The Catastrophe Deferred Drawdown Option (Cat DDO) is a form of contingent financing offered by IBRD to help countries take a proactive stand towards reducing exposure to catastrophic risk and access finds immediately after a natural disaster. Costa Rica was the first country to sign a Cat DDO with the World Bank and subsequently drew down the loan after a natural disaster. The Cat DDO complements other financial instruments and disaster risk management measures in place in the country. Natural disasters can throw important long-term Costa Rica is a small, middle-income country with development programs off course by diverting substantial exposure to natural disasters, including budgetary resources to respond to a crisis. Costa earthquakes, floods, hurricanes, landslides, and Rica needed to ensure access to funds immediately volcanic eruptions. According to a World Bank after a natural disaster to provide assistance to funded natural disaster study, Costa Rica ranks affected populations without hampering the number two in the world among countries most continuity of other development programs. exposed to multiple hazards, with 80 percent of the country’s GDP and 78 percent of Costa Rica’s population in high-risk areas. The Catastrophe Deferred Drawdown Option (Cat Costa Rica has built an efficient disaster response DDO), a form of contingent financing offered by system and established an effective system of IBRD to help countries take a proactive stand building codes, environmental standards, and land towards reducing exposure to catastrophe risk was use planning to mitigate the impact of natural the answer to Costa Rica’s challenge. Costa Rica disasters. It has also made substantial progress in became the first country to request and benefit from strengthening its institutional and legal framework a Development Policy Loan (DPL) with a Cat DDO. and mainstreaming catastrophe risk management in its national development program. The Cat DDO provides immediate liquidity up to US$500 million or 0.25% of GDP (whichever is strategy adopted by the country. The Cat DDO in less) to IBRD member countries in the event of a Costa Rica complements other financial natural disaster. Funds may be disbursed (partially instruments and disaster risk management or in full) when a state of emergency is declared by measures in place. In particular, it addresses two the government due to a natural disaster. The Cat key policy areas of the country’s disaster risk DDO also has a revolving feature, that is, amounts management program: (a) strengthening the repaid prior to the closing date are available for institutional and legal framework and (b) subsequent drawdown. Costa Rica also has the mainstreaming disaster risk management in the flexibility to change the repayment schedule for National Development and Investment Programs. each new drawdown before it is disbursed, which allows it to achieve the best combination of grace period and final payment maturity. As part of the terms of the Cat DDO, Costa Rica is expected to Amount maintain a proactive program to reduce its US$65 million exposure to disaster risk. Approval Date September 16, 2008 Repayment 29.5 years of final Schedule maturity (incl. a 5-year In January 2009, just months after securing the Cat grace period) with level DDO, a 6.2 magnitude earthquake struck 20 miles amortization of north of San José, affecting more than 120,000 principal people. Cost Rica drew down US$24 million of the Interest Rate Variable: Based on 6- Cat DDO to rebuild damaged infrastructure. month LIBOR plus a fixed spread Cat DDOs provide bridge financing while other Disbursement 3 years; renewable up financial resources such as bilateral aid and Period to 15 years if original reconstruction loans are mobilized following a program remains in natural disaster. This financial product is most place effective as part of a broader risk management Fees 0.25% Front-End Fee1 Miguel Navarro-Martin, Head of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722 1 On August 5, 2009, IBRD increased the front-end fee from 0.25 percent to 0.50 percent and introduced a 0.25 percent renewal fee for new DPLs with a Cat DDO. Photo Credits Front: LA Times