10.9 Natural Disaster Relief

Background

Natural disaster relief can be a significant and largely uncontrolled part of the Commonwealth Budget. Over the past four years, natural disasters including the Black Saturday bushfires in Victoria, the Brisbane floods and Cyclone Yasi in Queensland and other events across the eastern States and Tasmania have claimed more than 200 lives and directly affected hundreds of thousands of people. Damage has been significant.

Rationale for government intervention

Disaster management is the responsibility of the States and local governments, which largely determine the type and level of relief and recovery measures to be adopted following a disaster and the administrative arrangements to manage these measures. State and local governments are also the predominant owners and managers of economic and infrastructure assets impacted by natural disasters, and are also responsible for the planning and zoning decisions relevant to the way disasters affect individual interests (loss of life, property loss and business loss/interruption).

Similarly, individuals and businesses who build and manage the assets most likely to be affected by natural disasters should, as much as possible, act in a prudent fashion by seeking appropriate levels of insurance and taking whatever physical steps are necessary to minimise the possibility of damage to themselves and their property.

Notwithstanding the Commonwealth’s limited jurisdictional responsibility for disaster management and response, natural disasters often result in large-scale expenditure by State governments, imposing financial burdens on their budgets. To alleviate this burden, assistance from the Commonwealth Government was formalised under the Natural Disaster Relief and Recovery Arrangements (NDRRA) in 1974 following Cyclone Tracy. Cyclone Tracy was, at the time, a disaster on a scale unparalleled in Australian history. It caused millions of dollars in damage and destroyed most of Darwin, with over 30,000 people evacuated from a population of 45,000. It also exposed inadequacies in Commonwealth responses to disasters.

Current structure of the programme

The Attorney-General's Department (AGD) is the lead agency for natural disaster response within the Commonwealth. It will often draw on contributions from other agencies and liaise closely with the States which have prime responsibility for natural disaster management. Emergency management within AGD is primarily undertaken across two divisions:

  • the National Security Resilience Policy division provides policy advice on emergency management; and
  • the Emergency Management Australia (EMA) division is responsible for preparing for emergencies and disasters through the development and maintenance of national plans, and coordination of Commonwealth Government crisis response and recovery efforts. It also assists with overseas requests for disaster assistance, in conjunction with the Department of Foreign Affairs and Trade. Within the EMA, the Australian Emergency Management Institute at Mt Macedon is a centre of excellence for education, knowledge and development in the emergency management sector.

Within the Department of Infrastructure and Regional Development, the National Disaster Recovery Taskforce (the Taskforce) was established in February 2011 in response to the extreme weather events of late 2010 to early 2011 in Queensland and Victoria. It provides coordination and oversight of the Commonwealth Government's contribution to reconstruction efforts and supports the Australian Government Reconstruction Inspectorate.

The Commonwealth Government provides States, individuals and some businesses with financial assistance to assist with relief and recovery in a number of forms.

Natural Disaster Relief and Recovery Arrangements

The Commonwealth Government provides funding through the Natural Disaster Relief and Recovery Arrangements (NDRRA) to help pay for natural disaster relief and recovery costs. AGD administers partial reimbursement to States for eligible expenditure on certain natural disasters and terrorist events. There are four categories of assistance.

  • Category A: provides assistance to individuals for immediate needs.
  • Category B: provides assistance to State or local governments for the restoration of essential public assets.
  • Category C: provides for the establishment of a community recovery package.
  • Category D: provides assistance beyond Categories A to C in response to exceptional circumstances.

Whether or not a State receives Commonwealth funding under the NDRRA in any given financial year depends on how much it has spent as a proportion of state revenue.

The first threshold is disaster spending totalling 0.225 per cent of the State’s total general revenue and grants. From that point on, the States will be subsidised 50 cents in every dollar they spend above that amount until the State’s disaster spending reaches 1.75 times its first threshold (0.39 per cent of their revenues). From that point, any additional dollar they spend will be reimbursed 75 cents.

Australian Government Disaster Recovery Payment

The Australian Government Disaster Recovery Payment (AGDRP) is a short-term, non-means-tested financial assistance payment for eligible Australian residents adversely affected by a major disaster, either in Australia or overseas.

The AGDRP is activated when the impact of a disaster on individuals and families warrants Australian Government assistance, in addition to any provided under the NDRRA. The recovery payment is $1,000 for eligible adults and $400 for eligible children. Claims for this assistance, when available, can be made through the Commonwealth Department of Human Services (Centrelink).

New Zealand Special Category visa holders ex-gratia payment

The ex-gratia payment is a short-term, non-means-tested financial assistance for eligible New Zealand visa holders adversely affected by a major disaster in Australia. It has the same eligibility criteria as AGDRP and is paid at the same rate.

Disaster Recovery Allowance

The Disaster Recovery Allowance (DRA) ex-gratia payments assist employees, small business persons and farmers who experience a loss of income as a result of a major disaster.

Australian Government Reconstruction Inspectorate

In addition to these arrangements, the Commonwealth has also entered into separate National Partnership Agreements with Queensland and Victoria to oversee large Commonwealth contributions towards reconstruction costs relating to disaster events in those States. These agreements allowed for upfront contributions of Commonwealth funds in return for which more direct management and oversight was provided by a newly created body, the Australian Government Reconstruction Inspectorate.

An Australian National Audit Office (2013) report on the work of the Reconstruction Inspectorate found that its activities have led to significant value for money outcomes for both the Commonwealth and the States, likely to have reduced Commonwealth expenditure by about $100 million.

Trends

Commonwealth contributions to the States for disaster expenditure are often significant, unexpected and highly variable (see Chart 10.9.1). In particular, since 2009 a number of major disasters have resulted in over $12 billion in reimbursements being paid or committed to the States.

Spending since 2010-11 has been relatively high due to the floods and cyclones during that time, particularly in Queensland. Increases in population density and regional development could see costs continue at a higher level, but this is contingent on where and what events occur. For example, while the NSW bushfires in October 2013 destroyed over 120,000 hectares of bushland and 208 houses, claims will not be of the order of magnitude of the Queensland floods and cyclones.

Due to the considerable difficulties in estimating impacts there is no provision for future disasters in the forward estimates.

Chart 10.9.1: Commonwealth disaster assistance to the States

This chart shows the Commonwealth's spending on natural disaster assistance from 2000-01, which was generally at a low level until spiking up to over three-and-a-half billion dollars in 2010-11, and being nearly as large in a number of the following years.

Source: Department of Finance.

Drivers

Deloitte Access Economics (2013) suggests that the cost of natural disasters will increase over time from around $6.3 billion in 2012 to $23 billion in real terms by 2050. However, these forecasts need to be treated with caution. The economic costs of natural disasters are not collected systematically and there is little agreement on how they might be calculated (Crompton and McAneney, 2008; Latham, McCourt & Larkin, 2010).

As natural disasters – particularly the most severe ones – timing and severity is unpredictable and funding for recovery is volatile. The cost of natural disasters in the last few years can largely be explained by three incidents:

  • the Black Saturday bushfires in Victoria (7 February 2009) in which 173 people were killed with damage causing insurance costs of $1.1 billion;
  • the Queensland Floods (December 2010 to January 2011) where 38 people were killed with damage causing insurance costs of $2.4 billion; and
  • Cyclone Yasi in north Queensland (February 2011) with damage causing insurance costs of $1.4 billion.

Disasters of this magnitude have generally been infrequent, but account for a large portion of the damage. The other recent disasters of this magnitude include Cyclone Tracy in 1974, the Newcastle earthquake of 1989 and the Sydney hailstorm of 1999. It could be argued that recent data represents an aberration rather than a trend.

While the cost of natural disasters could increase over time because of population growth and more people living in areas more likely to be affected by disasters and climate change, the growth rate nominated by Deloitte Access Economics is broadly in line with GDP. Hence the capacity of individuals, businesses and governments to respond to disasters is increasing at largely the same rate as underlying growth in the damage.

Issues

The major issues with the Commonwealth’s role in natural disasters are:

  • Commonwealth relief and recovery funding – the extent to which the Commonwealth should be responsible for funding the recovery efforts after natural disasters and the associated procedures (currently as reflected in the NDRRA); and
  • mitigation – the case for funding mitigation expenditure, and again the extent to which the Commonwealth should provide funding.

Relief and recovery

Currently, the Commonwealth pays a major share of the reconstruction costs of large natural disasters. Beyond certain thresholds the Commonwealth contributes either 50 per cent or 75 per cent of a State’s reconstruction expenditure on replacing essential public assets (mostly road infrastructure) damaged by natural disasters. In principle, the Commonwealth has a better revenue base and hence a greater capacity to absorb the financial shock associated with large natural disasters.

However, the high share of Commonwealth contribution has created perverse incentives for State and local governments to minimise their investment in mitigation measures such as planning and development, capital investment and insuring assets. The Queensland Under Treasurer advised a House of Representatives inquiry in 2011 that his State had not sought to reinsure all the assets that could be covered partly because of the existence of Commonwealth funding.

In the absence of any changes to the currently generous Commonwealth funding arrangements, State and local governments are unlikely to face sufficient incentives to change current behaviours relating to planning and zoning requirements, infrastructure spending and maintenance, and restoration or replacement decisions.

The very low threshold ($240,000 in damage) triggering potential Commonwealth NDRRA support, when taken with the past AGDRP arrangements, has also contributed to ongoing community expectations that the Commonwealth will provide support for ‘minor’ disasters, including financial support for losses that are potentially insurable and/or avoidable or otherwise capable of being provided by State and local governments.

In relation to the AGDRP, there is also overlap between Category A of the NDRRA (provided, at least initially, by the States) and the AGDRP. Further, under previous AGDRP arrangements, persons suffering some form of loss were awarded the same payment whether they were severely affected or merely inconvenienced. Community concerns were highlighted during the recent NSW bushfires in October 2013, where the Commonwealth provided assistance only to those severely affected, but in doing so, attracted considerable media scrutiny and public criticism.

The NDRRA claims process has also been problematic. Attempts have been made over time to improve the terminology, timeliness and processes in dealing with and processing state claims, including trying to ensure that they are as consistent as possible with other reform initiatives relating to disaster resilience and Commonwealth specific reforms. For example, in September 2013, the Queensland Auditor-General reported that NDRRA local council claims totalling $725 million had been qualified because they lacked the necessary documentation that would allow a reliable assessment of the claim.

Notwithstanding these steps, for significant disaster events such as cyclones and major flooding, years will elapse between the event, the immediate response and the reconstruction efforts, involving a myriad of local governments, various state departments, state Auditors-General and Commonwealth departments including AGD (where EMA oversees and determines the claims) and the Departments of the Treasury, Finance, and the Prime Minister and Cabinet.

In relation to particular Queensland and Victorian disasters, there is a further layer of scrutiny through the Reconstruction Inspectorate.

According to a recent ANAO (2013) report, this increased scrutiny has decreased potential Queensland claims for Commonwealth reimbursement under the NDRRA by more than $100 million. This suggests that closer scrutiny of state claims is warranted, but also that some of the credit for the value for money outcomes is the result of improved State claims management processes through the Queensland Reconstruction Authority (QRA), which is responsible for coordinating and managing Queensland reconstruction activities.

The very large and unforseen state payments that can arise under the NDRRA pose considerable risks for managing the Commonwealth’s Budget and its fiscal strategies. These payments also present timing and management risks, arising from the drawn-out reimbursement process to pay state claims, which has led to substantial movements of funds across financial years.

In principle, State and local governments should simply insure their assets. In practice, insurance is not available for most public assets that could be affected by natural disasters.

  • Following a number of significant natural disasters occurring in 2011, Senator Nick Xenophon requested that the NDRRA include a three-yearly review of the potential for insurance of all State-owned assets. The NDRRA was subsequently amended in 2011 to incorporate requirements for States to submit independent assessments of their insurance arrangements.
  • The Department of Finance completed an initial review of State assets in 2011, with the outcome being that while non-road assets were generally insurable, there was little appetite in the commercial insurance market to insure State government road assets against natural disasters (Department of Finance and Deregulation, 2012). At this stage, it is not clear when a further review will be undertaken.

In order to reduce moral hazard (and hence total costs to society) the principles underpinning an improved approach would ensure that, to the extent possible, costs are borne by those who are in a position to reduce them by their behaviour.

Mitigation

Arguably, another important part of future disaster related spending is to increase investment on mitigation measures. There is growing and widespread community support for increasing mitigation spending, aided by recent reports prepared by the private sector - particularly the insurance industry.

A 2002 COAG Review noted that additional investment in natural disaster mitigation was estimated to reduce the economic cost of natural disasters and, in particular, that for every dollar invested in flood mitigation around $2.10 was saved.

A 2013 paper by Deloitte Access Economics noted that the budgetary impact of responding to and recovering from natural disasters could potentially be significantly reduced through carefully considered and directed investment in pre-disaster resilience. In particular, the paper stated that annual programme expenditure on pre-disaster resilience of $250 million, could potentially generate budget savings of $12.2 billion for all levels of government and reduce natural disaster costs by more than 50 per cent by 2050.

However, the case for increased spending on mitigation is not conclusive. Damage caused by natural disasters is highly volatile and most of the cost is the result of a small number of extremely damaging events. While reasonable data is available on insured costs, information on the total economic cost is largely speculative. Thus attempts to project the cost of disasters into the future, as seen in the Deloitte Access Economic study, should be treated with caution due to the extent of assumptions that are needed.

The potential benefits of mitigation are difficult to assess and test and thereby likely to be overstated. The potential benefits (arising from actual spending) would also depend on the quality, quantity and timing of the infrastructure decisions and the fact that the measures would not be overwhelmed by a major disaster. Notwithstanding how much knowledge and foresight governments might have, funding for mitigation, without appropriate governance mechanisms to evaluate projects, could lead to poorly targeted expenditure on sub-optimal projects.

Under the current arrangements, the States (and the wider community) appear to be looking to the Commonwealth to provide funding support for significant mitigation projects. The logic appears to be that as the Commonwealth bears the majority of the costs of large disasters, the Commonwealth can save itself money if it invests in mitigation.

The alternative view – that better aligns with the Commission’s Principles of Good Government – would be that as State and local governments are primarily responsible for disaster mitigation, response and recovery, they are not only the appropriate funders of mitigation measures, but are also in a better position to maximise the chances of the most efficient allocation of funding on those projects calculated to minimise State risks and exposures.

Irrespective of how much knowledge and foresight governments might have, funding for mitigation, without appropriate governance mechanisms to evaluate projects, could lead to poorly targeted expenditure on sub-optimal projects.

Potential areas for reform

Relief and recovery

Taking the above principles into account, possible options for reform of Commonwealth Relief and Recovery Funding include:

Option 1. Substantially reduce Commonwealth involvement in disaster recovery funding

The Commonwealth could retain the AGDRP but allow for appropriate contributions to be paid directly by the Commonwealth to only those individuals severely affected by natural disasters. This is consistent with the view that the Commonwealth should support only those who have suffered severe hardship. To continue providing payments to those moderately affected will maintain community expectations of Commonwealth taxpayer support even where the effects of events are not severe.

The Commonwealth could replace the NDRRA with a grant – paid upfront or in instalments – to the States in the event of a significant natural disaster. The level of Commonwealth contribution would vary depending on the size of the event and the Commonwealth’s capacity, but could be set at between 25 and 33 per cent of the likely reconstruction costs of the disaster, with the amounts based on assessments by infrastructure and insurance expert assessors. These amounts would be determined by the Commonwealth and could be provided across future years based on the likely timing of the road infrastructure spend and taking into account the Commonwealth’s spending estimates for the Budget and forward years.

This approach would seek to ensure that State and local governments are more focused on disaster management and prevention, particularly mitigation measures, as well as managing disaster recovery expenditure on infrastructure. It would allow for significant yet flexible Commonwealth financial involvement in disaster funding with minimal initial oversight, avoiding the complex and administratively burdensome NDRRA claims process.

Option 2. Amend the NDRRA to retain the basic structure and main processes, but amend thresholds and Commonwealth contribution rates

Another option could be for the Commonwealth to maintain the basic structure of the NDRRA (and the AGDRP) but to significantly amend its contribution rates for the NDRRA. Under this model the NDRRA would be retained, but significantly amended to:

  1. lower Commonwealth contributions for infrastructure funding (Category B) to either 25 or 33 per cent of government contributions. Conditions of this contribution could include:
    1. significantly increasing the level of expenditure at which a small disaster becomes an eligible disaster (for the purposes of calculating support under the NDRRA), currently $240,000. In keeping with the principle that only significant disasters justify Commonwealth funding, this should be increased to, say, $50 million for the larger three States, $20 million for South Australia and Western Australia and $5 million for Tasmania and the two Territories;
    2. raising the threshold for prior State expenditure (the ‘excess’) to 0.5 per cent of State revenue before Commonwealth contributions commence (this is more than double the current first threshold of 0.225 per cent);
    3. State and local governments equally sharing the remaining 66 (or 75) per cent of funding; and
    4. that civic assets, such as buildings, which are capable of being commercially insured, be excluded from claims; and
  2. simplify and strengthen the claims process, adopting lessons learned by the Reconstruction Inspectorate. Options could include:
    1. requiring States with significant reconstruction expenditure to establish agencies similar to the QRA to manage and coordinate reconstruction work and NDRRA claims for reimbursement; and
    2. clarifying, consolidating and harmonising the claims approval process, through steps such as: merging the EMA claims function with the Reconstruction Inspectorate functions; adopting consistent approaches to funding for all States (with no state-specific National Partnership Agreements); and fast-tracking assessment and decision making for claims.

Similar to Option 1, the lower contribution rate under Option 2 would still provide Commonwealth support but would limit the Commonwealth’s liability for poor decisions by State and local governments and limit the extent to which they can in effect upgrade their assets using Commonwealth funds (for example by upgrading or widening roads to current engineering standards) and ensure that responsibility for disaster management resides with the States. Any decrease in the proportion of the Commonwealth’s reconstruction costs reduces the perverse incentives (moral hazard) imposed by the NDRRA and reduces the budgetary risks to the Commonwealth.

Either Option 1 or Option 2 could be implemented before the 2014-15 disaster season.

Overall, Option 1 is preferred, as it limits Commonwealth involvement in predominantly state affairs, yet still allows for substantial intergovernmental and community support as necessary.

Although the claims process could be significantly improved under Option 2, it would still maintain a potentially unnecessary level of Commonwealth involvement in State matters and duplicate State oversight. Notwithstanding the significant gains achieved through the Reconstruction Inspectorate process, it remains very difficult to effectively, efficiently or consistently manage state claims for NDRRA contributions.

Under Option 1, the need for a Reconstruction Inspectorate would not be required, however in the interim it would be desirable for all aspects of disaster response to be dealt with by the one department and minister.

Mitigation

On mitigation, as yet there is not a compelling case for increased Commonwealth involvement, but this issue could be considered further after the planned Productivity Commission Review of Disaster Relief Arrangements announced on 20 December 2013. This could advise on the extent to which disaster mitigation funding is justified.

Organisational arrangements

If the Government adopts the Commission’s recommendations on providing a grant for NDRRA there may no longer be a need for the National Disaster Recovery Taskforce currently in the Department of Infrastructure and Regional Development. The Taskforce coordinates the Commonwealth's contribution to reconstruction efforts in Queensland and Victoria and supports value for money assessments by the Australian Government Reconstruction Inspectorate. The role of AGD in administering the NDRRA would also need to be examined.

References

Australian Business Roundtable for Disaster Resilience and Safer Communities 2014, Submission to the National Commission of Audit 2013, unpublished, Sydney.

Australian National Audit Office 2013, The Preparation and Delivery of the Natural Disaster Recovery Work Plans for Queensland and Victoria, Canberra.

Council of Australian Governments (COAG) 2002, Natural Disasters in Australia: Reforming Mitigation, Relief and Recovery Arrangements, COAG, Canberra.

Crompton, R and McAneney, J 2008, The Cost of Natural Disasters in Australia: The Case for Disaster Risk Reduction, Australian Journal of Emergency Management, 23(4).

Deloitte Access Economics (DAE) 2013, Building Our Nation's Resilience to Natural Disasters, DAE, Canberra.

Department of Finance and Deregulation 2012, Review of the Insurance Arrangements of States and Territories under the NDRRA Determination 2011, Canberra.

House of Representatives Standing Committee on Economics 2011, Inquiry into the Income Tax Rates Amendment (Temporary Flood Reconstruction Levy) Bill 2011; and the Tax Laws Amendment (Temporary Flood Reconstruction Levy) Bill 2011, Parliament of the Commonwealth of Australia, Canberra.

Insurance Council Australia (ICA) 2014, Industry Statistics and Data - Disaster Statistics, ICA, Sydney.

Latham, C, McCourt, P and Larkin, C 2010, Natural Disasters in Australia: Issues of Funding and Insurance, Institute of Actuaries of Australia 17th General Insurance Seminar, Gold Coast.

Productivity Commission 2013, Barriers to effective climate change adaptation, Canberra.

Queensland Government 2013, Review of the Auditor-General’s Report to Parliament 10: 2012-13 – Results of Audits: Local Government Entities 2011-12, Queensland Parliament, Transport, Housing and Local Government Committee, Report no. 30, Brisbane.