PROJECT INFORMATION DOCUMENT (PID)
Appraisal Stage
Report No.: AB4062
Costa Rica Catastrophe Deferred Drawdown Option (CAT DDO)
Operation Title
LCR
Region
Disaster Prevention (100%)
Sector
P111926
Project ID
Costa Rica
Borrower(s)
Ministry of Finance (Ministerio de Hacienda), Ministry of
Implementing Agencies
National Planning and Economic Policy (MIDEPLAN), National
Budget Office (Contraloría General de la República, CGR), and
National Risk Prevention and Emergency Management
Commission (CNE).
July 21, 2008
Date PID Prepared
July 29, 2009
Date of Appraisal
Autorization
Estimated Date of Board September 16, 2008
Approval
1. Country and Sector Background
Country context
Costa Rica is an upper-middle-income developing country of about 4.5 million people, has an
income per capita of US$5,900 (2007), and is well known for its socioeconomic achievements.
The country has a stable political system, with a long democratic tradition, generally effective
institutions, a broad social base, and relatively high social indicators, all of which have
contributed to creating a favorable environment for sustainable growth. Costa Rica’s poverty and
inequality are lower than the averages for Latin America and Central America, and social
indicators are generally stronger than for comparable countries in the region. Costa Rica, a
country with only 51,000 square kilometers (19,730 square miles), has experienced steady
economic expansion over the past 15 years, primarily due to the implementation since the late
1980s of a strategy of outward-oriented, export-led growth, openness to foreign investment, and
gradual trade liberalization. Costa Rica has also been a world leader on environmental issues,
ensuring that economic growth is not achieved at the expense of its rich natural endowments, and
successfully developing linkages between environmental protection and poverty reduction.
As a result of the growth experienced during the last 15 years, the percentage of Costa Ricans
living in poverty—using the national poverty lines—fell from 32 percent in 1991 to 20 to 22
percent during 1994–2006. Over the same period, extreme poverty stayed close to 5 to 7 percent.
In 2007 the increase in real incomes and social transfers pressed the poverty rate down to a
record low of 16.7 percent, while extreme poverty decreased to 3.3 percent. Income inequality,
measured by the Gini coefficient, is around 0.48 (2004), which is below the Latin American
average of 0.52. However, the current administration is strongly committed to further reducing
both poverty and inequality through equitable growth, better targeting of social assistance
programs, and improved social services.
Costa Rica’s key social indicators are generally stronger than, the averages for Latin America
and other upper-middle-income countries in the region. Life expectancy at birth, at 79 years, is
higher than in comparator countries, which show an average of 74 years. Close to 96 percent of
Costa Rican adults are literate compared to an average of 94 percent of upper-middle-income
countries in the Latin America and the Caribbean (LAC) Region, and infant and child mortality
rates in Costa Rica (12 per 1,000) are significantly lower than comparator countries (30 per
1,000). But there is one notable exception, secondary education, where coverage lags the
comparator countries by a substantial margin.
Sector Context
Due to its geographic location and geotectonic characteristics, Costa Rica is exposed to a large
variety of natural hazards including hydro-meteorological (floods, cyclones,1 and landslides) and
geophysical (earthquakes and volcanoes). The most important events for the country have been
the following:
Floods. The frequency of floods has been on the increase in Costa Rica and this natural hazard
now represents the main sources of loss in the country2. Recent floods, in November 2005 and
December 2007 caused US$25 million and US$80 million worth of damage respectively. In
May 2008, tropical storm Alma affected 20 counties, resulting in 21,000 people directly affected,
over 1,150 houses destroyed and more than 130 roads cut off. Direct economic loses are
estimated at US$40 million. CNE has been able to efficiently respond in all these cases and after
the passage of law 8488 in 2006 more resources have been made available to the institution.
Hurricanes. Costa Rica is also exposed to hurricane risk on its Caribbean coast. Hurricane Joan
caused economic losses estimated at US$200 million in October 1988. More recently Hurricane
Cesar (July 1996) resulted in economic losses estimated at US$53 million destroying 165
educational centers, 157 roads, 150 bridges, 10 hospitals and health centers, as well as damaging
to housing and irrigation systems. Two years later, Hurricane Mitch, one of the most destructive
events in Central America, caused economic losses amounting to approximately US$98 million
(935 houses were affected, 69 bridges were damaged, 93 educational centers were impacted, and
the agricultural and fishery sectors experienced serious losses). The new coordinating role of
CNE under law 8488 makes possible to achieve a better institutional coordination during
extreme events.
Earthquakes: Costa Rica is located on the subduction zone of the Caribbean and Cocos tectonic
plates and the fracturing movements of these two plates have caused frequent earthquakes in the
country. The Telire-Limón earthquake in April 1991, a particularly severe and recent earthquake,
caused close to US$100 million in economic losses and 53 fatalities. New alert systems
1
An atmospheric system characterized by the rapid inward circulation of air masses about a low-pressure center,
usually accompanied by stormy, often destructive weather (for example, hurricanes, typhoons). Cyclones circulate
counterclockwise in the Northern Hemisphere and clockwise in the Southern Hemisphere.
2
Wind patterns and seasonal changes cause variations to the sources and the intensity of rainfall. Every year
northerly trade winds predominate from December to March, causing intense rainfalls along the Caribbean and
Northern watersheds. Interaction with the Inter-tropical Convergence Zone and Caribbean tropical cyclones increase
rainfall amounts and intensities from April to November.
established by the GoCR (under the coordination of CNE) and support to the Volcanic and
Seismic Observatory provide the country with the tools to better address events of this type in the
future.
Volcanoes: There are at least nine active volcanoes in Costa Rica. Five of them (Rincón de la
Vieja, Arenal, Poás, Irazú and Turrialba) have caused significant damage in recent years. For
example, the eruption of Irazú in March 1963, which lasted for two years, caused economic
losses of approximately US$35 million. The Arenal eruption in July 1968 completely wiped out
a whole village bearing its name (Arenal), causing economic damages of up to US $15 million,
and 87 fatalities. Volcanoes Turrialba and Poás have shown recent signs of a progressive
reactivation.
Landslides. Landslides and torrential debris flows are among the most costly in terms of human
lives. They are triggered by intense rainfall, earthquakes and volcanic eruptions. In May 1973
the Tilaran-Arenal landslide had an estimated economic impact of US$4 million and 26
fatalities. Costa Rica has developed better information and new regulations on land use in risk
prone areas that will enable the country to reduce losses in the future.
The natural-disaster hotspot study financed by the World Bank3 ranks Costa Rica number two in
the world among countries most exposed to multiple hazards, with 36.8 percent of the total area
exposed to three or more adverse natural event. The study estimates that 77.9 percent of Costa
Rica’s population and 80.1 percent of the country’s GDP reside in areas at high risk of multiple
hazards.
Costa Rica experienced 49 major natural disaster events during 1910–2008, which affected 1.4
million people.
2. Operation Objective
The overall development objective of the proposed operation is to enhance the government’s
capacity to implement its natural disaster risk management program in the country. This program
document proposes a US$65 million Catastrophe Deferred Drawdown Option (CAT DDO) as
budget financing for the Government of Costa Rica (GoCR) for three years, renewable up to four
times (for a total of 15 years).
Costa Rica benefits from a strong emergency management system. In recent years, the country
has also made substantial progress toward implementing a robust disaster risk management
framework, focusing on actions to mitigate natural disaster risks and lower the country’s
vulnerability in the context of the “Hyogo Framework for Action 2005–2015: Building the
Resilience of Nations and Communities to Disasters.”4 Specific steps that demonstrate such
progress include the following:
3
Natural Disaster Hotspots: A Global Risk Analysis, World Bank, 2005.
As a commitment to take action to reduce disaster risk at the global level, governments around the world have
adopted guidelines to reduce vulnerabilities to natural hazards, called the Hyogo Framework for Action (Hyogo
Framework). The Hyogo Framework assists the efforts of nations and communities to become more resilient to, and
cope better with, the hazards that threaten their development gains.
4

The recent strengthening of the institution and legal framework reflected in key disaster
risk management actions such as: (a) adoption of Law No. 8488 of 2006 and its
reglamento (regulations) in 2008, and (b) implementation of a mandatory contribution of
3 percent of financial surplus or profit from all governmental institutions to be transferred
to the National Emergencies Fund.

The GoCR’s substantial progress toward mainstreaming disaster risk management in its
development programs through: (c) incorporation of Disaster Risk Management in the
2006–2010 National Development Plan (PND), and (d) incorporation of disaster risk
analysis in the MIDEPLAN screening of investment projects.
3. Rationale for Bank Involvement
This CAT DDO is one of the lending operations agreed for the upcoming Country Partnership
Strategy. As indicated by the CPS, the CAT DDO would provide Costa Rica a rapid source of
funds in the event of a major natural disaster (floods, hurricanes, earthquakes, volcano, and
landslides), enabling a quicker response to address emergency needs. This instrument would be
accompanied by the further implementation of a comprehensive disaster risk management
program.
The Bank is currently providing technical assistance to Costa Rica to support its disaster
management program. For example, INS is developing a financial strategy for improving and
expanding the coverage of its public assets with Bank support. Costa Rica is also one of the two
pilot countries included in the Central America Probabilistic Risk Assessment (CAPRA).
CAPRA, a regional initiative led by CEPREDENAC in collaboration with the UN-ISDR, the
World Bank and other national government entities and institutes of Central America, will
identify and evaluate the main sources of potential losses (both geographically and by sector)
from disasters, combined with an assessment of government capacity to finance recovery
operations. Results from this study will nourish the formulation of strategies and policies to
strengthen the national risk prevention and emergency management system, and to develop a risk
financial strategy.
4. Financing
The IBRD loan amount is expected to be around US$ 65 million.
5. Institutional and Implementation Arrangements
While the Ministry of Finance (Hacienda) is the main counterpart of the Bank for this CAT
DDO, implementation of the program is a shared responsibility among the Ministry of National
Planning and Economic Policy (MIDEPLAN), the National Budget Office (Contraloría General
de la República, CGR), and the National Risk Prevention and Emergency Management
Commission (CNE).
Throughout the drawdown period, the satisfactory implementation of the Disaster Risk
Management Program would be monitored periodically. Such periodic monitoring may take
place at a frequency consistent with the information needs of the Bank, but no less than every 12
months, and could be initiated by either the Bank or the borrower. In broad terms, the program is
expected to result in: (a) a strengthened CNE capacity to coordinate and incentivize disaster risk
management activities, (b) a well-funded and functioning system to finance risk reduction and
disaster recovery activities, (c) the generation of analysis and inclusion of risk mitigation
initiatives in the program of line ministries, and (d) an increasing proportion of investment
projects that properly integrate disaster management considerations.
6. Benefits and Risks
Benefits.
The CAT DDO will provide a source of immediate liquidity in case of a natural disaster. The
CAT DDO will complement other instruments in the country and provide a source of bridge
financing while other sources (for example, concessional funding, bilateral aid, and
reconstruction loans) are being mobilized following a natural disaster. This operation will
support two key policy areas of the Costa Rica Disaster Risk Management Program: (a)
strengthening of the institutional and legal framework, and (b) mainstreaming disaster risk in the
National Development and Investment Programs.
Risks.
Several risks were identified during project preparation, and those that deserve attention are as
follows: (a) Deterioration of Costa Rica’s macroeconomic situation due to internal and external
factors (rated moderate). Costa Rica currently benefits from a robust macroeconomic framework.
(b) The resources made available under the CAT DDO may be insufficient in the aftermath of a
major catastrophe (rated as low). The CAT DDO is meant to be one of several sources of
liquidity for the government in the immediate aftermath of a disaster, and the assessment of
liquidity needs shows that the proposed amount of the CAT DDO is appropriate for Costa Rica.
(c) Coordination is a systemic risk in any emergency management project (rated low). In Costa
Rica, the CNE has strong capacity for leading an emergency response and institutional efforts.
(d) Lack of acceptance of the Government Disaster Risk Management Program (rated low).
Government efforts to strengthen disaster risk management in the country is the result of years of
consultations and a general concern about the increase in losses due to adverse natural events. (e)
Political risk (rated low). The country is politically stable and has low turnover of senior
officials. (f) The procedures implemented prove unable to disburse funds rapidly (rated as low).
Given the inherent purpose and structure of the instrument, the Bank team will work closely with
the GoCR and relevant Bank departments to ensure prompt disbursement.
7. Poverty and Social Impacts and Environment Aspects
Poverty and Social Impact
The implementation of the Catastrophe Deferred Drawdown Option (CAT DDO) is expected to
have a positive poverty and social impact. In general terms, improvements in national disaster
risk management and vulnerability reduction strategies are expected to benefit the poor. Costa
Rica has a relatively well developed set of social protection programs, but many of its poor still
fall outside their scope.5
This operation will benefit from the priority given by the current administration to strengthening
Costa Rica’s social safety net. This strengthening should ensure “that social protection is
available to the poorest, most vulnerable groups, thus protecting them against risks and shocks
while improving their access to basic services.”6 By enhancing the efficiency of spending and by
strengthening the targeting of social protection programs, the impacts of this operation will build
up. As has been extensively documented, the poor are the segment of the population most at risk
from the impacts of natural and man-made disasters, particularly in terms of health and
productivity. Law No. 8488 and its reglamento mandate the actions that the GoCR will
implement to reduce vulnerability to disaster risk, which causes losses of life and social,
environmental, and economic damages that mainly affect the poor.
Therefore, the poor are expected to benefit in the form of improved ability to return to, or
improve, the existing socioeconomic, health, and environmental conditions found before the
occurrence of a disaster event. The National Risk Prevention and Emergency Management
Commission (CNE), for example, has worked to minimize disasters with indigenous and other
groups located in the Atlantic watershed, an area vulnerable to floods in the southeast of the
country near the border with Panama. The Government of Costa Rica’s (GoCR’s) disaster risk
prevention and emergency management policy efforts will help the country achieve the
Millennium Development Goals (MDGs) by improving the potential for more productive
workdays and a better quality of life for the rural and urban poor and other vulnerable groups.
The disruption of public utilities, such as potable water or sewage systems, communications, and
transport infrastructure during a disaster event, increases the probability of the poor and other
vulnerable groups (such as indigenous groups) suffering from increased gastrointestinal and
other illnesses. The incorporation of (a) disaster risk management in the National Development
Plan, and (b) ex ante disaster risk considerations in the Ministry of National Planning and
Economic Policy (MIDEPLAN) national investment project approval process have the potential
to reduce and minimize the incidence of illnesses among the urban and rural poor after a disaster
hits, because these vulnerable groups are, for example, more likely to live near point sources of
water pollution.
The CAT DDO will help the GoCR to enhance its capacity for disaster risk management, by
supporting the implementation of its Disaster Risk Management Program at the national level.
The mandatory transfers of governmental institutions to CNE will better position the GoCR to
address ongoing activities toward: (a) the existing institutional and legal framework to enforce
compliance of adequate settlement and construction standards of public and private affordablehousing programs; (b) the existing legal and financial provisions to explore affordable natural5
Social protection programs are public interventions designed to help people better deal with risk, and to ensure
basic levels of well-being to the poor. Part of this social protection network is the assistance given by the CNE in the
event of a disaster, and the compensatory program of the Institute of Social Assistance (IMAS) that provides direct
transfers to families that are poor or have suffered as a result of a natural disaster (emergency subsidies).
6
“Costa Rica Poverty Assessment–Recapturing Momentum for Poverty Reduction,” World Bank, 2007.
hazard insurance schemes (under the National Insurance Institute [INS]); (c) the strengthening of
the capacity of municipalities to include and enforce disaster prevention considerations in their
master plans (with CNE’s support); and (d) the promotion of local organization and education
campaigns targeted to poor neighborhoods and vulnerable communities, including indigenous
groups (with Ministry of Education and CNE support).
In addition, the CAT DDO will foster accountability, transparency, and greater public
participation by supporting the implementation of Law No. 8488, which mandated the creation
of CNE. The full adoption of the new reglamento is a key step to effectively implement this law.
Law No. 8488 also mandates strengthening of the capacity of local government and civil society
organizations to address emergency situations. It directs the CNE to develop mechanisms that
allow their participation at the decision-making table with respect to the design and
implementation of policies that affect local governments and their communities, including
indigenous groups.
Disasters have historically been a powerful source of poverty. The proposed operation supports
policies that seek to alleviate poverty by strengthening disaster risk management in Costa Rica.
In case of a declaration of emergency, the activation of the CAT DDO will avoid the need of
deviating funds originally designated to development projects. This will guarantee the continuity
of development plans, mainly targeted at alleviating the needs of the poor.
Environmental Aspects
The project is expected to have significant positive impacts on the environment and natural
resources, by providing the GoCR with critical funding for implementing measures that reduce
environmental degradation and their adverse consequences on the population. In particular, this
operation will help the GoCR support and strengthen the following areas: (a) disaster risk
management institutional, legal, and policy frameworks, by focusing on key program milestones
and outcomes; (b) risk identification, assessment, and monitoring capacities by enhancing its
institutional framework; (c) knowledge management and education, by implementing relevant
programs (such as the National Education Plan for Risk and Disaster Reduction, building new
schools with infrastructure less vulnerable to disasters, and renovating old schools, accordingly);
(d) reducing underlying risk factors such as developing new projects in safe areas; and (e)
preparedness for effective response and recovery by supporting the CNE.
Since the raison d’être of the operation itself is to support the government’s effort in
mainstreaming disaster risk management into a number of key sectors, the operation’s design is
proactive with respect to internalizing environmental concerns, reflected in the role of the
Ministry of the Environment and Energy (MINAE) as a member of the CNE board of directors.
Other positive impacts on the environment are expected to derive from improved environmental
management at the national and local levels. The CNE is mandated to support local
municipalities in implementing binding land-use zoning regulations.
The CAT DDO operation places particular emphasis on assuring improved transparency and
accountability of social and environmental issues with respect to governmental oversight and
decision-making processes. All risk prevention activities are subject to environmental impact
assessments, and even if the emergency response (primer impacto), rehabilitation, and
reconstruction activities are in principle exonerated of an ex ante assessment, a report on any
impact is often prepared and filed. Thus, social, economic, and environmental considerations are
taken into account by the GoCR during an emergency situation, and the following steps taken
during an emergency are regulated by law.
8. Contact point
Name: Armando E. Guzmán
Title: Disaster Risk Management Specialist
Tel.: 1-202-522 0338
Fax: 1-202-522 0262
Em: aguzman3@worldbank.org
9. For more information contact:
The InfoShop
The World Bank
1818 H Street, N.W
Washington D.C 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Email: pic@worldbank.org
Web: http://www.worldbank.org/infoshop