Earthquake risk to Morocco was assessed using MnhPRA most provinces) but also affects only selected places (i.e., (Figure 6). Earthquake risk is primarily concentrated in only some parts of each province). certain regions—mostly the North and, to a lesser extent, on a line running through Fez and Marrakech to Aga- Using the same criteria as was used for earthquakes—i.e., dir. Five provinces (Nador, Al-Hoceima, Berkane, Taza, Loss Cost exceeding 1‰—the total value exposed to flood Tetouan), representing only 8% of the total national build- is much higher. For flood it is MAD 541 billion, compared ing exposure, have an earthquake AAL of 34% of the to- to MAD 148 billion for earthquake. Additionally, flood risk tal national building earthquake AAL. This means that on tends to be much more frequent than earthquake, resulting average, for buildings only, 8% of the building exposure in much higher Loss Costs. Although earthquake Loss Costs contributes 34% of the earthquake potential loss. Clearly, if rarely exceed 2‰, flood Loss Costs in a number of cases are the risk of 8% of Morocco’s buildings can be reduced, Mo- more than 10‰ (i.e., 1%). Further analysis identified that 18 SECTION II: Integrated Risk Management in Morocco MnhPRA – Morocco natural hazards Probabilistic Risk Analysis BOX 10:  A guiding principle of modern management is “what gets measured gets managed.” A key element of the Government of Morocco’s disaster risk management program has been the development of MnhPRA, a Geographic Information System (GIS) based software package that inventories the country’s assets at risk and the hazards that threaten these assets, and allows analysis to estimate the impacts of these hazards on the assets. MnhPRA thus permits measurement of disaster risk, a key step towards managing that risk. MnhPRA is open-source software developed during 2010–12 under a project coordinated by an inter-ministerial committee and managed by Ministère des Affaires Générales et de la Gouvernance (MAGG), with technical support provided by the World Bank and the Global Facility for Disaster Reduction and Recovery and scientific review by a panel of Moroccan university professors. MnhPRA contains GIS databases of Morocco’s assets at risk—that is, Morocco’s population, the entire built environment of Morocco—all buildings, roads, bridges, railways, ports and airports, electric generation and transmission and other infrastructure, and selected agricultural crops. MnhPRA combines these asset databases with databases of hazards (currently, earthquake, flood, tsunami and drought) that threaten these assets, and links these two with vulnerability functions, to estimate fatalities, injuries and direct economic costs due to all possible disaster occurrences. An advanced model of the Moroccan economy, developed in conjunction with Le Haut Commissariat au Plan (HCP) then provides estimates of the overall impacts on the national economy. Results are provided in detailed tables at the commune level, summary tables at the province, region and national levels, and maps. MnhPRA is an advanced powerful tool that allows both local and centrally coordinated management of natural hazards, using the same data so that decisions are made on a common basis. Towards this end, technical staff from a number of ministries attended training sessions for MnhRPA. Because it is open source and GIS-based however, MnhPRA is intuitive, easy to use and can be extended to other hazards, becoming Morocco’s fundamental tool for integrated risk management, thereby saving lives and reducing damage at a lower cost than if MnhPRA were not available. four provinces (Kenitra, Tetouan, Casablanca and Sidi Ka- would result in devastating waves as high as 10 meters cem) contributed 60% of the total building flood AAL. at Casablanca. Analyses indicate that although the AAL from a tsunami is estimated to be only about 15% and Tsunami is a significant threat to Morocco’s Atlantic and 3% of earthquake and flood AAL, respectively, an infre- Mediterranean coasts—a repeat of the 1755 earthquake quent (e.g., “500 year”) tsunami has the potential to be as 19 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy Average Annual Loss (AAL) for Earthquake and Flood by Commune FIGURE 6:  destructive as a great earthquake or flood, as experienced Drought is a very significant risk to agriculture in Mo- recently in the tragic 2004 Indian Ocean and 2011 Japan rocco—the sector employs about 40% of the nation’s tsunamis. workforce and is the largest employer in the country. FIGURE 7: Tangier Industrial Zone Flooded in 2008 Credit: Scawthorn, 2008. Flooding resulted from the channel on the right; red line on left wall indicates level of flood. 20 SECTION II: Integrated Risk Management in Morocco BOX 11: “What-ifs” Scenarios “What-ifs” are scenario analyses of the benefits and costs of a particular risk reduction, or mitigation, action. For example “what if schools in a high seismicity region are strengthened for an earthquake?” The “what if…?” question asks “what are the benefits if… [some action is taken].” In the context of risk reduction, the benefits are typically avoided future losses, which are calculated based on probabilistic risk analysis techniques. While greater and greater benefits can be realized with increasing mitigation actions, since these actions come at some (increasing) cost, there is typically an ‘optimum’ level of mitigation, which is the point at which the decreasing loss equals the increasing cost of mitigation. Probably the most common method of determining the optimum level of mitigation is benefit-cost analysis, which seeks to determine the Benefit-Cost Ratio (BCR) of a particular mitigation action—the higher the BCR, the more bang (benefits, that is, avoided loss) for the buck (cost of mitigation). Based on MnhPRA, what-ifs were developed for a total of 51 scenarios, ranging from strengthening of buildings, flood warning systems, structural measure of flood mitigation and evacuation mapping to elevating buildings to protect against floods. The scenarios considered high-risk areas such as Al-Hociema and Nador province for earthquake, Kenitra province for floods and coastal areas of the country for tsunami, as well as other key provinces such as Fes and Agadir. The BCR for the 51 scenarios varied from 54.3 to 1.1. The total cost of mitigation for all 51 what-if scenarios was MAD 9.3 billion. The top ten scenarios in terms of BCR were: (i) Flood warning system for Ouregha sub basin (BCR = 54.3) (ii) Culverts on railway lines in Gharb plains (BCR = 34.6) (iii) Evacuation mapping for tsunami in coastal areas (BCR = 8.3) (iv) Mitigation of residential buildings for floods in new township near Kenitra (BCR = 8.2) (v) Mitigation of government buildings for floods in new township near Kenitra (BCR = 7.2) (vi) Strengthening of hospital buildings in Nador province (BCR = 5.8) (vii) Risk assessment for floods in new township near Kenitra (BCR = 5.7) (viii) Risk assessment for proposed schools in the country (BCR = 4.4) (ix) Mitigation of school buildings for floods in new township near Kenitra (BCR = 4.2) (x) Strengthening of schools in Nador province (BCR = 3.6) Source: World Bank 2012. What If Scenario Analysis Report, Morocco Natural Hazards Probabilistic Risk Analysis and National Strategy Development. The Ministry of General Affairs and Governance, prepared by RMSI Ltd. Historically, drought has caused severe problems in Mo- risk on a national basis consistent with other risks, although rocco (Table 1). Especially at risk are the cereal-growing results are only available for three cereal crops11which ac- lowlands, which are subject to considerable variation in count for about 20% of the agricultural sector’s total pro- annual precipitation. On average, drought occurs in Mo- duction (Figure 8). Furthermore, impacts of drought on rocco every third year, creating a volatility in agricultural potable water supply and industrial production have not production that is the main constraint on expansion in yet been similarly modeled. the sector. A framework has been developed for quantifying and un- 11 Barley [Hordeum vulgare L.], common wheat [Triticum derstanding drought impacts and attendant agricultural aestivum L.] and durum wheat [Triticum durum Desf.]. 21 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy Map Showing Return Periods for Severe Drought for the Three Crops Considered in FIGURE 8:  MnhPRA to Date Note: The brown areas are likely to suffer severe drought about every decade (5~15 years) while in yellow areas severe drought is less frequent (15~30 years).  isaster Risk Institutional and 2.1. b D take charge of the response phase. The Plan stipulates that the Central Government intervenes only when the governor Legal Framework seeks support (i.e. when the human and material resources Institutionally, the GoM has a number of agencies and at the local level are inadequate to manage the crisis). Al- Ministries mandated with the management of some aspect though there is general consensus among the GoM entities of disaster risk. These include, among others, the Ministry and the communities on the efficacy of the CVC in terms of Interior, the Ministry of Water and Environment, the of disaster response, since 2007 no ‘major’ disaster (of the Ministry of Health, the Ministry of Energy and Mines, and magnitude of Al-Hoceima for example) has struck Morocco the Ministry of Education. to evaluate the agency. However, the CVC is currently insuf- ficiently equipped to predict upcoming hazards, or invest in For disaster response, for example, the GoM has in place activities that assist with the prevention and preparedness good systems for crisis response within the Ministry of Inte- of communities before a disaster. A schematic of the insti- rior—supported by a corresponding legislative framework. tutional structure during a disaster is outlined in Figure 9. As a result of the devastating Al-Hoceima earthquake in 2004, a Royal Commission set up by the King recommended On disaster prevention and preparedness, while a number the creation of (i) a National Coordinating Committee to co- of initiatives are in place, the GoM has a more fragmented ordinate emergency situations by bringing together different approach. For example, from a legal perspective, the Depart- Ministries and technical and scientific committees during ment of Environment has the mandate of prevention of natu- the disaster event; and (ii) the Centre de Veille et de Coor- ral disaster risks (according to Decree n°2-99-922 instituted in dination (CVC) to manage the actual emergency situation 2000), as well as managing a potential crisis relating to marine on the ground, allocating resources (financial and physical), pollution (according to the National Emergency Plan, applied as well as coordinating stakeholders. The CVC also houses a since 2003), while all other crisis prevention is the responsi- ‘Situation or Crisis Room,’ dedicated to coordinating, sup- bility of the Ministry of Interior (Decree from 1997), thereby porting and assisting those deployed in the field during an reducing incentives to work together. Scientific agencies like emergency. The ‘ORSEC’ Plan (programme d’organisation the National Geophysics Institute (ING) conduct research des secours à l’échelon départemental, en cas de catastro- on seismic activity in Morocco as well as map the national phe), which is triggered at the time of a disaster (Circular seismic hazard zones to design better building codes. Simi- no. 25 and 172), empowers the Ministry of Interior, through larly, various national hydrologic basin offices collect data on its Walis and governors at the provincial and local levels, to rainfall and stream flow, and develop maps of flood zones. 22 SECTION II: Integrated Risk Management in Morocco BOX 12: Measuring and Enhancing Economic Resilience through IO and CGE Modelsa Measuring indirect economic effects of disasters (how the economy will adjust to a shock and how the population will be affected by households’ income and consumption) requires specific macro-economic models that capture the interdependencies between all the sectors of the economy and macro-economic actions adopted by the government before the disaster, and to responses following a disaster. Those policies can reduce the economic and social impacts of disasters and support fast recovery. Input-Output (IO) models, developed and used by the Haut Commissariat au Plan (HCP), allow the government to rapidly estimate the short-term total economic losses from a disaster by sector and for the whole economy Computable General Equilibrium (CGE) models are more sophisticated and capture the long-term dynamics. For example, a manufacturing plant affected by an earthquake, could switch production to other plants not operating at full capacity in parts of the country not affected, thus limiting total production loss. Key results of the analysis The higher-order effects and total impacts of disasters are significant and complex: 1. The IO method calculates the total production losses (direct and indirect) that would be higher than the sole direct losses estimated by the probabilistic risk assessment, ranging from MAD 13.5 billion for a flood of 1,000 year return period, to MAD 52 billion, for an earthquake of 10,000 year return period; approximately 6% and 23% of the government budget, respectively. These total losses would be MAD 26.4 billion in the case of a 1,000 year return tsunami (or 11.6% of government budget).The evaluation by the CGE model shows that when markets and the adjustment mechanisms work more flexibly, the negative effects of direct loss of production, although relatively high, tend to be attenuated compared to the IO method. 2. The decline in economic activity would impact negatively household incomes, resulting in a reduction of consumption and standards of living. The financial capacity of the state can also be adversely affected and in a massive earthquake could experience a reduction of MAD 11 billion. It is therefore important to appropriately evaluate and account for the interconnectedness between industry sectors and economic agents (consumers, businesses). Analysis of the sectoral distribution of total impacts reveals that the manufacturing and services sectors suffer from those interdependency effects more than other sectors, such as agriculture and mining, because they rely more on inter- industry relationships domestically and/or internationally and are located in the middle and at the end of production chains. Damages and losses on the other sectors propagate to these two sectors, resulting in larger economic disruption. However, the intensity of inter-industry relationships, or interdependencies, varies significantly, as do the impact effects. 3. The total losses calculated by the IO model are often typically higher by 25 to 30%, compared to the direct losses based on the estimation of physical losses found by RMSI, demonstrating that disaster losses can be more significant via ripple effects through interdependencies within an economy when the disaster affects critical assets. With the CGE, those losses are slightly lower than 25%, since it takes into account longer-term adjustment. The CGE model results are consistent with many international assessments, which show that the effects of disasters are lessened when the economy is developed and markets and adjustment mechanisms work properly. Taking the right macro-economic actions when a disaster happens is critical Resilience-supporting public policy can significantly alleviate the negative impact of natural hazards on the economy and accelerate its rate of recovery. The two key economic policies—investment and productivity enhancement—simulated to counter the shock of a large earthquake would reduce GDP loss up to 40%. Household income could increase if the government implements such policies. This in turn will impact positively households’ consumption, yielding an overall increase in the aggregate demand that will give an economic boost. Also, the worsening of the government deficit after the disaster would be significantly less if those economic resilience policies were implemented. The development of the IO and CGE models provide the GoM with state-of-the-art analytic tools to improve macro- economic decision-making and can be used for disaster scenario and/or public policy mix. Based on international experience, these tools position Morocco as one of the most advanced non-OECD countries for disaster macro- economic policy evaluation capability. a. The full economic analysis, undertaken under the direction of Professor Dukkali in Rabat as part of the World Bank IRM team, and in collaboration with the Moroccan HCP, is available in the 50-page report provided to the Government of Morocco: “Evaluating Direct and Indirect Economic Impacts of Natural Disasters: The Development of an Input-Output and a CGE Models for Morocco”, 2012. 23 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy FIGURE 9: Schematic of Institutional Structure During a Disaster Structures organisationnelles pour la gestion des risques Structure de coordination Comité National de Coordination Centre de Veille et de Coordination CVC Niveau National Mode de veille Situation d’urgence Action d’atténuation Action de préparation Salle de Crise Anticiper – prévenir Elaborer les plans Assurer la veille (opérations et Evaluer les risques communications) Opérations Planification Logistique et Finances Communication Etudier les situations Former les équipes Coordination des Planification des Transfert des moyens Préparation des antérieures Définir les moyens opérations moyens demandés messages et des Consulter les experts Mettre les plans à Elaboration ordre Elaboration documenta- Estimation des dégits communications l’essai de priorita tion technique Centre Provincial de Veille et de Coordination CPVC Niveau Provincial Salle de Crise Opérations Planification Logistique et Finances Communication Structure d’intervention Niveau Poste de Commandement Avancé PCA Local Direction des operations de sauvetage, de secours et de rétablissment Opérations Planification Logistique et Finances Communication Specific disaster risk mitigation programs exist for flood pro- supports countries through such actions, some of which tection and preparedness for earthquakes. The Secretariat of are listed in Box 1 (Section 1.1). It is important to note Water formulated the National Water Strategy in 2009 which that the GoM already has institutional structures in place includes setting up early warning systems for floods, as well with different responsibilities in the disaster risk man- as weather forecasting, including flood risk plans for urban agement (DRM) cycle, such as the CVC. The suggestions planning and watershed management. Morocco also has a regarding possible mitigation actions are not intended to National Flood Protection Plan which identifies the specific overturn or duplicate any of the actions already put in sites vulnerable to floods and identifies investment programs. place by the GoM, but rather are meant to supplement Furthermore, as a consequence of the Al-Hoceima earth- and augment the current risk management structures and quake, the Moroccan building codes were updated in 2011 programs. (RPS 2011) and now set the standards for calculation and de- sign of structures to strengthen them against seismic shocks Furthermore, flood mitigation differs from earthquake and enact the technical provisions of civil engineering and mitigation in that earthquake mitigation is structure-spe- architectural design for buildings to withstand earthquakes. cific—typically each building must be addressed individ- ually. Therefore, for a thousand buildings, on average the cost of earthquake mitigation will be a thousand times the  ptions for reducing Morocco’s 2.1. c O cost of one building, everything else being equal. Flood risk due to natural disasters mitigation, however, can be accomplished several ways—at the individual building level, but also (and more usually) A number of short, medium and long term mitigation ac- collectively, via flood protection works such as urban flood tions could be undertaken by the GoM. The World Bank walls, levees and dams. For this reason, protecting, for ex- 24 SECTION II: Integrated Risk Management in Morocco BOX 13: Risk Perception Survey of Communities in Morocco Efforts to reduce disaster risks and implement risk reduction programs should build upon a community’s knowledge and experience about hazards, vulnerabilities and disaster risk reduction while recognizing the importance of local customs, culture and materials. To capture this facet of community perception of risks, the World Bank together with the GoM (TFESSD financed) conducted a study in four urban and rural communes in the provinces of Guelmim, Hoceima, Taounate and Chefchaouen. The objective was to capture existing good practices in CBDRM, conduct a social qualitative assessment (survey questionnaire and focus groups) of risk perceptions based on experience of a previous disaster, and an institutional assessment of DRM structures. The results were quite interesting: community interest to DRM seemed to vary based on (i) available financial resources (only 12% of respondents had a financial reserve of any kind); (ii) residential status (84% of respondents owned their own home and wished to reduce the potential damage to their property); (iii) the recurrence of hazards (89% of the respondents considered floods as the main risk, even in areas prone to earthquakes); and (iv) the type of hazard (for example, a sense of helplessness and acquiescence in the case of slow onset hazards like droughts). The role of the state seemed to vary depending on the geographic region (proximity), type of hazard (fast vs. slow onset) and the phase in the disaster cycle (high intervention during response and reconstruction but low during the ex ante phase). Although all respondents recognized their role in the management of natural hazards and the importance of community action, 81% thought that investing in risk management is a government responsibility (national and local). All these findings are important indicators and inputs when designing mitigation and adaptation actions as the ultimate beneficiaries, responders and users of most of the risk reduction actions (infrastructure, insurance, etc.) are the communities. Source: Etude préliminaire en gestion communautaire des risques de catastrophes naturelles, World Bank, April 2012 ample, only public buildings from flooding is typically ir- Programs and Institutions relevant as either all buildings in a flood zone are protected, or none. Disaggregating exposures according to public and 1. Early warning systems12 are required for earthquakes, private ownership is less relevant. floods and tsunami. Tsunami warning is probably the only mitigation that is feasible for this hazard for Mo- rocco, and should begin with Morocco’s participation in Experience also shows that unless DRM efforts are sus- North Eastern Atlantic, the Mediterranean and Connect- tainable at the individual and community level, it is dif- ed Seas Tsunami Early Warning and Mitigation System ficult to reduce the losses and scale of the tragedy (also (NEAMTWS),13 while simultaneously developing and see Box 13 on Risk Perception Survey of Communities deploying a tsunami warning dissemination system that conducted in Morocco). Involving people from the ini- includes public education, tsunami evacuation signage tial programming stage of disaster management activi- and other measures to effectively utilize the technical ties to final implementation increases both sustainability warning. Earthquake warning is an emerging technology, and effectiveness of disaster risk management. Efforts but has operated in Mexico and Turkey for the last de- to reduce disaster risks should therefore build upon a cade and is now becoming operational in Japan and the community’s knowledge and experience of hazards, vul- United States. It could be operationalized in the north of nerabilities and disaster risk reduction. It is essential to Morocco. Flood warning systems are already operational- recognize the importance of local customs, culture and materials while developing and implementing risk re- duction programs. Box 14 shows government actions in CBDRM in Vietnam and the sustainability of risk reduc- 12 EWS consist of a number of elements—data collection, processing and warning issuance decision-making, messaging tion measures put in place. and broadcast of the warning, and preparation and education of the warning recipients regarding appropriate actions to While there are many methods to reduce natural hazards take in the event of a warning. risk, this note proposes risk mitigation options under two 13 North Eastern Atlantic, the Mediterranean and Connected Seas Tsunami Early Warning and Mitigation System broad categories: “Programs and Institutions” and “Struc- (NEAMTWS) was formed in 2005 with 39 member countries tural Measures.” (Intergovernmental Coordination Group, 2007). 25 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy BOX 14: Building Resilient Communities in Vietnam Since 2000, the Government of Vietnam has refined its approach to DRM by empowering provincial organizations and communities to plan for and respond to disasters. The national government has combined institutional capacity building efforts with risk reduction structural investments at the community and provincial levels. The main non- structural measures that have been adopted in Vietnamese communities are the establishment of early warning and evacuation systems and the organization of training programs for citizens, including evacuation drills. Similarly, the introduction of new technologies has led to increased public participation and transparency, with tools such as a cell-phone based monitoring system and a farmers’ management information system. The structural measures for risk reduction at the community level include the construction of reservoirs, dams, drainage canals, rural roads and irrigation infrastructure built with new standards, as well as multi-purpose evacuation centers. A key to the overall success of the program has been the inclusion of these measures in the community development plans, and the creation of Safer Community Plans. Similarly, the participation of all stakeholders, including villagers, relevant government agencies at all levels and international partners, ensures the durability and feasibility of the program. Finally, the linkage of physical investments with CBDRM activities through geographic clustering provides for greater synergies and a more comprehensive approach. What began as a pilot project in 2000 is now a model that is being reproduced by the government in nearly 6,000 communities. Source: https://www.gfdrr.org/node/1283. ized in some river basins in Morocco, and this mitigation 4. In the five provinces (Nador, Al-Hoceima, Berkane, approach should be greatl y expanded (for instance with Taza, and Tetouan) with high earthquake risk, establish the purchase of many more modern weather stations). a program to educate private and public sector build- ing owners about the need for and benefit of seismic 2. Hazard Mapping and Analysis for floods and earth- retrofit. quakes needs to be enhanced, with priority given to ar- eas of recent development, particularly ‘new cities.’ This 5. DRM needs to be included in Plan Communal de De- would also enable the GoM to strengthen its standards velopment and enhance rescue and relief plans in com- of construction, interventions and prioritization during munities identified as high risk by MnhPRA. the phase of post-disaster reconstruction. Further and in-depth analysis will need to be conducted for high- risk areas that have been identified by MnhPRA—Ke- Structural Measures14 nitra, Tetouan, Casablanca, Sidi Kacem, and Larache XX1. Flood Protection structural improvement programs for floods and Nador, Al-Hoceima, Berkane, Taza and Tetouan for earthquakes. need to be accelerated, particularly in provinces with high flood risk (Kenitra, Tetouan, Casablanca, Sidi Ka- 3. Building Code Compliance will need to be enhanced to cem, and Larache) and also be extended to other prov- reduce potential earthquake impact in high earthquake inces over time. Additionally, the Agences du Bassin risk provinces (Nador, Al-Hoceima, Berkane, Taza, and Hydraulique should be provided more resources, with Tetouan) and be extended to other provinces over time, risk-based allocation of the resources. via a multi-pronged approach of education, manage- XX2. Earthquake retrofitting of public buildings in the five ment and enforcement. Education of builders, owners and building inspection personnel are all required, and high earthquake risk provinces (Nador, Al-Hoceima, Ber- need different content and formats. Worldwide, one of kane, Taza, and Tetouan) should be undertaken, and be the main challenges is to make sure that modern codes extended to other provinces over time. Preliminary stud- are actually enforced. Some countries make the builders ies (World Bank, 2012b) show that for the subject prov- legally responsible for the quality of the building for five or ten years after construction is finalized (as does Chile for instance). This might be a requirement for Morocco to consider. 14 These methods tend to resist or channel the natural hazard. 26 SECTION II: Integrated Risk Management in Morocco inces, seismic retrofitting of essential facilities typically sion by MAGG to increase the consumer prices of gasoline, costs about 20% of replacement value. diesel, and fuel oil, and the on-going preparation of a pack- age of comprehensive reforms of the compensation system XX3. Investment should be made in small-scale communi- which will ease the burden on the budget. They also include ty-based risk resilient infrastructure in communities the strategy developed by the Ministry of Energy, Mines, identified as high-risk by MnhPRA. Environment and Water (MEMEE) to implement specific XXIn addition to these institutional reforms and structur- energy efficiency initiatives to control energy consumption, al measures, risk transfer interventions,15 including in combined with simultaneous and significant investments the risk financing arena, are equally important. In rec- to increase the share of renewable energy (wind, solar, hy- ognition of the need for more effective risk financing in draulic) from 25% (2013) to 42% (by 2020) of total energy Morocco, the Ministry of Economy and Finance’s (MEF) production.16 Department of Insurance (DAPS) has already started to develop a catastrophe risk insurance program for the res- While these policy decisions illustrate options that have po- idential and commercial sectors. More recently, the MEF tentially a long-term impact in reducing the risk profile of has started considering a broader disaster risk financing Morocco, it is important to recognize that they are also part and insurance approach that would address risk in other of a pre-existing and on-going government decision mak- sectors, such as the agricultural sector, as well as manage ing process that far exceeds the scope of the engagement disaster-induced volatility on the government’s budget. on commodity price risk volatility to date—and are there- These risk transfer aspects are discussed in more detail fore not covered in this report. As originally envisaged, this in Section 2.4. document focuses more narrowly on the short-term mech- anisms that aim to manage the existing fiscal risk, related Commodity (Energy) Price 2.2  to the subsidy system, with the mutual understanding that it only addresses one piece of a much broader and more Volatility Risk complex set of issues. In this context, the options highlight- The second pillar of joint work between the GoM and the ed below could be considered by the GoM to reduce the im- World Bank concerns commodity (energy) price volatility pact of commodity (energy) price volatility on its budget. risk and its ultimate impact on the national budget. On a macro-economic level, the vulnerability of the Moroccan The subsidy system in Morocco aims to provide a certain economy to commodity prices arises primarily from its level of social protection to the economy and against in- heavy dependency on imported energy products. The two creases in prices. By taking the role of a de facto insurer risks this engenders are balance of payments risk, given against price rises of imports on behalf of its constituents, the pressure exerted on foreign reserves to acquire foreign the subsidy system exposes the government and the state goods, and political risk, in light of the energy security budget to significant commodity price risk. This risk is concerns. On a more micro-level, the government‘s poli- driven mainly by three variables, namely (i) the volumes cy of subsidizing various food and fuel products translates consumed/compensated; (ii) the market prices of the sub- into a third type of risk, with direct impact on the domestic sidized commodities; and (iii) the level of protection (sub- budget: fiscal risk, or the (recurring) contingent liability sidy) established by the government. emanating from needing to cover the difference between international prices and fixed domestic prices. Managed through the Caisse de Compensation (CdC), the subsidy system has been a source of growing concern for As with other types of risks, the toolset available to manag- the government. This has been due to its magnitude, which ing commodity price risk includes one set of mechanisms, involving policy decisions and programs designed to reduce the exposure to risk in the long term, while a second set of 15 These seek to spread the global impacts over many more mechanisms, involving risk management instruments, aims people, so as to reduce the local (i.e., per person) impact to to manage the existing or remaining risk in the short term. a tolerable level. The best example of risk transfer is financial, often in the form of insurance. Morocco has made a number of policy decisions to reduce 16 Ministre de l’energie, des mines, de l’eau et de l’environnement (MEMEE). 2011. Strategie energetique bilan the exposure to commodity price risk. These include re- d’etape, Mai 2011. http://www.mem.gov.ma/Actualites/2011/ forms to lower the level of subsidy, such as the 2012 deci- aout/sen.htm 27 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy Table 4: Hazards and Possible Interventions 1,000 yr loss impact Hazard (MAD) Priority Provinces Priority interventions Cost to mitigate Impact Earthquake 47 High priority: Nador, Al Hoceima, Structural strengthening Seismic Strengthening in Berkane, Taza, Tetouan, of selected schools, High Priority Provinces hospitals, government Medium priority: Larache, All public buildings: buildings Chefchaouen, Taourirt, Tanger- approx. MAD 230 million Assilah, Taounate, Fahs-Anjra, Earthquake insurance for All schools: approx. MAD Ouajda-Angad, Kenitra, private sector buildings 1.7 billion (3) All Health Facilities: approx. MAD 700 million Flood 34 High Priority: Kenitra, Azilal, Flood warning system 10 FWS to cover 3 regions: Mohammedia, Taounate, Tetouan, (FWS) approx. MAD 400 million Ouarzazate, Khemisset, Taourirt, Construct / raise levees capital outlay and MAD 40 Boulemane, El KelGa Des Sraghna, and other structural million annual operating Larache, Chtouka-AitBaha, flood protections costs. Taroudannt, Skhirate-Temara, Khenifra, Khouribga, Chefchaouen, Flood insurance for SidiKacem, Meknes, Jerada, private sector buildings Benslimane, Mediouna, Nouaceur, (3) Casablanca. Medium Priority: El-Jadida, Tan-Tan, Settat, Fes, Assa-Zag, MoulayYacoub, Sale, Chichaoua, Al Haouz, Zagora, Al-Hoceima, Inezgane-AitMelloul. Tsunami 59 All coast provinces (no priority): Ben Tsunami warning system Evacuation signage costs: Slimane, El Jadida, Safi, Kénitra, approx. MAD 100 million Evacuation route Casablanca, Guelmim, Tan-Tan, capital outlay and MAD 2 identification and Laâyoune, Essaouira, Nador, million annual maintenance marking (i.e., signs) Salé, Skhirate-Témara, Agadir- Ida ouTanane, Chtouka-AïtBaha, Flood insurance for Tiznit, Chefchaouen, FahsAnjra, private sector buildings Larache, Tanger-Assilah, Tétouan, Al (3) Hoceïma Note: Earthquake: High Priority: Loss Cost > 1 per mille; Medium Priority: 0.5 per mille < Loss Cost < 1 per mille Flood: High Priority: Loss Cost > 5 per mille; Medium Priority: 1 per mille < Loss Cost < 5 per mille. has increased every year but one (in 2009) over the past es to its public investments to improve infrastructure and decade, as well as its unpredictable nature. services. Subsidy expenditures are now the second line item in the Programs and Institutions budget of the government, after employee salaries, and, in Article 44 of the Budget Law enables the government to 2012, reached a high of 6.2% of GDP. Since 2004, the vol- actively manage price risk by means of risk management atility of commodity prices has resulted in actual subsidy instruments. However, Morocco currently still lacks an payments surpassing the projected/budgeted amounts by overarching/comprehensive strategic approach and corre- 30% (2006) to a maximum of 190% (2011), as shown in sponding institutional framework for managing these risks. Figure 10. Exposure to commodity prices has impacted It is in this context that the following recommendation negatively the government’s ability to allocate its resourc- could be considered by the GoM: 28 SECTION II: Integrated Risk Management in Morocco FIGURE 10: Cost of Subsidies-Actual versus Budgeted 60,000 250% 50,000 200% 150% 40,000 100% 30,000 50% 20,000 0% 10,000 –50% 0 –100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Budgeted (Dirham Million) Actual (Dirham Million) Actual/Budget difference (right scale, in %) Source: MEF and World Bank. 1. Develop a Price Risk Management Strategy, including XXConduct technical analysis. This includes a cost-benefit a corresponding institutional management framework: review of products and approaches and simulations and/ Morocco could begin to develop an appropriate institutional or scenario analysis of prototype hedging strategies; this framework by establishing a working group, or a more formal may include the virtual testing of hedging strategies in committee, to ensure that risk management activities are syn- order to gain practice with new policies and procedures chronized and coordinated among the stakeholders. A Price before implementation. Risk Management Strategy could then be developed, in con- XXBuild capacity. This step covers capacity-building of sultation with the working group or committee. Developing staff, stakeholders, and key decision makers. the strategy could include the following critical steps:17 XXEstablish robust institutional arrangements. This should XXAssess risk. This step identifies the risk composition occur at every stage in the process. (products, price level, time frame, and volume) and defines a base case and evaluates it against a variety of Risk Transfer market scenarios. Several well-known risk management solutions can be used XXDocument objectives. This is achieved by establishing to protect the budget by transferring risk to market coun- the realistic limits of the approach, obtaining consensus terparties, either by means of physical instruments18 and/ from a broad range of stakeholders, and clearly commu- or financial instruments. Table 5 and the discussion below nicating what the hedge strategy is and is not designed provide an overview of a selected number of hedging in- to do. This may include clearly establishing the price to be defended (i.e., through a link to price levels assumed in the budget) in order to avoid the ambiguities and 17 Yépez-García, Rigoberto Ariel and Julie Dana. 2012. political risks associated with trying to time the market Mitigating Vulnerability to High and Volatile Oil Prices: Power and desired hedging transactions. Sector Experience in Latin America and the Caribbean. Washington, DC: World Bank. DOI: 10.1596/978-0-8213- 9577-6. License: Creative Commons Attribution CC BY 3.0 XXEvaluate the enabling environment. This includes the governance and legal framework, coordination with 18 These include storage arrangements (i.e. strategic reserves), strategic timing of purchases and sales, forward contracts, other policies, staff capacity, information systems, pub- minimum/maximum price forward contracts, price-to-be-fixed lic disclosure, and audit processes. contracts and long-term contracts with fixed or floating prices. 29 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy  verview of Selected Commodity Price Risk Instruments: Advantages and Disadvantages Table 5: O Product Interest Benefits Cost / Risks / Constraints Forwards Integrating price risk Since forwards are physical supply May be complex for government to management solutions contracts, the risk management implement if it is not directly involved in into physical supply solution is embedded in the physical importing. Depending on the contracts. supply contract, and there is no pricing formulas used, will have the same need for a separate contract/ costs/risks/constraints as the financial documentation. Pricing of forward products described below. contracts can be customized to the needs of the hedger: prices can be fixed, floating, or include caps/floors and collars (a pre-agreed range or band). Depending on the pricing formula used, forwards have the same benefits as the financial products described below. Futures Establishing fixed price There are no upfront costs. It is Locks in fixed prices and limits the certainty without interest possible to lock in forward prices hedger’s ability to take advantage of in taking advantage through a financial contract. positive price movements that may occur of future upside in the future. Creates unknown and or downside price unpredictable future liability since hedger movements. will owe the market counterparty if the market moves in an adverse direction. Requires financing of a credit line or a credit guarantee. Requires managing cash flow/liquidity requirements to support (potential) daily margin calls. Options Establishing a cap or The hedger can lock in maximum Has an upfront cost, or premium, pricing floor on prices but and minimum prices and take for which is market-driven and can be maintaining flexibility to advantage of positive price volatile. On an indicative basis, premium take advantage of lower movements that may occur in the costs can range from 5 to 12% of the value or higher prices that may future. of the underlying price for 6–18 month occur in the future. coverage. Collars Establishing a price Price exposure is limited to Creates unknown and unpredictable band or range. a price band (collar) that has future liability since hedger will owe both a ceiling and a floor. The the counterparty if the market moves upfront costs can be lower since below the price floor. Requires financing the hedger is, for example, of a credit line or a credit guarantee. simultaneously buying a call Requires managing cash flow/liquidity option and selling a put option. requirements to support (potential) daily margin calls. Swaps Establishing price There are no upfront costs. As with Creates unknown and unpredictable certainty without interest futures contracts, swaps can be future liability. Requires financing of a in taking advantage used to lock in fixed price levels. credit line or credit guarantee. Requires of future upside Swaps provide the ability to simul- managing cash-flow requirements to or downside price taneously manage two commodity support (potential) daily margin calls. movements. exposures or financial flows. Commodity Combining price On a more macro level, these Can be more complex to structure. May linked protection into a loan instruments could be used to not be effective as a hedge for specific, so that repayment connect borrowing or financing short-term commercial exposures. obligations are lower programs to the performance of a when prices move in an specific commodity index. adverse direction. Source: Yépez-García, Rigoberto Ariel, and Julie Dana. 2012. Mitigating Vulnerability to High and Volatile Oil Prices: Power Sector Experience in Latin America and the Caribbean. Washington, DC: World Bank. DOI: 10.1596/978-0-8213-9577-6. License: Creative Commons Attribution CC BY 3.0. 30 SECTION II: Integrated Risk Management in Morocco struments, along with some of their costs, benefits and im- modity risk management strategies by sovereigns is much plementation constraints. less common and practices are not as well established as in the private sector. Although a few governments actively 1. Physical instruments include storage arrangements manage their exposure to commodity prices, information (i.e., strategic reserves), strategic timing of purchas- about these programs is often not publicly available and es and sales, forward contracts, minimum/maximum lessons learned are relatively new. Box 15 summarizes the price forward contracts, price-to-be-fixed contracts and experience of one such country, Mexico, which was willing long-term contracts with fixed or floating prices. These to share its strategy and vision with the World Bank. instruments consist of contractual negotiations between buyers and sellers, and concern the terms of the actual It will be important for the GoM to make decisions on what physical exchange of goods. Physical instruments have type of response is judged the most appropriate. One option the advantage of being relatively simple arrangements is of course to continue financing these fiscal shocks through from an operational, legal, accounting and auditing per- increasing public deficit and debt. Whether this is the opti- spective but may not be practical for governments who mal strategy needs to be determined after proper quantifica- are typically not directly involved in the supply chain. tion of the cost and benefits of alternative strategies. 2. Financial instruments, which include futures, options, swap and collar contracts, as well as commodity-linked Although the MEF is best positioned to take the lead in bonds and loans, are purely financial arrangements the development of the commodity price risk manage- that operate independently from the supply chain and ment strategy, and its implementation, an integrated ap- physical delivery of the underlying commodity. Such proach is critical for its success and sustainability, given instruments, known in finance as derivatives, require that several key stakeholders will have complementary strong institutional arrangements and highly-skilled views and need to be involved. These include the Ministry teams. This is because of the higher degree of complex- of General Affairs and Governance (MAGG), which has ity in terms of documentation, relationship with finan- oversight of the implementation of the government’s sub- cial counterparties, pricing, recording, and monitoring sidy policy; the Ministry of Energy, Mines, Environment throughout the life of those financial contracts. and Water (MEMEE), the primary domestic expert on the local and international fuel market dynamics; and the It is important to note that a priori no single risk man- Bank Al Maghrib (BAM) which, as the central bank, has agement instrument is superior to another, and that the the ability to provide front/back office technical support to selection of one specific instrument should be based on a the MEF with access to market information and manage- comprehensive evaluation of (i) the specific risk that needs ment of relationships with market counterparties. Adopt- to be managed, and (ii) the costs, benefits and constraints ing an integrated approach to risk management could help associated with each instrument. enable these institutional linkages to be established and the National Office of Risk Management (NORM) could It is also important to keep in mind that the use of these so- play a key role. phisticated financial instruments is also risky. Because they are traded on international markets, there is always a cur- rency risk (that is, the risk of a change in the relative value Risks in the Agriculture Sector 2.3  of two currencies; for instance Moroccan dirham versus the The third pillar of joint work between the GoM and the euro or U.S. dollar), credit risk (that is, the possibility that World Bank focuses on agriculture, which is critical to the the counterparty that bears some of the risk Morocco wants economic and social equilibrium of the country. As men- to hedge actually defaults) and basis risk (the risk of using tioned earlier the work on agricultural risk was led by the an instrument whose value does not match exactly that of GoM and no independent analytical work was commis- the intended commodity). These additional risks specific to sioned by the World Bank. the use of these hedging financial instruments need to be seriously evaluated before the signature of the contract and managed during the validity of the contract. 2.3. a Morocco’s agriculture risk profile Agriculture is a major sector of the Moroccan economy; its The use of risk management instruments in the private/ role is crucial for growth because of its downstream (as a commercial sector is widespread. Implementation of com- supplier of goods to be processed or marketed on local, na- 31 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy Mexico’s Oil Hedging Strategy: Institutional Capacity for Risk Management BOX 15:  Mexico’s state-owned oil company, PEMEX, the world’s third largest oil production company, pays taxes and levies totaling about 60% of sales. This represents more than one-third of overall government revenues, meaning that the federal budget is vulnerable to oil price declines. In response, Mexico’s Ministry of Finance and Public Credit (MFPC) has implemented an oil price hedging program—part of a three-pronged, public finance strategy to guarantee sustainability, including adequate liquidity and financial risk management. Each year, Mexico’s Congress establishes a projected oil price for budgetary calculations, based on a pre-established formula using historical and futures prices. The MFPC designs and executes the oil hedging strategy based on the projected price, with funding from the Oil Revenues Stabilization Fund (FEIP), created in 2001. Any revenues obtained from the hedging transactions are used to offset lost revenues from price declines that have adversely affected oil marketing and sales. Currently, the government implements the hedging program using the purchase of put options, giving it the right, but not the obligation, to sell oil in the future at a pre-determined strike price equivalent to the projected price set in the budget for the next year. This strategy creates a floor in the price for oil exports giving the country an opportunity to take advantage of upward price movements should they occur. Typically, the government transacts 12-month, put-option contracts, with a strike price equivalent to the projected oil price used to develop the national budget. Institutionally, the MFPC develops the hedging strategy and purchases put options for the following year; it pays the premium from the FEIP via its financial agent, the Central Bank, which runs a competitive process for each transaction to determine market counterparties. In the early program years, Mexico hedged 20–30% of its net oil exports. Mexico’s oil hedging program has been operating for nearly a decade. A strong set of institutional arrangements has provided a solid foundation for the government’s risk management strategy. Its systematic approach has resulted in increased sophistication and capacity. The government has a clear and consistent message, which it takes care to communicate to the public. The objective of the hedging strategy is not to profit directly from a fall in the price of oil, but to hedge the existing financial risk that Mexico faces, owing to its heavy dependence on oil revenues. Source: Yépez-García, Rigoberto Ariel, and Julie Dana. 2012. Mitigating Vulnerability to High and Volatile Oil Prices: Power Sector Experience in Latin America and the Caribbean. Washington, DC: World Bank. DOI: 10.1596/978-0-8213-9577-6. License: Creative Commons Attribution CC BY 3.0 tional and international markets) and upstream (as a con- trolled urban development, the volume of available fresh sumer of inputs including labor and services) effects on the water for agriculture is decreasing significantly, posing an economy.19 Agriculture contributes 15% of national GDP important challenge to the sector.22 and 23% of Morocco’s exports. The sector is the largest em- ployer in Morocco, providing jobs to nearly 40% of the na- It is estimated that the total exposure of the agriculture sec- tional labor force; and a critical 75% of rural employment. tor to various risks (drought, pest and diseases, and market According to a study by the Ministry of Agriculture20, the price volatility) was MAD 75 billion in 2008, and likely to three most important risks are drought, pest and diseases, increase to MAD 185 billion in 2020.23 and market price volatility; the three most exposed sectors are vegetables, olive trees and cereals; and the three re- gions most exposed are Sousse-Massa-Draa, Meknes, and Marrakech-Tensift. 19 Haut Commissariat au Plan (HCP). 2012. HCP en collaboration avec le Conseil Général du Développement Agricole. Prospective Maroc 2030. Agriculture 2030. Quels Avenirs pour Given the importance of the sector to the national GDP, le Maroc? fluctuations in agricultural production due to rainfall sig- 20 Ministère de l’agriculture et de la pêche maritime (MAPM): nificantly impact the national GDP figures (see Figure 11 Strategie de la gestion des risques dans le secteur agricole. which depicts a strong positive correlation between ag- 21 Ministère de l’agriculture et de la pêche maritime (MAPM): riculture production and the national growth domestic 2010. Etude sur la gestion des risques et la mise en place d’un système d’assurance agricole au Maroc. Identification et product). hiérarchisation des risques agricoles, Novembre 2010. 22 ——— 2011. Changement climatique et agriculture: impact et As 90% of Moroccan agriculture is traditional and rain-fed implications politiques. Juin 2011. based,21 the sector is highly vulnerable to climatic related 23 ——— 2010. Etude sur la gestion des risques et la mise en risks. Additionally, because of fast and sometimes uncon- place d’un systeme d’assurances agricoles au Maroc. 32 SECTION II: Integrated Risk Management in Morocco FIGURE 11: Rainfall Variations, GDP, and Agricultural GDP (1981–2006) 100 80 60 40 Pourcentage 20 0 –20 –40 -60 –80 –100 1981 1986 1991 1996 2001 2006 PIB PIB agr Variation des précipitations (Année agricole) Source: Indicateurs du développement dans le monde et Direction de la Météreologie nationale. Drought is one of the biggest risks in the sector and there post crisis management to risk mitigation, ex ante invest- have been longer episodes of droughts in recent years. This ments and new insurance products. This strategy aims to could worsen even more in light of the looming threat of reduce the vulnerability of small farmers against agricul- climate change. The impact of drought on cereal produc- tural risks; promote and secure agricultural investment; tion (covering only three crops—see also Section 2.1 a) and provide direct public support to insurance products has been estimated to cost the economy of Morocco about for better agricultural risk management. MAD 2.6 billion a year.24 This is equivalent to about half the estimates of the average annual loss due to floods (see Table The instruments of risk management implemented by the 3 in Section 2.1 a). This comparison provides an important Ministry of Agriculture can be classified into three types benchmark for the government. Droughts and floods are according to their distinct approach to risk: very different risks and affect different social-economic sys- tems—farmers for droughts; residences, businesses and in- XXTreatment and support instruments following the frastructure operation for flood (and to some extent farm- occurrence of a risk (“ex post” approach): they aim to ers too if crops are inundated). Having one common model relieve the victims after the occurrence of a disaster, makes it possible to compare and contrast the impact of by providing technical, financial, material, or health different hazards across different sectors of the economy. assistance. XXPrevention and mitigation instruments (“ex ante” ap- 2.3. b I nstitutional and legal framework proach): they are intended to reduce the likelihood of risk occurrence and mitigate their impact. in the agriculture sector XXInsurance-transfer instruments (“ex ante” approach): Given the importance of the sector to the economy and they cover the main crops and animal production and communities, the GoM has a number of initiatives, pro- apply to all types of agriculture production (i.e. modern grams and legal structures in place to potentially mitigate and other). risks. Some specific programs to achieve this aim include the Plan The Ministry of Agriculture and Marine Fisheries (MAMF) Maroc Vert, the Programme national d’économie d’eau en has recently developed a National Strategy for Agricultural irrigation, and the Programme d’extension de l’irrigation à Risk Management (until 2020) in an effort to shift from ex l’aval des barrages. In terms of investing in agriculture risk 33 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy mitigation infrastructure, the GoM established the MAD istry of Agriculture and Marine Fisheries (MAMF), 170 billion Plan Maroc Vert (PMV) for the period 2008–20. the National Institute of Agronomic Research (INRA) This aims to transform this sector into a stable source of and the National Directorate of Meteorology (DMN). growth, competitiveness, and broad-based economic devel- Such index-based insurance would cover cereals and le- opment in rural areas through a combination of agricultural gumes against the effects of drought. Another insurance investments and systemic public sector reforms. Although (“named peril”) would cover crops against a given risk. primarily an investment program, it can also help to in- There are also plans to develop products for white meat crease the risk resilience of the agricultural section. Insti- sectors and sugar crops. tutionally, a National Agency for Agricultural Development XXInsurance products which are not subsidized by the has been set up within the Ministry to oversee the agricul- state: The main products offered by the private insur- tural strategy and the PMV. ance cover agricultural machinery, farm liability, agri- cultural fires, and livestock mortality. The National Program of Irrigation Water Conserva- tion (Programme national d’économie d’eau en irrigation, Options to mitigate risks in the 2.3. c  PNEEI)—a 15 year development program, at MAD 37 billion, seeks to invest in the modernization of individual agriculture sector and collective irrigation systems and improved agricultural While a detailed analysis of the different options goes be- water management. The Program of Irrigation from Con- yond the scope of this IRM strategy report, several options structed Dams (Programme d’extension de l’irrigation à are worth consideration. l’aval des barrages) aims to create new irrigation systems and strengthen existing ones around dams (either already Programs and Institutions under construction or projected for 2008–12). This pro- gram of MAD 18 billion has led to the extension of 10 irri- 1. Extend Drought Risk Analysis to entire the agricultur- gation channels since 2008. al sector based on MhnPRA (which has covered so far only three crops). Morocco also has a portfolio of insurance programs aimed at protecting farmers against a range of risks. These include: 2. Establish Data Collection Systems for Collection, Man- agement, and Processing of Agricultural Data and Weather Information. XXThe agricultural insurance programs, subsidized by the state: “The multiple peril crop insurance” covers 3. Build Institutional Capacity for Improved Data Man- four types of cereals. Launched in 2011–12, it aims to agement on Risks in the Agricultural Sector. cover one million hectares by 2014. Another insurance program covers hail. An agreement was signed between 4. Enhance early warning systems for droughts. the State and the Moroccan Mutual Agricultural Insur- Structural measures ance (MAMDA) for the agricultural campaigns 2009– 10, 2010–11 and 2011–12. It supports farmers and en- 1. Build and/or modernize Irrigation Networks in priori- courages them to purchase this insurance (a state grant ty areas, including in Souss-Massa-Draa, Meknes, and is provided if they do). Marrakech-Tensift. 2. Invest in Flood Protection works in high-risk rural ar- XXNew agricultural insurance programs subsidized by eas, including Gharb-Chaouia-Ourdigha. the state to be launched: Private multi-risks insurance that would cover perennial crops (olive and fruit trees) 3. Invest in equipment, including for example, weather and vegetables is expected to be available to the market stations, modeling, computers, software, satellite pho- soon. The parametric insurance products are also being tos, etc., necessary for the implementation of the para- studied: they would provide coverage against climatic metric insurance hazards associated with rainfall, insuring not the occur- rence of a loss but the realization of an index. In this Further information on risk transfer interventions in the context a pilot is underway in the areas of Meknes and sector is detailed in the section on Risk Financing (Sec- Chaouia, as part of a collaboration between the Min- tion 2.4). 34 SECTION II: Integrated Risk Management in Morocco Disaster Risk Financing and 2.4  inflict damages to public assets in excess of 4.4% of the Cen- tral Government’s annual budget. While the GoM does not Insurance25 bear the full cost of damages to residential assets, its effort Morocco’s exposure to risks, including those in the three to establish a public-private partnership (PPP) for catastro- subsectors reviewed above, imposes a significant financial phe risk insurance suggests that it acknowledges an implicit burden on its population, enterprises, and government (as contingent liability to this sector. Losses in the residential insurer of first or last resort). The adoption of an IRM strat- sector cannot be further disaggregated into losses to high-, egy will reduce these adverse impacts through risk preven- middle-, and low-income populations, but it is notable that tion and mitigation. In recognition of the need for more residential assets represent 41% of the value at risk in Mo- effective risk financing in Morocco, the Ministry of Econo- rocco and are the greatest driver of damages across hazards my and Finance’s (MEF) Department of Insurance (DAPS) and return periods.27 Even if only considering low-income has already started to develop a catastrophe risk insurance populations, with greater than 36% of households being ru- program for the residential and commercial sectors. More ral or slum dwellers,28 the reliance on the government for recently, the MEF has started considering a broader disas- post-disaster aid for asset reconstruction and livelihood ter risk financing approach that would address risk in other support could be significant. sectors, such as the agricultural sector, as well as manage disaster-induced volatility on the government’s budget. Quantifying the expected losses to the aforementioned assets from natural hazards does not take into account indirect fiscal impacts nor does it account for the time Financial impacts of disasters in Morocco dimension of spending needs. In conjunction with major disaster-induced expenditure, the government could face The probabilistic risk assessment discussed in Section 2.1 revenue reductions (e.g., reduced tax revenue linked to eco- (see Table 3), reveals that each year, on average, Morocco nomic disruption) and concurrent adverse macroeconom- is likely to suffer about MAD 5 billion in direct damages ic conditions (e.g., recession) that could further destablize as a consequence of floods, earthquakes and tsunamis. This its fiscal balance. Additionally, aggregate loss figures do number is even higher if one consider the ripple effects on not provide a sense of the time dimension of spending on other sectors of the economy (as calculated through IO and disasters; for example, the government’s ability to quickly CGE models; see Box 12). Once every 100 years, on average, mobilize resources (e.g., through budget reallocation, use Morocco will face damages totaling around MAD 60 billion, of contingency budgets, etc.) to restore essential facilities equivalent to an estimated 7% of GDP. These figures repre- and infrastructure as soon as possible following an event sent physical damages and do not take into account indirect is an essential key factor in determining how quickly soci- socio-economic impacts, which are estimated to be signifi- ety can recover. Table 6 a and b below use findings of the cant. Floods drive losses at both of these levels, although the probabilistic risk assessment for natural disasters described contribution of earthquake becomes increasingly important earlier in section 2 of the report (see Table 3) to show spe- as events become less frequent but more severe. cifically the maximum probable loss a 100-year return pe- riod event would cost (in direct damage only). The impacts of natural hazards could place a significant fiscal burden on the Government. Although the GoM’s 24 World Bank. February 2012. Morocco Natural Hazard fiscal exposure to the impacts of natural hazards (focusing Probabilistic Risk Assesment. Washington, DC. here on floods, earthquakes and tsunamis) needs to be as- 25 This section is authored by the World Bank GFDRR Disaster sessed in more detail. Examination of the costs that the GoM Risk Financing and Insurance Program. It draws heavily on Boudreau, L and O. Mahul. 2013. “Integrated Disaster Risk could incur to reconstruct public assets and some portion of Financing and Insurance Strategy in Morocco.” Working residential assets (such as those of low income households) Paper, GFDRR, World Bank, Washington, DC. provide insight into basement figures for its direct losses. 26 Central Government Budget figures for 2011 were used for Each year, damage to essential facilities, government build- this assessment. ings, and infrastructure is estimated at MAD 1.4 billion, or 27 World Bank. 2012. Morocco Natural Hazards Probabilistic 0.6% of the central government’s annual budget.26 This fig- Risk Analysis and National Strategy Development. ure could climb much higher if an extreme event occurred Washington, DC. (Tables 6 a and b). A one-in-100 flood, for example, could 28 Ibid 35 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy  verage Annual Loss and Maximum Expected Loss (MEL) for a 1-in-100 year event for Tables 6a & b: A selected assets (MAD million) a. b. AAL Flood Earthquake Tsunami Max Exp. Loss (MEL) Flood Earthquake Tsunami Residential 1,895 506 23 Residential 12,092 8,670 57 Essential Facility 1,005 97 1 Essential Facility 8,328 1,564 5 Industrial 471 35 18 Industrial 2,231 674 148 Commercial 434 144 18 Commercial 2,530 2,823 180 Government 369 7 0 Government 2,351 151 — buildings buildings Infrastructure 3 60 63 Infrastructure 24 1,435 14 Total 4,177 850 124 Total 27,556 15,317 404 Note: Essential facilities include schools, health units, police, and fire stations. Infrastructure includes utility and transportation systems. Current approach to disaster and Since the late 2000s, in recognition of the need for more effective risk financing in Morocco, the Ministry of Econ- agriculture risk financing in Morocco omy and Finance’s (MEF) Direction des Assurance et de la Prevoyance Sociale (DAPS) started to develop a catastro- Currently, the government’s full contingent liability to nat- phe risk insurance program for the residential and com- ural disasters remains to be assessed. Beyond its explicit mercial sectors. More recently, the MEF has started con- contingent liability for emergency response and restoration sidering a broader disaster risk financing approach that of public assets, the state faces an implicit contingent lia- would address risk in other sectors, such as the agricul- bility for damages to uninsured private assets, including tural sector, as well as manage disaster-induced volatility residential and commercial, and for agricultural losses on the government’s budget. The legislation (still being since the victims are likely to turn to the government for finalized) towards the national catastrophe insurance pro- compensation after a large disaster. The government’s con- gram (project de loi n. 34-08) would introduce a manda- tingent liability emanating from the private sector is likely tory multi-hazard catastrophe extension for property in- significant; property insurance penetration, for example, is surance policies with fixed tariffs as well as the creation low, and very few policies carry voluntary extensions for of a solidarity fund for catastrophes (le Fonds de solidarité catastrophe risk.29 contre les événements catastrophiques—FSEC) that will compensate uninsured victims. The bill covers both nat- The government retains its exposure to catastrophe risk, ural disaster and terrorism, although the focus of this re- primarily relying on ex post measures to finance disaster port is on natural disasters.30 The FSEC will be funded via losses. Public funding for disasters is determined after their contributions (to be defined), a percentage of catastrophe occurrence, mainly relying on an ad hoc approach to iden- tification and allocation of resources. The government has established, however, a special fund for emergency relief 29 In 2011, Morocco’s non-life insurance market penetration was approximately 2%; above neighboring Tunisia (1.5%) and operations, capacity building for emergency responders Algeria (0.6%), but well below the Western European average (e.g., the Civil Protection), and investment in prevention of 3.2%. Swiss Reinsurance Co., Ltd. Economic Research and and early warning systems. The special fund, in place since Consulting. 2012. World Insurance in 2011: Non-life Ready for Take-off. Sigma 03/2012, Zurich. 2009, was capitalized by a MAD 100 million grant from 30 A report providing an international benchmark of terrorism Saudi Arabia, a MAD 300 million grant from the Hassan risk insurance programs and insights for Morocco was II Fund for Economic and Social Development, and state delivered to the Government of Morocco by the World Bank budget allocation of MAD 200 million; the budget alloca- team as part of the IRM initiative. Michel-Kerjan, Erwann O. 2011. Managing and Insuring Terrorism Risk: International tion for the special fund was renewed throughout the pe- Insights for the Government of Morocco. World Bank Report, riod 2010–12. October 1, 2011. Washington, DC. 36 SECTION II: Integrated Risk Management in Morocco insurance premiums collected via the mandatory exten- Option A. Operationalize Law 34-08 to establish a na- sion, and the government. DAPS is the technical leader for tional catastrophe insurance program for private assets. the development and proposal of Law 34-08 to establish The GoM could invest in supporting information technol- the catastrophe insurance program. ogy (IT) for data collection and management and risk mar- ket infrastructure to implement the proposed Law 34-08. The proposed catastrophe insurance program would rely Strong IT system(s) will be essential for operationalizing on a PPP to effectively allocate responsibility for catastro- the proposed law and managing a wide range of functions phe risk among stakeholders in Morocco. The law would critical to optimal management of the catastrophe insur- increase the number of residential, commercial, and in- ance system. The experiences of other countries and re- dustrial properties insured against catastrophes and would gions with national catastrophe insurance programs, such include the domestic insurance sector, the Société Centrale as Turkey and Southeastern Europe, in establishing IT sys- de Réassurance (SCR), the international reinsurance mar- tems to manage their programs could be leveraged ket, and the government (possibly via the FSEC) in the risk financing strategy. The law would clarify the government’s The government could also further refine the catastrophe contingent liability for financial support to Morocco’s (un) insurance program’s risk financing strategy (illustrated insured population, as a global limit on the amount payable in Box 17) based on actuarial analysis, and could secure from the government under the program would be set.31 (contingent) capital to ensure the scheme’s claims-paying As of early 2013, the government is considering a series of capacity, including the FSEC’s liability for uninsured popu- modifications to the proposed law (Box 16). lations, at a determined level of solvency. The government could conduct actuarial analysis, building on the MnhPRA As discussed in Section 2.3 of this report, the government capacity that has now been developed and for which several has also long supported subsidized agricultural insurance line ministries have been trained, to determine the optimal to manage catastrophe and extreme weather risk in the claims-paying capacity of the catastrophe insurance pro- agricultural sector. The current agricultural insurance pro- gram as well as the optimal capitalization of the FSEC. gram is largely supported by the state and distributed by the agricultural mutual MAMDA. The government’s vision for Option B: Develop and implement an integrated disaster the program is based on two pillars: (i) indemnity-based risk financing strategy that builds on the establishment insurance for large farms and (ii) area yield-based or of a national catastrophe insurance program and the weather-based index insurance for small farms. Addition- outcomes of a fiscal risk assessment. The development of ally, as discussed earlier, the government recently launched the strategy could be informed by a fiscal disaster risk as- multi-peril crop insurance for the 2012–13 growing sea- sessment and a review of public financial management of son, covering about 500,000 hectares. It aims to insure one disasters in order to quantify the government’s contingent million hectares by 2015. A second insurance program for liabilities to disasters and to identify any potential funding arboriculture and horticulture, primarily targeted at olive gaps based on the government’s fiscal risk profile. The de- groves, is being launched in 2013. Both programs include velopment and implementation of such an integrated di- significant premium subsidies, estimated at about 80% of saster risk financing strategy as an important component the premium. A third index insurance pilot program is in of the overall IRM strategy would equip the government to preparation to launch in 2014–15. enact an effective post-disaster response while maintaining its long-term fiscal balance and reduce its contingent liabil- Four complementary options for improving Morocco’s ity to disasters in the long-term. financial resilience to disasters and risks in the agricul- ture sector Option C: Promote agricultural insurance market devel- opment through technically-informed product design The risk financing options presented in this report build and transition to a stronger public-private partnership. on the catastrophe risk profiling conducted during the The government could promote sustainable scale-up of its first phase of the integrated risk management initiative, the Government of Morocco (GoM)’s current risk financing activities and the GoM’s expressed risk financing interests. 31 World Bank. 2012. Note Technique sur l’analyse du cout It is consistent with the World Bank GFDRR disaster risk du régime de couverture. World Bank Policy Note, February financing and insurance framework. 2012. Washington, DC. 37 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy BOX 16: Proposed Modifications to Law 34-08 Following a reexamination of the proposed Law 34-08a and consultation with the insurance sector, the government is considering a number of modifications to the provisioned law that will clarify the scope of the law and the risk financing responsibilities of the stakeholders in the law. The proposed modifications can be summarized as follows: Insurance policies and design: The catastrophe insurance would cover a list of named perils, as opposed to the broader coverage for unnamed perils previously anticipated. Deductibles and limits for each type of exposure (e.g., vehicle, residential, commercial, industrial) would be set by regulation and these may be adjusted over time based on the scheme’s maturity and risk financing capacity. Risk financing responsibilities and limits: Moroccan insurers would retain a tranche, totaling between MAD 500 million and MAD 1 billion, of the catastrophe risk transferred through the program. The government would act as reinsurer for a top risk layer, the size of which will be determined annually or over a multi-year period depending on the amount required to secure an adequate level of solvency for the scheme and to overcome the volatility of the international reinsurance market. This intervention would either be direct or via the Fonds de solidarité contre les événements catastrophiques. Finally, a global limit on the amount payable under the compulsory catastrophe insurance program would be set via regulation. If damages incurred under the program exceed this overall limit, the amount paid out under the program will be adjusted so that it does not exceed the overall limit. The catastrophe insurance program’s revised risk financing strategy is as follows: Residual risk layer above State-guarantee (above global comprensation limit set by Program) State A final layer is guaranteed by the State, either directly or indirectly International reinsurance Layer covered by international reinsurance companies Platfond global SCR Retention of the Société Centrale de Réassurance (SCR) Insurers A part of the risk is retained by insurers, and the rest is transferred A portion of the damage is borne by the insured through deductibles and Insured coverage limits. Source: World Bank-GFDRR Disaster Risk Financing and Insurance Program, with information from DAPS, 2013. a. The technical revisions made to the proposed legislation Law 34-08 on the catastrophe insurance program are broadly build on the main recommendations of the World Bank Note Technique sur l’analyse du cout du régime de couverture of February 2012. agricultural insurance programs, which are currently ex- premium subsidization and other public support. The gov- panding to cover more farmers, through enhancements ernment could more effectively support these programs to their design. While the programs exhibit some features through investment in information infrastructure as public of international best practice, they rely heavily on public goods, including the collection and management of agri- 38 SECTION II: Integrated Risk Management in Morocco The Southeastern Europe and the Caucasus Catastrophe BOX 17:  Risk Insurance Facility (SEEC CRIF) The Southeastern Europe and the Caucasus Catastrophe Risk Insurance Facility (SEEC CRIF) project is facilitating the development of national catastrophe and weather risk markets in SEEC through the design and introduction of innovative, low-cost insurance products, insurance business production technologies, regulatory reform, consumer education, and provision of reinsurance services. The project is supported by the World Bank, UNISDR, the European Commission, the Swiss State Secretariat for Economic Affairs, and the Global Environment Facility. SEEC CRIF is being implemented through the creation of a specialty government-owned catastrophe risk reinsurer, Europa Reinsurance Facility Ltd. (Europa Re), with the view to improving access to weather risk and catastrophe risk insurance for millions of households, small businesses, and governments in the Facility’s member states. Established in 2009 in Switzerland, Europa Re employs an independent Board of Directors and is managed by a professional management team. SEEC member governments are Europa Re’s shareholders; currently, Albania, the former Yugoslav Republic of Macedonia, and Serbia have joined the Facility, with others in discussions to join. Europa Re is currently completing probabilistic high resolution regional earthquake and flood risk models for the SEEC member countries. The models will be used for the purposes of underwriting and pricing flood and earthquake risk in these countries. It is also developing a web-based underwriting and risk-pricing platform that will provide insurers with automated real-time underwriting, pricing, and reinsurance decisions for all risks assumed through the sales of approved catastrophe insurance products in member countries. This platform will allow participating insurers to keep track of all policies issued through the portal and will enable them to report, and Europa Re to settle, insurance claims. Finally, Europa Re will utilize the platform to track its risk accumulations by location and type of risk. Source: Europa Reinsurance Facility, 2013. cultural production and weather data, and the revision of Option D: Evaluate the implementation of a national ratemaking to foster private sector participation. Building insurance program for public assets. The GoM’s disas- on international experience in India (see Box 18), Mon- ter risk financing strategy could include an evaluation of golia, and elsewhere, could support the government in the current insurance coverage of public assets, including moving toward effective, sustainable agricultural insurance those under construction and/or management of conces- programs. sionaires. A strategic approach to insure these assets would Improving India’s National Agricultural Insurance Scheme Through Risk Data BOX 18:  Infrastructure Relying on Innovative Technology Developed in 1999, the National Agricultural Insurance Scheme (NAIS) offers insurance for food and commercial crops through the state-owned insurer, Agriculture Insurance Company of India (AICI). The Government of India supports the NAIS through a substantial subsidy (over US$2.5 billion since its inception) and has faced key challenges in its operation, including budgeting for its claims liability ex post events and a lack of risk-based pricing in the system. Since 2005, the Government of India has been working to address these challenges by transitioning NAIS from the ex post regime to an ex ante financed, market-based insurance program. This involved extensive work and technical support from the World Bank; AICI’s technical capacity was built to transition NAIS to a market based approach. Analytical tools and prototype actuarial software were developed to statistically analyze weather index insurance products and develop actuarially sound rating methodologies, which in turn led to more targeted distribution of government subsidies. The quality and timeliness of the data was improved, using innovative mobile technology in crop-cutting experiments and developing an auditing function and improved database. An area-yield based insurance product was piloted and is now beginning to scale up, providing farmers with more reliable insurance coverage. Source: World Bank-GFDRR Disaster Risk Financing and Insurance Program, 2013. 39 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy BOX 19: Overhauling Insurance of Public Assets in Colombia The Ministry of Finance and Public Credit (MHCP) in Colombia has developed and is implementing a national disaster risk financing strategy, which includes improving its approach to the insurance of public assets, with prioritization of central government buildings and PPPs in the first phase. In 2011–12, the MHCP reviewed the state of insurance coverage of public assets. Using the results of the review, the Government of Colombia (GoC) is now moving to a centralized approach to the insurance of central government buildings that will pool risk into one diversified, well-structured portfolio to pass to insurers through a group insurance policy. This approach will lower operating costs and increase the GoC’s bargaining power. More recently, in light of US$22.5 billion worth of new infrastructure concessions over 2013–14, the GoC is enhancing insurance requirements for PPPs based on international (re) insurance market standards. Source: Programme d’assurance et de financement des risques de catastrophes WB-GFDRR 2013. allow the government to reduce its fiscal exposure to natu- execute a disaster response while protecting its long-term ral disasters by transferring a portion of these risks to pri- fiscal balance. Two complementary actions currently being vate insurance markets (see Box 19). undertaken by several governments are the establishment and/or strengthening of mechanisms for post-disaster budget execution (e.g., national disaster funds) and di- Additional options to be considered by the saster loss assessment and tracking systems. These actions Government of Morocco could be included in the government’s disaster risk financ- ing strategy, linked to the pillar on budget management of The GoM may also wish to consider a number of other op- disaster risk. tions for improving its capacity to effectively finance and to 40 SECTION III Moving from Risk Assessment to Integrated Risk Management in Morocco 3.  Morocco: The Road be needed. As suggested in Section 1, these arrangements could include the following: Ahead XXA National Office of Risk Management (NORM) could The previous sections of the report have discussed the ben- support the development of a coherent, consistent na- efits of developing an IRM approach, and have highlighted tional risk-reduction strategy. This strategy can be based the vulnerability and exposure of the Moroccan economy on consistent management, analysis, and measurement and population to natural hazards, commodity (energy) of the risks to Morocco. Management of these risks will price volatility and risks in the agriculture sector, and have require consistent methods and criteria for differentiat- suggested some recommendations to mitigate these risks. ing acceptable from unacceptable risks, and for allocating resources according to a risk-based approach. To achieve Section 1 discussed the eight steps of a successful risk this goal—coordinated risk analysis, measurement, de- management strategy. Section 2 showed how Morocco ad- cision-making and resource allocation—a special office dressed steps 1 to 3 (risk identification, risk prioritization (NORM) will need to be created within the GoM. The and detailed quantitative assessment of the selected key first task of NORM would be to improve on the recent risk priorities). Morocco, independently and in partner- national MnhPRA risk analysis performed with the ship with the World Bank and its advisors, has considered World Bank by acquiring and using more detailed data. possible risk mitigation options for the three pillars of its NORM’s mandate is not to replace decisions by line Min- emerging IRM strategy (step 4). Those options were also istries, but rather to enhance the decision-making pro- discussed in Section 2 of this report. cess and the coordination across ministries and types of risks. It would report to the Head of Government. It is The Government of Morocco is now beginning to act on crucial, based on lessons learned from the private sector steps 5 to 6; that is, which options to support first and the and from other countries that have embarked on an IRM design of an implementation strategy. This concluding sec- strategy, that such an office be staffed by highly compe- tion discusses the next steps and the possible actions in the tent, influential and respected individuals. In Morocco, short, medium and long term. the head of NORM should be at least a Director in the administration. The number of staff in the office will be a As demonstrated throughout this report, examining risks decision to be made by the government, although it may in an integrated manner would enable the GoM to make be suitable to start with half a dozen and expand over the necessary linkages and thereby improve future infra- time. Openness and collaboration with line Ministries is structure and related public investment decisions; better also critical, as is NORM’s role in fostering vertical inte- anticipate budget needs and prioritize budget allocation; gration of risk management (for instance by organizing, coordinate actions across ministries to improve communi- under the auspices of the Chef de Gouvernement, an cation; avoid overlapping actions and benefit from econo- annual meeting with the Ministers and Walis to discuss mies of scale; reduce the cost of mismanaged and ignored specific risk-related issues).32 risks; and improve social resilience by being more proactive XXA Risk Information and Management System (RIMS) before a negative event occurs in attempting to reduce its will be required for the cross-ministry government-wide economic and social impact. exchange and management of geo-referenced exposure, To move from risk identification to integrated risk manage- 32 NORM is similar in spirit as the concept of a “National Risk ment, a set of cross-cutting institutional arrangements may Board” developed for the WDR14 on Risk. Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy hazard and risk data. RIMS will be the information ex- discussions on which specific areas to support going forward change between NORM and each line Ministry, assuring as integrated risk management is being operationalized. Ear- timely and accurate exchange of data. Use of the same ly discussion suggests that the financial and technical assis- data by all agencies will foster consistency in analysis. tance support could fall into the following two broad cat- egories: (a) institutional reform and policy development XXA Centre of Risk Excellence (CORE) is also needed, to and; (b) priority risk mitigation projects. As has been men- support NORM and RIMS. NORM is a small coordi- tioned in Section 2, the Government has already instituted nating and operational bureau within the Government, a number of programs and initiatives and the objective of tasked with monitoring and coordinating risk manage- the World Bank support will not be to duplicate ongoing ac- ment. CORE will be established in an academic or re- tivities but to support the development of the IRM strategy, search institution (e.g., CNRST) to provide the technical build integrated institutional frameworks and scale up the support to NORM and RIMS. CORE will maintain and existing risk mitigation initiatives in place (both in physical improve MnhPRA, RIMS and their associated databas- infrastructure and financial protection solutions). es. It will research emerging risk management tools, and maintain a dialogue with the international risk manage- To illustrate, on institutional reform and policy develop- ment community, to ensure Morocco is using the best ment, the World Bank could support the creation of NORM, tools for risk management. CORE will also provide train- RIMS and CORE; the implementation of the IRM strategy, ing in MnhPRA and RIMS, and participate in graduate including associated sectoral investment plans (this note education to train the next generation of risk managers. provides the inputs to the Strategy); the development of an XXNORM, RIMS and CORE will enhance coordination and integrated risk financing strategy; or the implementation of efficiency across government agencies. As discussed in the catastrophe risk law. On risk mitigation pilot projects, Section 1, NORM could be complemented by a new fiscal the Bank could support investments in retrofitting public risk management unit within the Ministry of Finance buildings; flood protection investments; investments in (the risks considered in Morocco will ultimately have small-scale community based risk-resilient infrastructure; an impact on the national budget) and work in concert and creation and capitalization of guarantee funds required with the Ministry of Interior’s CVC which handles crisis for the continued evolution of the disaster and risk insur- management at a national level (for instance by providing ance markets. This list summarizes only initial suggestions the CVC with additional information and analytics using and other priority institutional development, policy reform MnhPRA to optimize its crisis management process). and risk mitigation pilots could equally be supported. These cross-cutting institutional actions will need to be In conclusion, many countries around the world have wit- complemented by the risk mitigation activities outlined in nessed how internal (natural disasters) or external shocks Section 2 and summarized in Table 7. (commodity price volatility, financial crises) can have seri- ous domestic impacts by destabilizing the social-economic Of course, this is an ambitious agenda and implementation balance. These shocks have also proven to be roadblocks to will take time. Cohesive action by the Government will growth in many developing economies.33 Significantly im- need resources, commitment, communication and own- proving risk management capacity and doing so in an in- ership of different stakeholders—both at the national and tegrated manner is recognized as good practice today. Im- local levels—so that the strategy can be a true collaboration plementing such an integrated risk management strategy is between the GoM and the local communities. Also, devel- neither simple nor quick. It requires expertise, coordination oping the strategy will only be the first step. To achieve the and leadership at the top, with a clear understanding of how intended outcomes and outputs, all stakeholders will need key risks will affect all levels of society, from citizens, busi- to continuously refine the strategy in an iterative and col- nesses, local communities to the government itself and the laborative process. Finally, the actions summarized in Table economy. It also requires building the institutions that will 7 are only indicative of some activities on which the GoM carry on this task through successive elected administrations. can focus—and not a full and comprehensive set. 33 Erwann Michel-Kerjan, “Are Extreme Events Roadblocks to The World Bank-GoM Partnership on integrated risk man- Growth?” The Huffington Post, April 2011. http://www. agement began in 2008 and is now entering the third phase huffingtonpost.com/erwann-michelkerjan/earthquake- (see Figure 12). The World Bank and the GoM are in early finance_b_949551.html 42 SECTION III: Moving from Risk Assessment to Integrated Risk Management in Morocco Table 7: Summary of Key Actions Cross-Cutting Institutional Actions Time* Establish a National Office of Risk Management (NORM) M Develop an Integrated Risk Management Strategy C Establish a Risk Information and Management System (RIMS) M Create a Centre of Risk Excellence (CORE) M Natural Disasters Programs and Institutions Establish early warning systems for floods, tsunamis and earthquakes S Enhance hazard mapping and analysis for floods and earthquakes based on MhnPRA S Enhance building code compliance to reduce potential earthquake impact in high earthquake risk S/M provinces (Nador, Al-Hoceima, Berkane, Taza, Tetouan) and extend to other provinces over time Establish a program to educate public and private building owners about need for retrofits in high earthquake S risk provinces (Nador, Al-Hoceima, Berkane, Taza, Tetouan) and extend to other provinces over time Include DRM in Plan Communal de Development and enhance rescue and relief plans in communities M/L identified as high risk by MnhPRA Structural Measures Accelerate flood protection structural improvements in provinces with high flood risk M/L (Kenitra, Tetouan, Casablanca, Sidi Kacem) and extend to other provinces over time Implement earthquake retrofitting of public buildings in high earthquake risk provinces M/L (Nador, Al-Hoceima, Berkane, Taza, Tetouan) and extend to other provinces over time Invest in small-scale community based risk resilient infrastructure in communities identified as high risk by M MnhPRA Commodity (Energy) Price Risk** Programs and Institutions Develop a commodity price risk management strategy and establish corresponding institutional S/M management arrangements Risk Transfer Commodity price hedging through financial instruments S Agriculture Sector Risk Programs and Institutions Extend drought risk analysis to entire agricultural sector based on MhnPRA S (which has covered so far only three crops) Establish data collection systems for collection, management, and processing of agricultural data and S weather information Build institutional capacity for improved data management on risks in the agricultural sector M Enhance early warning systems for droughts M Structural Measures Build irrigation networks in priority areas, including in Souss-Massa-Draa, Meknes, and Marrakech-Tensift M/L Invest in flood protection works in high risk rural areas, including in Gharb-Chaouia-Ourdigha M/L Invest in equipment, for example synoptic stations, modeling, computers, software, satellite photos, etc., M necessary for the implementation of the parametric insurance Continued on next page 43 Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy Table 7: Summary of Key Actions Disaster Risk Financing and Insurance Operationalize Law 34-08 to establish a national catastrophe insurance program for private assets S Develop and implement an integrated disaster risk financing strategy that builds on the establishment of a national catastrophe insurance program (covering businesses and individuals) and the outcomes of M a fiscal risk assessment (evaluation of government’s exposure) Promote agricultural insurance market development through technically-informed product design and M transition to a stronger PPP Evaluate the implementation of a national insurance program for public assets M * S: short term (1–2 years); M: medium term (2–5 years); L: long term (> 5 years) C: court terme (1–2 ans); M: moyen terme (2–5 ans); L: long terme (> 5 ans). ** Commodity (Energy) Price recommendations focus only on one aspect: how to use market-based commodity price risk hedging as a way to mitigate the short term impact of commodity price volatility on Morocco’s budget.. Broader measures are of course also required, such as the reform of the subsidy system, diversification of energy supply, and improved energy efficiency. Morocco has embarked in a very innovative initiative in col- earthquakes, tsunamis, numerous agriculture risks, or the laboration with the World Bank and its advisors. Substan- spiking price of oil and other commodities that Morocco tial progress has been made to quantify the risks to which needs to import on a massive scale. By commencing this Morocco is exposed, using state-of-the art techniques that initiative, Morocco has now entered the group of countries have been developed in the risk assessment field. Solutions (most of which are OECD countries) that have started to to reduce this exposure have been proposed (both physical implement IRM strategies. While more needs to be accom- and financial) and Morocco can now decide how best to plished, that step constitutes an important and highly visi- reduce its exposure, to a variety of risks, including floods, ble leadership move. FIGURE 12: GoM-WB Risk Management Partnership, 2008–current Integrated approch to Risk Management in Morocco (2008 – ONWARD) Overview of Morocco – Bank Partnership Phase I Phase II Phase III Risk Identification* Risk Assessment* Risk Management (2008) (2009–2012) (2013– ) High level risk identification, • Probabilistic Disaster Risk • Analytical/TA work**: including: Assessment & Model - Integrated Risk • Natural hazard risk • Institutional Risk Management Management Strategy • Commodity price risk Assessment, including atthe: - Commodity Price Risk - National level • Agiculture sector risk Management Strategy - Community level • Disaster Risk Financing - Disaster and Agriculture • Commodity (energy) price risk: Risk Financing Needs assessment • Agriculture Sector Risk: Ongoing dialogue • Operational work: FY14 Project on Risk Management Sources: The World Bank. 44 References Abdelkhalek, Touhami. 2005. 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Software User Manual, Morocco Natural Analysis and National Strategy Development. The Hazards Probabilistic Risk Analysis and National Ministry of General Affairs and Governance, Strategy Development. The Ministry of General prepared by RMSI Ltd., Washington, D.C. Affairs and Governance, prepared by RMSI Ltd., Washington, D.C. 2012. Drought Hazard Report, Morocco Natural Hazards Probabilistic Risk Analysis and National 2012. Tsunami Hazard Report, Morocco Natural Strategy Development. The Ministry of General Hazards Probabilistic Risk Analysis and National Affairs and Governance, prepared by RMSI Ltd., Strategy Development. The Ministry of General Washington, D.C. Affairs and Governance, prepared by RMSI Ltd., Washington, D.C. 2012. Earthquake Hazard Report, Morocco Natural Hazards Probabilistic Risk Analysis and 2012. What If Scenario Analysis Report, Morocco National Strategy Development. The Ministry of Natural Hazards Probabilistic Risk Analysis and General Affairs and Governance, prepared by National Strategy Development. The Ministry of RMSI Ltd., Washington, D.C. General Affairs and Governance, prepared by RMSI Ltd., Washington, D.C., Rabat. 2012. Flood Hazard Report, Morocco Natural Hazards Probabilistic Risk Analysis and National Yépez-García, Rigoberto Ariel et Julie Dana. 2012. Strategy Development. The Ministry of General Mitigating Vulnerability to High and Volatile Oil Affairs and Governance, prepared by RMSI Ltd., Prices: Power Sector Experience in Latin America Washington, D.C. and the Caribbean. Washington, DC: World Bank. 46 APPENDIX 1: IRM Project Outputs The following are the key outputs of the Morocco-Bank hPRA) for risk assessment of natural disasters for Partnership on risk management completed since its incep- the country, delivered to MAGG and installed in tion in 2008. All documents are available at the Ministère different Ministries. des Affaires Générale et de la Gouvernance: Four training sessions on MnhPRA for ministries b.  and CNRST / scientists. Based on an agreement Phase 1 (October 2008–March 2009): with the GoM and documented in a letter, the data used in MnhPRA provided by the government are Preliminary risk assessment phase (identification) includ- owned by the government and remain the govern- ing through one World Bank mission (November, 2008) ment’s property. and major inter-ministerial meeting. Detailed probabilistic risk assessments at the na- c.  Outputs: tional level, produced by the consulting firm (1) Report on Integrated Catastrophe Risk Management. RMSI, comprising 11 reports. While referring to Catastrophe Risk, this report used ”Vision note” on integrated risk management for d.  the term in the broad sense to specifically include the Government of Morocco. natural hazards, price volatility in the energy sector and agricultural risk. Terms of Reference for the creation of a National e.  Office of Risk Management (“NORM”). Phase 2 (April 2009–February 2013): Study on Community Based Disaster Risk f.  Detailed risk assessments supported by the World Bank, in- Management. cluding through ten missions (November 2009, April 2010, Report and presentation on the financial coverage g.  May 2010 April 2011, June 2011, November 2011, March of catastrophic risks: A new strategic challenge for 2012, June 2012, September 2012 and December 2012). many countries. Outputs: “Synthesis note on the analysis of the Bill 34.0”. h.  Ten aides-memoires detailing key findings each (1)  Report on methods of financial coverage of and i.  mission; insurance against terrorism: International perspec- Commodity Price Volatility: (2)  tives (e.g., France, England, Germany, USA, and a.  Report on Managing Commodity Price Risk in Switzerland) and its applications to Morocco. Morocco: Current Situation. j. Report on macroeconomic modeling of risks of nat- b.  Workshop on the management of commodity ural disasters and development of a new model (IO price risk. and CGE) for Morocco (for use by the High Plan- c.  Terms of Reference for future technical assistance ning Commission and other interested parties). and execution services. Agricultural Sector Risk: (4)  Disaster Risk: (3)  Support to the government (Ministry of Agricul- a.  This work focused on probabilistic risk modeling for earth- ture) through several meetings in 2010 and 2012, quakes, tsunamis, floods, landslides and drought for the regarding (i) the identification and prioritization entire country and the built environment. of agricultural risks, (ii) a retrospective assessment of instruments developed at the national level to a.  Probabilistic modeling (comprising a detailed deal to agricultural risks, and (iii) a study on inter- method of quantification) and software (Mn- national practices on agricultural risk insurance.