Managing Jakarta's weather risks effectually<\/p>\n
Edward McMillan, Jakarta<\/p>\n
As a city, Jakarta is unusually vulnerable to weather-related
\nrisks. Flooding invariably brings traffic to a juddering halt and
\nparalyses the city. Hot temperatures promote smog, increase the
\nincidence of heat stroke and push up air-conditioning bills.<\/p>\n
Mitigating these effects often isn't easy. Planting trees is
\none answer -- but where, in such a densely built-up city?
\nClearing river banks is another -- but where would the displaced
\ninhabitants then live? Stricter regulation of vehicle emissions
\nis an obvious step, but faces the twin obstacles of bureaucratic
\ninertia and corruption. And the political will often isn't there
\nto seriously address these problems anyway, especially when the
\nsolutions might hinder economic growth and job creation.<\/p>\n
What is needed is a means of incentivising the city
\nauthorities to do what they reasonably can, but also to
\nfinancially guard against serious weather-induced damage.
\nTraditional insurance can't do this, and may actually prove
\ncounter-productive: A city government that can claim compensation
\nany time it floods might be tempted to do less flood-prevention
\nwork, not more.<\/p>\n
Help is at hand, however, in the form of weather derivatives.
\nThese are a recent financial innovation -- they only appeared on
\nthe Chicago Mercantile Exchange in 1999 -- that allow parties to
\nagree pay-outs not on the basis of bad outcomes (flooding or poor
\nair quality, for example) but on the basis of the bad weather
\nthat causes them.<\/p>\n
For instance, the Jakarta government might choose to purchase
\na weather derivative relating to rainfall. For every millimeter
\nof rain above an agreed-upon threshold, the government would be
\nable to collect a pay-out. This, in turn, could then be used to
\npay for the increased costs that flooding -- in the form of road
\nrepairs, subsidence, damage to public buildings, public health
\nand so on -- incurs.<\/p>\n
Since precipitation can't be influenced by the government,
\nthere is no possibility of cheating. And because the pay-out sums
\nrelate to rainfall and not to the actual damage done, there is a
\nreal incentive for the government to do something about flood
\ncontrol: after all, if it can reduce its flood-related costs
\nwhile still receiving pay-outs, it could actually make a profit
\non the deal.<\/p>\n
The government might purchase such a weather derivative from a
\nthird party, such as an insurance company. But the additional
\nadvantage of weather derivatives is that, if a suitable counter-
\nparty can be found, they need not cost the city anything at all.<\/p>\n
Consider the case of temperature. Higher temperatures impose
\ncosts upon the city, in terms of air-conditioning bills and
\ndeteriorating air quality. But they spell good news for Jakarta's
\nelectricity supplier, PLN: For every one-degree Celsius increase
\nin temperature, PLN can expect the peak electricity load in
\nJakarta to increase by approximately 3 percent. That not only
\nrepresents more profit, it also represents the basis of a
\nmutually-beneficial deal between the city government and PLN.<\/p>\n
This is how it would work. The city government would not pay
\nup-front for a weather derivative; instead, it would pay PLN if
\nthe temperature is cooler than an agreed-upon threshold, and
\nwould receive money from PLN if the temperature exceeds the
\nthreshold. If, at the end of the deal period, the weather turns
\nout to be cooler than expected, the city's reduced expenditure on
\nair-conditioning and healthcare pays for the derivative; if the
\nweather is hotter than expected, the derivative pay-outs cover
\nthe additional costs the city incurs. In effect, the city trades
\na portion of the potential savings from a cool season for
\nimproved cash-flow certainty throughout the year.<\/p>\n
If all of this sounds incredibly hypothetical, it isn't.
\nGoldman Sachs, Deutsche Bank, ICICI Lombard and ABN Amro all
\noffer weather derivative products. The International Swaps and
\nDerivatives Association is heavily promoting the sector. And with
\nthe World Bank actively supporting the provision of weather
\nderivatives to subsistence farmers in the developing world, it's
\nonly a matter of time before metropolitan governments
\nparticipate.<\/p>\n
Successive city governments have failed to remedy Jakarta's
\npressing environmental problems. Perhaps it is time to leave
\ntraditional approaches behind and try something completely new?<\/p>\n
The writer is a British freelance writer based in Jakarta.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/managing-jakartas-weather-risks-effectually-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }