1. Drought Risk Management in Ethiopia – the big LEAP*
Expert Meeting – Requirements of Weather Markets WMO
December 5, 2007
Ulrich Hess, Chief of Business Risk Planning
*Livelihoods + Early Assessment + Protection

2. AGENDA
Risk: Managing Risk instead of Managing Disasters
Ethiopia Phase I: Pilot 2006
Ethiopia Phase II: Risk Management Framework

3. PROBLEM: TIMING and NATURE OF INTERVENTIONS E. g
PROBLEM: TIMING and NATURE OF INTERVENTIONS E.g. Safety Net Areas - Highlands
Emergency Appeal
Life Saving Interventions (mostly food)
Crop+ Emergency Needs Assessment
Aug
Sept
Oct
Nov
Dec
Jan 2008
Feb
Mar
Apr
May
June
July
Aug

4. Enrolment of Beneficiaries LEAP Index signals severe livelihood stress
RATIONALE (I): EFFECTIVENESS - PROTECT LIVELIHOODS FIRST Example: Tigray, Ethiopia
Enrolment of Beneficiaries
Cash or food for work
Aug
Sept
Oct
Nov
Dec
Jan 2008
Feb
Mar
Apr
May
June
July
Aug
LEAP Index signals severe livelihood stress
Funds disburse

5. Ethiopia Pilot Drought Insurance Transaction
designed in response to Government’s concern that Ethiopia was wrought in a cycle of responding to disasters rather than managing risks.
tested the possibility of leveraging donor contributions to secure a reliable, timely and cost-effective way of funding emergency operations

6. THE 2006 ETHIOPIA TRANSACTION
Risk Transfer Structure
Counterparty (buyer of option): UN World Food Programme – on behalf of Government of Ethiopia
Competitive Tender Process
Official UN WFP procurement process
9 companies invited to tender, 5 participated
Tender Winner (seller of option): AXA Re, Paris
Final Transaction:
Premium: $930,000, paid by USAID mainly
Maximum Payout: $7,100,000
Risk transferred based on weather derivative contract tendered out in competitive tender
Counterparty to contract was UN WFP, on behalf of GoE
International Swaps and Derivatives association specifies that payment must be made within 5 days of end of contract period
Donors consulted to ascertain whether premium price is acceptable or whether they prefer to retain risk (funding made accessible to WFP on same contractual basis as derivative contract); premium price demanded by market during tender is current cost of Ethiopian weather risk, at least, as constructed in the model above.

7. Lessons Learnt from the Pilot
There is a market for Ethiopian drought risk;
possible to develop objective, timely and accurate indicators that serve as a relatively good proxy of actual aggregate needs;
Ethiopian weather data from NMA satisfies international weather risk market standards; and
If insurance is to become an effective risk-management tool for Ethiopia, it must be coordinated with other financial instruments to provide more comprehensive coverage of Ethiopia’s drought risks.

8. ETHIOPIA PHASE II – RISK MANAGEMENT FRAMEWORK
I. IMPROVED INDEX: LEAP
II. Develop budgeted contingency plans
Early Warning System
with reliable baseline and trigger points
Contingency Planning
for appropriate and timely response
Contingent Financing
of contingency plans
Capacity Building
for effective plan implementation
IV. Establish timely emergency financing through use of contingency financing
III. Build planning and implementation capacity at regional level

9. IMPROVED INDEX – PART OF RISK MANAGEMENT FRAMEWORK
I. IMPROVED INDEX: LEAP
Early Warning System
with reliable baseline and trigger points

10. Role of LEAP as a risk management framework
provide a good proxy estimate of the costs of protecting transient food insecure peoples’ livelihoods at the time of shock;
be an independent, objective, verifiable and replicable index of livelihood losses in the country;
convey information in near real-time to ensure that to the extent possible the response to livelihood crises will be more timely and effective.
Provide early warning of livelihood stress levels
Signal amount of financial resources required for livelihood protection at regional levels
Crop and pasture monitoring

11. Crop + soil coefficients Livelihood Protection
Livelihoods + Early Assessment + Protection: LEAP INDICES
Objective: capture livelihood protection funding needs at regional level
Target group: vulnerable population
Weather data
Crop + soil coefficients
Water
Requirement
Satisfaction
Index
(WRSI)
for Crops + Rangelands
Livelihood Protection
Beneficiaries
Costs
(Livelihood
Protection
Cost Index LPCI)

12. Viewing output parameters

13. RISK MANAGEMENT FRAMEWORK
II. Develop budgeted contingency plans
Contingency Planning
for appropriate and timely response
WFP COMPETENCY

14. III. CAPACITY BUILDING + OWNERSHIP
Government and development partners agreed that the index should be developed with participation of all stakeholders.
A Technical Steering Committee chaired by FSCB, was established to oversee the implementation of phase II of the project.
Training of Government (MOARD, NMA, and FSCB staff) on the LEAP software package was done in June and October.
A concept note and project proposal for LEAP development and endorsed by the Technical Steering Committee.
The phase II was funded jointly by the Government, WFP, the World Bank and FAO.

15. RISK MANAGEMENT FRAMEWORK
Contingency Financing
of contingency plans
IV. Establish timely emergency financing through use of contingency financing
WB + DFID (?) + WFP (?)

16. IV: INTEGRATED RISK FINANCING
Drought severity – Early Livelihood Protection costs ($US Mil)
Contingency Grant/Fund/WFP CEMOP
Insurance
Flash Appeal
Productive Safety Net
8.3 Mil Safety Net Beneficiaries
7 Mil Livelihood Protection Target Beneficiaries
Occurrence (no. of years)

17. CONCLUSION: THIS IS IMPORTANT
Destitution
Dignity
Cost
Climate Change

18. THANKS! Ethiopia LEAP Tool download: http://vam.wfp.org/LEAP
Free software download. Please do not distribute without consent of WFP and World Bank
For questions: