Natural disaster clauses and growth and resilience bonds are two of the proposals that the Caribbean Community (CARICOM) is being asked to consider as leaders in the region seek to build resilience against natural disasters.
The CARICOM Commission Report on the Economy points to the need for the region to speed up private sector investment in resilience by creating new requirements for households and enabling the issuance of a new asset class of bonds that would fund it.
Speaking on this recommendation during a recent online discussion forum hosted by the UWI Cave Hill Campus and the Sagicor Cave Hill School of Business and Management, Chairman of the CARICOM Commission on the Economy Avinash Persaud said this was critical to safeguarding the region’s gross domestic product (GDP) during these disasters.
Recalling the massive loss of GDP in several islands due to hurricanes over the years, Persaud said it was being proposed that every debt agreed from the public sector and private sector should have natural disaster clauses in them.
“What they do is that they make the fact that when you have a natural disaster of a certain size, automatically without you having to ask, that two years of interest payment and debt payment shift to the end of the loan agreement. So you have two years of interest and principal payments free to basically give you space in order to deal with the crisis,” Persaud explained.
As part of its debt restructuring two years ago, Barbados had included a natural disaster clause in the restructuring agreement with bondholders, currently making the island the largest issuer of sovereign debt with such a clause.
This is expected to free up some seven per cent of GDP should the island experience a natural disaster and need to put a hold on debt repayment.
Persaud said this effort was still ongoing as Barbados sought to put this in all debt contracts all over the world.
He said with climate change being an uninsurable event, it was critical for the region to build in a more resilient way, adding that this did not always mean building more expensively but building smarter.
It is for this reason that the CARICOM Commission on the Economy is proposing that a focus be placed on speeding up private sector investment in resilience building.
“The commission reckons for that amount of building we need US$20 billion at a minimum. The governments can’t afford that.
We are the most indebted region in the world,” said Persaud.
“For example, let’s say we underground all of the utilities, therefore when a hurricane hits we don’t need to spend a big chunk of GDP rewiring the country. Undergrounding is really expensive, but maybe if we underground the electricity cables with the telephone cables, separately next door in conduits running parallel, water, gas and all these other things and rebuilding the gas at the same time maybe we can make it cheaper, make costs savings.
Therefore, the private sector will be prepared to invest in this and get a return, and that is the way we might be able to spend US$20 billion, making ourselves the first climate-resilient region in the world,” he explained.
In relation to the growth and resilience bonds, Persaud said it was about time that the over US$50 billion in the region’s banking system be put to use in helping to build resilience.
“We are trying to plan a new asset class, the first in the world, called growth and resilience bonds. These growth and resilience bonds will be fund managers who sign up to only invest in things that will move the needle on resilience and we will have independent assessors on whether this is really sustainable and resilient and they will sign up to do this and we, as savers, can put our money into these funds,” he explained.
“The fund managers will find good investment opportunities that hit resilience, put our money to work and we will get more than we are currently getting in the banking sector because of the returns to be had from building more resilience, whether that is returns from cost savings or returns from generating more revenue,” he added.
He further pointed out that the plan was to have the monies raised from the issued bonds be spent only on approved projects that make the region more resilient to climate change and other natural disasters.
Persaud suggested that a rating agency could be established to rate the sustainability of projects, adding that this would allow fund managers to invest in projects with a certain rating and this could attract further investment.
It is also being proposed that the planned CARICOM Procurement Act be urgently put in place to allow a member state to open up bidding to firms throughout the region.
“We also need to make sure that the private sector is not expected to live off great government contracts. So we need to minimize some of those government contracts, minimize the rate of return, and so to push the private sector back into focusing on making money from being competitive rather than from lobbying governments,” added Persaud. (MM)