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Ethiopia: Insuring Against Famine
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Ethiopia: Insuring Against Famine

Can risk management techniques from global financial markets help people in the developing world avoid the worst effects of famine? The World Food Programme's new director of business planning thinks this approach could revolutionize the aid industry.

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Segment 1

TITLE
Insuring Against Famine
VOICEOVER
It's something we're used to: pictures of Africans made destitute and desperate by drought, displayed on our TV screens to raise money. Weeks later, the funds are forthcoming; months later, the aid arrives and people receive what they need to survive. The United Nations has tried to address this over the years but UN agencies like the World Food Programme have been operating in the same way for decades. But change is in the air. Richard Wilcox is out to shake it up. He was a member of Bill Clinton's administration, and was invited into WFP with the aim of blowing a fresh wind of commercialism and financial discipline into the business.
RICHARD WILCOX [Director of Business Planning, WFP]
The big idea behind this project is financing, humanitarian financing. Until we really started this project in its first incarnations about two years ago, the entire aid industry worked on one business model which is, you wait for a crisis to happen, you try to forecast and anticipate as best as you can. But then, when a crisis happens, you go out and assess the damage, you go out and ask for funds, and only when those funds become confirmed to you -- essentially the donors give it to you, they either sign a contract or they move the cash into your bank accounts -- then you start moving. And, in so doing, we found that it's a very inefficient way of responding to disasters, because people need the assistance right then when disaster strikes. So, the solution to that is financing.
VOICEOVER
It's a USD$2 billion business. Yet, he says, WFP financing is nothing but bookkeeping. He's gathered a team of economists around him to change that. All under 40, all with commercial financial experience, they're something quite new for WFP.
ULRICH HESS [Chief of Business Risk Planning, WFP]
My name is Ulrich Hess, I am Chief of Business Risk Planning at WFP. Previously I was with the World Bank with a commodity risk management group as senior economist.
YOSHIKO MAKINO [Contract Lawyer, WFP]
My name is Yoshiko Makino. I am a lawyer qualified in the UK and New York. My area of specialty is finance law, particularly in the field of project finance, asset finance, and securitization.
JOANNA SYROKA [Quantitative Strategist, WFP]
I'm Joanna Syroka. I'm a quantitative strategist specializing in weather risk management.
RICHARD WILCOX
Julie, the evaluation team is coming at two.
VOICEOVER
Introducing radical new financial processes means Richard driving through new methods of working across WFP, and shaking up the whole way people think about the jobs they do.
RICHARD WILCOX
Planning, thinking through contingencies, trying to anticipate how much funding would come in, really thinking through your business plan over the course of an operation: that placed a whole new burden on our managers, and it's been difficult, but we're finding we're attracting new people because it's an exciting new approach to it. And a lot of the old people actually do have the skills, just never challenged to really use them in this way.
VOICEOVER
As you'd imagine, it's being looked on with suspicion in some areas of the organization, and by some of the donor governments who provide the funding for WFP.
NEIL GALLAGHER [Director of Communications, WFP]
In any bureaucracy, you're going to have a certain amount of resistance to new ideas. I think WFP actually is fairly receptive, because 85 percent of our work is emergency based and we have to be flexible. In the end we may find out that WFP is quite receptive, but the donors are a little bit skittish about it. It's too early to say at this point.
VOICEOVER
The team is into blue-skies thinking, and they're experimenting with various financial techniques. Their latest radical idea is to insure Ethiopia's poor subsistence farmers on the international financial market. They want to take out a weather insurance policy on behalf of people in villages like Waja Washboula.
RICHARD WILCOX
When our executive director took over in 2003, he challenged us to think through what sort of private sector analogies are relevant for WFP. What is this organization? Yes, we know it's an international organization, it's an aid organization: what does that mean? Are we a global logistics organization? Well, right, like UPS for the poor, right, or FedEx. Are we a project manager like Bechtel, or are we an insurance company? And, from a financial perspective, we really are an insurance company. We need to have funds ready in order to be effective when disaster strikes.
VOICEOVER
In Ethiopia every eight or ten years there's a calamitous drought that destroys millions of farmers' livelihoods and brings them and their families to the point of starvation They can be left destitute for years. Richard has these people's livelihoods in his sights. At a hotel in the Ethiopian capital Addis Ababa, local government and donor bigwigs have come to hear Richard explain how he hopes weather insurance will work. It starts from a very simple premise.
RICHARD WILCOX
This line of reasoning essentially is, we need to have funds available when they're needed, when they're needed by the beneficiaries and not when they're mobilized. And, essentially, in the past, all we were able to do, really, in any large-scale form, was to make funds available whenever we were able to mobilize them, which is obviously not the same time that beneficiaries will need the support.
VOICEOVER
Ulrich Hess explains that the team plan to pilot the weather insurance project for 70 million farmers. He says that that despite the UN presence on the ground, these farmers are still carrying the risk of disaster on their own shoulders.
ULRICH HESS
We should be managing risks instead of managing crisis. I think this really sums it up, this is where we are trying to help increase up front, a priori, again, smallholder productivity and resilience against drought.
VOICEOVER
Yoshiko Makino, the corporate lawyer, explains the weather derivative market. It's not well known as it's only been operating for eight years and is still at the cutting edge of financial trading. It's a bit like high-stakes gambling.
YOSHIKO MAKINO
It's a futures contract. It's because you are forming a contract today about something that might or that might not happen in the future. A farmer may want to take an insurance against lack of rain. On the other hand, for example if you're a construction company and there's a lot of rain, you can't work, you make a loss, so then a construction company may want to insure your risk against too much rain. So what's interesting is, there are lots of people out there with opposing risks that will balance the risk out.
VOICEOVER
But the farmers in Ethiopia face more than a fall in productivity or profit: bad weather can mean mortal danger here. Some members of the audience are skeptical, but so far they're willing to look for the positive
MAN
Transferring the risk to the other body, so, in terms of money, we are valuing the climate information in terms of money, and this is ... for me this is an advancement.
VOICEOVER
Farmers in villages like Waja Washboula are going to be in the pilot project. Hammou Waticha has 15 children. Like all farmers around here, he's regarded as relatively well off. He has two hectares of land, and with reasonable rainfall his family can support itself.
HAMMOU WATICHA [Farmer]
With good rains I can get six to seven hundred kilograms of grain each year. If there's less rain, then I get less grain.
VOICEOVER
Hammou knows he faces risks. He, like heads of families across the world, tries to insure himself and his family against them. He diversifies, spreading his assets, not just relying on his land. He keeps as many animals as he can. Farmers here don't have access to banks, so he buys livestock as a form of savings. He puts any extra income into his animals, which he can sell when times get hard. It is a form of insurance against crop failure. To further diversify in case of agricultural failure, he has a tiny shop that his wife runs to earn extra cash. But even this forward planning is not enough when the rains fail completely as they did in 1984 and 2002.
HAMMOU WATICHA
In the 2002 drought, the cows died and the cattle died and the family went hungry We got less than 200 kilograms from the land that year. When I realized the rains had failed, I sold my cattle and even my oxen, but the price was very low. I got less than 500 for my ox. But then the donors came, gave us food to eat.
VOICEOVER
These are the droughts that Richard is speaking of. Everyone in the area is affected, along with Hammou and his neighbor, Dalou Waya. The value of livestock plummets as everyone tries to sell at the same time. If you don't sell, the animals die. But selling the oxen they'll need to plough the land once the rains return could leave these farmers completely destitute.
DALOU WAYA [Farmer]
Before the drought, I had ten different cattle. Because of the drought, some died, and I sold the rest. Even up till now, I've only been able to get back three dairy cows and one ox. And one ox is not enough to plow; you need two oxen to plow.
VOICEOVER
It is exactly this downward spiral of continuing destitution that weather insurance should prevent. Hammou and his family would receive money immediately the rains fail, before they started suffering, as the insurance company would be contractually compelled to pay up
RICHARD WILCOX
Charity is a good thing, but it ultimately relies on us advertising other people's misery at their worst moments in order to motivate people to help them. If we can advertise them as productive human beings who have a future but who need help in dealing with shocks that have not yet occurred, but will occur at some point in the future, then it's a much more dignified approach than using their misery to pass around the begging bowl later.
VOICEOVER
So the question is, can a developing country like Ethiopia enter the weather insurance market?

Segment 2

VOICEOVER
The World Food Programme is planning to insure vulnerable Ethiopian farmers against drought so that cash for food is available at the time it's needed. But it's not just the farmers who will benefit. It is also better for aid organizations to have access to resources as early as possible. Rushing mountains of food to starving people to keep them alive is expensive. The earlier the money arrives, the cheaper it is to deliver what's needed, and you won't end up providing for destitute families indefinitely.
RICHARD WILCOX
The 2002-2003 response was as good, as a traditional response, as it gets in Ethiopia, and very few people died as a result of what was the second-worst rainfall year in recent history. But, at the same time, somewhere between one and two million more people fell into destitution, and those people now have become wards of the government and of the international community, which is, leaving aside issues of dignity we just touched upon, is just a terribly expensive proposition.
VOICEOVER
But first you have to get a company to take on the risk and guarantee the payout. Dr. Jo Syroka has the job of creating a contract, which will quantify the farmer's risk in a way that can be used and trusted by financiers in high-rise offices on the other side of the world.
JOANNA SYROKA
Everyone around the world knows what a millimeter of rainfall is. So one millimeter of rainfall here in Addis means exactly the same as one millimeter of rainfall in New York or in London. So when we're beginning to transfer ... talking about transferring risk, if we can index it to something like rainfall that both parties understand, we're on a common field and we can begin to really talk about how we can move risk from vulnerable populations to the financial markets.
VOICEOVER
There are obvious links between a weather risk, its human consequences, and the humanitarian aid needed when the event happens. But, according to Jo Syroka, the emergency aid community is better at managing crisis than managing risk. She's the World Food Programme's link to the international weather risk market, and she's been dispatched to find out if reliable rainfall data can be collected in the rural areas they want to insure. This will form the basis of the contract. International finance is wary of developing countries like Ethiopia because it requires high-quality data, and a lot of it. But rainfall data is internationally recognized, and Jo is sure that Ethiopia has the capacity to fulfill international demands. She's here in Zewai to meet the local meteorologist.
JOANNA SYROKA
There are many other risks that a farmer faces -- pests, fertilizers, bad seed -- but drought is the biggest one. And there are many ways we can correlate rainfall that happens in the station to the production a farmer expects to get on his field.
VOICEOVER
Zewai weather station is one of 26 the team chose to provide data for their initial pilot scheme. It's one of the better ones in Ethiopia and the meteorologist does provide reliable rainfall data. The contract stipulates data has to be collected every day at exactly 9am. Then that data has to get to the insurance company within a set number of hours. That's quite a big deal in a country like this where communications are poor. First it's radioed to the Meteorological Headquarters in Addis Ababa. Here, data from all 26 stations will be collated and sent on daily to the insurance company. Ethiopia's history of weather risks means they're well experienced in collecting weather data. At the meteorological agency's archive there's more crucial information. The records go back 50 years, and just like any car insurer checking your previous claims, this detailed archive is used to assess the probability of an extreme weather event and help them calculate the premium.
MAN [Meteorologist]
We have about 1.8 million charts. We have also about three billion station observations which have been collected since half a century ago.
JOANNA SYROKA
Although we don't ask these vulnerable beneficiaries to pay a premium like we do in normal insurance -- for example, for your house insurance you pay a premium, for car insurance you pay a premium - there is an inherent obligation in our work to turn up and help these people when they need our assistance, be that food, be it for other agencies shelter, be it some kind of healthcare. And our mandate, if anything, is stronger than an insurance company's, because the timeliness of our aid means people are in mortal peril.
VOICEOVER
Commercial farmers in Ethiopia, like this large-scale cattle farmer, can afford to take out insurance premiums on an individual basis. But the majority of farmers can't. For them, WFP food handouts have always been like a last-resort insurance. But is it acceptable to rely on this last-minute begging bowl culture?
JOANNA SYROKA
Insurance is there to help you deal with risks that don't happen often, but when they happen, are really important and dangerous to you. In this case, this is essentially the role WFP has, that the beneficiaries don't pay the premium but we still have that mandate, and we should ensure that we fulfill that mandate as well as possible. We've made promises to essentially assist these people, and we should really make good on that promise. And I think one way of doing that is making sure we manage our risk appropriately for us to do that.
VOICEOVER
Back in Europe, the contract is ready and the team have presented it to the international insurance companies. Nothing like this has ever been done before, so they were unsure of the outcome.
JOANNA SYROKA
I think what they were very surprised by is actually we were at such a stage to be ready to transact, and they were incredibly supportive, I think. I don't have to sell this idea to these people. They know that, in the context of risk management, weather risk management, they know this is something that people in America and Europe use to manage their risk. And why shouldn't we? Why shouldn't people here in Africa use the same tool? I mean, that's the whole objective of our work, is to take things that people in America or in Europe take for granted and can benefit, you know, can capitalize on, and bring them here, because here they probably have more impact than back home.
VOICEOVER
In fact, six international finance houses offered to take the risk. In the end AXA won the contract
YOSHIKO MAKINO
What was wonderful was on the night I closed the transaction with AXA, and really the absolute enthusiasm coming from them of, really this is the beginning of perhaps a new phase of financing, you know, something to come. So I think there's a huge amount of enthusiasm I've seen from the private sector. And also, I have to confess, in this process I was a little bit worried that maybe I'm not going to get the terms that are essential, and I have to tell you that when we opened the envelope, really it was a very, very good premium, a market standard type of premium, that I was really extremely happy.
VOICEOVER
So is this the start of a new form of humanitarian funding?
YOSHIKO MAKINO
From the, I think, the positive response that we've got so far, and the details of the response to the terms in the tender that we have, yes, I think so, I think I can be very optimistic that it is something that's possible. Definitely.
VOICEOVER
For Richard Wilcox, it's been an achievement to prove that the international financial market will take on the risk of some of the world's most vulnerable people. But this is only one of many tools he plans to use to bring even greater efficiency into the humanitarian aid world.
RICHARD WILCOX
It's a tool one uses for a humanitarian end. It's a modern tool, and we're actually quite proud that we've been able to tap into quite such a modern tool, something that wasn't around even eight years ago. And it's our responsibility in trying to make the most out of the funds that the donor community is able and willing to make available for our beneficiaries, to essentially have a relentless search for innovation of what can we do to make this work better. And for that, we should be tapping into the most advanced services and tools we can find.
VOICEOVER
Richard's team are looking to the future. They've started the ball rolling on behalf of the world's poorest. Now they hope that the ideas they're piloting will bring an end to the begging bowl and ad hoc nature of aid provision for vulnerable peoples worldwide.
TITLE
[end credits]