Help for Two Economies Dependent on Productivity Gains and Exposed to Disaster Losses: The Island Nations Maritime Partnership

I just downloaded two great McKinsey reports, one on Indonesia, one on Vietnam.  Both economies are dependent on productivity growth to prosper and maintain stability.  Both are also very exposed to loss from natural and man-made disasters.  The Pacific Maritime Partnership, which includes safer vessels, maritime training, and disaster resiliency, is an answer to at least part of that problem.  A briefing on the partnership, of which I am a principal, follows:

The Island Nations Maritime Partnership

Summary

The Sunrise Trade Network, Inc. is promoting development of a Public-Private Partnership (PPP) Project involving US, Australian, and Pacific Island interests to strengthen the maritime capability of Pacific Island nations. It would focus on three areas: safe marine infrastructure; disaster relief and economic recovery, and ferry and boat construction. The initial emphasis would be on Papua New Guinea. Later work might involve other Pacific nations such as Guam, Kiribati, Solomon Islands etc. Aid agencies, non-governmental organizations, and the private sector through economic development organizations would be asked to finance public/private interest elements.

Background

PacificIsland nations, especially PNG, depend heavily on ferries and smaller craft (e.g. launches, banana boats) for the transport of produce and equipment, tourists and local families around their coastlines. This infrastructure is in need of major upgrading. The reasons put forward by third parties are:

  • Vessels are either unseaworthy or unsuitable in heavy seas.
  • Overcrowding due to lack of capacity and poor ticketing systems.
  • Inadequate safety equipment, navigational aids and training.
  • Poor servicing of engines and equipment.
  • Weak regulation and monitoring of the industry’s performance.

The sinking of the Rabaul Queen in 2012 (around 300 dead) brought these issues into sharp relief. There are other precedents, and many smaller unreported events.   A considerable amount of local effort is going into addressing the above problems. However we believe this would be further enhanced by the facilitation of partnerships with world-class companies operating in places like Louisiana in the US and Cairns and Darwin in Australia.   The feasibility study would be undertaken by the Sunrise Trade Network, Inc. a Louisiana-based 501c3, and will be based around a visit to PNG by a small mission from companies, instructors on maritime safety snd standards, plus disaster resiliency expertise, all furnished by the regional economic development organizations South Louisiana Economic Council in the U.S.; and Cairns and Darwin regional economic development organizations.

Project has three parts

1. Safe Maritime Infrastructure:  This part would assess the nature of the problem and determine best options on possible roles for US and Australian companies working in partnership with PNG interests. Suggestions might also be offered on the scope for the development of PNG repair yards and ship chandlers, improved ticketing and management systems, inferred navigational tracking systems, early disaster detection and warning systems etc.

2. Disaster Relief & Economic Recovery:  Papua New Guinea is prone to natural-caused disasters including earthquakes, volcanic eruptions, tsunamis, cyclones, river flooding and coastal erosion and landslides. Indeed the considerable work underway in disaster relief is to be applauded. The particular relevance is that the Louisiana authorities have developed world standing in this field due to its Hurricane Katrina recovery effort. This followed on from longstanding work in the Gulf of Mexico servicing oil and gas facilities. As a result, Sunrise members have particular expertise in disaster relief, damage surveillance and assessment, and economic recovery programs involving technical assistance programs on finance and accounting, marketing and advertising, business development, small business incubators, micro-finance, etc.

3. Ferry & boat construction  The third part would focus on upgrading the marine fleets in the region via the development of a local marine construction industry.  PNG has a world-class timber resource, an artisan tradition in some areas, competitively-priced labor and a familiarity with boats. While wooden vessels may no longer be looked upon as ‘world class’ vessels in the eyes of the global market, the internal fittings are usually laced with wood product in order to soften the surroundings of long suffering seafarers. We would like to explore this as a potential niche market for PNG.  Recent investigations have sparked our interest in the potential for a new boat design that could be the basis for local manufacturing, based on local sea, climate and market needs. Our thinking is as follows:

  • Large-scale manufacture of half cabin launches could deliver a safe, robust and relatively low-cost product for the market (perhaps in the $US20,000 – $US30,000 range) and that aid funds could be very legitimately applied to subsidizing the cost to local villages.
  • The supply of US-manufactured outboard engines might be a further element, together with joint ventures in respect of repairs and servicing.
  • Marketing and distribution might be assisted by US companies, many of which have the channels and know-how in this field. However the local knowledge of PNG and possibly Australian firms will be vital.
  • In terms of governance, the main options appear to be (i) local ownership, (ii) foreign ownership, or (iii) joint ventures between existing companies. The study would assess these options, interview some of the potential players and relay their views and concerns on matters like IP arrangements, profit sharing, ownership and control, legal issues, export assistance.

Such an initiative could be the basis for a very interesting and beneficial PPP arrangement. The study could also evaluate the use of a PPP approach for the leasing of newer ferries from international fleets.

Timing

The aim would be to begin the feasibility study by mid 2012, enabling a progress report to be given at the Australia-PNG Ministerial Forum in late 2012, to which US representatives would be invited.  Should the project prove viable, further funding would be sought through partnerships between USAID/AusAID, Major NGOs in the region, and the private sector via the South Louisiana Economic Council and similar organizations in Australia.

Project partners

The Project would only involve companies of the highest standing; those with empathy with different cultures and commercial systems, a track record of fair dealings, and patient capital. A methodology would be developed to identify such companies.

Costs

The cost of the feasibility study is estimated at $US100,000.  The study would in turn identify the cost of the full feasibility study, together with some funding options. For example, assuming the study points to substantial net benefits for PNG, a mix of bilateral and multilateral aid may be possible.  The fundamental difference between this Project and many others is that the feasibility study is designed to prove out a concept that draws in private sector partners to develop commercially viable operations based around collaborative principles. Once proven in PNG, the project, and variations of it dependent on need, can be taken to island nations worldwide.

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Participating in a web session on disaster risk management–while in the remnants of one!

Today, August 30th 2012, the day after Isaac slammed New Orleans, on the (talk about eerie) 7th anniversary of Hurricane Katrnia, I was invited to participate in a session on using Public Private Partnerships to manage disaster risk in India Mexico, Vietnam, and the Caribbean by the Swiss Re Centre for Global Dialogue outside Geneva.

A panel representing the four nations/regions gave very interesting presentations on how private and public sectors had worked together on response and recovery efforts, and the Swiss Re representative discussed the potential for even greater cooperation.  At the end of the session, questions were solicited from the audience and web-based participants.  As I watched, I wanted to ask about using PPP to enhance resiliency efforts BEFORE disasters happen…

….but I couldn’t, because I had been kicked off my internet connection, I assume by a temporary power outage at the cell tower closest to my office caused by the wind.  You see, the wind that most likely caused the outage was from the remnants of Isaac, and by the time I was able to re-connect, it was too late.  Not that the session was over, it was too late because someone in the audience there had asked that very question.  The panelists answered in vague terms, obviously uncomfortable with an area they had not prepared to discuss.  That amazed me.  

There is an entire movement, and a movie, based on a concept called “paying it forward”.   The theory is that, if you give, even when it seems unreasonable to do so, you will receive more than your gift in return.  That’s what resiliency is all about..paying it forward.  Not waiting until the event to invest. And, just as the movement has proven to be based on fact, so is resiliency–investing in an uncertain future with the knowledge that, one way or another, a return will come.  

Isaac is a point in fact.  The US Army Corps of Engineers invested some $12 billion in a hurricane barrier surrounding New Orleans.  That investment worked.  Even though Isaac stalled over the city, and kicked up a storm surge that could easily have caused another catastrophe on the level of Katrina, the damage in terms of both property and life was far less.  Yes, Isaac was not as powerful.  But it was powerful enough to have been awful without that investment.  Was the storm protection system a PPP in the academic sense?  Maybe not, but the support of the private sector, the cooperation of property owners in allowing additional land to be utilized to create the system, and implementing their own resiliency measures, minimized what could have been far, far worse damage.

So, we still have work to do….in showing the value of paying it forward.  Let’s do it now before the next Japan, before the next Katrina, before the next Thailand.  Because there WILL be a next…..

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Forget the Myan Prophesy–The REAL Threat in 2012 is the Potential Impact Disasters in Developing Nations Can Have on the Teetering Global Economy

All nations face increasing risks from natural and man-made disasters.  The past three years have seen consecutive record economic losses from these events.  In Developing Nations, where reinsurance giant Swiss Re estimates climate risks could cost some countries as much as 19 percent of annual GDP by 2030, these risks are acute.  The 2011 floods in Thailand show clearly that those impacts can have enormous secondary effects.  With the global economy already in turmoil, we can scarcely afford these disruptions.

To meet these challenges, a variety of new financial innovations are arising from what some may see as strange bedfellows: the insurance/reinsurance industry, large non-governmental organizations (NGOs), substantial private foundations, developed nation aid ministries, and governments of developing nations themselves.  These public-private partnerships, or PPPs as they are known, have the potential to change the dynamics of disaster impacts for the better.

Swiss Re, the Swiss reinsurance giant, has published a number of works on climate risk and impacts on developing nations.  In their Blueprint for Managing Climate Risks in Emerging Markets, Swiss Re proposes the development of collaborative risk transfer arrangements involving the public and private sectors, including catastrophe bonds (CAT bonds).  CAT bonds transfer risk to the financial markets by allowing governments to issue bonds to cover potential losses from low-frequency, high-impact events. They work like any insurance policy–if the event does not occur, the bonds are not activated and the purchasers receive a return.  If the event does occur, and they are activated, the cost of borrowing is much less than if that government had waited until after the disaster to borrow for recovery.

In 2009, the Mexican Government entered a risk transfer transaction to cover $290 million in potential losses (see http://treasury.worldbank.org/bdm/pdf/Handouts_Finance/Financial_Solution_MultiCat.pdf ) from hurricanes and/or earthquakes using a CAT bond formula that triggered payouts according to pre-defined criteria.  After the April 4, 2010 earthquake in Baja California, I helped develop a long-term recovery strategy for that devastated rural area.  The rebuilding of communities destroyed by that 7.2 magnitude quake would have no doubt taken longer had reconstruction funds not been immediately available, and the Mexican government would have no doubt paid a higher cost for recovery activities.

Other innovative risk management and transfer mechanisms are being developed by insurers, NGOs like the United Nations and World Bank, plus foundations such as OxFam.  One of the most interesting is the Weather Index Insurance program, or HARITA, which provides crop-loss insurance for farmers in exchange for their own work, engaging them in locally designed crop irrigation, reforestation, and other initiatives.  Another innovation is the Turkish Catastrophe Insurance Pool, which in this middle-income nation combines incentives for property owners to invest in earthquake resilience measures, with the World Bank by providing reinsurance-style funding guarantees at very favorable terms.

Microinsurance is also becoming a very popular way to reduce overall risks by making very small policies available to large numbers of low-income people.  In many developing nations partnerships are being developed to subsidize or provide reinsurance to microinsurance programs.  Other programs have multiple benefits.  In Malawi, a drought-prone Southern African nation, the World Bank and Swiss Re joined to provide protection from damage to corn crops as a result of prolonged dry conditions, measured by a pre-determined index.  Not only does this protect financial interests of small farmers, it reduces the probability of widespread hunger, and the political unrest that can follow, due to shortages of this staple food.

All of these measures, along with both pre-disaster and post-disaster strategic planning that produces both more resilient regions and more effective, sustainable economic recovery, help transfer risk and reduce loss.  According to Swiss Re Chairman of Global Partnerships Martyn Parker, “in the countries we (Swiss Re) have studied, between 40% and 70% of expected disaster losses can be cost-effectively averted if you put in the fundamental preparations beforehand”.  In these economic times, reducing a potential 19% loss in GDP by 70% through better planning and innovative risk transfer doesn’t just make sense, it’s a necessity.  Thankfully, a lot of very smart people are working on just that.

The key, of course, is to have the right ways to share these ideas, coordinate these efforts, and serve as a connection between the developing world, those working to reduce/transfer risk, and the global financial marketplace.  I, along with my partners in the Sunrise Trade Network and Cockatoo Network, hope to play a role in making those connections.  We’re about 400 strong, based in both developed and developing nations around the world, and know how to bring disparate groups together to collaborate and succeed. By working with the insurance/reinsurance industries, foundations/NGOs, and governments, we can indeed make a difference.

With the global economy already teetering, we can scarcely afford NOT to act.  Let’s just hope enough people get that message……or 2012 could be remembered for things far worse than the end of the Myan calendar…..

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