CASE STUDY

Colombia’s Cat DDO: Strengthening Resilience toDisasters, Climate Change and Health Risks
The USD 300 million Third Disaster Risk
Management Development Policy Loan(DPL) with a Catastrophe Deferred
Drawdown Option (Cat DDO) will help
Colombia reduce disaster, climate, andpublic health risks.
Exogenous shocks from disasters, pandemics,and commodity price adjustments can harm acountry’s fiscal balance. An IBRD loan with a Cat
DDO can help countries mitigate such risks bymaking a line of credit available to them.
On December 17, 2021, the World Bank's Boardof Directors approved a USD 300 million Cat
DDO for Colombia (Cat DDO III) to reduce fiscal
vulnerability to adverse natural and climaterelated events, including disease outbreaks.
Colombia has proactively used this contingent
financing instrument as part of its broader
fiscal risk management strategy since 2008.

Background

Colombia has one of the highest rates of disasters
caused by natural and climate-induced hazards in theLatin America and Caribbean region 1. Eighty-fourpercent of Colombia's population and 86 percent of
its assets are exposed to two or more naturalhazards 2.
Climate change is also a major concern. The Ministryof Environment and Sustainable Development
estimates that about two percent of Colombia's
population and capital stock will be affected by floods
and the loss of marine and coastal ecosystems. 3
Disaster and climate risks represent Colombia's
largest contingent liability, with an estimated impactof up to 4.4 percent of gross domestic product (GDP).
1People with facemask due COVID-19 waiting for public bus at bus stop in
Bogota - Colombia. Photo Credit "Working in Media" iStockIn recent decades, Colombia has made important
strides in developing comprehensive fiscal risk
management strategies.
Mitigation measures
included managing interest rate risk by significantly
reducing the floating rate share of the country's debt
portfolio and other fiscal risks by deploying new
methodologies to manage contingent liabilities frompublic-private-partnership (PPP) programs.
For more than 20 years, the Government has
partnered with the World Bank on disaster risk
management and climate change adaptation
framework development, including the use of Cat
DDOs and Catastrophe Bonds (Pacific Alliance Catbond). Cat DDO I disbursed in 2011 during the La Niña
2010-11 phenomenon; Cat DDO II disbursed in 2020
at the onset of the COVID-19 pandemic.

Financial Objective

Meet immediate liquidity needs following anemergency provoked by natural, climate-induced or
public health hazards.

3 DNP, CEPAL y BID. 2014. Impactos económicos del cambio climático en
Colombia ranks fourth in the region for disaster risk. EU Commission. 2019.
Colombia. Síntesis.
INFORM Risk Index.
2DNP. 2014. Bases del Plan Nacional de Desarrollo 2014-2018: Todos por un Nuevo País.
Pais.

CASE STUDY
Financial Solution and Outcomes

As a contingent financing line, the Cat DDO can play
an important role as part of a comprehensive disasterrisk management strategy by delivering immediateliquidity in response to shocks related to pre-defineddisasters and health-related events.
It serves as early financing while funds from othersources such as bilateral aid or reconstruction loans
are being mobilized. Cat DDOs enhance countries'
capacity to plan for and manage crises by securing
access to financing before disaster strikes. It isapproved before the disaster and disburses quickly
once the event occurs.
Using the Cat DDO, Colombia will be able to draw
down the loan any time over a three-year period,
which can be extended up to four times for a
maximum of 15 years.
Cat DDO III also highlights Colombia's commitment tothe climate change agenda. One of the prior actions
for Cat DDO III is the issuance of a sovereign greenbond, which along with other prior actions, sets thestage for broader reforms to help the government
strengthen its program for reducing natural, climatedriven, and public health related risks.
In September 2021, Colombia issued its first sovereign
green bond with technical assistance from the World
Bank. The green bond is a vehicle for financing
projects that promote climate change mitigation andadaptation. The management of disaster risks
associated with climate change is included as one of
the eligible uses of the green bond proceeds andcould help finance the implementation of relevant
sectoral plans and policies. Therefore, the green bondcomplements the objectives of Cat DDO III. A second
green bond was auctioned in October 2021. Colombia
plans to issue sovereign green bonds as needed tosupport green expenditures in the budget.

World Bank Treasury's Role•

The World Bank Treasury team worked with theUrban, Disaster Risk Management, Resilience and•Land
GlobalPractice,
theFinance,Competitiveness and Innovation Global Practice,and the Ministry of Finance throughout the project
cycle. The Ministry of Finance benefited fromTreasury's guidance to understand the financial
terms and conditions of the financial instrument,
including the approval criteria, country limit,
drawdown triggers, currency, financial risk, andrepayment schedule scenarios. Treasury helped
the project team and the client navigate the loan
negotiation process to enable timely delivery to
the World Bank Board.
The World Bank Treasury’s Sustainable Finance
Advisory Program provided technical assistance tothe Ministry of Finance to facilitate the issuance ofColombia’s first sovereign green bond in the local
market, thus meeting the related prior action.

IBRD financial products can play a critical role instrengthening clients' fiscal resilience. Cat DDOs, withtheir contingent financing lines, can be the first line offinancial relief for disasters or health related events.
As each client's needs are unique, World Bank
Treasury can help clients use the flexibility of IBRD
loans to achieve better financial terms for theirprojects, optimize the cost and risk of their debt
portfolios, as well as provide technical assistance forgreen bond transactions
Summary of Financial Terms
Approval Date

December 17, 2021

AmountUSD 300 million

Repayment Schedule

19.5 years of final maturity (incl.
a 3.5-year grace period) withlevel amortization of principal. Itmay be modified upondrawdown at borrowers'
request.

Disbursement Period

Three years; renewable up to 4times, for a maximum durationof 15 years in total

Fees

0.50% Front-End Fee; 0.25%
Renewal Fee

Contact: Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury
 mnavarromartin@worldbank.org  +1 (202) 458 4722
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.