Climate changes poses a considerable threat to the African continent. Over the last four decades, sub-Saharan Africa has experienced more than 1,000 disasters. These events have inflicted significant economic damage and considerable loss of lives and livelihoods. Within this context, weather-related disasters have been a major concern, given the significant impact on the agricultural sector and the associated implications for food security on the continent and the economic livelihood of millions of Africans.
The World Bank estimates an adaptation investment cost need of US $14 to 17 billion per year over the period 2010 and 2050 for sub-Saharan countries to adapt to an approximately 2°C warmer climate forecast for 2050. For these countries, having to manage ongoing impacts with the need to mobilise resources to adapt to climate change is a significant burden, particularly so given other development challenges. Additionally, despite the significant resources pledged to support adaptation and resilience efforts on the continent, the reality is that for many African governments, the funds have not been forthcoming in the magnitude required.
In such difficult circumstances, African governments have, however, sought to find innovative ways to access and leverage resources in support of their resilience-building and climate-change adaptation efforts. In 2012, the African Union established the African Risk Capacity (ARC) as a specialized agency of the African Union to help member states improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters, therefore protecting the food security of vulnerable populations. The objective was to assist member states to reduce the risk of loss and damage to extreme weather events and natural disasters affecting Africa’s populations by providing targeted responses to disasters in a more timely, cost-effective, objective and transparent manner.
The institution was structured to comprise of two entities: the ARC Agency, a treaty-based international organization and specialized agency of the African Union, which provides technical and capacity-building services to its member states; and the ARC Insurance Company Limited, which is its financial affiliate established to provide insurance to participating sovereigns. At a fundamental level, the establishment of this institution by the African Union was also to catalyze the creation and improvement of risk-management systems in member countries. Through the mechanism, governments are not only able to buy insurance policies for natural disasters, such as drought, but also commit to a process of defining their risk profile and establishing a well-defined preparedness programme.
In 2014, the ARC launched the first drought insurance pool, which was capaitalised with $200 million from the governments of the United Kingdom and Germany through a no-interest loan for 20 years. The governments of Kenya, Mauritania, Niger and Senegal also purchased $129 million in drought insurance coverage for $17 million in premium costs paid by these governments. In 2015, the ARC proof of concept was demonstrated. After a significant rainfall deficit brought on by drought conditions, Senegal, Mauritania and Niger received a payout of just over $26.3 million from weather-risk insurance policies these countries had purchased from the ARC. Instead of waiting for the slow process of international aid through the appeals system, these countries were able to quickly implement pre-planned drought relief programmes to assist affected populations.
Mauritania received $6.3 million for food distribution to 250,000 people in food-insecure areas. Senegal’s payout was $16.5 million for food distribution for 925,000 people, as well as subsidized sales of animal feed for 570,000 cattle. Niger received $3.5 million for conditional cash transfers and food distribution for 175,000 people, and rice distribution to 42,000 people. In total, the early response programme in the three countries assisted around 1.3 million people, saving lives and supporting livelihoods through the delivery of food, cash or livestock fodder. It also demonstrated the importance of empowering national governments to be able to respond to the needs of their people. In 2015, the ARC pool was increased with the governments of The Gambia, Mali and Malawi joining the second drought risk pool and securing insurance coverage of $178 million, with a corresponding premium of $24.7 million. It is expected that as ARC adds new products, such as flood and tropical cyclone products, the size of the pool will also continue to grow.
For African governments, the establishment of the ARC, its performance through the demonstrative effect of the payouts in 2014 and also the broader capacity-building efforts implemented by the Agency led to further consideration around the role of the mechanism in supporting access to resources for adaptation. In 2015, the ARC launched the research and development phase into an Extreme Climate Facility (XCF). The purpose of this was to develop a data-driven, multi-year vehicle that will provide financial support to eligible African countries to help them build their climate resilience and be financially prepared to undertake greater adaptation measures, should extreme weather event frequency and intensity increase in their region.
It will be designed as an African-led initiative to access private capital, diversifying the sources and increasing the amount of international funding available for climate adaptation in Africa. The ARC provides an ideal platform to develop and operationalize such a new facility, with the scope for the XCF to become the second financial affiliate of the ARC Agency. The idea is that the XCF will use both public and private funds, and facilitate direct access to climate-adaptation finance for eligible African governments, based on the demonstrated need for enhanced adaptation measures. Its financial obligations to African countries will be securitized and issued as a series of climate change catastrophe bonds. These bonds will provide additional climate-change adaptation financing to participating AU countries, in the event that extreme shocks such as extreme heat, droughts, floods or cyclones increase in occurrence and intensity. The bonds will be financed by capital provided through private investors, with donors supporting the annual bond coupon payment. XCF will be structured so as to issue more than $1billion in African climate change bonds over the next 30 years.
The XCF will be entirely data driven by objective climate data. It will utilize 30 years of Africa’s meteorological climatology as a baseline. It will establish a multi-hazard Extreme Climate Index (ECI) for each African climatic region. This index will track increases in the frequency and magnitude of extreme climate events over and above the baseline. When the index exceeds pre-determined thresholds, countries will automatically receive payments from the XCF to support their pre-approved climate adaptation plans.
The innovation emerging from the ARC has been largely driven by the expressed needs of African countries around the need for additional resources to support their resilience-building efforts. The challenges are tremendous and the ARC mechanism alone will not solve this problem. What will be required is innovation and pragmatic solutions to catalyse better risk-management practices on the continent, and an effort to ensure that this takes place in a broader picture where partners – national, international, private sector and civil society – all work together in a concerted manner. The role of ARC in catalyzing this innovative shift in climate risk management is a step in the right direction towards building resilience on the continent.